-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, PcigXhNeN4sMfBxpLntYDkGmkghLjRFpiYGVhwk7ii10QIEiq6jiorEJ7zi4M9wf tylE9lOGnz1v3OFod2n7SQ== 0000950124-94-000645.txt : 19940331 0000950124-94-000645.hdr.sgml : 19940331 ACCESSION NUMBER: 0000950124-94-000645 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALC COMMUNICATIONS CORP CENTRAL INDEX KEY: 0000783425 STANDARD INDUSTRIAL CLASSIFICATION: 4813 IRS NUMBER: 382643582 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 000-14127 FILM NUMBER: 94518840 BUSINESS ADDRESS: STREET 1: 30300 TELEGRAPH RD STREET 2: STE 350 CITY: BIRMINGHAM STATE: MI ZIP: 48010 BUSINESS PHONE: 3136474060 MAIL ADDRESS: STREET 1: 30300 TELEGRAPH ROAD STREET 2: SUITE 350 CITY: BINGHAM FARMS STATE: MI ZIP: 48025-4510 10-K 1 FORM 10-K 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended: December 31, 1993 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission file number: 1-10831 ALC COMMUNICATIONS CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 38-2643582 (State of incorporation) (IRS Employer ID No.) 30300 Telegraph Road, Bingham Farms, Michigan 48025 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (810) 647-4060 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered COMMON STOCK, $.01 par value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: CLASS A PREFERRED STOCK, $.01 par value * (Title of class) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [] 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 February 21, 1994, the aggregate market value of the voting stock held by non-affiliates of the registrant based on the last reported sales price of the registrant's Common Stock on the American Stock Exchange for that date was $1,119,379,106. As of February 21, 1994, the registrant had 33,101,601 shares of Common Stock outstanding. * The Class A Preferred Stock was redeemed by the registrant on December 31, 1993 and is no longer registered pursuant to Section 12(g) of the Act. 2 PART I ITEM 1. BUSINESS (A) GENERAL DEVELOPMENT OF BUSINESS ALC Communications Corporation was incorporated in Delaware on August 26, 1985 ("ALC" or the "Registrant"). ALC commenced business on December 19, 1985, the date of the affiliation of two long distance telephone companies, Allnet Communication Services, Inc. ("Allnet") and Lexitel Corporation ("Lexitel"). Allnet, a wholly owned subsidiary of ALC, now has the former businesses and operations of both Allnet and Lexitel. ALC conducts no business other than its position as a holding company for its subsidiary, Allnet. Unless the context otherwise requires, the term "Company" includes ALC, its wholly owned subsidiary, Allnet, and all of the wholly owned subsidiaries of Allnet. The principal executive offices of ALC are located at 30300 Telegraph Road, Bingham Farms, Michigan 48025 (810/647-4060). In the summer of 1990 the Company had begun an overall refinancing (the "Refinancing") of substantially all of its funded debt and in 1992 concluded the second phase of the Refinancing by substantially deferring or reducing the debt service obligations of the Company. In August 1992, the Company's then majority shareholder, Communications Transmission, Inc. ("CTI") conveyed the ALC Common Stock (the "Common Stock" or "ALC Stock"), Class B Preferred Stock (the "Class B Preferred") and Class C Preferred Stock (the "Class C Preferred") it owned to NationsBank of Texas, N.A., The First National Bank of Chicago, National Westminster Bank USA, CoreStates Bank, N.A. and First Union National Bank of North Carolina (the "Banks") pro-rata in exchange for the release of certain portions of CTI's obligations to each of the Banks. The Banks, in the aggregate, acquired all of the outstanding Class B Preferred and Class C Preferred, as well as 14,324,000 shares of Common Stock. In October 1992, the Company completed a stock offering (the "1992 Equity Offering") for 9,863,600 shares of Common Stock, a portion of which resulted from the exchange of the Class A Preferred Stock (the "Class A Preferred") held by individual stockholders and the remainder of which was due to Common Stock held by other entities, including the Banks. The Banks sold, in the aggregate, 3,000,000 shares of Common Stock in the 1992 Equity Offering. In January 1993, the Company filed a registration statement (the "shelf registration") under the Securities Act of 1933, as amended (the "Securities Act") to permit the sale, from time to time, of up to 19,500,909 shares of Common 1 3 Stock held by certain stockholders, including the Banks, or issuable upon exercise of certain outstanding warrants or conversion of outstanding Class B Preferred and Class C Preferred. Pursuant to the shelf registration, in March 1993, the Company completed a stock offering (the "March 1993 Equity Offering") whereby the Banks and the Prudential Insurance Company of America ("Prudential") sold an aggregate of 10,350,000 shares of Common Stock to the public. As part of the March 1993 Equity Offering, the Banks converted all outstanding shares of Class B Preferred and Class C Preferred to Common Stock. The Class B Preferred and Class C Preferred were retired effective March 25, 1993. The Banks subsequently reduced their ownership interest in the Company to a minimal position through subsequent sales and the transfer of other shares to Prudential by four of the five Banks. In February 1994 the one remaining Bank, First Union National Bank of North Carolina, sold shares in a series of brokerage transactions, then transferred the remaining balance of shares to or as directed by Prudential. In May 1993, the Company completed an offering of $85.0 million principal amount 9% Senior Subordinated Notes ("1993 Notes") and in June 1993 redeemed all of the 11-7/8% Subordinated Notes then outstanding, which were issued as part of the note exchange offer which occurred during the 1992 phase of the Refinancing. As of June 30, 1993, the Company executed an agreement for a $40.0 million line of credit (the "Revolving Credit Facility"), replacing the Company's prior revolving credit facility. Effective December 31, 1993, the Company redeemed the issued and outstanding Class A Preferred Stock (the "Class A Preferred"). Following such redemption, the Class A Preferred was retired effective January 4, 1994. For more detailed information regarding stock ownership in the Company, reference is hereby made to "Item 13. Certain Relationships and Related Transactions." In July 1993, the Company acquired the specialized 800 customer base of Call Home America, Inc. Call Home America, Inc. had approximately 50,000 customers, including parents of college students and frequent travelers, who continue to receive services under the Call Home America(R) name. These customers, who were then generating annualized revenue of approximately $20 million, are also able to utilize a wide range of other telecommunications services from the Company. (B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The Company operates in one industry segment. All significant revenues relate to sales of telecommunication services to the general public. 2 4 (C) NARRATIVE DESCRIPTION OF BUSINESS ALC is the holding company for Allnet and conducts no other business. Allnet provides long distance telecommunications services primarily to commercial and, to a lesser extent, residential subscribers in the majority of the United States and completes subscriber calls to all directly dialable locations worldwide. Allnet is one of the few nationwide carriers of long distance services and in 1993 carried in excess of 800 million calls over its network. The Company operates its own switches, develops and implements its own products, monitors and deploys its transmission facilities and prepares and designs its own billing and reporting systems. The Company focuses on a highly profitable segment of the long distance industry with high operating margins, specifically, commercial accounts, whose calling volume consists primarily of calls made during regular business hours which command peak-hour pricing. Commercial subscribers tend to make most of their calls on weekdays during normal business hours, while the Company's residential subscribers tend to make most of their calls in the evening and on weekends, when business usage is lowest. Neither commercial nor residential subscribers' access to the Company's service is limited as to the time of day or day of week. 3 5 SEASONALITY The Company experiences certain limited seasonality in the use of its services due to periods where commercial subscribers experience higher levels of time-off by their employees, such as during national holidays and vacation periods. Fewer business days during a calendar month will also impact usage. The Company will experience decreased commercial usage resulting from these factors. Seasonality in usage from residential subscribers tends to vary with the return of students to college and national holidays. The Company will experience increased residential usage resulting from these factors. PRODUCTS AND SERVICES The Company provides a variety of long distance telephone products and services to commercial and residential subscribers nationwide. The bulk of the Company's revenue is derived from outbound and inbound long distance services which are all under the "Allnet(R)" trademark. Many of the Company's products, however, differ from those of certain of its competitors due to the level of value-added services the Company offers, the flexibility of product pricing to maintain competitiveness and its broader geographic reach. The variety of products offered are categorized by the Company based upon certain primary characteristics: pricing, value-added services, reporting and 800 Services. Pricing. All of the Company's customers are identified by their telephone number, dedicated trunk or validated access code, and have a rating which is used to determine the price per minute that they pay on their outbound or inbound long distance calls. Rates typically vary by the volume of usage, the distance of the calls, the time of day that calls are made, the region that originates the call, and whether or not the product is being provided on a promotional basis. The outbound commercial product line is broken into three major types of services. Regional: Rates vary by area code or region and subscribers pay a flat rate for all long distance calls within these area codes or regions. Rates are determined by competitive positioning and vary according to the regions which the Company currently services. These products are priced at the area code level, and rates offered on these products are the primary method used to compete with small and more regionalized carriers. Nationwide: Rates are by mileage bands set at a distance around the call initiating point. Long Haul: Rates are designed for users who tend to make substantial bicoastal and international calls. These products offer distance-insensitive 4 6 domestic pricing and two time-of-day period rates, along with aggressive international pricing options. The Company's outbound residential product line is made up of Allnet "Dial 1" Service which also has two special discount options to service employees of commercial accounts ("EBP") and members of associations ("ABP"). Different rates are applied to inbound telephone services than to outbound telephone services. The inbound product line is provided for commercial accounts which use 800 telephone numbers to receive and pay for calls from customers and potential prospects and for residential accounts wishing similar type services. Value-added Services. When customers subscribe to value-added services on the Company's network, their calls are charged a fee based on the services provided. Customers access value-added services through Allnet Access(R), which is an interactive voice response system that allows subscribers to interact with the phone system by pressing numbers on the telephone. Allnet Access(R) is a customized platform or menu from which customers select the desired services to which they have subscribed. For example, a customer who would like to deliver a prerecorded message would dial an Allnet Access(R) 800 number or through a new streamlined dialing method known as "00 Platform" from an Allnet presubscribed Touch Tone(R) telephone and select "call delivery" from the voice menu. If the customer had subscribed to other services, these services would be offered on the menu as well. Once the customer makes a selection, the call is routed and charged accordingly. The Company's value-added services are aimed primarily at the business subscriber, although the Company also offers products for residential customers. Value-added services include: Allnet Call Delivery(R), a message delivery service which enables a customer to send a prerecorded message to a number; VoiceQuote, an interactive stock quotation service; Allnet InfoReach(R), numerous audio/text programs such as news and weather; a voice mail service; Option USA(R), a service to provide calls to the U.S. from selected international locations on Allnet Access(R); and three different teleconferencing services. During 1992 the Company launched a full spectrum of facsimile services including Allnet Broadcast FAX(R), which allows the customer to send or fax documents to multiple locations at the same time; fax on demand, which allows the customer to make a fax document available to people who call an 800 number; fax mail, which allows a customer to receive facsimile messages in a fax mailbox and pick them up at a later date; PC software, which allows the customer to manage his facsimile lists and documents from a PC; and special 5 7 international pricing to accommodate short duration facsimile traffic. During 1993 the Company began to focus on mobile products and services, offering MobileLine, the resale of cellular service provided by the regional Bell Operating Companies ("BOCs"), along with consolidated billing. In addition, the Company currently plans to introduce PageLine, a nationwide paging resale and consolidated billing product, in the second quarter of 1994. Reporting. The Company offers its customers a variety of billing options and media (two sizes of paper invoices [8-1/2X11 or 4X7 inches], diskette, and magnetic tape) aimed primarily at business customers. When a new commercial account is opened, the customer is offered the opportunity to custom design the format of its reports. For example, the Company can include company accounting codes or internal auditing codes for each call made with each billing statement. If a customer would like to change a particular reference code for a telephone line, the code can be changed automatically. The Company's primary product in this area is Allnet ESP(R) or Executive Summary Profile. A typical Allnet ESP(R) statement breaks out calls in a number of ways: by initiating caller number, by terminating number, by ranking, by department, by frequently dialed number/area/country or by time of day. Allnet customers pay a fixed monthly fee for these custom-tailored billing services. In late 1992, Allnet ESP(R) II was launched which gives customers graphic reports of traffic patterns on a nationwide basis by state, within state by area of dominant influence ("ADI") and within ADI by zip code. The Company believes this will be useful to certain customers for direct response and customer service applications. In mid-1992, the Company also launched its proprietary personal computer reporting service Allnet Invoice Manager(sm) ("AIM") which allows customers to design their own reports, prepare separate itemized bills, do mark-up reporting and generate numerous other customized reports. 