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 December 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 .
----- -----
4,531,174 shares of Common Stock were outstanding as of February 2, 1999
AMERILINK CORPORATION
QUARTERLY REPORT FOR THE QUARTER ENDED DECEMBER 27, 1998
Page No.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Balance Sheets as of March 29, 1998,
and December 27, 1998 (Unaudited) 3
Consolidated Statements of Income (Unaudited) for the
Thirty-nine Weeks Ended December 28, 1997, and December 27, 1998 4
Consolidated Statements of Income (Unaudited) for the
Thirteen Weeks Ended December 28, 1997, and December 27, 1998 5
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited) for the Thirty-nine Weeks Ended December 27, 1998 6
Consolidated Statements of Cash Flows (Unaudited) for the
Thirty-nine Weeks Ended December 28, 1997, and December 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. 18
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AMERILINK CORPORATION
CONSOLIDATED BALANCE SHEETS
March 29, December 27,
1998 1998
--------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 8,723,230 $ 10,822,853
Accounts receivable - trade, net of allowance for doubtful accounts of
$234,000 in 1998 and $186,000 in 1999 13,884,731 11,875,678
Work-in-process 5,690,546 5,026,127
Materials and supply inventories 1,655,809 1,468,651
Other receivables 229,702 232,556
Deferred income taxes 458,584 458,584
Other 114,895 317,504
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Total current assets 30,757,497 30,201,953
Property and equipment - net 7,585,118 6,047,060
Deposits and other assets 185,291 112,552
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Total assets $ 38,527,906 $ 36,361,565
---------------- ----------------
---------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 2,658,091 $ 1,716,721
Liability to subcontractors 1,886,173 1,488,951
Accrued compensation and related expenses 1,845,507 1,324,602
Accrued insurance 509,965 279,638
Other 307,579 269,952
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Total current liabilities 7,207,315 5,079,864
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 at March 29, 1998,
and December 27, 1998 24,017,256 24,183,868
Common stock held in treasury, at cost; 176,770 shares at ---- (1,310,158)
December 27, 1998
Retained earnings 7,303,335 8,407,991
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Total shareholders' equity 31,320,591 31,281,701
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Total liabilities and shareholders' equity $ 38,527,906 $ 36,361,565
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See notes to consolidated financial statements
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AMERILINK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the Thirty-nine Weeks Ended
December 28, December 27,
1997 1998
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Revenues $ 66,103,957 $ 48,077,714
Cost of sales 40,672,955 29,302,980
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Gross profit 25,431,002 18,774,734
Selling, general and administrative expenses 18,819,377 17,355,944
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Income from operations 6,611,625 1,418,790
Interest income (expense) (288,122) 404,866
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Income before income taxes 6,323,503 1,823,656
Provision for income taxes 2,542,000 719,000
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Net income $ 3,781,503 $ 1,104,656
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Earnings per share:
Basic $ 1.03 $ 0.26
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Diluted $ 0.95 $ 0.25
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---------------- ----------------
Weighted average shares:
Basic 3,661,240 4,234,199
Diluted 3,970,443 4,340,677
See notes to consolidated financial statements
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AMERILINK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the Thirteen Weeks Ended
December 28, December 27,
1997 1998
------------ ------------
Revenues $ 22,735,763 $ 15,669,062
Cost of sales 13,944,696 9,417,086
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Gross profit 8,791,067 6,251,976
Selling, general and administrative expenses 6,477,196 5,846,907
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Income from operations 2,313,871 405,069
Interest income 7,967 131,228
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Income before income taxes 2,321,838 536,297
Provision for income taxes 933,000 215,000
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Net income $ 1,388,838 $ 321,297
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Earnings per share:
Basic $ 0.35 $ 0.08
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Diluted $ 0.32 $ 0.08
