<PAGE> 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: September 30, 1994
/ / 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: 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 October 31, 1994, the registrant had 1,000 shares of Common Stock
outstanding.
OMISSION OF INFORMATION BY CERTAIN WHOLLY-OWNED SUBSIDIARIES
This 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.
<PAGE> 2
ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
------------ ------------
(Unaudited)
(In Thousands)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $30,490 $1,819
Accounts receivable, less allowance for
doubtful accounts of $4,170,000
and $3,974,000 81,073 58,761
Other current assets 7,203 4,543
------- -------
Total Current Assets $118,766 $65,123
Fixed Assets:
Communication systems $91,512 $81,752
Other equipment and leasehold improvements 35,648 29,785
Construction in progress 9,011 6,722
------- -------
$136,171 $118,259
Less accumulated depreciation and amortization 77,778 69,918
------- -------
Total Fixed Assets $58,393 $48,341
Cost in excess of net assets acquired 47,648 48,792
Deferred income taxes 10,240 10,240
Intangibles and other assets 35,432 21,045
------- -------
Total Assets $270,479 $193,541
======= ========
</TABLE>
<PAGE> 3
ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
------------- -------------
(Unaudited)
(In Thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $1,305 $1,397
Accrued liabilities 30,258 16,855
Accrued network costs 48,252 33,482
Taxes other than income 11,804 11,592
Notes payable, capitalized leases and
other long-term debt 246 392
------- -------
Total Current Liabilities $91,865 $63,718
Long-term Liabilities:
Notes payable, capitalized leases and
other long-term debt $3,229 $3,263
Senior Subordinated Notes 79,407 84,335
------- -------
Total Long-Term Liabilities $82,636 $87,598
------- -------
Total Liabilities $174,501 $151,316
Stockholders' equity:
Preferred Stock, par value $0.01; authorized --
14,784,000 shares; issued and
outstanding -- none
Common Stock, par value $0.01; authorized --
200,000,000 shares; issued and outstanding --
33,667,000 and 32,948,000 shares $337 $329
Capital in excess of par value 139,457 132,378
Paid-in capital -- Warrants 11,716 12,129
Accumulated deficit (55,532) (102,611)
------- -------
Total Stockholders' Equity $95,978 $42,225
------- -------
Total Liabilities and Stockholders' Equity $270,479 $193,541
======= ========
</TABLE>
See notes to consolidated financial statements
<PAGE> 4
ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- --------------------------
September 30, September 30, September 30 September 30,
1994 1993 1994 1993
---------- ----------- ----------- -------------
(In Thousands Except Per Share Amounts)
<S> <C> <C> <C> <C>
Revenue $149,054 $113,098 $414,751 $319,175
Operating Expenses:
Cost of communication services $80,655 $60,561 $225,053 $172,852
Sales, general and administrative 34,696 30,915 98,378 89,005
Depreciation and amortization 4,555 3,318 12,845 8,998
------- ------- ------- -------
Total Operating Expenses $119,906 $94,794 $336,276 $270,855
------- ------- ------- -------
Operating Income $29,148 $18,304 $78,475 $48,320
Interest expense (net of interest and other
income of $433,000, $45,000, $1,128,000
and $176,000) 1,380 2,050 4,621 8,570
------- ------- ------- -------
Income Before Income Taxes, Extraordinary
Item and Cumulative Effect of Accounting
Change $27,768 $16,254 $73,854 $39,750
Income taxes 10,175 5,400 26,775 12,500
------- ------- ------- -------
Income Before Extraordinary Item and Cumulative
Effect of Accounting Change $17,593 $10,854 $47,079 $27,250
Extraordinary Item:
Loss on early retirement of debt (net of
income tax benefit of $4,000,000) (7,490)
Cumulative effect of change in method of
accounting for income taxes 13,500
------- ------- ------- -------
Net Income $17,593 $10,854 $47,079 $33,260
======= ======= ======= =======
Earnings per common and common equivalent share:
Income before extraordinary item and cumulative
effect of accounting change $0.46 $0.29 $1.23 $0.75
Extraordinary item:
Loss on early retirement of debt (0.21)
Cumulative effect of change in method of
accounting for income taxes 0.38
------- ------- ------- -------
Net Income $0.46 $0.29 $1.23 $0.92
======= ======= ======= =======
Weighted Average Common and Common
Equivalent Shares 38,409 36,856 38,334 35,847
======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements
<PAGE> 5
ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
September 30, September 30,
1994 1993
------------ ------------
(In Thousands)
<S> <C> <C>
Operating Activities
Net income $47,079 $33,260
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 8,359 7,187