800 Services. The Company greatly expanded its 800 product offerings, capitalizing on opportunities resulting from FCC mandated portability in May 1993 (which allows customers to select a different long distance carrier without changing their 800 number). These new offerings include area code blocking and routing; time of day routing; Home Connection 800(sm) , fractional 800 service which allows residential customers to acquire 800 service utilizing a 4 digit security Personal Identification Number ("PIN"); Multi-Point(sm) 800 services, which allow the customer to use accounting codes on an 800 number or route a single 800 number to numerous locations simultaneously; Follow-Me 800, which allows a customer to change his routing from a Touch Tone(R) telephone; and TargetLine(sm) 800, which routes calls to the closest location and provides custom prompts based 6 8 upon a customer specific database. To supplement the Company's internal growth in this market, the Company also will evaluate strategic external growth opportunities. For example, in July 1993, the Company acquired the specialized 800 customer base of Call Home America, Inc. These customers, who were then generating annualized revenue of approximately $20 million, are also able to utilize a wide range of other telecommunications services from the Company. TRANSMISSION The Company endeavors to have sufficient switching capacity, local access circuits and long distance circuits at and between its network switching centers to permit subscribers to obtain access to the switching centers and its long distance circuits on a basis which exceeds industry standards regarding clarity, busy signals or delays. The network utilizes fiber optic and digital microwave transmission circuits to complete long distance calls. With the exception of a digital microwave system located in California for which Allnet holds the Federal Communications Commission ("FCC") licenses, such facilities are leased on a fixed price basis under both short and long term contracts. The California microwave facilities are on leased real estate and are subject to zoning and other land use restrictions. In recent years abundant availability and declining prices have dictated a strategy of generally obtaining new capacity for terms between six months and one year. While the Company has several long term contracts, these contracts have either annual "mark-to-market" clauses or, in one case, a "most favored nation" clause. These provisions function to keep the price the Company pays at or near current market rates. An important aspect of the Company's operation is planning the mix of the types of circuits and transmission capacity to be leased or used for each network switching center so that calls are completed on a basis which is cost effective for the Company without compromising prompt service and high quality to subscribers. Over 99% of the Company's domestic traffic is carried on owned or leased facilities ("on-net"). In establishing a network switching center, the Company can select equipment with varying capacities in order to meet the anticipated needs of the service origination region(s) served by the center. The equipment used by the Company is, for the most part, designed to permit expansion to its capacity by the addition of standard components. If the maximum capacity of the equipment in any center is reached, the Company replaces it with higher capacity switching equipment and attempts to move the replaced unit to a network switching center in a different service origination region. The Company is dependent upon the local telephone company for installing local access circuits and providing related service when establishing a network switching center. As of December 31, 1993, the Company had 16 network switching centers which originate traffic in all Local Access 7 9 Transport Areas ("LATAs") in the United States. International service is provided through participation in the International Carrier Group ("ICG") with three other major long distance companies. The ICG in turn contracts with other long distance companies and foreign entities to provide high quality international service at competitive rates. MARKETING Approximately 60% of the Company's employees are engaged in sales, marketing or customer services. The Company markets its services and products through personal contacts with an emphasis on customer service, network quality, value-added services, reporting, rating and promotional discounts. Allnet currently operates a sales network with 48 offices in the United States. The Company employs 866 sales, marketing and customer service individuals. Field sales representatives focus on making initial sales to commercial users. They solicit business through face-to-face meetings with small- to medium-sized businesses. Each field sales representative earns a commission dependent on the customer's usage and value-added services. The Company's sales strategy is to make frequent personal contact with existing and potential customers. The prices and promotions offered for the Company's services are designed to be competitive with other long distance carriers. Prices will vary as to interstate or intrastate calls as well as with the distance, duration and time-of-day of a call. In addition, the Company may offer promotional discounts based upon duration of commitment to purchase services, incremental increases in service or "free" trial use of the many value-added and reporting services. Volume discounts are also offered based upon amount of monthly usage in the day, evening and night periods or based solely on total volume of usage. The Company has three groups which provide ongoing customer service designed to maximize customer satisfaction and increase usage. First, customer service personnel located in Southfield, Michigan are available telephonically free of charge 24 hours a day, seven days a week. Second, a customer service center in Columbus, Ohio processes calls from customers with significant usage levels who have been enrolled in the Company's "Select Service" programs. Third, communications specialists located at the sales offices provide personal service to large commercial accounts. The Company services more than 295,000 customers. Of these customers, approximately 137,000 are commercial accounts, with the remainder being residential accounts. During the past two years, the Company has become more geographically diversified, adding new markets as necessary. The Company is currently focusing on an agent program to increase customer acquisition in specific target markets. 8 10 COMPETITION AND GOVERNMENT REGULATION Competition is based upon pricing, customer service, network quality and value-added services. The Company views the long distance industry as a three tiered industry which is dominated on a volume basis by the nation's three largest long distance providers: American Telephone and Telegraph Company ("AT&T"), MCI Telecommunications Corporation ("MCI") and Sprint Communications, Inc. ("Sprint"). AT&T, MCI and Sprint, which generate an aggregate of approximately 88% of the nation's long distance revenue of $65 billion, comprise the first tier. Allnet is positioned in the second tier with four other companies with annual revenues of $250 million to $1.5 billion each. The third tier consists of more than 300 companies with annual revenues of less than $250 million each, the majority below $50 million each. Allnet targets small- and medium-sized commercial customers ($100 to $50,000 in monthly long distance volume) with the same focus and attention to customer service that AT&T, MCI and Sprint offer to large commercial customers. Allnet is one of the few long distance companies with the ability to offer high quality value-added services to small- and medium-sized commercial customers on a nationwide basis. A number of the Company's competitors are primarily regional in nature, limited by the size of their transmission systems or dependent on third parties for their billing services and product offerings. Generally, the current trend is toward lessened regulation for both the Company and its competitors. Regulatory trends have had, and may have in the future, both positive and negative effects upon Allnet. For example, more markets are opening up to Allnet, as state regulators allow Allnet to compete in markets from which it was previously barred. On the other hand, the largest competitor, AT&T, has gained increased pricing flexibility over the years, allowing it to price its services more aggressively. As a nondominant Interexchange Carrier ("IXC"), the Company is not required to maintain a certificate of public convenience and necessity with the FCC other than with respect to international calls, although the FCC retains general regulatory jurisdiction over the sale of interstate long distance services by IXCs, including the requirement that calls be charged on a nondiscriminatory, just and reasonable basis. Although the FCC had previously ruled that nondominant carriers, such as Allnet, do not need to file tariffs for their interstate service offerings, a recent Court of Appeals decision has vacated that FCC ruling. The impact of the Court of Appeals decision on Allnet was minimal and primarily administrative in nature. Allnet has already taken any necessary steps to comply with that decision, including filing an interstate tariff with the FCC. The FCC has since adopted reduced requirements regarding the filing of tariffs for non-dominant carriers, including Allnet. The Company believes that it has operated and continues to operate in compliance with all applicable tariffing and 9 11 related requirements of the Communications Act of 1934, as amended. In the FCC decision implementing certain provisions of the Telephone Operator Consumer Services Improvement Act ("TOCSIA"), Allnet was designated subject to the payment of charges by "private payphone owners." Allnet presently is challenging that designation with the FCC and in the courts, as it does not believe that it is engaged in the sort of activity intended to be regulated under TOCSIA. In addition, by virtue of its ownership of interstate microwave facilities located in California (as described in "Transmission"), Allnet is subject to the FCC's common carrier radio service regulations. In 1984, pursuant to the AT&T Divestiture Decree, AT&T divested its 22 Bell Operating Companies ("BOCs"). In 1987, as part of the triennial review of the AT&T Divestiture Decree, the U.S. District Court for the District of Columbia denied the BOCs' petition to enter, among other things, the long distance ("inter-LATA") telecommunications market. The District Court's ruling was appealed to the United States Court of Appeals for the District of Columbia which, in 1990, affirmed the District Court's decision to retain the inter-LATA prohibition for the BOCs. Currently pending before Congress is legislation that would allow the BOCs into the inter-LATA business in competition with long distance carriers, such as Allnet. The recently introduced "Brooks-Dingell Bill" (in the House of Representatives, H.R. 3626) and the "Hollings Bill" (in the Senate, S. 1822) set forth various time frames and certain entry requirements for the BOCs to enter certain markets, including the long distance market, from which the BOCs are currently barred under the AT&T Divestiture Decree. As initially proposed, the Brooks-Dingell Bill would allow entry into various segments of the long distance business when various combinations of conditions and timing requirements have been satisfied. Some entry requirements may be successfully applied almost immediately upon the passage of the bill, while others may not be applied until 18 months or 60 months have passed. In contrast, as initially proposed, the Hollings Bill would require that long distance only be offered by a BOC through a separate subsidiary, but only after the FCC, after consultation with the Attorney General, finds that the BOCs have met certain entry requirements. Under the Hollings Bill, there is one set of entry tests for "out-of-market" services, and another for "in-market" services. To allow a BOC to provide long distance service outside of its market area through a separate subsidiary, the FCC must find there is no substantial possibility that the BOC could use its market power to impede competition in the long distance market that the BOC seeks to enter. To allow a BOC to provide long distance service in its local market (i.e., where it provides telephone exchange or exchange access services), the FCC must make additional findings that 10 12 the BOC has opened up its local network to competitors, and that it faces actual and demonstrable competition based on objective standards of competitive penetration set forth in the Hollings Bill. It cannot be determined at this time whether these or other bills will be adopted or the timing of such adoption or, if adopted, whether the final legislation will be similar to either of these proposed bills. To the extent final legislation, if any, results in the BOCs being permitted to provide inter-LATA long distance telecommunications services and to compete in the long distance market, existing IXCs, including the Company, would likely face substantial additional competition from local BOC monopolies. As part of the AT&T Divestiture Decree, the divested BOCs were required to charge AT&T and all other carriers (including Allnet) equal per minute rates for "local transport" service (the transmission of switched long distance traffic between the BOCs' central offices and the IXCs' points of presence). BOC and other local exchange company ("LEC") tariffs for local transport service have been based upon these "equal per unit" rules since 1984, pursuant to the AT&T Divestiture Decree and the FCC's waiver of certain local transport pricing rules. Although the portion of the AT&T Divestiture Decree containing this rule ceased to be effective by its terms on September 1, 1991, the FCC had extended its effect until it concluded the rulemaking proceeding in which it considered whether to retain or modify the "equal per unit" local transport pricing structure. On September 17, 1992, the FCC voted to maintain the existing "equal per unit" pricing rules until late 1993. A two year interim would then begin. Based on the interim plan rates that have now taken effect as of January 1, 1994, Allnet does not anticipate a material impact during 1994 and 1995. To moderate IXC costs, the FCC has ordered that non-recurring charges for reconfiguring a carrier's access lines should be waived until May 1994, to accommodate the change in access pricing structure. The FCC has left open the access rate structure issue for the post 1995 period. The FCC issued a Further Notice of Proposed Rulemaking for consideration of a permanent rate structure to take effect beginning no earlier than late 1995. The FCC has also recently voted to allow expanding competition for monopoly local access through expanded local switched access interconnection. This could ultimately provide Allnet with alternatives to purchasing its local access from the monopoly local exchange carriers. The FCC has issued orders stating that carriers, such as Allnet, were entitled to refunds for overcharges paid to a number of local exchange carriers during the 1985-1986 and 1987-1988 periods. These awards have, in most cases, been paid to Allnet. Although these awards are in the aggregate significant, they are not a material portion of the Company's total access costs. Some local exchange carriers have appealed the orders and some of the awards which were 11 13 paid are conditioned on the outcome of the appeals. In addition Allnet has pending claims for overcharges during the 1989-1990 period. Two of the four claims have been settled. At this time, Allnet is not aware of any pending rulings on the remaining claims. The intrastate long distance