UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _______________ to ________________
Commission file number 0-24334
AMERILINK CORPORATION
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(Exact name of registrant as specified in its charter)
OHIO 31-1409345
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1900 E. DUBLIN-GRANVILLE ROAD, COLUMBUS, OHIO 43229
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(Address of principal executive offices, including zip code)
(614) 895-1313
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(Registrant's telephone number, including area code)
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 .
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4,174,574 shares of Common Stock were outstanding as of November 1, 1998
-1-
AMERILINK CORPORATION
QUARTERLY REPORT FOR THE QUARTER ENDED SEPTEMBER 27, 1998
Index Page No.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 29, 1998,
and September 27, 1998 (Unaudited) 3
Consolidated Statements of Income (Unaudited) for the
Twenty-six Weeks Ended September 28, 1997, and September 27, 1998 4
Consolidated Statements of Income (Unaudited) for the
Thirteen Weeks Ended September 28, 1997, and September 27, 1998 5
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited) for the Twenty-six Weeks Ended September 27, 1998 6
Consolidated Statements of Cash Flows (Unaudited) for the
Twenty-six Weeks Ended September 28, 1997, and September 27, 1998 7
Notes to Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 15
PART II - OTHER INFORMATION
ITEMS 1 THROUGH 5 16
ITEM 6 17
SIGNATURES 17
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AMERILINK CORPORATION
CONSOLIDATED BALANCE SHEETS
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March 29, September 27,
1998 1998
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 8,723,230 $ 11,447,695
Accounts receivable - trade, net of allowance for doubtful accounts of
$234,000 in 1998 and $320,000 in 1999 13,884,731 11,415,524
Work-in-process 5,690,546 6,098,988
Materials and supply inventories 1,655,809 1,397,361
Other receivables 229,702 253,206
Deferred income taxes 458,584 458,584
Other 114,895 362,278
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Total current assets 30,757,497 31,433,636
Property and equipment - net 7,585,118 6,114,995
Deposits and other assets 185,291 108,184
---------------- ----------------
Total assets $ 38,527,906 $ 37,656,815
---------------- -----------------
---------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 2,658,091 $ 1,781,317
Liability to subcontractors 1,886,173 1,738,526
Accrued compensation and related expenses 1,845,507 1,345,735
Accrued insurance 509,965 229,656
Other 307,579 294,388
---------------- -----------------
Total current liabilities 7,207,315 5,389,622
Shareholders' equity:
Preferred stock, without par: 1,000,000 shares authorized; none issued
or outstanding ---- ----
Common stock, without par: 10,000,000 shares authorized; 4,255,930 and
4,283,344 shares issued and outstanding at
March 29, 1998, and September 27, 1998 24,017,256 24,180,499
Retained earnings 7,303,335 8,086,694
---------------- ----------------
Total shareholders' equity 31,320,591 32,267,193
---------------- ----------------
Total liabilities and shareholders' equity $ 38,527,906 $ 37,656,815
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See notes to consolidated financial statements
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AMERILINK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the Twenty-six Weeks Ended
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September 28, September 27,
1997 1998
---- ----
Revenues $ 43,368,194 $ 32,408,652
Cost of sales 26,728,259 19,885,894
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Gross profit 16,639,935 12,522,758
Selling, general and administrative expenses 12,342,181 11,509,037
---------------- ----------------
Income from operations 4,297,754 1,013,721
Interest income (expense) (296,089) 273,638
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Income before income taxes 4,001,665 1,287,359
Provision for income taxes 1,609,000 504,000
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Net income $ 2,392,665 $ 783,359
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---------------- ----------------
Earnings per share:
Basic $ 0.68 $ 0.18
Diluted $ 0.64 $ 0.18
Weighted average shares:
Basic 3,495,797 4,261,370
Diluted 3,757,411 4,401,721
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See notes to consolidated financial statements
-4-
AMERILINK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the Thirteen Weeks Ended
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September 28, September 27,
1997 1998
---- ----
Revenues $ 21,717,124 $ 15,759,425
Cost of sales 13,379,231 9,718,392
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Gross profit 8,337,893 6,041,033
Selling, general and administrative expenses 6,206,018 5,613,499
---------------- ----------------
Income from operations 2,131,875 427,534
Interest income (expense) (131,038) 142,611
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Income before income taxes 2,000,837 570,145