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Weighted average shares:
Basic 3,992,126 4,181,596
Diluted 4,396,509 4,220,328
See notes to consolidated financial statements
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AMERILINK CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
Common Stock Common Stock Held in Treasury Retained
Shares Issued Amount Shares Amount Earnings Total
------------- ------ ------ ------ -------- -----
Balance at March 29, 1998 4,255,930 $ 24,017,256 $ 7,303,335 $ 31,320,591
Net income ---- ---- 1,104,656 1,104,656
Proceeds from exercise
of stock options 25,000 158,750 ---- 158,750
Repurchases of common
stock ---- ---- (176,770) $ (1,310,158) ---- (1,310,158)
Issuance of restricted
stock, net of deferred
compensation expense 2,414 ---- ---- ---- ---- ----
Amortization of deferred
compensation expense ---- 7,862 ---- ---- 7,862
--------- ------------ -------- ------------ ----------- ------------
Balance at December 27, 1998 4,283,344 $ 24,183,868 (176,770) $ (1,310,158) $ 8,407,991 $ 31,281,701
--------- ------------ -------- ------------ ----------- ------------
--------- ------------ -------- ------------ ----------- ------------
See notes to consolidated financial statements
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AMERILINK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Thirty-nine Weeks Ended
December 28, December 27,
1997 1998
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OPERATING ACTIVITES
Net income $ 3,781,503 $ 1,104,656
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization 2,196,165 2,217,168
Net gain on disposal of fixed assets (15,887) (5,944)
Changes in operating assets and liabilities:
Accounts receivable and work-in-process (3,719,024) 2,673,473
Materials and supply inventories (124,382) 187,158
Other receivables 45,737 (2,854)
Other assets 28,863 (202,609)
Trade accounts payable 589,726 (941,370)
Liability to subcontractors 248,363 (397,222)
Accrued compensation and related expenses 663,492 (520,905)
Accrued insurance 69,249 (230,327)
Other liabilities (295,808) (37,628)
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Net cash provided by operating activities 3,467,997 3,843,596
INVESTING ACTIVITIES
Purchase of property and equipment (4,255,613) (1,577,299)
Proceeds from sale of property and equipment 285,760 911,994
Deposits and other assets (33,749) 72,740
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Net cash used in investing activities (4,003,602) (592,565)
FINANCING ACTIVITIES
Principal payments on long-term debt (25,794,190) ----
Proceeds from borrowings on long-term debt 16,725,000 ----
Proceeds from issuance of common stock 13,895,557 ----
Repurchases of common stock ---- (1,310,158)
Proceeds from exercise of stock options 617,325 158,750
Tax benefit from exercise of options 979,768 ----
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Net cash provided by (used in) financing activities 6,423,460 (1,151,408)
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Increase in cash and cash equivalents 5,887,855 2,099,623
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 $ 6,008,250 $ 10,822,853
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Supplemental cash flow disclosures:
Interest paid $ 347,281 $ ----
Income taxes paid $ 1,891,724 $ 850,584
See notes to consolidated financial statements
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AMERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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), long distance carriers and competitive local exchange carriers
(CLECs) (collectively, "Telcos"); 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 December 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 thirty-nine
weeks ended December 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)
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 December 28,
1997, and December 27, 1998.
Thirteen Weeks Ended Thirty-nine Weeks Ended
December 28, December 27, December 28, December 27,
1997 1998 1997 1998
---- ---- ---- ----
BASIC EPS:
Net income $ 1,388,838 $ 321,297 $ 3,781,503 $ 1,104,656
Weighted average common shares
outstanding 3,992,126 4,181,596 3,661,240 4,234,199
------------- ------------- ------------- -------------
Basic EPS $ 0.35 $ 0.08 $ 1.03 $ 0.26
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
DILUTED EPS:
Net income $ 1,388,838 $ 321,297 $ 3,781,503 $ 1,104,656
Weighted average common shares
outstanding 3,992,126 4,181,596 3,661,240 4,234,199
Dilutive stock options 404,383 38,732 309,203 106,478
------------- ------------- ------------- -------------
Total shares and dilutive
potential shares 4,396,509 4,220,328 3,970,443 4,340,677
------------- ------------- ------------- -------------
Diluted EPS $ 0.32 $ 0.08 $ 0.95 $ 0.25
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
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.