Amortization of intangible assets and bond discount 4,575 2,596
Loss on sale of assets (97)
Cumulative effect of change in accounting principle (13,500)
Loss on retirement of debt, net of tax 7,490
Increase in accounts receivable and
other current assets (23,722) (21,785)
Increase in current liabilities 27,637 20,974
------- -------
Net Cash Provided by Operating Activities $63,831 $36,222
Financing Activities
Payments on revolving credit facility ($13,802)
Payments on long-term debt ($768) (19,698)
Retirement of senior subordinated notes (72,380)
Proceeds from subordinated notes 84,335
Retirement of subordinated notes (5,017)
Proceeds from issuance of common stock 3,208 13,035
Payment of dividend on preferred stock (114)
------- -------
Net Cash Used in Financing Activities ($2,577) ($8,624)
Investing Activities
Expenditures for fixed assets ($18,453) ($12,258)
Purchase of customer base (5,857) (15,426)
Change in other non-current assets (8,273) 86
------- -------
Net Cash Used in Investing Activities ($32,583) ($27,598)
------- -------
Increase in Cash and Cash Equivalents $28,671 $0
Cash and cash equivalents at beginning of period 1,819 112
------- -------
Cash and cash equivalents at end of period $30,490 $112
======= =======
Interest paid $7,890 $8,836
======= =======
Income taxes paid $17,253 $2,237
======= =======
</TABLE>
See notes to consolidated financial statements
<PAGE> 6
ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 1994
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION> Paid-in capital
Common Stock Capital in -- Warrants
------------------ excess of --------------- Accumulated
Shares Amount par value Shares Amount deficit Total
-------- ------- --------- ------ ------ ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 32,948 $329 $132,378 4,266 $12,129 ($102,611) $42,225
Exercise of stock options 306 4 1,142 1,146
Tax benefit from exercise of stock
options 3,466 3,466
Exercise of warrants 413 4 2,471 (413) (413) 2,062
Net income for the nine months ended
September 30, 1994 47,079 47,079
------- ---- -------- ----- ------- ------- -------
Balance, September 30, 1994 33,667 $337 $139,457 3,853 $11,716 ($55,532) $95,978
======= ==== ======== ===== ======= ======= =======
</TABLE>
See notes to consolidated financial statements
<PAGE> 7
ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
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 September 30, 1994 and
December 31, 1993, and the results of operations and cash flows for the three
and nine month periods ended September 30, 1994 and 1993.
The balance sheet at December 31, 1993 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, 1993.
NOTE B -- TRANSMISSION CONTRACTS
In August 1994, the Company completed a series of contracts which will result
in a reduction of the Company's Michigan network costs by over $2 million per
year. The transactions included loans totalling $9.2 million in exchange for
notes receivable to be repaid over 5 years and a 15% minority ownership
position in a company owning a Michigan-based digital fiber optic network.
NOTE C -- PURCHASE OF CUSTOMER BASE
During July 1993, the Company acquired the specialized 800 customer base of
Call Home America, Inc. for $15.5 million plus a $4.2 million payment made in
August 1994 which was based on certain 800 customer base revenue in April, May
and June 1994.
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D -- LONG TERM DEBT
In April 1994, the Company acquired, on the open market, $5.0 million of its
9.0% Senior Subordinated Debentures at the Company's approximate book value.
<PAGE> 9
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company reported net income of $17.6 million on revenue of $149.1 million
for the three month period ended September 30, 1994. This compares to net
income of $10.9 million on revenue of $113.1 million for the same period in
1993. For the nine months ended September 30, 1994, the Company reported net
income of $47.1 million on revenue of $414.8 million. This compares to income
before extraordinary item and cumulative effect of an accounting change of
$27.3 million on revenue of $319.2 million for the nine months ended September
30, 1993. Gross margin as a percent of net revenue remained relatively
constant for both the three and nine months ended September 30, 1994 compared
to the year earlier period. The Company's continued strong performance was
reflected by the increase in operating income of $10.8 million for the three
months and $30.2 million for the nine months ended September 30, 1994 over the
same periods one year earlier. The improved operating results for 1994 were
primarily due to an increase in long distance traffic and a reduction of sales,
general and administrative expenses as a percentage of revenue.