telecommunications operations of the Company are also subject to various state laws and regulations, including certification requirements. Generally, the Company must obtain and maintain certificates of public convenience and necessity as well as tariffs from regulatory authorities in most states in which it offers intrastate long distance services, and in most of these jurisdictions, must also file and obtain prior regulatory approval of tariffs for its intrastate offerings. At the present time, the Company can provide originating services to customers in all 50 states and the District of Columbia. Those services may terminate in any state in the United States, and may also terminate to countries abroad. Only 31 states have public utility commissions that actively assert regulatory oversight over the services currently offered by the Company. Like the FCC, many of these regulating jurisdictions are relaxing the regulatory restrictions currently imposed on telecommunication carriers for intrastate service. While some of these states restrict the offering of intra-LATA services by the Company and other IXCs, the general trend is toward opening up these markets to the Company and other IXCs. Those states that do permit the offering of intra-LATA services by IXCs generally require that end users desiring to access these services dial special access codes which place the Company and other IXCs at a disadvantage as compared to LEC intra-LATA toll service which generally requires no access code. PATENTS In December 1992, MCI filed a lawsuit in the United States District Court for the District of Columbia against AT&T. The complaint seeks, among other things, a declaration that certain AT&T patents relating to basic long distance services, toll free "800" service, and other telephone services are invalid or unenforceable against MCI (and other similarly situated telecommunications providers). AT&T counterclaimed against MCI for patent infringement. Contemporaneously with the filing of its declaratory judgment action, MCI requested the court in the AT&T Divestiture Decree case to rule that AT&T should be barred from asserting its pre-divestiture patents to impede competition in the interexchange telecommunications market. Both of the foregoing actions are currently pending. AT&T has generally indicated that it believes that long distance telecommunications companies may be infringing on certain AT&T patents and has offered to license such patents. AT&T has numerous patents, some of which may pertain to the provision of services similar to those currently provided or to be provided by the Company or to 12 14 equipment similar to that used or to be used by the Company. If it were ultimately determined that the Company has infringed on any AT&T patents and the Company is required to license such patents and pay damages for infringement, such costs could have an adverse effect on the Company. EMPLOYEES As of December 31, 1993, the Company employed 1,488 employees in the United States, none of whom were subject to any collective bargaining agreements. ITEM 2. PROPERTIES On December 31, 1993, the Company had under lease approximately 113,000 square feet of office space in Bingham Farms, Michigan for executive and administrative functions and approximately 43,000 square feet in Southfield, Michigan for customer service, collections, and data processing. The Company also leases approximately 290,000 square feet in the aggregate for sales and administrative offices, network switching centers and unmanned microwave sites in 90 other locations in the continental United States. Most of the leased premises are for an initial term of five-to-ten years with, in many cases, options to renew. All properties presently being used for operations of the Company are suitable, well maintained and equipped for the purposes for which they are used. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Executive Officers Of The Registrant The following table sets forth as of February 14, 1994 the executive officers of ALC as designated by the Company or otherwise required by law to be so designated. Executives are elected annually and serve at the pleasure of the Board.
NAME AGE POSITION John M. Zrno 55 President, Chief Executive Officer and Director Marvin C. Moses 49 Executive Vice President, Chief Financial Officer, Assistant Secretary and Director
13 15 William H. Oberlin 49 Chief Operating Officer, Executive Vice President and Director Gregory M. Jones 43 Senior Vice President Connie R. Gale 47 Vice President, General Counsel and Secretary
John M. Zrno has held his positions since August 1988. From December 1981 until joining the Company, Mr. Zrno held a number of executive positions with Cable & Wireless North America, Inc., the most recent of which was President and Chief Executive Officer. Between 1972 and 1981, Mr. Zrno first served as an officer of MCI Telecommunications Corporation, a long distance provider, then as an officer of American Satellite Corporation, a satellite common carrier, and finally as an officer of F/S Communications Corporation, an independent telephone interconnect company. Marvin C. Moses has held his officer positions since October 1988, and director since September 1989. From February 1982 through September 1988, Mr. Moses held a number of executive positions with Cable & Wireless North America, Inc., the most recent of which was Chief Financial Officer and Senior Vice President. From 1980 through February 1982, Mr. Moses worked with Atlantic Research Corporation, where he was involved in obtaining project financing for an alternative energy product. From 1975 to 1980, Mr. Moses was Vice President - Finance and Chief Financial Officer of GTE Telenet, a data communications company now part of Sprint. William H. Oberlin has held the position of Chief Operating Officer since July 1990, the position of Executive Vice President since October 1988 and director since July 1993. From November 1983 through September 1988, Mr. Oberlin held a number of executive positions with Cable & Wireless North America, Inc., the most recent of which was Senior Vice President - Sales and Marketing. During 1983, Mr. Oberlin was founder and principal shareholder of Electronic Express, Inc., a facsimile-based priority mail and delivery system. From April 1982 through March 1983, Mr. Oberlin was Chief Executive Officer of DHL Business Systems, Inc., a worldwide manufacturer and distributor of word processing terminals. From 1974 through April 1982, Mr. Oberlin was employed by Sprint. From September 1979 through April 1982, Mr. Oberlin was President of Southern Pacific/Distributed Message Systems, Inc., distributors of facsimile machines and electronic mail services. Gregory M. Jones has held the position of Senior Vice President since December 1990 and had formerly served as Vice President - Marketing since January 1989. Mr. Jones was previously director of Sure Check and Retail Services, Inc., a wholly owned subsidiary of Comp-U-Check, Inc. From July 1979 to June 1987 Mr. Jones held various positions with MCI Telecommunications Corporation including director of 14 16 marketing for MCI Midwest in Chicago, senior manager of telemarketing, and senior manager of customer service. Connie R. Gale has held the position of Vice President since January 1991 and has held the positions of General Counsel and Secretary since October 1988, commencing her employment with the Company December 1986 as Associate General Counsel and Assistant Secretary. Ms. Gale previously served as corporate counsel for Chrysler Corporation from July 1973 to February 1980 and for American Natural Resources, Inc. from February 1980 to March 1981. Ms. Gale was Associate General Counsel at Federal-Mogul Corporation from April 1981 to November 1986. _____________________________ References to "Sprint" include its former designations: Southern Pacific Communications Co., GTE Sprint and U.S. Sprint. 15 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock, $.01 par value, has been traded on the AMEX since September 4, 1991 and is listed under the symbol ALC. The table below sets forth the ranges of high and low closing sales prices of the Common Stock as reported on the AMEX composite tape for calendar years 1992 and 1993.
1992 1993 ---- ---- HIGH LOW HIGH LOW 1st quarter $ 7.00 $ 4.25 $16.63 $12.50 2nd quarter $ 6.00 $ 4.25 $20.00 $15.50 3rd quarter $ 6.38 $ 5.00 $28.25 $19.75 4th quarter $14.13 $ 5.13 $30.75 $23.88
As of February 21, 1994, there were 2,079 holders of record of the Common Stock. The high and low sales price per share of the Common Stock for the period from January 1, 1994 to February 21, 1994, as reported by AMEX, were $33.63 and $28.13, respectively. Since its inception, ALC has not declared or paid any dividends on its Common Stock. While any Preferred Stock was outstanding, dividends could not be paid on Common Stock if any dividends were due on, or ALC had any past-due obligation to redeem, Preferred Stock. The Company is allowed to pay dividends by the terms of its Revolving Credit Facility as long as (a) the sum of such dividend distribution does not exceed at any one time an amount equal to 30 percent of cumulative Net Adjusted Income (calculated after January 1, 1993) and (b) no default in payment of any Obligations or Event of Default exists at the time such distribution is made, or would be created by any such distribution (capitalized terms not otherwise defined herein are defined in the Revolving Credit Facility). ALC paid $1.5 million in cash dividends to the Class A Preferred holders in 1988. On July 22, 1993 and on October 21, 1993, the Board of Directors of ALC declared current quarterly dividends of $0.32 per share on each of the 355,956 issued and outstanding shares of Class A Preferred. On December 10, 1993, the ALC Board of Directors announced the redemption of the 355,956 issued and outstanding shares of Class A Preferred on December 31, 1993 to stockholders of record at the close of business December 13, 1993. The redemption price was $20.00 per share plus all accrued dividends (including the dividend which was declared on October 21, 1993) in the total amount of $10,361,879. Following the redemption, the Class A Preferred was retired as of January 4, 1994. 16 18 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth for the indicated fiscal years and periods ended, selected historical financial information for the Company. Such information is derived from financial statements presented in Part IV, Item 14. of this Annual Report on Form 10-K and should be read in conjunction with such financial statements and related notes thereto. ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY Selected Financial Data
As of and for the years ended December 31, ----------------------------------------------------------------- 1993 1992 1991 1990 1989 ----------------------------------------------------------------- (In thousands except per share data) Income Statement Data: Revenue $436,432 $376,064 $346,873 $326,004 $333,765 Income (loss) before extraordinary items and Cumulative Effect of Accounting Change $ 39,676 $ 13,826 $ 2,717 ($19,643) ($22,689) Income (loss) per common share before extraordinary items and Cumulative Effect of Accounting Change (1) $ 1.07 $ 0.43 ($0.17) ($2.29) ($10.43) Net income (loss) $ 45,686 $ 20,826 $ 5,347 ($19,643) ($21,324) Net income (loss) per common share (1) $ 1.23 $ 0.74 ($0.02) ($2.29) ($9.93) Balance Sheet Data: Total assets $193,541 $143,266 $140,846 $149,375 $161,015 Long term obligations (2) $ 87,598 $ 83,950 $105,355 $181,450 $ 77,655
- ------------- (1) 1989 and 1990 have been restated to reflect the 1:5 reverse stock split. (2) 1989 through 1992 include Class A Preferred Stock. 17 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW By 1993, ALC had completed a multi-year series of refinancing transactions which provided for the simplification and improvement of the debt and capital structure of the Company. ALC was successfully transformed from a Company that in 1990 was owned by a controlling interest stockholder, Communications Transmission, Inc. ("CTI"), and had an equity structure that included three issues of preferred stock. In addition, at December 31, 1990 the Company had a debt structure which required principal and interest payments of as much as $79 million in 1992, a level which could not be met from operating cash flow and therefore required significant refinancing actions. Accordingly, during 1992, the Company completed the Refinancing which included the rescheduling of substantially all debt, resulting in significantly reduced or deferred debt service obligations. In 1992, the Company's major debt instrument represented by the Company's Original Debentures, Replacement Debentures, PIK Debentures and accrued interest was replaced by 11 7/8% Subordinated Notes of Allnet ("1992 Notes"). As part of the restructuring of the Debentures, 3,400,000 ALC Common Stock warrants were issued representing 10.2% of the fully-diluted equity of ALC. These debentures were replaced in May 1993 with 9% Senior Subordinated Notes ("1993 Notes") which do not mature until May 2003. Additional debt including the $20.0 million Restructured Promissory Note and the approximately $8.0 million balance on the 1990 Note Agreements was paid in full. As a result, at December 31, 1993 ALC has a single debt instrument outstanding, $85.0 million of 9% Senior Subordinated Notes. During 1992, the Refinancing also included the restructuring and simplification of the equity of ALC. In August 1992, the equity interest of CTI represented by 14,324,000 shares of ALC Common Stock, and the ALC Class B and Class C Convertible Preferred Stock ("Preferred Stock") was transferred to a group of five banks ("Banks"). Subsequently such Preferred Stock was converted into 3,796,000 shares of ALC Common Stock. A series of stock offerings in 1992 and 1993 was used to facilitate the sale of substantially all of the shares held by the Banks. As part of the stock offering in October 1992, the Company also completed an Exchange Agreement which provided for the exchange of 2,144,044 Class A Preferred Shares for 6,399,227 shares of ALC Common Stock at an effective 40% discount. 18 20 During 1992 and continuing throughout 1993, the Company achieved both the successful completion of the Refinancing and a significant financial turnaround which included twelve consecutive quarters of income through the quarter ended December 31, 1993. Net income grew from a level of $3.3 million for the first quarter of 1992 to $12.4 million for the fourth quarter of 1993. Net income for the year ended 1993 increased approximately 90% over the previous year (excluding the effect of the extraordinary item and cumulative effect of the accounting change in 1993). The results of operations for 1992 and 1993 reflect increases in both billable minutes and revenue and a significant reduction in operating expenses as a percent of revenue. RESULTS OF OPERATIONS The Company reported net income of $45.7 million for the year ended December 31, 1993. This includes the impact of both the $13.5 million cumulative effect of a change in method of accounting for income taxes and the $7.5 million net loss related to early retirement of debt. Excluding these items, income for the year ended December 31, 1993 totalled $39.7 million on revenue of $436.4 million. This compares to net income of $20.8 million on revenue of $376.1 million and $5.3 million on revenue of $346.9 million for the years ended December 31, 1992 and 1991, respectively. Operating income increased from $23.9 million for the year ended December 31, 1991 to $40.7 million in 1992 to $68.9 million in 1993. This improvement is primarily the result of increased revenue from increased billable minutes and improved gross margin.
