1
FORM 10-Q
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 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
filing requirements for the past 90 days.
Yes __X__ No____
As of August 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
June 30, December 31,
1995 1994
--------- ---------
(Unaudited)
(In Thousands)
Current Assets:
Cash and cash equivalents $ 2,876 $ 41,412
Accounts receivable, less allowance for doubtful accounts of
$4,647,000 and $4,192,000 110,999 81,214
Other current assets 17,944 7,121
---------- ---------
Total Current Assets $ 131,819 $ 129,747
Fixed Assets:
Communication systems $ 105,804 $ 91,140
Building and other equipment 47,746 36,842
Construction in progress 8,572 8,690
---------- ---------
$ 162,122 $ 136,672
Less accumulated depreciation and amortization 84,311 77,514
---------- ---------
Total Fixed Assets $ 77,811 $ 59,158
Cost in excess of net assets acquired 88,446 47,267
Customer bases 35,706 30,444
Deferred income taxes 10,429 10,429
Other assets 13,055 7,680
---------- ---------
Total Assets $ 357,266 $ 284,725
========== =========
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ALC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
1995 1994
--------- -------------
(Unaudited)
(In Thousands)
Current Liabilities:
Accounts payable $ 4,886 $ 2,018
Accrued liabilities 31,495 20,864
Accrued network costs 66,752 51,672
Taxes other than income 12,151 13,425
Capitalized leases and other long-term debt 218 232
----------- -----------
Total Current Liabilities $ 115,502 $ 88,211
Long-term Liabilities:
Capitalized leases and other long-term debt $ 3,953 $ 3,048
Senior Subordinated Notes 79,442 79,418
----------- -----------
Total Long-Term Liabilities $ 83,395 $ 82,466
----------- -----------
Total Liabilities $ 198,897 $ 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 -- 34,439,000
and 33,712,000 shares $ 344 $ 337
Capital in excess of par value 145,025 140,278
Paid-in capital -- Warrants 11,091 11,715
Retained earnings (deficit) 1,909 (38,282)
----------- -----------
Total Stockholders' Equity $ 158,369 $ 114,048
----------- -----------
Total Liabilities and Stockholders' Equity $ 357,266 $ 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 Six Months Ended
------------------------------- ---------------------------
June 30, June 30, June 30, June 30,
1995 1994 1995 1994
--------- -------- --------- --------
(In Thousands Except Per Share Amounts)
Revenue $ 197,238 $ 135,908 $ 374,991 $ 265,697
Operating Expenses:
Cost of communication services
and equipment sales $ 111,270 $ 74,388 $ 211,115 $ 144,398
Sales, general and administrative 45,071 32,451 83,883 63,682
Depreciation and amortization 6,956 4,263 12,908 8,290
------------ ------------- ------------ ----------
Total Operating Expenses $ 163,297 $ 111,102 $ 307,906 $ 216,370
------------ ------------- ------------ ----------
Operating Income $ 33,941 $ 24,806 $ 67,085 $ 49,327
Interest expense 1,600 1,615 2,894 3,241
------------ ------------- ------------ ----------
Income Before Income Taxes $ 32,341 $ 23,191 $ 64,191 $ 46,086
Income taxes 12,125 8,350 24,000 16,600
------------ ------------- ------------ ----------
Net Income $ 20,216 $ 14,841 $ 40,191 $ 29,486
============ ============= ============ ==========
Net income per Common and
Common equivalent share $ 0.52 $ 0.39 $ 1.04 $ 0.77
============ ============= ============ ==========
Weighted average Common and
Common equivalent shares 38,971 38,282 38,605 38,289
============ ============= ============ ==========
See notes to consolidated financial statements
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ALC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
--------------------------------
June 30, June 30,
1995 1994
--------------------------------
Operating Activities
Net income $ 40,191 $ 29,486
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 7,734 5,430
Amortization of intangible assets and bond discount 5,174 2,942
Provision for deferred income taxes (98)
Increase in accounts receivable and
other current assets (17,337) (15,298)
Increase in current liabilities 15,015 15,564
------------ -----------
Net Cash Provided by Operating Activities $ 50,777 $ 38,026
Financing Activities
Payments on long-term debt $ (460) $ (490)
Proceeds from issuance of stock 2,281 2,811
Retirement of senior subordinated notes (5,017)
------------ -----------
Net Cash Provided by (Used in) Financing Activities $ 1,821 $ (2,696)
Investing Activities
Expenditures for fixed assets $ (10,894) $ (10,241)
Acquisition of ConferTech International, Inc. (64,054)
Proceeds from sale of fixed assets 121
Change in other non-current assets (2,666) 206
Purchase of customer bases (13,520) (4,229)
------------ -----------
Net Cash Used in Investing Activities $ (91,134) $ (14,143)
------------ -----------
Increase (Decrease) in Cash and Cash Equivalents $ (38,536) $ 21,187
Cash and cash equivalents at beginning of period 41,412 1,819
------------ -----------
Cash and cash equivalents at end of period $ 2,876 $ 23,006
============ ===========
Interest paid $ 3,960 $ 3,917
