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FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT TO APPLICATION OR REPORT
Filed pursuant to Section 12, 13, or 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
ALC COMMUNICATIONS CORPORATION
(Name of Issuer)
Amendment No. 1
The undersigned registrant hereby amends certain portions of Part I,
Item 2, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," appearing in the Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1995 (Form 10-Q).
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
ALC COMMUNICATIONS CORPORATION,
a Delaware corporation
By:/s/ Marvin C. Moses
-----------------------------
Marvin C. Moses,
Executive Vice President
and Chief Financial Officer
Dated: July 13, 1995
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company reported net income of $20.0 million on revenue of $177.8 million
for the three month period ended March 31, 1995. This compares to net income
of $14.6 million on revenue of $129.8 million for the same period in 1994.
Gross margin (revenue less cost of communication services and equipment sales)
as a percent of net revenue decreased slightly from 46.1% to 43.8% for the
three months ended March 31, 1995 compared to the year earlier period. The
improved operating results were due primarily to an increase in long distance
traffic and a reduction of sales, general and administrative expenses as a
percentage of revenue. The Company's continued strong performance was reflected
by the increase in operating income of $8.6 million for the three months ended
March 31, 1995 over the same period one year earlier.
OPERATING RESULTS AS A PERCENT OF REVENUE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1995 1994
--------- ----------
<S> <C> <C>
Revenue 100.0% 100.0%
Cost of communication services and
equipment sales (56.2) (53.9)
------ ------
Gross Margin 43.8% 46.1%
Sales, general and administrative (21.8) (24.1)
Depreciation and amortization (3.4) (3.1)
------ ------
Operating Income 18.6% 18.9%
====== ======
</TABLE>
Billable minutes have increased since the third quarter of 1990 when compared
to the same quarter in the prior year. Sequentially, billable minutes have
reached record levels for the seventh consecutive quarter. The increase
results from a 35.1% increase in traffic generated by new customers, including
strong growth in reseller traffic, as well as increased sales productivity, the
introduction of new products and increased minutes per customer partially
offset by billable minutes lost through attrition of existing customers. The
results of operations for the three months ended March 31, 1995 reflect a
continuation of the trend of strong financial performance as indicated by a
36.4% increase in net income from the comparable quarter of 1994.
During late February 1995, ALC completed a tender offer and, by mid-March
1995, had acquired all the shares of ConferTech International, Inc.
("ConferTech"). The financial statements reflect the transaction effective
March 1, 1995. ALC financed the purchase price, $66.4 million or $8.00 per
share, through cash from operations as well as utilizing its line of credit.
ConferTech is a leading provider of teleconferencing services and audio bridge
equipment. Operating income for 1995 relating to ConferTech totaled $0.5 million
or approximately 1.6% of total operating income.
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DEFINITIVE MERGER AGREEMENT
ALC Communications Corporation entered into a definitive agreement dated April
9, 1995, to merge with Frontier Corporation ("Frontier"). The combined
company, which will operate under the name Frontier Corporation, will become
the fifth largest long distance company in the United States. The combined
company will have total consolidated long distance, local and cellular annual
revenues approximating $2 billion. Under the terms of the merger agreement,
shareholders of ALC will receive 2.0 shares of Frontier for each share of ALC
stock for a total of approximately 78.7 million shares. The merger is intended
to qualify as a tax-free reorganization and a "pooling of interests" for
accounting purposes. The merger is subject to various conditions including
approval of the shareholders of the two companies and various regulatory
approvals. Completion of the transaction is anticipated in the third quarter
of 1995.
REVENUE
Revenue increased by 37.0% for the three months ended March 31, 1995 from the
comparable period of 1994. Billable minutes again reached the highest level in
the history of the Company, increasing by 50.5% for the three months ended
March 31, 1995 over the comparable period in 1994. The first full month
revenue from new sales in the first quarter of 1995 has increased 35.1% from
the same period one year earlier. The Company's base revenue per minute of
16.0 cents continues to be strong, though it has decreased from the prior
year quarter level of 18.1 cents per minute primarily due to changes in the
sales mix. Revenue from the ConferTech acquisition totaled $4.6 million (one
month) and represented 2.6% of the total growth in revenue from the same
quarter in the prior year.
Reseller revenue has continued to grow significantly from the prior year period
level of 14.8% of net revenue to over 30% of net revenue for the three months
ended March 31, 1995. Although reseller revenue per minute (between 11 cents
and 12 cents) is lower than regular commercial traffic, the increased reseller
traffic has a positive impact on operating income due to low incremental
sales, general and administrative costs. Growth was also impacted positively by
a major reseller customer whose revenue has increased substantially in the last
several months and comprises approximately 16.0% of total revenue for 1995 to
date. It is ALC's understanding that this reseller, through a joint venture,
will be installing long distance switching capacity during 1995 which, as
completed, would result in over half of this traffic gradually moving to the
joint venture network. However, the joint venture has in turn entered into a
three year contract with Allnet effective as of April 1, 1995. Allnet will
terminate the joint venture traffic which cannot be terminated on the venture's
own network. Allnet also obtained provisions regarding exclusivity and
minimums.