Operating Results as a Percent of Revenue ----------------------------------------- Year Ended December 31, ----------------------------------------- 1993 1992 1991 ---- ---- ---- Revenue 100.0% 100.0% 100.0% Communication services (53.8) (57.7) (61.3) ------ ------ ------ Gross Margin 46.2 42.3 38.7 Sales, general & admin. (27.5) (28.5) (28.2) Depreciation & amort. (2.9) (3.0) (3.6) ------ ------ ------ Operating Income 15.8% 10.8% 6.9% ------ ------ ------ ------ ------ ------
19 21 REVENUE Revenue increased 16.1% to $436.4 million from 1992 to 1993 resulting from an 18.9% increase in billable minutes offset somewhat by a decrease in the revenue per minute. Revenue per minute decreased from 1992 to 1993 resulting from certain changes in the sales mix which were more than offset by additional efficiencies in network costs. Billable minutes have continued to increase since the third quarter of 1990 when compared to the same quarter in the prior year. Most importantly, billable minutes reached their highest level in 1993. The increase in billable minutes results from traffic generated by new customers and increased minutes per customer. Beginning in May 1993, the Company benefited from new traffic growth generated from the availability of 800 portability. Beginning in July 1993, the Company had additional revenue from the acquisition of the customer base of Call Home America, Inc. ("CHA") which represented 2.5% of the increase in revenue for the year ended December 31, 1993 compared to 1992. In addition, resellers contributed an additional $20.0 million to revenue during 1993. Revenue increased from $346.9 million in 1991 to $376.1 million in 1992. The 8.4% increase in revenue represents a 9.6% increase in billable minutes offset by a modest decrease in the revenue per minute. Revenue per minute decreased slightly from 1991 to 1992 resulting from lower unit prices which were more than offset by the impact of reduced cost of communication services as a percent of revenue. The revenue generated from customers' first full month of service in 1993 was 30.7% higher than in 1992 and 7.5% higher in 1992 than in 1991. The increased revenue from new sales along with revenue from existing customers is outpacing revenue lost from customer attrition. Attrition improved from 2.0% in 1991 to 1.8% in 1992. Attrition increased in 1993 to 2.4%, reflecting the change to the portability of 800 numbers from carrier to carrier. The provision for uncollectible revenue, which is deducted from gross revenue to arrive at reported revenue, was 1.9% for the year ended December 31, 1993, 3.0% for the year ended December 31, 1992, and 3.4% for the year ended December 31, 1991. During the last three years, procedures were implemented to improve the collection process and provide earlier detection of credit risks. Procedures include an expanded system for initial credit review and screening, monitoring of early usage levels on new accounts, modification of dunning and collection methods and timing, and improved collection processes on past due accounts. 20 22 COST OF COMMUNICATION SERVICES The cost of communication services increased from $212.7 million and $216.9 million to $234.8 million for the years 1991, 1992, and 1993, respectively. The increase in cost of communication services is due to the 18.9% and 9.6% increase in billable minutes in 1993 and 1992. These increases were offset by unit cost reductions for transmission capacity experienced in 1992 and further efficiencies gained during 1993. The cost of communication services decreased, however, as a percent of revenue from 61.3% for 1991 to 53.8% in 1993, the lowest rate in the Company's history. Switched access costs per hour as a percent of revenue declined 3.5% reflecting lower tariffed rates. A combination of the use of high volume, fixed price leased facilities to transmit traffic and reduced international costs through contractual agreements have contributed to this percentage decline. In addition, the Company has continued to reconfigure its network to optimize utilization. The Company's use of high volume, fixed price transmission capacity is significantly more cost effective than the use of measured services. By utilizing fixed price leased facilities to transmit traffic, the Company has successfully decreased its network costs without the capital expenditures associated with construction of its own fiber optic or digital microwave network. Over 99% of traffic traverses low cost "on-net" digital facilities. OTHER EXPENSES Sales, general and administrative expense was $98.0 million, $107.3 million and $119.8 million for the years 1991, 1992 and 1993, respectively. Sales, general and administrative expense for 1993 increased $12.5 million or 11.7% compared to 1992. The increase reflects increased commissions, taxes other than income, and other expenses related to sales. Sales, general and administrative expense, however, declined as a percent of revenue which reflects management's continuing focus on cost containment. Procedures implemented to improve efficiencies and contain expenses included improved budgeting techniques, continued review of actual expenses against budgeted levels, incentive programs tied directly to achievement of budget objectives, and detailed review of general expense programs. 21 23 Sales, general and administrative expense for 1992 increased $9.3 million or 9.5% compared to 1991. Sales expense increased 19.6% from 1991 which resulted from increased advertising and marketing expenses as well as increased commissions reflecting higher first full month revenue as well as enhancements to the commission plan to encourage customer retention. General and administrative expenses continued to decrease as a percent of net revenue. The increase in depreciation and amortization from $11.2 million in 1992 to $12.8 million in 1993 is primarily the result of depreciation on newly capitalized fixed assets and intangible assets reflecting the increase in capital expenditures in 1992 and 1993 and the purchase of CHA. The decrease from 1991 to 1992 reflected the termination of depreciation on analog multiplex and switch equipment, for which the Company provided a reserve, and the termination of depreciation as assets reach the end of their useful lives. These reductions in depreciation were partially offset by depreciation on assets capitalized during the period. INTEREST EXPENSE Interest expense has dramatically decreased from $18.1 million in 1991 and $17.2 million in 1992 to $10.5 million in 1993. This resulted from reduced interest related to the replacement of the 11 7/8% Subordinated Notes, which had an effective interest rate of 13.6%, with the 9% Senior Subordinated Notes. In connection with the Refinancing, the Restructured Promissory Note and the 1990 Note Agreement were paid in full in 1993 and 1992, respectively. Interest expense also declined due to lower average balances on the Revolving Credit Facility, as well as lower interest rate charged under the new Revolving Credit Facility. INCOME TAXES Effective January 1, 1993, the required implementation date, the Company adopted the Financial Accounting Standards Board Statement 109 "Accounting for Income Taxes" ("Statement 109"). Application of the new rules resulted in the recording of a net deferred tax asset and additional income of $13.5 million as of January 1, 1993, related primarily to the future tax benefits which are expected to be realized upon utilization of a portion of the Company's tax net operating loss carryforwards ("NOLs"). Statement 109 requires that the tax benefit of NOLs be recorded as an asset to the extent that management assesses that the realization of such NOLs is "more likely than not". Management believes that realization of the benefit of the NOLs beyond a three-year period is difficult to predict and therefore has recorded a valuation allowance which has the effect of limiting the recognition of future NOL benefits to those expected to be realized within the three year period. The Company has not applied Statement 109 22 24 retroactively and thus did not restate prior year financial statements to reflect adoption of the new rules. Prior to January 1, 1993, the Company accounted for income taxes in accordance with Accounting Principles Board Opinion No. 11. The tax provisions for the years ended December 31, 1992 and 1991 included an amount that would have been payable except for the availability of NOLs. The tax benefits of the loss carryforwards utilized were reported as an extraordinary item for the years ended 1992 and 1991. With the adoption of Statement 109, the income tax expense for 1993 includes the benefit of utilizing net operating losses. In 1992 and 1993 the Company was subject to regular tax and due to a Code Section 382 "ownership change", the utilization of net operating losses was limited. In 1991, the Company was subject to alternative minimum tax and the operating losses were utilized to offset 90% of the taxable income. SECTION 382 LIMITATION Section 382 (in conjunction with Sections 383 and 384) of the Code provides rules governing the utilization of certain tax attributes, including a corporation's NOLs, "built-in-losses," capital loss carryforwards, unused investment tax credits ("ITCs") and other unused credits, following significant changes in ownership of a corporation's stock. Generally, Section 382 provides that if an ownership change occurs, the taxable income of a corporation available for offset by these tax attributes will be subject to an annual limitation ("382 Limitation"). The transfer of ALC Common Stock, Class B Preferred and Class C Preferred by CTI to the Banks in August 1992 resulted in an ownership change with a 382 Limitation of approximately $10 million per annum. As a result of this annual limitation, along with the 15 year carryforward limitation, the maximum cumulative NOLs and ITCs which can be utilized for federal income tax purposes in 1994 and future years are limited to approximately $120 million, assuming no future ownership change or built-in gain recognition. The Company is also subject to numerous state and local income tax laws which limit the utilization of NOLs after an ownership change. Future events beyond the control of the Company could reduce or eliminate the Company's ability to utilize the tax benefit of its NOLs and ITCs. Any future ownership change under Section 382 would require a new computation of the 382 Limitation based on the value of the Company and the long term tax-exempt rate in effect at that time. Furthermore, the tax benefit of NOLs would be reduced to zero if the Company fails to satisfy the continuity of business enterprise requirement for the two-year period following an ownership change. Under the continuity of business requirement, the Company must either continue its historic business or use a significant portion of its pre-ownership change assets in a business. 23 25 SEASONALITY The Company's long distance revenue is subject to certain limited seasonal variations. Because most of the Company's revenue is generated by commercial customers, the Company traditionally experiences decreases in long distance usage and revenue in those periods with holidays. In past years the Company's long distance traffic has declined slightly during fourth quarters from previous quarters due to the holiday periods. However, in 1993 and 1992 the impact of this trend was more than offset by strong year over year traffic growth, which was up 26.0% and 12.3% from the fourth quarter of 1992 and 1991, respectively. LIQUIDITY AND CAPITAL RESOURCES For the years ended December 31, 1993, 1992 and 1991, the Company generated positive cash flow from operations of $59.4 million, $30.4 million and $27.3 million, respectively, reflecting the strong trend of profitability. The positive cash flow reflects fourteen consecutive quarters of increased revenue and operating profits as of December 31, 1993 versus prior year comparable quarters. The positive cash flow from operations resulted in working capital of $1.4 million at December 31, 1993 compared to negative $31.7 million at December 31, 1992. The increase in working capital is largely attributable to: (a) the pay down of the Revolving Credit Facility which was classified at December 31, 1992 as a short term liability, (b) the increase in accounts receivable due to the increase in revenue, and (c) the reduced balance in the current portion of notes payable due to the payoff of the Restructured Promissory Notes and payments made on capital leases. In addition to the positive cash flow from operations, the Company's short term liquidity position is further strengthened by the unused availability under the Revolving Credit Facility. As of June 30, 1993 the Company executed an agreement for a $40.0 million line of credit, replacing the previous Facility. The new Revolving Credit Facility expires June 30, 1995. Under this Revolving Credit Facility, the Company is able to minimize interest expense by structuring the borrowings under three alternatives. Each alternative has a varying interest rate calculation associated with it. The effective rate under the Facility during 1993 approximated 5.8%. The agreement includes financial covenants which allow the Company to further reduce interest expense on outstanding borrowings beginning in July 1994. A .375% per annum charge is made on the unused portion of the line. Advances under the Revolving Credit Facility are made based on the level of receivables. As of December 31, 1993, the Company had availability of $39.8 million under the line and no balance outstanding. 