Provision for income taxes 789,000 231,000
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Net income $ 1,211,837 $ 339,145
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---------------- ----------------
Earnings per share:
Basic $ 0.35 $ 0.08
Diluted $ 0.31 $ 0.08
Weighted average shares:
Basic 3,510,014 4,265,644
Diluted 3,918,794 4,367,707
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See notes to consolidated financial statements
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AMERILINK CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
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Common Stock Retained
Shares Amount Earnings Total
------ ------ -------- -----
Balance at March 29, 1998 4,255,930 $ 24,017,256 $ 7,303,335 $ 31,320,591
Net income ---- ---- 783,359 783,359
Proceeds from exercise
of stock options 25,000 158,750 ---- 158,750
Issuance of restricted
stock, net of deferred
compensation expense 2,414 ---- ---- ----
Amortization of deferred
compensation expense ---- 4,493 ---- 4,493
------------ -------------- -------------- ---------------
Balance at September 27, 1998 4,283,344 $ 24,180,499 $ 8,086,694 $ 32,267,193
------------ -------------- -------------- ---------------
------------ -------------- -------------- ---------------
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See notes to consolidated financial statements
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AMERILINK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Twenty-six Weeks Ended
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September 28, September 27,
1997 1998
---- ----
OPERATING ACTIVITES
Net income $ 2,392,665 $ 783,359
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization 1,384,077 1,433,551
Net loss (gain) on disposal of fixed assets 4,082 (15,188)
Changes in operating assets and liabilities:
Accounts receivable and work-in-process (2,261,099) 2,060,766
Materials and supply inventories (213,018) 258,448
Other receivables 90,619 (23,504)
Other assets (31,177) (247,383)
Trade accounts payable 961,191 (876,774)
Liability to subcontractors 1,227,778 (147,647)
Accrued compensation and related expenses 807,575 (499,772)
Accrued insurance 70,290 (280,309)
Other liabilities (99,363) (13,193)
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Net cash provided by operating activities 4,333,620 2,432,354
INVESTING ACTIVITIES
Purchase of property and equipment (3,214,082) (776,850)
Proceeds from sale of property and equipment 246,099 833,103
Deposits and other assets (3,586) 77,108
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Net cash provided by (used in) investing activities (2,971,569) 133,361
FINANCING ACTIVITIES
Principal payments on long-term debt (15,719,190) ----
Proceeds from borrowings on long-term debt 13,900,000 ----
Proceeds from exercise of stock options 192,000 158,750
Tax benefit from exercise of options 233,268 ----
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Net cash provided by (used in) financing activities (1,393,922) 158,750
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Increase (Decrease) in cash and cash equivalents (31,871) 2,724,465
Cash and cash equivalents at beginning of period 120,395 8,723,230
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Cash and cash equivalents at end of period $ 88,524 $ 11,447,695
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Supplemental cash flow disclosures:
Interest paid $ 253,878 $ ----
Income taxes paid $ 1,296,922 $ 504,086
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See notes to consolidated financial statements
-7-
AMERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: AmeriLink Corporation (the "Company") designs, constructs,
installs and maintains fiber optic, coaxial and twisted-pair copper cabling
systems for the transmission of video, voice and data. The Company's cabling
services include the drops and cable feeds to, and wiring of, residences,
multiple dwelling units and commercial buildings and the construction of aerial
and underground distribution plant. The Company offers these services on a
national basis to providers of telecommunications services, including: major
cable television multiple system operators (MSOs); traditional telephone service
providers, including local exchange carriers (LECs) and long distance carriers;
competitive local exchange carriers (CLECs); Direct Broadcast Satellite (DBS)
providers; system integrators and users of local area network (LAN) and
wide-area network (WAN) systems; and other businesses providing specific or
bundled telecommunications services. The Company's services are provided
predominantly through the use of independent contractors via its national
network of regional and satellite field offices. The Company's corporate
headquarters are located in Columbus, Ohio, and, as of September 27, 1998, the
Company had 21 regional field offices that service the following metropolitan
areas: Atlanta, Baltimore, Chicago, Cincinnati, Cleveland, Columbus, Dallas,
Detroit, Houston, Indianapolis, Los Angeles, Louisville, New York, Omaha,
Phoenix, Richmond, San Antonio, San Francisco, St. Louis, Seattle/Tacoma and
Tampa Bay.