============ ===========
Income taxes paid $ 23,536 $ 8,952
============ ===========
See notes to consolidated financial statements
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ALC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six Months Ended June 30, 1995
(Unaudited)
Paid-in capital
Common Stock Capital in -- Warrants
-------------------- excess of -------------------------
Shares Amount par value Shares Amount
------ ------ --------- ------------ -------
(In Thousands)
Balance, December 31, 1994 33,712 $337 $140,278 3,852 $11,715
Exercise of warrants 585 6 2,258 (585) (624)
Exercise of stock options 142 1 640
Tax benefit from exercise of stock
options 1,849
Net income for the six months
ended June 30, 1995
------ ----- -------- ----- -------
Balance June 30, 1995 34,439 $344 $145,025 3,267 $11,091
====== ===== ======== ===== =======
Retained
earnings
(deficit) Total
--------- ---------
Balance, December 31, 1994 ($38,282) $114,048
Exercise of warrants 1,640
Exercise of stock options 641
Tax benefit from exercise of stock
options 1,849
Net income for the six months
ended June 30, 1995 40,191 40,191
------- ---------
Balance June 30, 1995 $ 1,909 $158,369
======= =========
See notes to consolidated financial statements
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ALC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended June 30, 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 June 30, 1995 and
December 31, 1994, and the results of operations and cash flows for the three
and six month periods ended June 30, 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
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 not to exceed 83.5 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. Both the Company and Frontier have scheduled shareholder meetings
on August 16, 1995 to seek approval for the merger from their shareholders.
The Company expects that regulatory approval will have been received by that
date. The transaction is expected to be effective as of August 16, 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 indicative 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 Six months ended
June 30, June 30,
------------------ ----------------
1995 1994 1995 1994
---- ---- ---- ----
(in thousands except per share amounts)
Revenue $197,238 $145,819 $382,338 $286,006
Net income $ 20,216 $ 13,841 $ 40,254 $ 8,348
Earnings per Common and
Common equivalent share $ 0.52 $ 0.36 $ 1.04 $ 0.74
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 June 30, 1995, the Company had $105.0
million of availability 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 $20.2 million and $40.2 million on revenue
of $197.2 million and $375.0 million for the three and six month periods ended
June 30, 1995. This compares to net income of $14.8 million and $29.5 million
on revenue of $135.9 million and $265.7 million for the same periods in 1994.
Gross margin, defined as revenue less cost of communication services and
equipment sales, as a percent of net revenue decreased from 45.3% and 45.7%
for the three and six months ended June 30, 1994 to 43.6% and 43.7% for the
three and six months ended June 30, 1995 primarily due to the impact of lower
average revenue per minute. 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 $9.1
million and $17.8 million for the three and six months ended June 30, 1995 over
the same periods one year earlier.
OPERATING RESULTS AS A PERCENT OF REVENUE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------
1995 1994 1995 1994
------------------------------------------
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of communication services
and equipment sales (56.4) (54.7) (56.3) (54.3)
----- ----- ----- -----
Gross Margin 43.6% 45.3% 43.7% 45.7%
Sales, general and administrative (22.9) (23.9) (22.4) (24.0)
Depreciation and amortization (3.5) (3.1) (3.4) (3.1)
----- ----- ----- -----
Operating Income 17.2% 18.3% 17.9% 18.6%
===== ===== ===== =====
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 eighth consecutive quarter. The increase results
from traffic growth generated by new customers, including strong growth in
reseller traffic, as well as the introduction of new products partially offset
by billable minutes lost through attrition of existing customers. The results
of operations for the three and six months ended June 30, 1995 reflect a
continuation of the trend of strong financial performance as indicated by 36.2%
and 36.3% increases in net income from the comparable quarter and year to date
periods 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 the three and six months ended June 30, 1995 reflects
ConferTech results since March 1, 1995. The portion of operating income
relating to ConferTech totaled $1.2 million and $1.6 million or approximately
3.6% and 2.4% 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 not to exceed 83.5 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. Both the Company and Frontier have scheduled shareholder meetings
on August 16, 1995 to seek approval for the merger from their shareholders.