24 26 Further evidence of the Company's stronger liquidity position was the Company's ability to finance the cash needs of $19.6 million for the CHA customer base acquisition and $10.4 million for the redemption including accrued dividends of Class A Preferred Stock from cash flow from operations. Because the Company has chosen to lease rather than own its transmission facilities, the Company's requirements for capital expenditures are modest. Capital expenditures totalled $16.2 million in 1993. Capital expenditures during the year ended December 31, 1993 included projects for enhanced efficiency and technical advancement in the network, information systems and customer service. The 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. The level of capital expenditures for 1994 is expected to be $20 - $25 million. In March 1993, an equity offering was completed in which an aggregate of 10,350,000 shares of ALC Common Stock were sold by certain stockholders of ALC at $14.25 per share. ALC did not receive any of the proceeds from the sale of these shares, although it did receive $1.9 million upon exercise of 963,684 warrants. In May 1993, the Company completed an offering of $85.0 million of 9% Senior Subordinated Notes. Interest on the 1993 Notes is payable semiannually commencing November 15, 1993. The 1993 Notes will mature on May 15, 2003 but are redeemable at the option of the Company on or after May 15, 1998. Management used the $84.3 million of proceeds of this offering to repay the outstanding 1992 Notes aggregating $72.4 million, and to reduce the amount outstanding under the Revolving Credit Facility. The 1993 Notes provide additional benefits on both short and long term liquidity by reducing interest expense as well as deferring redemption requirements. In September 1993, an equity offering was completed in which an aggregate of 7,763,391 shares of ALC Common Stock were sold by certain shareholders at $25.50 per share. This offering included the exercise of 3,240,025 warrants. In October 1993, an additional 177,100 warrants were exercised, and the shares subsequently sold to the public. ALC did not receive any proceeds from the sale of any of these shares but did receive $6.9 million from the exercise of warrants. In December 1993, the Company redeemed the remaining 355,956 shares of Class A Preferred for $10.4 million including $3.2 million of accrued dividends. 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. 25 27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required by this Item 8. are set forth in Part IV, Item 14. of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT As of the date of this Annual Report on Form 10-K, the Board of Directors of ALC consists of seven positions, all elected by the holders of Common Stock. Six of the seven positions are presently filled. The following list identifies (i) the persons who are Directors of the Company; and (ii) each Director's principal occupation for the past five years. RICHARD D. IRWIN has held the position of Chairman of the Board of Directors since August 1988. He is the President of Grumman Hill Associates, Inc. ("Grumman Hill"), a merchant banking firm, having held that position since its formation in 1985. Prior to the formation of Grumman Hill, Mr. Irwin was a Managing Director of Dillon, Read & Co. Inc. from 1983 through 1985. Mr. Irwin is also a member of the Board of Directors of Caire, Inc. and Pharm Chem Laboratories, Inc. JOHN M. ZRNO has held the positions of President, Chief Executive Officer and Director since August 1988. From December 1981 until joining Allnet, Mr. Zrno held a number of executive positions with Cable & Wireless North America, Inc., the most recent of which was President and Chief Executive Officer. Between 1972 and 1981, Mr. Zrno first served as an officer of MCI, then as an officer of American Satellite Corporation, a satellite common carrier, and finally as an officer of F/S Communications Corporation, an independent telephone interconnect company. MARVIN C. MOSES has held the positions of Executive Vice President, Chief Financial Officer and Assistant Secretary since October 1988. Mr. Moses was elected as a Director in September 1989. From February 1982 through September 1988, Mr. Moses held a number of executive positions with Cable & Wireless North America, Inc., the most recent of which was Chief Financial Officer and Senior Vice President. From 1980 through February 1982, Mr. Moses worked with Atlantic Research Corporation, where he was involved in obtaining project financing for an alternative energy 26 28 product. From 1975 to 1980, Mr. Moses was Vice President - Finance and Chief Financial Officer of GTE Telenet, a data communications company now part of Sprint. WILLIAM H. OBERLIN has held the position of Director since July 22, 1993, and has held the position of Chief Operating Officer since July 1990 and the position of Executive Vice President since October 1988. From November 1983 through September 1988, Mr. Oberlin held a number of executive positions with Cable & Wireless North America, Inc., the most recent of which was Senior Vice President - Sales and Marketing. During 1983, Mr. Oberlin was founder and principal stockholder of Electronic Express, Inc., a facsimile-based priority mail and delivery system. From April 1982 through March 1983, Mr. Oberlin was Chief Executive Officer of DHL Business Systems, Inc., a worldwide manufacturer and distributor of word processing terminals. From 1974 through April 1982, Mr. Oberlin was employed by Sprint. From September 1979 through April 1982, Mr. Oberlin was President of Southern Pacific/Distributed Message Systems, Inc., distributors of facsimile machines and electronic mail services. RICHARD J. UHL has held the position of Director since September 3, 1991. Mr. Uhl is the President and a member of the Board of Directors of Chicago Holdings, Inc. ("CHI"), having held those positions since 1985. CHI is a privately owned company which manages several lease portfolios owned by it and its subsidiaries. Since November 1990 he has also been the Chief Executive Officer and a member of the Board of Directors of Hurrah Stores, Inc. ("Hurrah"), a subsidiary of CHI. Mr. Uhl has also been President of Steiner Financial Corporation, another subsidiary of CHI, since December 1987. Mr. Uhl currently serves on the Boards of Directors of Dealers Alliance Credit Corp. (as Chairman of the Board, since October 1993) and of First Merchants Acceptance Corporation, since March 1991, which are both privately-owned companies in which CHI has a significant equity investment. Prior to 1991, Mr. Uhl served in a number of executive capacities as well as on the Boards of Directors of certain finance organizations as well as a distributor of personal computer equipment, and a manufacturer of automotive products. MICHAEL E. FAHERTY has held the position of Director since June 23, 1992. Mr. Faherty primarily works (since 1977) as a business consultant and in the contract executive business, in connection with which Mr. Faherty formerly served in a number of executive positions, including Chairman of the Board and President, with Shared Financial Systems, Inc. from January 1992 through January 1994. As part of his duties as a contract executive, he has worked for Digital Sound Corporation, Systeme Corporation, Advanced Business Communications, Inc., BancTec, Inc. and Intec Corporation. Mr. Faherty is also a member of the Board of Directors of BancTec, Inc., Biomagnetic Technologies, Inc. and Davox Corporation. 27 29 The Board of Directors held eight regularly scheduled and special meetings in the aggregate during the fiscal year from January 1, 1993 through December 31, 1993. Several important functions of the Board of Directors of ALC have been performed by committees comprised of members of the Board of Directors. The Amended and Restated Bylaws of ALC (the "Bylaws") prescribe the functions and the standards for membership on the Audit Committee. Subject to those standards, the Board of Directors acting as a body appoints the members of the Audit Committee at the meeting of the Board of Directors coincident with the annual meeting of stockholders. However, the Board of Directors has the power at any time to change the authority or responsibility delegated to the committee or the members serving on the committee. Under the Bylaws, the Audit Committee performs the following functions: (i) recommends to the Board of Directors annually a firm of independent public accountants to act as auditors of the Company; (ii) reviews with the auditors the scope of the annual audit; (iii) reviews accounting and reporting principles, policies and practices; (iv) reviews with the auditors the results of their audit and the adequacy of accounting, financial and operating controls; and (v) performs such other duties as are delegated to it by the Board of Directors. The members of the Audit Committee during the 1993 fiscal year were Richard D. Irwin, Richard J. Uhl and Michael E. Faherty. During 1993, the Audit Committee met four times. The Board, pursuant to the Bylaws, also established a Compensation Committee. The Compensation Committee has the authority to: (i) establish the compensation (including salaries and bonuses) of the officers; (ii) establish incentive compensation plans for the officers; (iii) administer the stock option plans and grants of options under those plans; and (iv) perform such other duties as are from time to time delegated to the Compensation Committee by the Board of Directors. The members of the Compensation Committee during fiscal 1993 were Richard D. Irwin, Richard J. Uhl and Michael E. Faherty. During 1993, the Compensation Committee met five times. The Board of Directors does not have a standing committee responsible for nominating individuals to become directors. Section 16(a) of the Securities Exchange Act requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission and the American Stock Exchange. In addition, officers, directors and greater than ten percent shareholders are required to furnish the Company with copies of all Forms 3, 4 and 5 they file. 28 30 Based solely on the Company's review of the copies of such forms it has received and written representations from certain reporting persons that they were not required to file Forms 5 for specified fiscal years, the Company believes that all of its officers, directors, and greater than ten percent shareholders complied with all filing requirements applicable to them with respect to transactions during fiscal 1993 except that the Company has been informed as follows: Saulene M. Richer, a former director elected by holders of the Company's Class A Preferred Stock (redeemed in 1993) and also a ten percent shareholder of Class A Preferred, failed to timely file one required report relating to one transaction in ALC Stock. A series of five related transactions, although reported on a timely basis by NationsBank of Texas, N.A., was not reported on a timely basis by NationsBank Corporation (the parent corporation of NationsBank of Texas, N.A.) due to its late filing of a required report (which transactions were otherwise properly disclosed in the Company's reports filed under the Exchange Act). The Trustees of General Electric Pension Trust ("General Electric") failed to timely file three required reports relating to seventeen transactions in ALC Stock. General Electric subsequently filed three late Forms 4 regarding such transactions. Reference is made to the Item captioned "Executive Officers of the Registrant" in Part I of this Report. ITEM 11. EXECUTIVE COMPENSATION DIRECTOR COMPENSATION For 1992 and 1993, and to be continued for 1994, Richard J. Uhl and Michael E. Faherty received or will receive remuneration of up to $20,000 per year for their services as Board members. Of that fee, $8,000 is dependent upon per meeting attendance at the four regularly scheduled Board meetings. Richard D. Irwin waived his right to fees throughout his term of service on the Board. On September 3, 1991, ALC granted Richard J. Uhl an option to purchase 40,000 shares of Common Stock at $4.25 per share, the market price at date of grant. Mr. Uhl is entitled to exercise the option in full; it expires on the earlier of 60 days subsequent to Mr. Uhl's death, resignation or removal as a director and September 3, 1998. On June 23, 1992, ALC granted Michael E. Faherty an option to purchase 40,000 shares of Common Stock at $4.63 per share, the market price at date of grant. Mr. Faherty is entitled to exercise the option in full; it expires on the earlier of 60 days subsequent to Mr. Faherty's death, resignation or removal as a director and June 23, 1998. It is anticipated that the Common Stock issuable upon the exercise of the options held by Messrs. Uhl and Faherty will be registered under the Securities Act. In addition, 29 31 Grumman Hill, of which Richard D. Irwin is President, entered into an Advisory Agreement with Stock Option dated September 7, 1988 (the "Advisory Agreement") with the Company. Pursuant to the terms of the Advisory Agreement, Grumman Hill performs certain advisory services with respect to the management, operation and business development activities of the Company. In exchange for such services, Grumman Hill was initially granted a stock option to purchase at a price of $11.25 per share 153,163 shares of Common Stock and receives an annual fee of $100,000. In conjunction with the 1990 phase of the Refinancing, the option was regranted at an exercise price of $3.50 per share. The option was subsequently assigned to Grumman Hill Investments, L.P. ("Grumman Hill, L.P.") (of which Mr. Irwin is the General Partner). Grumman Hill, L.P. is entitled to exercise the option in full. It is anticipated that the Common Stock issuable upon the exercise of the option will be registered under the Securities Act. The option will expire on September 7, 1998. 30 32 EXECUTIVE COMPENSATION Summary Compensation Table The following table summarizes the total compensation paid to the Chief Executive Officer and the four most highly compensated executive officers at the end of calendar year 1993 for each of the past three fiscal years during which the named executive acted as an executive officer.