INTERIM FINANCIAL STATEMENTS: These financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles for complete financial statements.
These financial statements should be read in conjunction with the March 29,
1998, audited financial statements of AmeriLink Corporation contained in its
Annual Report to Shareholders. The financial information included herein
reflects all adjustments (consisting of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair presentation of the results
for interim periods. The results of operations for the thirteen and twenty-six
weeks ended September 27, 1998, are not necessarily indicative of the results to
be expected for the full year.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Management believes those estimates and assumptions utilized
in preparing the financial statements are reasonable. Actual results could
differ from those estimates. Estimates used in the Company's consolidated
financial statements include, but are not limited to, revenue recognition of
work-in-process, the allowance for doubtful accounts, self-insured claims
liabilities, the valuation of deferred tax assets, depreciation and amortization
and the estimated lives of assets.
RECLASSIFICATIONS: Certain reclassifications have been made to the fiscal 1998
consolidated financial statements to conform to the fiscal 1999 presentation.
-8-
AMERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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2. COMMON STOCK AND EARNINGS PER SHARE ("EPS")
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS includes the dilution of common stock equivalents
consisting of shares subject to stock options. The following table sets forth
the calculation of basic and diluted EPS for the periods ended September 28,
1997, and September 27, 1998.
Thirteen Weeks Ended Twenty-six Weeks Ended
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September 28, September 27, September 28, September 27,
1997 1998 1997 1998
---- ---- ---- ----
BASIC EPS:
Net income $ 1,211,837 $ 339,145 $ 2,392,665 $ 783,359
Weighted average common shares
outstanding 3,510,014 4,265,644 3,495,797 4,261,370
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Basic EPS $ 0.35 $ 0.08 $ 0.68 $ 0.18
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DILUTED EPS:
Net income $ 1,211,837 $ 339,145 $ 2,392,665 $ 783,359
Weighted average common shares
outstanding 3,510,014 4,265,644 3,495,797 4,261,370
Dilutive stock options 408,780 102,063 261,614 140,351
------------- ------------- ------------- -------------
Total shares and dilutive
potential shares 3,918,794 4,367,707 3,757,411 4,401,721
------------- ------------- ------------- -------------
Diluted EPS $ 0.31 $ 0.08 $ 0.64 $ 0.18
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Some options were outstanding during the periods presented but were not included
in the computation of diluted EPS because the average market price of the
Company's common stock during the period was less than the exercise price of the
options and, therefore, were antidilutive.
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
This Quarterly Report, including Management's Discussion and Analysis
of Financial Condition and Results of Operations, contains various
forward-looking statements (as such term is defined in the Private Securities
Litigation Reform Act of 1995) which, in addition to assuming a continuation of
the degree and timing of customer utilization and rate of renewals of contracts
with the Company at historic levels, are subject to a number of known and
unknown risks. Certain statements, such as statements regarding the Company's
future growth and profitability, are forward-looking. These statements are based
on the Company's current expectations and are subject to a number of risks and
uncertainties that could cause actual results in the future to differ
significantly from results expressed or implied in any forward-looking
statements included in this Quarterly Report. These risks and uncertainties
include, but are not limited to, the Company's relationship with key customers,
implementation of the Company's growth strategy, seasonality, changing market
conditions and customer purchase authorizations, competitive and regulatory
risks associated with the telecommunications industry, new products and
technological changes and other risks detailed in the Company's periodic report
filings with the Securities and Exchange Commission including, but not limited
to, the factors described under the caption "Variability in Quarterly Results
and Seasonality" below.