3. SUBSEQUENT EVENT - PLAN OF MERGER
On February 2, 1999, the Company, through a wholly-owned subsidiary, MCC
Acquisition Corp. ("MAC"), acquired Midwest Computer Cable, Inc ("MCCI"), a
commercial cabling installation firm headquartered in Des Moines, Iowa. The
transaction was consummated pursuant to an Agreement and Plan of Merger, dated
February 2, 1999, (the "Merger Agreement") among the Company, MAC, MCCI, Larry
Kendall, Dayton Kendall and Linda Kendall. A copy of the Merger Agreement is
included herewith as Exhibit 2 and is incorporated herein by reference.
Pursuant to the Merger Agreement, MCCI was merged with and into MAC (the
"Merger"). As a result, the separate corporate existence of MCCI ceased and
the shareholders of MCCI received as consideration a combination of $4.4
million in cash and 500,000 shares of the Company's no par common stock. The
Merger has been accounted for as a purchase.
-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 THIRTY NINE WEEKS ENDED DECEMBER 28, 1997 AND DECEMBER 27, 1998
REVENUES
Total revenues for the first nine months of fiscal 1999 were
$48,077,714 compared to $66,103,957 for the first nine months of fiscal 1998, a
decrease of 27%.
Revenues derived from residential and commercial premises wiring
activities decreased 26% to $43.7 million in the first nine months of fiscal
1999, versus approximately $59.0 million in the prior year period. Premises
wiring revenues from telephone companies for video communication services
decreased to approximately $8.7 million (18% of total Company revenues) from
$21.8 million (33% of total Company revenues) in the first nine months of last
year. Revenues from telephone companies for video communication services have
declined sequentially in each of the last six 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) an increase in competition from other
cabling service providers for available Telco work in certain market areas, (3)
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 (4) 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 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
-10-
first three quarters of fiscal 1999 were approximately $2.8 million, a
decrease of $9.1 million or 76% from the $11.9 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.
Residential premises wiring revenues from cable television MSOs for the
first nine months of fiscal 1999 approximated $21.2 million versus $19.7 million
during the first nine months of fiscal 1998. MSO revenues generated from
contracts with Tele-Communications Inc. (TCI) for the first three quarters of
fiscal 1999 approximated $4.9 million, an increase of $2.9 million or 146% from
the $2.0 million recorded in the first nine months of last fiscal year.
GROSS PROFIT
Gross profit for the first nine months of fiscal 1999 was $18,774,734
or 39.1% of revenues, as compared to $25,431,002, or 38.5% of revenues, in the
first nine 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 nine 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.
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 revenues and 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 nine months of fiscal 1999
were $17,355,944 (36.1% of revenues), as compared to $18,819,377 (28.5% of
revenues) in the prior year period, a decrease of $1,463,433, or 8%. 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
nine months of fiscal 1999, which decreased approximately 27% from the
comparable first nine months of fiscal 1998.
INTEREST INCOME AND EXPENSE
Interest income was $404,866 for the nine months ended December 27,
1998, as compared to net interest expense of $288,122 for the first nine 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.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 39.4% for the first nine 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.
-11-
COMPARISON OF THIRTEEN WEEKS ENDED DECEMBER 28, 1997 AND DECEMBER 27, 1998
REVENUES
Total revenues for the third quarter of fiscal 1999 were $15,669,062
compared to $22,735,763 for the third quarter of fiscal 1998, a decrease of 31%.
Revenues derived from residential and commercial premises wiring
activities decreased 32% to $14.2 million in the third quarter of fiscal 1999,
versus approximately $20.8 million in the prior year period. Premises wiring
revenues from telephone companies for video communication services decreased to
approximately $2.5 million (16% of total Company revenues) from $6.1 million
(27% of total Company revenues) in the third quarter of last year. GTE Media
Ventures revenues derived from classic hardwire cable system projects for the
most recent quarter were only $0.2 million, versus approximately $3.6 million in
the comparable third quarter of fiscal 1998 and $1.1 million in the previous
quarter ended September 27, 1998. The Company believes that Telco video revenues
as a group have now stabilized near fiscal 1999 third quarter levels.
Commercial premises wiring revenues for the third quarter of fiscal
1999 were approximately $3.3 million compared to $4.6 million for the third
quarter of fiscal 1998, a decrease of 28%. This reduction is due primarily to a
lower volume of regional and national network installation projects in the
current fiscal year as compared to fiscal 1998.