LONG-TERM ANNUAL COMPENSATION COMPENSATION -------------------------------------------- ------------------------ OTHER ANNUAL OPTIONS/ ALL OTHER COMPENSATION SARS COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) (#)(2) ($)(3) - ------------------------------- ---- -------- -------- ------------ -------- ------------ John M. Zrno................... 1993 $319,041 $273,000 $ 2,650(4) 300,000 $600 President, Chief Executive 1992 307,755 175,000 284,983 500 Officer, Director 1991 292,025 105,000 Marvin C. Moses................ 1993 $245,417 $210,000 240,000 $600 Executive Vice President, 1992 234,998 135,000 217,398 500 Chief Financial Officer, 1991 223,256 81,000 Assistant Secretary, Director William H. Oberlin............. 1993 $245,417 $210,000 240,000 $600 Executive Vice President, 1992 234,893 135,000 217,398 500 Chief Operating Officer, 1991 223,172 81,000 Director Gregory M. Jones............... 1993 $142,706 $ 37,948 60,000 $600 Senior Vice President 1992 135,090 49,708 $ 860(4) 55,092 500 1991 128,260 25,425 Connie R. Gale................. 1993 $138,000 $ 46,309 51,000 $600 Vice President, General 1992 130,250 48,280 47,385 500 Counsel and Secretary 1991 122,000 28,750 10,000
- ------------------------- (1) Total perquisites for each officer were less than either $50,000 or 10% of total salary and bonus. (2) Options granted in 1992 include options granted in 1990 and amended in 1992 (the exercise price was not changed). (3) Consists of Company contributions to defined contribution plan during 1993 and 1992 in the amounts of $600 and $500, respectively, for each officer. (4) Represents gross up for income taxes relating to a perquisite. 31 33 STOCK OPTION GRANTS DURING LAST FISCAL YEAR The following table sets forth information about stock option awards granted to the Chief Executive Officer and the four most highly compensated executive officers during 1993.
INDIVIDUAL GRANTS POTENTIAL REALIZABLE - --------------------------------------------------------------------------------- VALUE AT ASSUMED NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK SECURITIES OPTIONS/SAR'S PRICE APPRECIATION UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM* OPTIONS/SAR'S EMPLOYEES IN PRICE EXPIRATION ------------------------- NAME GRANTED(#)(1)(2) FISCAL YEAR ($/SH) DATE(3) 5%($) 10%($) - -------------------- ---------------- ------------- -------- ---------- ---------- ----------- John M. Zrno........ 300,000 18.40% $25.06 11/22/2003 $4,728,030 $11,981,756 Marvin C. Moses..... 240,000 14.72% $25.06 11/22/2003 $3,782,424 $ 9,585,405 William H. Oberlin.. 240,000 14.72% $25.06 11/22/2003 $3,782,424 $ 9,585,405 Gregory M. Jones.... 60,000 3.68% $25.06 11/22/2003 $ 945,606 $ 2,396,351 Connie R. Gale...... 51,000 3.13% $25.06 11/22/2003 $ 803,765 $ 2,036,898
- ------------------------- * These amounts represent assumed rates of appreciation which may not necessarily be achieved. The actual gains, if any, are dependent on the market value of the Company's Common Stock at a future date as well as the option holder's continued employment throughout the vesting period. Appreciation reported is net of exercise price. (1) All options were granted at market value on date of grant. The 1990 Stock Option Plan allows the exercise price and tax withholding obligations to be paid by delivery of already owned shares or with shares purchased pursuant to the exercise, subject to certain conditions. Vesting may be accelerated in the event of certain situations resulting in a change of ownership of the Company. The Compensation Committee, as administrator of the Company's stock option plans, has discretion to modify the terms of outstanding options, subject to certain limitations set forth in the plans. (2) One third of each grant will vest one third November 22, 1994, November 22, 1995 and November 22, 1996. The second third shall vest one third November 22, 1995, November 22, 1996 and November 22, 1997. The final third shall vest one third November 22, 1996, November 22, 1997 and November 22, 1998. (3) Unless earlier terminated due to such events as termination of employment or death. Note: No matter what theoretical value is placed on a stock option on the date of grant, its ultimate value will be dependent on the market value of the Company's Common Stock at a future date. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT FY END(#) FY END($)(1) SHARES ------------- ------------- ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/ NAME ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE - ---------------------------------------------- ----------- ---------- ------------- ------------- John M. Zrno.................................. 155,000 $2,705,863 445,344 $ 11,286,522 484,655 5,681,455 Marvin C. Moses............................... 103,000 2,085,213 383,062 9,719,382 381,938 4,418,924 William H. Oberlin............................ 63,400 1,081,000 422,662 10,729,182 381,938 4,418,924 Gregory M. Jones.............................. 77,326 1,220,063 0 0 93,766 1,041,577 Connie R. Gale................................ 0 0 61,543 1,542,396 81,842 933,563
- ------------------------- (1) Values are calculated by determining the difference between the fair market value of the Common Stock at December 31, 1993 and the exercise price of the options. 32 34 EMPLOYMENT CONTRACTS AND TERMINATION OR CHANGE IN CONTROL ARRANGEMENTS In late 1988, ALC entered into employment agreements with John M. Zrno, Marvin C. Moses and William H. Oberlin. These arrangements had initial four year terms and were amended in 1991 to extend for an additional two years. In January 1994, ALC and Allnet jointly entered into amended and restated employment agreements with John M. Zrno, Marvin C. Moses and William H. Oberlin. These agreements provide for a base salary of $319,041, $245,417 and $245,417, respectively, for Messrs. Zrno, Moses and Oberlin for service provided in 1993 through 1994, beginning and ending with the month of each officer's respective anniversary of hire. Each of these agreements has an initial three year term and contains a provision that, in the event the officer's employment is terminated for any reason except death, disability, voluntary resignation or cause, such officer will continue to receive his current salary from twelve to twenty-four months. Should the officer be terminated without cause, the stock options granted in the agreement would fully vest and remain exercisable for the succeeding twelve months. According to the employment agreements with Messrs. Zrno, Moses and Oberlin, each officer may receive incentive compensation as determined by the Board of Directors, based on the Board's determination of the officer's individual achievements. Officers below the level of Executive Vice President entered into severance agreements wherein the Company agreed to provide salary continuation and certain employee benefits for a period of twelve months (formerly, from six-to-twelve months) should an officer be terminated from employment prior to December 31, 1995. These agreements, originally effective February 1990, were renewed in February 1991, August 1992, July 1993 and January 1994. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the Compensation Committee during fiscal 1993 were Richard D. Irwin, Richard J. Uhl and Michael E. Faherty. Richard D. Irwin, Chairman of the Board of Directors since August 1988 and a member of the Compensation Committee, is a former officer of the Company because, prior to March 1991, the position of Chairman of the Board was an officer position under the Company's Bylaws. Grumman Hill, of which Richard D. Irwin is President, entered into the Advisory Agreement with the Company in 1988. Pursuant to the terms of the Advisory Agreement, Grumman Hill performs certain advisory services with respect to the management, operation and business development activities of the Company. In exchange for such services, Grumman Hill was initially granted a stock option to purchase 153,163 shares of Common Stock at a price of $11.25 per share and receives an annual fee of $100,000. In 33 35 conjunction with the 1990 phase of the Refinancing, the option was regranted at an exercise price of $3.50 per share. The option was subsequently assigned to Grumman Hill, L.P. (of which Mr. Irwin is the General Partner). Grumman Hill, L.P. is entitled to exercise the option in full. It is anticipated that the Common Stock issuable upon the exercise of the option will be registered under the Securities Act. The option will expire on September 7, 1998. Prior to the Note Exchange Offer (as defined in "Certain Relationships and Related Transactions - Banks Stock Ownership in the Company"), Grumman Hill, L.P., the Grumman Hill Associates Pension Plan, Mr. Irwin and Mr. Irwin's Individual Retirement Account held approximately $2.5 million, $75,000, $339,000 and $188,000, respectively, in principal amount of 11 7/8% Senior Subordinated Debentures of ALC due December 31, 1995 (the "Replacement Debentures") (exclusive of PIK Debentures issued or issuable in respect of certain interest payments on the Replacement Debentures). As a consequence of the Note Exchange Offer, prior to January 28, 1993 Mr. Irwin and Grumman Hill, L.P. and affiliates owned $4.1 million in principal amount of 1992 Notes and owned 194,393 1992 Warrants (capitalized terms as defined in "Certain Relationships and Related Transactions - Banks Stock Ownership in the Company"). Mr. Irwin subsequently purchased 40,000 shares of Common Stock in the 1992 Equity Offering, which, together with other options and warrants, give these entities the right to purchase in the aggregate up to 815,646 shares of Common Stock. Grumman Hill, L.P. subsequently sold $3.3 million in principal amount of 1992 Notes. In June 1993, the 1992 Notes, including the remaining $800,000 in principal amount held by Mr. Irwin and affiliates, were paid in full. As of January 1994, Mr. Irwin, Mr. Faherty (as general partner of a family-owned partnership), Mr. Uhl, Mr. Zrno and Mr. Moses own $533,000, $600,000, $200,000, $100,000 and $100,000, respectively, in principal amount of 1993 Notes which they acquired either in the 1993 Note Offering or in open-market transactions. 34 36 PRINCIPAL STOCKHOLDERS The following table sets forth information regarding beneficial ownership of the stock of ALC as of February 21, 1994 by each person known by ALC to be the beneficial owner of more than 5.0% of any class of stock, each director of ALC and all executive officers and directors of ALC as a group. The figures presented are based upon information available to ALC.