OPERATING RESULTS AS A PERCENT OF REVENUE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Communication svcs. (54.1) (53.6) (54.3) (54.2)
------ ------ ------ ------
Gross Margin 45.9% 46.4% 45.7% 45.8%
Sales, gen'l & admin. (23.3) (27.3) (23.7) (27.9)
Depreciation & amort. ( 3.0) ( 2.9) ( 3.1) ( 2.8)
------ ------ ------ ------
Operating income 19.6% 16.2% 18.9% 15.1%
====== ======= ===== =====
</TABLE>
Billable minutes have continued to increase since the third quarter of
1990 when compared to the same quarter in the prior year. Billable minutes
have reached record levels for the fifth consecutive quarter. The increase
results from traffic growth generated by new customers, including growth in
reseller traffic, minutes from the acquisition of a customer base, increased
sales productivity, the introduction of new products and increased minutes per
customer partially offset by billable minutes lost through attrition of
existing customers. The results of operations for the three months ended
September 30, 1994 reflect a continuation of the trend of strong financial
performance as
<PAGE> 10
indicated by a 62.1% increase in net income from the comparable
quarter of 1993.
Results for 1993 included both the cumulative effect of the change in
method of accounting for income taxes which resulted in an increase in income
of $13.5 million in the first quarter of 1993 and an extraordinary loss on the
early retirement of debt of $7.5 million, net of tax, recorded in the second
quarter of 1993.
REVENUE
Revenue increased by 31.8% and 29.9% for the three and nine months
ended September 30, 1994 from the comparable periods of 1993. Billable minutes
again reached the highest level in the history of the Company, increasing by
46.7% and 40.6% for the three and nine months ended September 30, 1994 over the
comparable period in 1993. The first full month revenue from new sales in the
third quarter of 1994 was significantly higher than the same period one year
earlier. The Company's revenue per minute of 17.0 cents continues to be
strong, though it has decreased from the prior year quarter level of 18.9 cents
primarily due to changes in the sales mix. Reseller revenue has continued to
grow significantly from prior year periods reaching 20.3% of net revenue for the
nine months ended September 30, 1994. This growth includes the impact of a
major customer whose revenue has increased substantially in the last nine
months and comprises approximately 8.2% of total revenue for 1994 to date.
Although reseller revenue per minute is lower than regular commercial traffic
(between 11 cents and 12 cents per minute), the increased reseller traffic has
a positive impact on operating income due to low incremental sales, general and
administrative costs.
The provision for uncollectible revenue was 1.8% and 1.7% of gross
revenue for the three and nine months ended September 30, 1994 and 1.8% and
2.0% for the same periods of 1993. Strong controls and procedures have enabled
the Company to improve the collection process and provide earlier detection of
credit risks.
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.
The cost of communication services increased $20.1 million and $52.2
million during the three and nine month periods ended September 30, 1994
compared to the same periods in 1993. This cost, however, remained relatively
constant as a percent of net revenue for the comparable periods. By the use of
high volume fixed price leased facilities to transmit traffic and lower
prevailing unit prices for such capacity, the Company has
<PAGE> 11
successfully reduced its long-haul transmission costs as a percent of revenue.
Sales, general and administrative expense increased by 12.2% and
10.5% for the three and nine month periods ended September 30, 1994 from the
same periods one year earlier (but was significantly reduced as a percentage of
revenue). The increase reflects increased commissions, new sales channel
program costs and other expenses related to greater sales activity. 1994
results include a $1.2 million addition to pre-tax income, recorded in the
first quarter of the year, resulting from the favorable settlement of a state
telecommunications excise tax dispute.
Depreciation and amortization increased 37.3% and 42.8% from the third
quarter and the first nine months of 1993 to the same periods in 1994 but
remains relatively constant as a percentage of revenue. This is primarily due
to the amortization of the costs related to the acquisition of the Call Home
America customer base.