Fiscal 1998 third quarter premises wiring revenues also included
approximately $1.2 million in revenues from telephone companies for voice and
data services, including approximately $1.0 million derived from a large
contract in Phoenix, Arizona, with U.S. West. Work under this contract was
substantially complete as of June 28, 1998.
GROSS PROFIT
Gross profit for the third quarter of fiscal 1999 was $6,251,976 or
39.9% of revenues, as compared to $8,791,067, or 38.7% of revenues, in the third
quarter 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 nine 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the third quarter of
fiscal 1999 were $5,846,907 (37.3% of revenues) compared to $6,477,196 (28.5% of
revenues) in the prior year period, a decrease of $630,289 or 10%. 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 third quarter of fiscal
1999, which decreased approximately 31% from the comparable quarter in fiscal
1998.
INTEREST INCOME AND EXPENSE
Interest income was $131,228 for the three months ended December 27,
1998 as compared to $7,967 for the three months ended December 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.
-12-
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
December 27, 1998 the Company had approximately $10.8 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,
potential acquisitions and other general corporate purposes. A total of
176,770 shares were repurchased as of December 27, 1998, at an aggregate
purchase price of approximately $1.3 million.
On February 2, 1999, the Company, through a wholly-owned subsidiary,
MCC Acquisition Corp., acquired Midwest Computer Cable, Inc., a commercial
cabling installation firm headquartered in Des Moines, Iowa. The
consideration delivered to the shareholders of MCCI in connection with the
Merger consisted of $4.4 million in cash and 500,000 shares of the Company's
no par common stock, of which 249,000 were shares previously held in treasury.
Combined accounts receivable and work-in-process at December 27, 1998
totaled $16.9 million compared to $19.6 million at March 29, 1998, a decrease of
approximately $2.7 million, or 13.7%. This decrease is due to the decline in
revenues in the first nine 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. Since March 26, 1998, the Company has
held a commitment from a commercial bank for a $10.0 million unsecured revolving
credit note. The Company has continued to negotiate with other commercial banks
to evaluate other credit agreements; therefore, terms of the $10.0 million
unsecured revolving credit note have not been finalized. The Company has never
drawn funds under this commitment. The current commitment for the revolving
credit note expires February 17, 1999. The Company anticipates that it will
finalize a new credit agreement with a commercial bank by the end of its current
fiscal year.
CASH FLOW FROM OPERATING ACTIVITIES. For the first nine months of
fiscal 1999, net cash provided by operating activities was approximately $3.8
million versus approximately $3.5 million for the corresponding period last
year. Cash provided in fiscal 1998 was primarily a result of approximately $6.0
million from net income and
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non-cash depreciation and amortization expense, reduced by an increase in
combined accounts receivable and work-in-process of approximately $3.7
million. Cash provided in fiscal 1999 is primarily a result of a decrease of
approximately $2.7 million in combined accounts receivable and
work-in-process. This decrease in accounts receivable and work-in-process is
due to a decline in revenues in the first nine months of fiscal 1999.
CASH FLOW FROM INVESTING ACTIVITIES. Net cash used in investing
activities for the first nine months of fiscal 1999 totaled $592,565 versus
approximately $4.0 million for the corresponding period last year. Investing
activities primarily relate to the purchase of property and equipment, which
totaled approximately $4.0 million (net of proceeds from the sale of property
and equipment) for the first nine months of fiscal 1998. The capital
expenditures in fiscal 1998 were a result primarily of new project start-ups and
more outside plant construction activity (approximately $7.1 million in revenues
in the first nine months of fiscal 1998 versus approximately $4.4 million in the
first nine months of fiscal 1999). Proceeds from the sale of property and
equipment for the first nine months of fiscal 1999 totaled approximately $0.9
million and were 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 six quarters,
from approximately $8.3 million in the first quarter of fiscal 1998 to
approximately $2.5 million in the third 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 from classic hardwire cable system
projects for the first three quarters of fiscal 1999 were approximately $2.8
million, a decrease of $9.1 million or 76% from the $11.9 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'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.
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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 ensure 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 August
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.
Not applicable.
ITEM 5. OTHER INFORMATION.