RESULTS OF OPERATIONS
Revenue is generated from cabling projects performed via work orders
issued under master contracts. Contract costs may vary depending upon the
contract volume, the level of productivity, competitive factors in the local
market and other items. Cost of sales includes subcontractor production costs,
materials not supplied by the customer, vehicle and machinery expenses and
business insurance related costs. Selling, general and administrative expenses
consist primarily of field employee wages and payroll costs.
COMPARISON OF TWENTY SIX WEEKS ENDED SEPTEMBER 28, 1997 AND SEPTEMBER 27, 1998
REVENUES
Total revenues for the first six months of fiscal 1999 were $32,408,652
compared to $43,368,194 for the first six months of fiscal 1998, a decrease of
25%.
Revenues derived from residential and commercial premises wiring
activities decreased 23% to $29.5 million in the first six months of fiscal
1999, versus approximately $38.2 million in the prior year period. Such revenues
accounted for 91% of the Company's total revenues for the fiscal 1999 period
versus 88% in the prior fiscal year. Premises wiring revenues from telephone
companies for video communication services decreased to approximately $6.2
million (19% of total Company revenues) from $15.7 million (36% of total Company
revenues) in the first six months of last year. Revenues from telephone
companies for video communication services have declined sequentially in each of
the last five fiscal quarters. This sequential decline in revenues is due to a
number of factors, including: (1) a decision by SBC Communications, Inc., to
halt construction of a cable project in California in June 1997 which produced
approximately $1.1 million of revenues in the Company's fiscal 1998 first
quarter, (2) a shift from higher revenue generating underground cabling work
orders to lower revenue aerial installation work orders in GTE Media Ventures
franchise areas in California, (3) an increase in competition from other cabling
service providers for available Telco work in certain market areas, (4) an
apparent reassessment by Telcos with regard to their video strategies by
pursuing less costly wireless cable systems (DBS and MMDS systems) in lieu of
their current and more costly hybrid fiber-coaxial hardwire systems and (5) a
slowdown in the buildout rate of video networks in their current franchise
areas. The amount of future capital allocated by these companies to their video
programs is largely contingent upon the financial success of these programs,
possible new technical developments and overall strategic decisions by the
companies regarding video services. In addition, consolidation within the
telecommunications
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industry may also delay or depress capital spending among Telcos, as
companies assess their new business plans and strategies and focus on
administrative and operational issues associated with their acquisitions or
alliances. Revenues from GTE Media Ventures for the first two quarters of
fiscal 1999 were approximately $2.6 million, a decrease of $5.7 million or
69% from the $8.3 million recorded in the prior year period. GTE Media
Ventures was the Company's largest customer in fiscal 1998 and comprised
approximately 17% of total Company revenues. The company believes that
revenues generated from contracts with GTE will continue to decline during
the remaining six months of the current fiscal year.
Residential premises wiring revenues from cable television MSOs for the
first six months of fiscal 1999 approximated $13.9 million, for an increase of
13% when compared with $12.3 million during the same period in fiscal 1998. The
Company believes the increased capital spending by MSOs is being driven by the
industry's desire to upgrade cable networks for enhanced digital services.
Outside plant construction revenues for the first two quarters of fiscal 1999
declined to approximately $2.9 million from approximately $5.2 million,
reflecting management's strategy to increase its emphasis on premises wiring
services.
GROSS PROFIT
Gross profit for the first six months of fiscal 1999 was $12,522,758,
or 38.6% of revenues, as compared to $16,639,935, or 38.4% of revenues, in the
first six months of fiscal 1998.