The Company expects that regulatory approval will have been received by that
date. The transaction is expected to be effective as of August 16, 1995.
REVENUE
Revenue increased by 45.1% and 41.1% for the three and six months ended June
30, 1995 from the comparable periods of 1994. Billable minutes again reached
the highest level in the history of the Company, increasing by 54.2% for the
three months ended June 30, 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 15.3 cents continues to be strong, though it has decreased from the prior
year quarter level of 17.5 cents primarily due to changes in the sales mix.
Revenue from the ConferTech acquisition totaled $13.2 million for the three
months ended June 30, 1995. Excluding the impact of the ConferTech acquisition,
revenue increased 35.5% for the three months ended June 30, 1995 from the
comparable period in 1994.
Reseller revenue has continued to grow significantly from prior year periods
reaching over 30% of net revenue for the three and six months ended June 30,
1995 compared to approximately 20% of net revenue for the same periods one
year ago. 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 year and a half
and comprises approximately 17.6% 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 certain provisions regarding exclusivity and minimums.
The provision for uncollectible revenue was 1.5% of gross revenue for the three
and six months ended June 30, 1995 and 1.5% and 1.7% for the same periods 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 $36.9 million
and $66.7 million during the three and six month periods ended June 30, 1995
compared to the same periods 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
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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 6% of revenue for the six months ended June 30,
1995.
Sales, general and administrative expense increased by 38.9% and 31.7% for the
three and six month periods ended June 30, 1995 from the same periods one year
earlier (but decreased slightly as a percent of revenue). The dollar increase
reflects increased salaries and other expenses related to a 23.3% increase in
headcount for the six month period compared to the prior year to support the
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 63.2% and 55.7% for the three and six
months ended June 30, 1995 compared to the same periods in 1994. This increase
is the result of a $2.3 million increase in year to date depreciation due to
newly acquired fixed assets and a $2.3 million increase in year to date
amortization of intangible assets associated with the purchase of ConferTech
and various customer bases.
INTEREST EXPENSE
Net interest expense remained relatively constant for the three months ended
June 30, 1995 and decreased 10.7% for the six months ended June 30, 1995
compared to the same periods in 1994 due to improved cash flow from operations
and a $0.5 million increase in interest income for the six months ended June
30, 1995 compared to the same period in the prior year. 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 six months of 1994 to
37.4% for the first six 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 six months ended June 30, 1995 and 1994, the Company generated positive
cash flow from operations of $50.8 million and $38.0 million, respectively.
The positive cash flow reflects twenty consecutive quarters of increased
revenue and operating profits compared to prior year comparable quarters.
The Company's working capital was $16.3 million at June 30, 1995 compared to
$41.5 million at December 31, 1994. The decrease in working capital is largely
the result of the $38.5 million decrease in the cash balance resulting from the
use of funds for the acquisition of ConferTech and the $25.7 million increase
in accrued liabilities and network costs attributable to increased volume,
offset by the $10.8 million increase in other current assets resulting from the
ConferTech acquisition as well as the costs of the Frontier merger and the
$29.8 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.
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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 June 30, 1995, the Company had $105.0 million available under the line.
Upon the successful completion of the Frontier merger, the Company expects to
terminate the Facility.
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 $10.9 million for the first six 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. Future investment
requirements for capital expenditures relate directly to traffic growth which
necessitates the purchase of switching and related equipment. In addition, a
major component of the capital budget relates to technological advancements as
the Company continually updates its network capabilities to offer enhanced
products and services.
Management believes that the Company's cash flow from operations will provide
adequate sources of liquidity to meet the Company's anticipated short and long
term liquidity needs.
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PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
EXHIBIT INDEX
[refer to definitions at end of Index]
Incorporated Page
Exhibit Filed Herein by Number
Number Description Herewith Reference to: Herein
------ ------------ ---------- ------------- ------
11.1 Computation of Per Exhibit 11.1 to
Share Earnings ALC Second Quarter
1995 10-Q
27.1 Financial Data Schedule X
DEFINITIONS: ALC: ALC Communications Corporation
The Registrant hereby agrees to furnish the Commission a copy of each of the
Indentures or other instruments defining the rights of security holders of the
long-term debt securities of the Registrant and any of its subsidiaries for
which consolidated or unconsolidated financial statements are required to be
filed.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the second 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: August 11, 1995
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EXHIBIT INDEX
Exhibit
No. Description Page
------- ----------- ----
Ex 27.1 Financial Data Schedule