On February 2, 1999, the Company, through a wholly-owned subsidiary,
MCC Acquisition Corp. ("MAC"), acquired Midwest Computer Cable, Inc.
("MCCI"), a commercial cabling installation firm headquartered in Des
Moines, Iowa. The transaction was consummated pursuant to an Agreement
and Plan of Merger, dated February 2, 1999 (the "Merger Agreement"),
among the Company, MAC, MCCI, and the principal shareholders of MCCI,
Larry Kendall, Dayton Kendall and Linda Kendall. A copy of the Merger
Agreement is included herewith as Exhibit 2 and is incorporated herein
by reference. Pursuant to the Merger Agreement, the Company and MAC
entered into a Short-Form Merger Agreement, dated the same date as the
Merger Agreement, with the remaining shareholders of MCCI. A copy of
the Short-Form Merger Agreement is included herewith as Exhibit 99(i)
and is incorporated herein by reference.
Pursuant to the Merger Agreement, MCCI was merged with and into MAC
(the "Merger"). As a result, the separate corporate existence of MCCI
ceased and the shareholders of MCCI received as consideration a
combination of cash and common shares (without par value) of the
Company ("Common Shares"). MAC changed its name to "Midwest Computer
Cable, Inc." and will continue to conduct business as a wholly-owned
subsidiary of the Company. The consideration delivered to the
shareholders of MCCI in connection with the Merger consisted of $4.4
million in cash and 500,000 Common Shares. The terms of the Merger
Agreement and the consideration delivered thereunder were established
by arms-length negotiations among the parties. The MCCI acquisition has
been accounted for as a purchase. The excess of the total cost over the
fair value of the net assets acquired will be amortized under the
straight-line method for twenty-five years.
Also pursuant to the Merger Agreement, MCCI entered into three-year
employment agreements with Larry Kendall, who shall continue to serve
as the President of MCCI, and certain management employees of MCCI. The
Company has guaranteed the payment and performance of all obligations
of MCCI under those employment agreements. Mr. Kendall's employment
agreement is included herewith as Exhibit 99(ii) and is incorporated
herein by reference.
The Company issued a press release on January 28, 1999, announcing
imminent plans to consummate the Merger, and issued another press
release on February 2, 1999 announcing the completion of the Merger.
The January 2, 1999 press release and the February 2, 1999, press
release are included herewith as Exhibit 99(iii) and Exhibit 99(iv),
respectively, and are incorporated herein by reference.
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MCCI provides network design, maintenance and installation services for
premises wiring cabling systems through six offices located in Iowa,
Kansas, Ohio and Texas. Upon completion of the Merger, the Company
acquired all the assets of MCCI, including leases, equipment and
inventory. The Company intends to continue to use the assets acquired
pursuant to the Merger as they were used prior to the Merger, subject
to such changes as the Company may deem appropriate in the future.
The foregoing description of the Merger is not intended to be complete
and is qualified in its entirety by reference to the Merger Agreement.
This information is provided in lieu of a Current Report on Form 8-K.
AmeriLink Corporation will subsequently file a Form 8-K, as permitted
under the Rules of the Exchange Act, which includes financial
statements of the business acquired and required proforma information.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit No. Description
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2 Agreement and Plan of Merger, dated February 2, 1999,
among Larry Kendall, Dayton Kendall, Linda Kendall,
Midwest Computer Cable, Inc., AmeriLink Corporation
and MCC Acquisition Corp., a wholly-owned subsidiary
of AmeriLink Corporation.
10 Employment Agreement of Larry Kendall, dated February
2, 1999.
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.
99.1 Short-Form Merger Agreement.
99.2 Press Release dated January 28, 1999.
99.3 Press Release dated February 2, 1999.
(b) No reports on Form 8-K have been filed during the quarter ended
December 27, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERILINK CORPORATION
(Registrant)
Date: February 2, 1999 By: /s/Larry R. Linhart
------------------------------
Larry R. Linhart
Chairman, President and Chief Executive Officer
Date: February 2, 1999 By: /s/James W. Brittan
------------------------------
James W. Brittan
Vice President of Finance
(Principal Financial and Accounting Officer)
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