The increase in gross margin is due primarily to a decrease in
subcontractor production costs, which decreased as a percent of labor cabling
revenues in the first six months of fiscal 1999 compared to the corresponding
period last year. Contract and project subcontractor costs are dependent upon a
number of factors, including pricing for the Company's services, the level of
productivity, competitive factors in the local market and other items. The
Company's profitability for the first six months of fiscal 1999 was negatively
impacted by its decision to terminate a contract in Phoenix, Arizona, with a
Telco in May 1998. Individual project work orders related to this contract
generated approximately $0.6 million in revenues and an operating loss of
approximately $0.2 million in fiscal 1999. Work under this contract was
substantially complete as of June 28, 1998. As of September 27, 1998 the
Company had approximately $1.3 million in unsecured accounts receivable
relating to work performed under this contract.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company's selling, general and administrative cost structure is
maintained at levels necessary to adequately support both anticipated near term
revenues and projected longer term revenues. These anticipated revenue levels
and associated cost structures may vary among the Company's regional field
offices and geographic market areas. The Company is reluctant to significantly
reduce its cost structure during periods of reduced spending by its customers
and believes a certain expense level is necessary to adequately support longer
term revenue growth and quality customer service. Selling, general and
administrative expenses for the first six months of fiscal 1999 were $11,509,037
(35.5% of revenues), as compared to $12,342,181 (28.5% of revenues) in the prior
year period, a decrease of $833,144 or 7%. This decrease is primarily a result
of a decrease in employee wage expense and employee benefits. The increase in
selling, general and administrative expenses as a percentage of revenues is a
result of a decline in revenues in the first six months of fiscal 1999, which
decreased approximately 25% from the comparable first six months of fiscal 1998.
INTEREST INCOME AND EXPENSE
Interest income was $273,638 for the six months ended September 27,
1998, as compared to net interest expense of $296,089 for the first six months
of fiscal 1998. In October 1997 the Company used part of the proceeds received
from a public stock offering to pay in full its outstanding bank debt of
approximately $6.8 million. The balance of the proceeds are being invested in
short-term investment grade securities.
-11-
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 39.1% for the first six months of
fiscal 1999 versus 40.2% for the comparable period in fiscal 1998. This decrease
is primarily the result of a lower anticipated effective state tax rate in
fiscal 1999.
COMPARISON OF THIRTEEN WEEKS ENDED SEPTEMBER 28, 1997 AND SEPTEMBER 27, 1998
REVENUES
Total revenues for the second quarter of fiscal 1999 were $15,759,425
compared to $21,717,124 for the second quarter of fiscal 1998, a decrease of
27%.
Revenues derived from residential and commercial premises wiring
activities decreased 27% to $14.4 million in the second quarter of fiscal 1999,
versus approximately $19.6 million in the prior year period. Premises wiring
revenues from telephone companies for video communication services decreased to
approximately $3.1 million (20% of total Company revenues) from $7.4 million
(34% of total Company revenues) in the second quarter of last year. Revenues
from GTE Media Ventures for the second quarter of fiscal 1999 were approximately
$1.1 million, a decrease of $3.5 million or 76% from the $4.6 million recorded
in the prior year period. GTE Media Ventures was the Company's largest customer
in fiscal 1998 and comprised approximately 17% of total Company revenues. The
company believes that revenues generated from contracts with GTE will continue
to decline during the remaining six months of the current fiscal year.
Residential premises wiring revenues from cable television MSOs for the
three months ended September 27, 1998, approximated $7.2 million, an increase of
17% from the $6.2 million recorded in the same period during fiscal 1998.
Revenues from Tele-Communications, Inc., (TCI) for the second quarter of fiscal
1999 were approximately $1.6 million, an increase of $1.0 million or
approximately 150% from the $0.6 million recorded in the second quarter of
fiscal 1998. The Company recently opened new regional offices in Dallas,
Baltimore and the Seattle/Tacoma area, primarily to service new TCI contracts.
These new regional offices should also allow the Company to expand its premises
wiring capabilities in these new geographic markets.
Fiscal 1998 second quarter premises wiring revenues also included
approximately $0.8 million in revenues from telephone companies for voice and
data services, whereas the Company recorded negligible Telco voice and data
revenues in its most recent quarter.
GROSS PROFIT
Gross profit for the second quarter of fiscal 1999 was $6,041,033
versus $8,337,893 in the second quarter of last year. The decrease in gross
profit is a result of lower revenues in the second quarter of fiscal 1999
compared to the second quarter of fiscal 1998. Gross profit as a percentage of
revenues was similar for both quarters (38.3% in the second quarter of fiscal
1999 and 38.4% in the second quarter of fiscal 1998).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the second quarter of
fiscal 1999 were $5,613,499 (35.6% of revenues) compared to $6,206,018 (28.6% of
revenues) in the prior year period, a decrease of $592,519 or 9.5%. This
decrease is primarily a result a decrease in employee wage expense and employee
benefits. The increase in selling, general and administrative expenses as a
percentage of revenues is a result of a decline in revenues in the second
quarter of fiscal 1999, which decreased approximately 27% from the comparable
quarter in fiscal 1998.