INTEREST EXPENSE
Net interest expense decreased 32.7% and 46.1% for the three and nine
months ended September 30, 1994 compared to the same periods in 1993. This
resulted primarily from increased interest income due to higher cash balances,
principal payments, reduced interest rates on the 1993 Notes, a $5.0 million
redemption of 1993 Notes in April 1994, and the elimination of borrowings under
the Revolving Credit Facility.
INCOME TAXES
The effective tax rate increased from 31.4% for the first nine months
of 1993 to 36.3% for the first nine months of 1994, due to the increase in the
federal income tax rate and the increase in taxable income (which results in a
decrease in the impact of the Company's annual available $10 million net
operating loss carryforward on the effective tax rate).
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1994 and 1993, the Company
generated positive cash flow from operations of $63.8 million and $36.2
million, respectively. The positive cash flow reflects seventeen consecutive
quarters of increased revenue and operating profits compared to prior year
comparable quarters.
The positive cash flow from operations resulted in working capital of
$26.9 million at September 30, 1994 compared to $1.4 million at December 31,
1993. The increase in working capital includes a $22.3 million increase in
accounts receivable due to the increase in revenue offset by a $28.2 million
increase in accrued
<PAGE> 12
liabilities and accrued network costs also related to higher traffic volumes.
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 ("Facility"). The Facility provides for borrowings
up to $40.0 million based on the level of accounts receivable and expires June
30, 1995. Under this Facility, the Company is able to minimize interest
expense by structuring the borrowings under three alternatives. The effective
rate under the Facility during 1993 approximated 5.8%. There have been no
borrowings under the Facility during 1994. As of September 30, 1994, the
Company had borrowing availability of $40.0 million and no balance outstanding.
Further evidence of the Company's strong liquidity position was its
ability to finance the purchase, in April 1994, of $5.0 million of the
Company's 1993 Notes from cash flow from operations. Additionally, in August
1994, the Company completed a series of contracts which resulted in a reduction
of the Company's Michigan network costs by over $2 million per year. The
transactions included loans totalling $9.2 million in exchange for notes
receivable to be repaid over 5 years and a 15% minority ownership position in a
company owning a Michigan-based digital fiber optic network.
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 $18.5 million for the first nine
months of 1994 and are expected to be approximately $25 million for the year
ended December 31, 1994. Capital expenditures year to date 1994 included
projects for enhanced efficiency and technical advancement in the network,
information systems and customer service. Future investment requirements for
capital expenditures relate directly to traffic growth which necessitates the
purchase of switching and related equipment. In addition, a major component of
the capital budget relates to technological advancements as the Company
continually updates its network capabilities to offer enhanced products and
services.
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.
<PAGE> 13
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]
<TABLE>
<CAPTION>
Incorporated Page
Exhibit Filed Herein by Number
Number Description Herewith Reference to: Herein
- - ------ ----------- -------- ------------ ------
<S> <C> <C>
10.1 Amendment to Amended Exhibit 10.1 to
and Restated Employ- ALC Third Quarter
ment Agrmt. ALC, Allnet 1994 10-Q
and John M. Zrno, Marvin
C. Moses, William H.
Oberlin
August 23, 1994
11.1 Computation of Exhibit 11.1 to
Earnings Per Share ALC Third Quarter
(ALC) 1994 10-Q
27.1 Financial Data Exhibit 27.1 to
Schedule ALC Third Quarter
1994 10-Q
</TABLE>
DEFINITIONS: ALC: ALC Communications Corporation
ALLNET: Allnet Communication Services, Inc.
The Registrant hereby agrees to furnish the Commission a copy of each of the
Indentures or other instruments defining the rights of security holders of the
long-term debt securities of the Registrant and any of its subsidiaries for
which consolidated or unconsolidated financial statements are required to be
filed.
Exhibit 10.1 is included pursuant to SEC Regulation S-K, Item 601(b)(19).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the third quarter of 1994.
<PAGE> 14
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.
ALLNET COMMUNICATION SERVICES, INC.
(Registrant)
By:/s/ Marvin C. Moses
-----------------------
Marvin C. Moses, Executive
Vice President and Chief
Financial Officer
By:/s/ Marilyn M. Lesnau
-----------------------
Marilyn M. Lesnau, Vice
President, Controller and
Chief Accounting Officer
Dated: November 11, 1994