APPROXIMATE NUMBER OF PERCENTAGE SHARES OF OF COMMON STOCK VOTING POWER NAME AND ADDRESS OF (% OF OF ALL BENEFICIAL OWNER CLASS)* STOCK* -------------------- ------------ ------------ FMR Corp.(1)................................................................... 2,442,830(2) 7.4% 82 Devonshire Street (7.4%) Boston, MA 02109 Montgomery Asset Management(3)................................................. 1,736,634 5.2% 600 Montgomery St. (5.2%) San Francisco, CA 94111 Trustees of General Electric Pension Trust..................................... 1,714,845(4) 5.0% c/o G.E. Investments Corp. (5.0%) 3003 Summer Street Stamford, CT 06904 Richard D. Irwin............................................................... 815,646(5) 2.4% 15 Ketchum Street (2.4%) Westport, CT 06880 Grumman Hill Investments, L.P. ................................................ 639,155(6) 1.9% 15 Ketchum Street (1.9%) Westport, CT 06880 Grumman Hill Associates, Inc. ................................................. 103,490(**)(7) ** 15 Ketchum Street Westport, CT 06880 John M. Zrno................................................................... 395,908(8) 1.2% Suite 350 (1.2%) 30300 Telegraph Road Bingham Farms, MI 48025 Marvin C. Moses................................................................ 395,066(9) 1.2% Suite 350 (1.2%) 30300 Telegraph Road Bingham Farms, MI 48025 Richard J. Uhl................................................................. 40,200(**)(10) ** One Thousand RIDC Plaza Pittsburgh, PA 15238 Michael E. Faherty............................................................. 40,000(**)(11) ** 15301 Dallas Parkway, Suite 600 Dallas, TX 75248 William H. Oberlin............................................................. 420,706(12) 1.3% Suite 350 (1.3%) 30300 Telegraph Road Bingham Farms, MI 48025 Gregory M. Jones............................................................... 942(**) ** Suite 350 30300 Telegraph Road Bingham Farms, MI 48025 Connie R. Gale................................................................. 65,148(**)(13) ** Suite 350 30300 Telegraph Road Bingham Farms, MI 48025 All current executive officers and directors as group (17 persons)............. 2,350,042(14) 6.6% (6.6%)
- ------------------------- * Percentage calculation based on 33,101,601 shares of Common Stock, issued and outstanding on February 21, 1994, plus shares of Common Stock which may be acquired pursuant to warrants and options exercisable within sixty days by such individual or group listed. ** Less than one percent. (1) Based on information set forth in a Schedule 13G, dated February 14, 1994, filed with the Securities and Exchange Commission. 35 37 (2) Includes all shares held by Fidelity Management & Research Company (acting as investment adviser) and by Fidelity Management Trust Company (acting as investment manager), which are wholly-owned subsidiaries of FMR Corp. These shares are deemed to be beneficially owned by Edward Johnson 3d; Mr. Johnson is the Chairman of the Board and a member of a controlling group with respect to FMR Corp. (3) Based on information set forth in a Schedule 13G, dated February 2, 1994, filed with the Securities and Exchange Commission. (4) Includes 1,494,845 shares of ALC Stock which may be acquired pursuant to the exercise of outstanding warrants. (5) Includes 153,163 shares of ALC Stock which may be acquired pursuant to the exercise of outstanding stock options held by Grumman Hill, L.P. and 622,483 shares of ALC Stock which may be acquired pursuant to the exercise of outstanding warrants held individually and by Grumman Hill and Grumman Hill, L.P. These Grumman Hill and Grumman Hill, L.P. shares are deemed to be beneficially owned by Mr. Irwin, as President and Director of Grumman Hill and as General Partner of Grumman Hill, L.P. (6) Includes 485,992 shares of ALC Stock which may be acquired pursuant to the exercise of outstanding warrants and 153,163 shares of ALC Stock which may be acquired pursuant to the exercise of outstanding stock options. (7) These shares of ALC Stock may be acquired pursuant to the exercise of outstanding warrants. (8) Includes 395,108 shares of ALC Stock which Mr. Zrno has the right to acquire pursuant to the exercise of outstanding stock options, and 800 shares of ALC Stock which Mr. Zrno's wife and mother-in-law own jointly (Mr. Zrno disclaims beneficial interest as to these shares). (9) Includes 386,060 shares of ALC Stock which Mr. Moses has the right to acquire pursuant to the exercise of outstanding stock options, 3,000 shares of ALC Stock which Mr. Moses owns as custodian for his children under UGMA and 1,000 shares of ALC Stock which Mr. Moses' daughter owns (Mr. Moses disclaims beneficial interest as to the latter 1,000 shares). (10) Includes 40,000 shares of ALC Stock which Mr. Uhl has the right to acquire pursuant to the exercise of outstanding stock options. (11) Shares of ALC Stock which Mr. Faherty has the right to acquire pursuant to the exercise of outstanding stock options. (12) Includes 420,666 shares of ALC Stock which Mr. Oberlin has the right to acquire pursuant to the exercise of outstanding stock options. (13) Includes 61,542 shares of ALC Stock which Ms. Gale has the right to acquire pursuant to the exercise of outstanding stock options. (14) Includes 1,663,483 shares of ALC Stock which executive officers and directors of ALC have the right to acquire pursuant to the exercise of outstanding stock options and 622,483 shares of ALC Stock which Mr. Irwin has the right to acquire or is deemed to have the right to acquire pursuant to the exercise of outstanding stock warrants held individually and by Grumman Hill and Grumman Hill, L.P. 36 38 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS BANKS STOCK OWNERSHIP IN THE COMPANY In August 1992, the Company's then majority stockholder, CTI conveyed the Common Stock, Class B Preferred and Class C Preferred it owned to the Banks pro-rata in exchange for the release of certain portions of CTI's obligations to each of the Banks. The Banks, in the aggregate, acquired all of the Class B Preferred and Class C Preferred, as well as 14,324,000 shares of Common Stock. Pursuant to a Registration Rights Agreement dated June 4, 1990, the Banks, Prudential, General Electric and Grumman Hill and Grumman Hill, L.P. (and their transferees of securities covered by such agreement) (the "Registration Rights Agreement") each had the right to require ALC to register the 1990 Warrants issued in connection with the 1990 phase of the Refinancing (the "1990 Warrants"), shares of Common Stock issuable upon exercise of such 1990 Warrants, shares of Common Stock issuable upon conversion of the Class B Preferred and Class C Preferred, and the shares of Common Stock previously held by the Banks, in each case held by such party, to permit a public sale of such shares under the Securities Act and applicable state securities laws. The parties could demand, in the aggregate, six such registrations, and may join in an unlimited number of ALC initiated registrations. Pursuant to the Registration Rights Agreement and an Assignment of Rights Agreement dated August 6, 1992 among the Banks and ALC (the "Assignment of Rights"), ALC registered and otherwise accommodated the 1992 Equity Offering and the 1993 Equity Offering through a "shelf registration." Also in the Assignment of Rights, ALC gave the Banks the right to participate on a preemptive basis in certain future private issuances of Common Stock by ALC. In October 1992, the Company completed the 1992 Equity Offering for 9,863,600 shares of Common Stock, a portion of which resulted from the exchange of the Class A Preferred held by individual stockholders and the remainder of which was due to Common Stock held by other entities, including the Banks. The Banks sold, in the aggregate, 3,000,000 shares of Common Stock in the 1992 Equity Offering. In the 1993 Equity Offering (which term includes all secondary public offerings pursuant to the shelf registration in 1993), the Banks sold 8,386,216 shares of Common Stock, of which 3,796,000 were received upon conversion of all outstanding shares of Class B Preferred and Class C Preferred. After the 1993 Equity Offering, the Banks held an aggregate of 4,321,784 shares of Common Stock, representing 15.0% of the then total voting power of ALC capital stock (10.9% assuming the exercise of certain warrants and options). Also pursuant to the shelf registration, in September 1993, the Company completed a stock offering whereby General Electric, Prudential and a major lessor sold an aggregate of 7,763,391 shares of Common Stock to the public. As a result of the 1993 Equity Offering and subsequent transfers pursuant to an escrow agreement, Prudential no longer holds a significant number of shares of Common Stock. Prudential agreed with a group of equipment lessors of Communications Transmission Group, Inc. ("CTGI") to allow 37 39 them to share in up to half of the shares of ALC capital stock acquired by Prudential pursuant to a Residual Option or received from the Banks, in each case under certain circumstances. Further, in August 1992 the Banks agreed under certain circumstances to transfer to Prudential 10% of the shares subject to the Residual Option upon disposition of any shares of ALC capital stock owned by them. In addition, each Bank agreed that after each Bank had received its pro rata portion of an amount calculated by the formula used to determine the aggregate exercise price for the Residual Option, plus interest thereon at 10% per annum from August 6, 1992 to the date of determination, each Bank would pay Prudential any additional proceeds received by it from the disposition of any shares of the ALC capital stock owned by it as a result of the August 1992 transactions and to deliver to Prudential any remaining shares of such ALC capital stock. In accordance with an agreement entered into in August 1992, the Banks paid Prudential 10% of their net proceeds from the 1992 Equity Offering, and transferred 1,412,000 shares of Common Stock to Prudential as a consequence of the 1993 Equity Offering. Subsequently, by March 1994, all of the Banks disposed of a sufficient number of shares to result in such Banks receiving their respective pro rata portions of the amount of debt of CTI released by the Banks on August 18, 1992 (plus interest), and such Banks tranferred all of their remaining shares of Common Stock to or as directed by Prudential. In October 1993, Electra Communications Holding Corporation ("ECHC") acquired rights from certain of CTGI's equipment lessors, including the right to share in 30.77% of the shares of ALC Stock subsequently acquired by Prudential from the Banks. ECHC further agreed to pledge any such shares it might receive to Sanwa as pledge agent for Nissho Iwai American Corporation ("NIAC"), one of CTGI's other equipment lessors. Prudential retained 282,035 shares of the 407,388 shares of ALC Stock it received from the Banks in March 1994 and transferred the remaining 125,353 