-12-
INTEREST INCOME AND EXPENSE
Interest income was $142,611 for the three months ended September 27,
1998 as compared to net interest expense of $131,038 for the three months ended
September 28, 1997. In October 1997 the Company used part of the proceeds
received from a public stock offering to pay in full its outstanding bank debt
of approximately $6.8 million. The balance of the proceeds are being invested in
short-term investment grade securities.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. Historically, the Company's principal sources of liquidity
have come from operating cash flow and credit arrangements. The Company's
primary requirements for working capital are to finance accounts receivable,
work-in-process and capital expenditures. Pursuant to a typical construction,
MDU or LAN cabling contract, work performed by the Company is generally not
billed to a customer until various stages in a project are reached or until the
entire project is complete. Because the Company pays its suppliers and
subcontractors on a current basis, to the extent that trade payables exceed
customer accounts paid at any given time, the Company would draw on its
revolving credit note to finance its work-in-process until project work is
billed to and paid by the customer.
In October 1997 the Company completed a public offering in which it
issued 600,000 new shares of common stock. Net proceeds from the offering were
$14,175,000 before deducting related expenses of $279,443. The Company paid in
full the outstanding balance of its revolving credit note of approximately $6.8
million and will use the balance of the proceeds for general corporate purposes
including working capital, expansion of sales and marketing activities, openings
of new field offices and possible acquisitions of businesses, services or
technology complimentary to the Company's business. Pending such uses, the
proceeds are being invested in short-term investment grade securities. As of
September 27, 1998 the Company had approximately $11.4 million in cash and cash
equivalents.
On September 4, 1998 the Company's Board of Directors authorized the
repurchase of up to 400,000 common shares of the Company's stock in the open
market or in privately negotiated transactions depending upon market conditions
and other factors. The Company intends to use current cash reserves to finance
the share repurchase program. Repurchased common shares will be held in the
Company's treasury and used for employee benefit plans and other general
corporate purposes. No shares had been repurchased as of September 27, 1998.
Combined accounts receivable and work-in-process at September 27, 1998,
totaled $17.5 million compared to $19.6 million at March 29, 1998, a decrease of
approximately $2.1 million, or 10.5%. This decrease is due to the decline in
revenues in the first six months of fiscal 1999. The Company anticipates that it
will continue to receive collections of its accounts receivable in the ordinary
course of business. There is no assurance, however, that the Company will be
able to collect all or substantially all of its accounts receivable outstanding
at any time, although the Company believes it has adequately provided for
potential losses through its allowance for doubtful accounts. The Company's
failure to collect substantially all of its accounts receivable and
work-in-process would have an adverse impact on its working capital and could
adversely affect its results of operations.
Capital requirements are dependent upon a number of factors including
the Company's revenues, level of operations and the type of contracts and work
that the Company performs. Due to the fact that the Company generally has no
extended commitments from its customers, it is difficult to forecast longer term
revenues and associated capital expenditure and operating cash requirements.
Management believes current cash reserves, cash flow from operations, possible
credit from commercial banks and funds which may be obtained from the issuance
of common stock should provide sufficient capital to meet the reasonably
foreseeable business needs of the Company.
CURRENT CREDIT ARRANGEMENTS. On March 26, 1998, the Company received a
commitment from a new commercial bank for a two-year $10.0 million unsecured
revolving credit note and terminated its prior credit agreement. The Company has
continued to negotiate with other commercial banks to evaluate other credit
agreements, and therefore terms of the $10.0 million unsecured revolving credit
note have not been finalized. The
-13-
Company anticipates that it will finalize a credit agreement with a
commercial bank by the end of its current fiscal year.