The provision for uncollectible revenue was 1.5% of gross revenue for the three
months ended March 31, 1995 and 1.8% for the same period of 1994. Strong
controls and procedures in the collection and credit risk detection processes
have enabled the Company to sustain a low bad debt rate.
OPERATING EXPENSES
The Company's primary cost is for communication services, which represents the
costs of originating and terminating calls via local exchange carriers
(primarily Bell Operating Companies). Also included in communication services
are the costs of owning and leasing long-haul transmission capacity as well as
bridges and the cost of providing conferencing services.
The cost of communication services and equipment sales increased $29.8 million
during the three month period ended March 31, 1995 compared to the same period
in 1994. This cost increased as a percent of net revenue for the comparable
periods, due in part to the significant concentration of reseller traffic which
has a lower rate per minute than regular commercial traffic. However, by the
use of high volume fixed price leased facilities to transmit traffic and lower
prevailing unit prices for such capacity, the Company has reduced its long-haul
transmission costs to less than 7% of revenue.
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Sales, general and administrative expense increased by 24.3% for the three
month period ended March 31, 1995 from the same period one year earlier (but
decreased to 21.8% of revenue). The dollar increase reflects increased salaries
and other expenses related to a 28.7% increase in headcount to support the
greater sales activity as well as the costs incurred by ConferTech in 1995.
Results for 1994 include a $1.2 million cost reduction, recorded in the first
quarter of the year, resulting from the favorable settlement of a state
telecommunications excise tax dispute.
Depreciation and amortization increased 47.8% from the first three months of
1995 compared to the same period in 1994. This increase is the result of a
30.7% increase in depreciation due to newly acquired fixed assets and a 79.8%
increase in amortization of intangible assets associated with the purchase of
ConferTech and various customer bases.
INTEREST EXPENSE
Net interest expense decreased 20.4% for the three months ended March 31, 1995
compared to the same period in 1994 due to improved cash flow from operations
and a $0.4 million increase in interest income. Additionally, a $5.0 million
redemption of the 1993 Notes was made in April 1994. These positive factors
were somewhat offset by increased interest expense due to borrowings made
during late February and March under the Revolving Credit Facility ("Facility")
to finance the ConferTech acquisition.
INCOME TAXES
The effective tax rate increased from 36.0% for the first three months of 1994
to 37.3% for the first three months of 1995, due to the increase in income
(which results in a decrease in the favorable impact of the Company's annual
available $10 million net operating loss carryforward on the effective tax
rate).
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 1995 and 1994, the Company generated
positive cash flow from operations of $37.5 million and $24.6 million,
respectively. The positive cash flow reflects nineteen consecutive quarters of
increased revenue and operating profits compared to prior year comparable
quarters.
The Company's working capital was $1.7 million at March 31, 1995 compared to
$41.5 million at December 31, 1994. The decrease in working capital is largely
the result of the $38.3 million decrease in the cash balance resulting from the
use of funds for the acquisition of ConferTech and the $27.2 million increase
in accrued liabilities and network costs attributable to increased volume,
offset by the $22.6 million increase in accounts receivable due to the increase
in revenue.
Evidence of the Company's strong liquidity position was its ability to finance
the purchase of ConferTech during March of 1995. ALC paid an aggregate
purchase price of $66.4 million, financing the purchase through cash
from operations as well as utilizing its Revolving Credit Facility. As of
March 31, 1995, the Company had borrowings of only $5.0 million remaining under
the Facility and the balance was paid completely in early May.
In addition to the positive cash flow from operations, the Company's liquidity
position is further strengthened by the availability under the Revolving Credit
Facility. The Facility provides for borrowings up to $105.0 million and
expires December 31, 1999. Under this Facility, the Company is able to
minimize interest expense by structuring the borrowings under either of two
alternatives. Each alternative has a varying interest rate associated with it.
As of March 31, 1995, the Company had $100.0 million available under the line.
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Because the Company has chosen to lease rather than own its transmission
facilities, the Company's requirements for capital expenditures are modest.
Capital expenditures totaled $2.0 million for the first three months of 1995
and are expected to be approximately $30 million for the year ended December
31, 1995 (without factoring in the potential impact of the pending Frontier
merger). Capital expenditures year to date 1995 included projects for enhanced
efficiency and technical advancement in the network, information systems and
customer service. Future investment requirements for capital expenditures
relate directly to traffic growth which necessitates the purchase of switching
and related equipment. In addition, a major component of the capital budget
relates to technological advancements as the Company continually updates its
network capabilities to offer enhanced products and services.
Management believes that the Company's cash flow from operations will provide
adequate sources of liquidity to meet the Company's anticipated short and long
term liquidity needs.