CASH FLOW FROM OPERATING ACTIVITIES. For the first six months of fiscal
1999, net cash provided by operating activities was approximately $2.4 million
versus approximately $4.3 million for the corresponding period last year. Cash
provided in fiscal 1998 was primarily a result of approximately $2.4 million of
net income plus non-cash depreciation and amortization expense. Cash provided in
fiscal 1999 is primarily a result of a decrease of approximately $2.1 million in
combined accounts receivable and work-in-process.
CASH FLOW FROM INVESTING ACTIVITIES. Net cash provided by investing
activities for the first six months of fiscal 1999 totaled $133,361 versus net
cash used of approximately $3.0 million for the corresponding period last year.
Investing activities primarily relate to the purchase of property and equipment,
which totaled approximately $3.0 million (net of proceeds from the sale of
property and equipment) for the first six months of fiscal 1998. Proceeds from
selling equipment slightly exceeded new purchases for the first six months of
the current fiscal year. The capital expenditures in fiscal 1998 were a result
primarily of new project start ups and more outside plant construction activity
(approximately $5.2 million in revenues in the first six months of fiscal 1998
versus approximately $2.9 million in the first six months of fiscal 1999). The
proceeds in fiscal 1999 are primarily the result of the company selling vehicles
that were utilized on a large project with a Telco in Phoenix, Arizona. This
contract was terminated and was substantially complete as of June 28, 1998.
VARIABILITY IN QUARTERLY RESULTS AND SEASONALITY
The Company's quarterly revenues and associated operating results have
in the past, and may in the future, vary depending upon a number of factors. The
Company has no long-term contractual commitments to provide its services. The
contractual commitments which do exist generally can be terminated on 30 days'
notice. These contractual commitments do not involve a firm backlog of committed
work because the Company's contracts with MSOs, Telcos, DBS providers and other
telecommunications providers produce daily work orders only on a
project-by-project basis which must be funded by an approved purchase order. In
addition, network cabling services are generally nonrecurring in nature and are
contracted on a project-by-project basis. Therefore, the amount of work
performed at any given time and the general mix of customers for which work is
being performed can vary significantly. Consolidation within the
telecommunications industry may also delay or depress capital spending as
companies assess their new business plans and strategies and focus on
administrative and operational issues associated with their acquisitions or
alliances. The Company's operations historically have also been influenced by
the budget cycles of the Company's customers. Many of the Company's MSO
customers utilize a calendar year budget cycle, funded with quarterly purchase
authorizations, which in certain fiscal years has resulted in a lack of
availability of funds in the Company's third fiscal quarter and has delayed work
authorizations in the early part of the calendar year (the Company's fourth and
first fiscal quarters.) Telecommunications providers are also subject to actual
and potential local, state and Federal regulations that influence the
availability of work for which the Company may compete. Weather may affect
operating results due to the fact that construction cabling services are
performed outdoors. Weather can also impact the Company's premises wiring
cabling services due to the limited and lost production associated with poor
driving conditions and soft ground which may prevent underground premises
installations, the burying of cable drops and increased restoration costs.
Operating results may also be affected by the capital spending patterns of the
Company's customers and by the success of various technologies and business
strategies employed by them. For example, in fiscal 1998 the Company recorded
approximately $25.9 million in revenues (30.2% of total revenues for the year)
from Telcos that were building or expanding video systems. Revenues from Telcos
for video systems have declined sequentially in each of the last five quarters,
from approximately $8.3 million in the first quarter of fiscal 1998 to
approximately $3.1 million in the second quarter of fiscal 1999. The amount of
future capital allocated by these companies to their video programs is largely
contingent upon the financial success of these programs, possible new technical
developments and overall strategic decisions by the companies regarding video
services. Revenues from GTE Media Ventures for the first two quarters of fiscal
1999 were approximately $2.6 million, a decrease of $5.7 million or 69% from the
$ 8.3 million recorded in the prior-year
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period. GTE Media Ventures was the Company's largest customer in fiscal 1998
and comprised approximately 17% of total Company revenues. The company
believes that revenues generated from contracts with GTE will continue to
decline during the remaining six months of the current fiscal year. The
Company's operating profitability and capacity to increase revenues is also
largely dependent upon its ability to locate and attract qualified field
managers, project managers and technical production personnel. Other factors
that may affect the Company's operating results include the size and timing
of significant projects and the gain or loss of a significant contract or
customer.
INFLATION
Historically, inflation has not been a significant factor to the
Company as labor is the primary cost of operations and its contracts are
typically short-term in nature. On an ongoing basis, the Company attempts to
minimize any effects of inflation on its operating results by controlling
operating costs and, whenever possible, seeking to insure that selling prices
reflect increases in costs due to inflation.
ENVIRONMENTAL MATTERS
The Company anticipates that its compliance with various laws and
regulations relating to the protection of the environment will not have a
material effect on its capital expenditures, future earnings or competitive
position.
YEAR 2000
The Year 2000 problem arises from the fact that due to early
limitations on memory and disk storage many computer programs indicate the year
by only two digits, rather than four. This limitation can cause programs that
perform arithmetic operations, comparisons or sorting of data fields to yield
incorrect results when working outside the year range of 1900-1999. This could
cause computer applications to fail or to create erroneous results unless
corrective measures are taken. Incomplete or untimely resolution of the Year
2000 issue could have a material adverse impact on the Company's business,
operations or financial condition in the future. The Company has been assessing
the impact that the Year 2000 issue will have on its computer systems, including
both hardware and software. In response to these assessments, which are ongoing,
the Company has developed and is implementing a plan to develop solutions to
those systems found to have date-related deficiencies. The Company is also
surveying its bank and critical suppliers to determine the status of their Year
2000 compliance programs. Based upon current available information, the Company
believes that Year 2000 compliance should be substantially completed by March
1999. Assuming that project plans can be implemented as planned, the Company
believes future costs related to becoming Year 2000 compliant, which will be
expensed as incurred, will not have a material adverse impact on the Company's
business, operations or financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's exposure to market risk through derivative financial instruments
and other financial instruments, such as investments in short-term marketable
securities and long-term debt, is not material.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On August 4, 1998, the Company held its Annual Meeting of Shareholders.
The following matters were voted upon:
1. The election of three Directors, each to serve until the 2000 Annual
Meeting and until their successors are duly elected and qualified;
2. The adoption of amendments to the 1994 Stock Incentive Plan.
The following table provides the number of votes cast for and withheld
as to the election of directors.
NAME OF NOMINEE VOTES FOR VOTES WITHHELD
--------------- --------- --------------
William H. Largent 4,027,229 20,205
George R. Manser 4,027,229 20,205
Robert D. Setzer 4,027,229 20,205
Robert L. Powelson, Larry R. Linhart and Richard W. Rubenstein, Esq.
continued their terms as directors after the meeting. They will continue to
serve until their terms end at the 1999 Annual Meeting of Shareholders.
The following table provides the number of votes cast for and against
and the number of abstentions and non-votes as to the adoption of amendments to
the 1994 Stock Incentive Plan.
BROKER NON-
VOTES FOR VOTES AGAINST ABSTENTIONS VOTES
--------- ------------- ----------- -----
2,168,493 933,156 14,657 931,128
ITEM 5. OTHER INFORMATION.
Not applicable.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit No. Description
----------- -----------
10.1 Amendments to 1994 Stock Incentive Plan.
Incorporated by reference to Exhibit A to
AmeriLink Corporation's 1998 Proxy Statement
dated July 6, 1998.
10.2 Amendment No. 2 to Executive Employment Agreement
between AmeriLink Corporation and Larry R.
Linhart.
11 Statement re: computation of per share earnings.
All information required by Exhibit 11 is
presented herewith on Page 9 under Note 2 to the
Company's consolidated financial statements.
27 Financial Data Schedule filed herewith as part of
this report on Form 10-Q.
(b) No reports on Form 8-K have been filed during the quarter ended
September 27, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERILINK CORPORATION
-------------------------
(Registrant)
Date: November 1, 1998 By: /s/ Larry R. Linhart
--------------------
Larry R. Linhart
Chairman, President and Chief Executive
Officer
Date: November 1, 1998 By: /s/ James W. Brittan
--------------------
James W. Brittan
Vice President of Finance
(Principal Financial and Accounting
Officer)
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