shares to ECHC, subject to ECHC's pledge to NIAC. Pursuant to a certain escrow agreement (the "Escrow Agreement") among Prudential, Nissho Iwai American Corporation, as administrative lessor for certain of CTGI's equipment lessors, and Sanwa Bank & Trust Company of New York ("Sanwa"), as Escrow Agent, on August 27, 1993, Prudential deposited 1,555,683 shares of Common Stock (the "Escrow Shares") with the Escrow Agent. Under the terms of the Escrow Agreement, subject to contractual restrictions to 38 40 which Prudential was subject contained in one or more underwriting agreements relating to ALC Stock, the Escrow Agent had the power to sell the Escrow Shares under certain circumstances. These Escrow Shares were subsequently sold in the 1993 Equity Offering and the Escrow Agreement terminated in October 1993. In August 1992, ALC had agreed with the Banks that it would not issue in excess of 8,000,000 shares of Common Stock prior to the earlier of (a) August 6, 1994 or (b) the date on which the Banks collectively held less than 8,000,000 shares of Common Stock or Common Stock equivalents. As a result of the 1993 Equity Offering, this restriction on ALC terminated. In addition, ALC agreed with Prudential that it would not issue in excess of 8,000,000 shares of Common Stock prior to the earlier of (a) March 31, 1994, or (b) the expiration of the Residual Option. As a result of the 1993 Equity Offering, this restriction on ALC also terminated. Also in August 1992, the Banks entered into a Stock Option Agreement (the "Stock Option") and a Residual Stock Option Agreement (the "Residual Option" and, together with the Stock Option, the "Options") with Prudential. By exercise of the Options, Prudential had the ability to acquire all of the shares of Class B Preferred, Class C Preferred and Common Stock owned by the Banks. The Stock Option covered 1,000,000 shares of Common Stock owned by the Banks. As part of the 1993 Equity Offering, Prudential exercised the Stock Option and sold the 1,000,000 shares of Common Stock acquired thereby. The Residual Option covered all of the shares of Class B Preferred and Class C Preferred, and all shares of Common Stock (other than the shares covered by the Stock Option), owned by the Banks. The exercise price for the Residual Option was an amount calculated by a formula that equaled the amount of the debt of CTI released by the Banks on August 18, 1992 as adjusted according to a formula. Upon the sale by the Banks of shares of Common Stock in the 1993 Equity Offering, the Residual Option terminated. TRANSACTIONS WITH GENERAL ELECTRIC AND PRUDENTIAL General Electric and Prudential participated in the cash financing as part of the 1990 phase of the Refinancing. As a result, General Electric held a note issued in 1990 (the "1990 Note") in the original principal amount of $3.5 million and was issued 1990 Warrants to purchase up to 2,305,105 shares of the Common Stock. In addition, prior to a note exchange offer (the "Note Exchange Offer") pursuant to which ALC and Allnet exchanged 11 7/8% debentures previously issued by ALC (the "Debentures") for note-warrant units (the "Units") consisting of 11 7/8% Subordinated Notes of Allnet due June 30, 1999 (the "1992 Notes") and warrants to purchase shares of Common Stock (the "1992 Warrants"), General Electric held $23.8 million in 39 41 principal amount of the outstanding Original Debentures and Replacement Debentures (exclusive of PIK Debentures issued or issuable in respect of certain interest payments due on certain Debentures), which constituted 43% of the total outstanding amount of those Debentures. As a consequence of the Note Exchange Offer, General Electric owns 1,494,845 1992 Warrants. Also as a consequence of the Note Exchange Offer, General Electric owned $31.8 million in principal amount of 1992 Notes (which the Company has been informed were subsequently sold by General Electric). General Electric purchased 500,000 shares of Common Stock in the 1992 Equity Offering; the Company has been informed 400,000 shares were subsequently sold in the open market. General Electric is also deemed to be the beneficial owner of 120,000 shares of Common Stock which are held of record by its investment manager. General Electric sold the 2,305,105 shares of Common Stock issued pursuant to its 1990 Warrants in the 1993 Equity Offering and in subsequent brokerage transactions. Pursuant to the 1990 Note Agreement between ALC and General Electric, as amended in August 1992, General Electric also had the right to nominate one person for election to the Board of Directors of ALC. There was no such nominee proposed by General Electric for election at the most recent Annual Meeting of Shareholders and, following its participation in the 1993 Equity Offering, General Electric no longer has equity ownership sufficient to maintain this right. The General Electric 1990 Note was amended and replaced in August 1992. Such amended and restated 1990 Note in the principal amount of $3,908,700 was paid in full as of December 1992. Prudential was the holder of a 1990 Note in the original principal amount of $3.0 million which was paid in full as of August 1992. Prudential retained the right to purchase up to 1,975,804 shares of Common Stock pursuant to warrants for same. These warrants were exercised and the related shares were sold in the 1993 Equity Offering. FINANCIAL SERVICES Richard D. Irwin has been a director of CTGI since June 1986 and is President of Grumman Hill. See also "Compensation Committee Interlocks and Insider Participation." TRANSACTIONS WITH MANAGEMENT AND OTHERS As of January 1994, Mr. Irwin, Mr. Faherty (as general partner of a family-owned partnership), Mr. Uhl, Mr. Zrno and Mr. Moses own $533,000, $600,000, $200,000, $100,000 and $100,000, respectively, in principal amount of 1993 Notes which they acquired either in the 1993 Note Offering or in open-market transactions. 40 42 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as a part of this report 1. Financial Statements. The following consolidated financial statements of ALC and its subsidiary required by Part II, Item 8. are included in Part IV of this Report:
Page Report of Ernst & Young F-1 Consolidated Balance Sheets as of December F-2 31, 1993 and December 31, 1992 Consolidated Statements of Operations for F-4 the years ended December 31, 1993, 1992 and 1991 Consolidated Statements of Cash Flows F-5 for the years ended December 31, 1993, 1992 and 1991 Consolidated Statements of Preferred Stock F-6 and Stockholders' Equity for the years ended December 31, 1993, 1992 and 1991 Notes to Consolidated Financial Statements F-8 2. Financial Statement Schedules Page Schedule V Property and Equipment F-21 Schedule VI Accumulated Depreciation on Property and Equipment F-22 Schedule VIII Valuation and Qualifying Accounts and Reserves F-23 Schedule IX Short-Term Borrowings F-24
41 43 3. Exhibits required by Item 601 of Regulation S-K EXHIBIT INDEX [refer to definitions at end of Index]
Incorporated Page Exhibit Filed Herein by Number Number Description Herewith Reference to*: Herein - ------ ----------- -------- -------------- ------ 2.1 Asset Purchase Exhibit 2.1 to Agreement among July 3, 1993 Form Call Home America, 8-K Inc., Steve R. Dutton, William A. Freed and Jeffrey T. Schlesinger and Allnet June 30, 1993 3.1 ALC Restated X Certificate of Incorporation January 7, 1994 3.2 Amended and Restated Exhibit 3.2 to Bylaws of ALC Third Quarter August 5, 1988 1991 Form 10-Q as amended Jan. 20, 1989, May 4, 1989, March 19, 1991, September 3, 1991 3.3 ALC Certificate of X Retirement of Class A Preferred Stock 4.1 Indenture, ALC, Allnet Exhibit 4.1 to Star Bank, N.A. Second Quarter May 15, 1993 1993 Form 10-Q 4.2 Warrant Agreement Exhibit 4.2 to ALC and Star Bank, N.A. Second Quarter July 1, 1992 1992 Form 10-Q 4.3 Form of Warrant Exhibit 4.3 to Certificate to be Second Quarter granted pursuant to 1992 Form 10-Q Warrant Agreement 4.4 Warrant Agreement be- Exhibit 4.3 to tween ALC and Registration No. Continental National 33-1882 Bank and Trust Co. of Chicago December 15, 1985 - ------------------------------
* Except as otherwise indicated, all references to "Forms" are to those of ALC. 42 44
Incorporated Page Exhibit Filed Herein by Number Number Description Herewith Reference to: Herein - ------- ----------- -------- --------------- ------ 4.5 Form of Note and Warrant Exhibit 4.3 to Agreement, as amended June 7, 1990 Form 8-K June 4, 1990 Exhibit 10.1 to Second Quarter 1991 Form 10-Q Exhibits 4.4 and 4.5 to Second Quarter 1992 Form 10-Q 4.6 Form of Stock Subscription Exhibit 28.1 to Warrant, as amended June 7, 1990 Form 8-K June 4, 1990 Exhibit 10.2 to Second Quarter 1991 Form 10-Q 4.7 Form of Amended/Restated Exhibit 4.6 to Second Stock Subscribtion Warrant Quarter 1992 Form 10-Q June 4, 1992 4.8 Registration Rights Exhibit 4.4 to Agreement ALC, CTI, June 7, 1990 GE Trust, Grumman Hill, Form 8-K Grumman Hill LP and Prudential June 4, 1990 4.9 Assignment of Rights Exhibit 4.18 to Agreement CTI, ALC, Registration Banks August 6, 1992 No. 33-57146 4.10 Exchange Agreement Exhibit 10.71 to between ALC and Registration No. Class A Preferred 33-51796 Stockholders September 8, 1992 4.11 Exchange Agreement Exhibit 4.1 to Banks, CTI, ALC September 1, 1992 August 6, 1992 Form 8-K 4.12 Sharing Agreement Exhibit 4.2 to ALC, Allnet, Banks, September 1, 1992 Prudential Form 8-K August 6, 1992 4.13 Stock Option Agreement Exhibit 4.3 to Banks, ALC and Prudential September 1, 1992 August 6, 1992 Form 8-K 4.14 Residual Stock Option Exhibit 4.4 to Banks, Prudential, ALC, September 1, 1992 August 6, 1992 Form 8-K
43 45
Incorporated Page Exhibit Filed Herein by Number Number Description Herewith Reference to: Herein - ------- ----------- -------- --------------- ------ 4.15 Intercreditor Agr. Exhibit 4.5 to CTI Creditors, CTI September 1, 1992 CTGI August 6, 1992 Form 8-K 4.16 Side Letter Agreement Exhibit 4.6 to with Banks and ALC September 1, 1992 August 6, 1992 Form 8-K 4.17 Side Letter Agreement Exhibit 4.7 to with Prudential and ALC September 1, 1992 August 6, 1992 Form 8-K 10.1** ALC 1986 Option X Plan, as amended 10.2** Amended and Restated X 1990 Stock Option Plan 10.3** Stock Option Exhibit 10.2 to Agreement for Third Quarter Richard J. Uhl 1991 Form 10-Q September 3, 1991 10.4** Stock Option Exhibit 10.8 to Agreement for Registration No. Michael E. Faherty 33-47857 June 23, 1992 10.5** Form of Amendment Exhibit 10.1 to to Stock Options of First Quarter Richard J. Uhl and 1993 Form 10-Q Michael E. Faherty January 27, 1993 10.6** Advisory Agr. with X Stock Option between ALC and Grumman Hill Sept. 7, 1988, as amended 10.7** Officer Perquisites X 10.8** Short Term Incentive X Program
_______________ ** Management contract or compensation plan or arrangement required to be identified by Item 14(a)(3) of this report 44 46
Incorporated Page Exhibit Filed Herein by Number Number Description Herewith Reference to: Herein - ------- ----------- -------- --------------- ------ 10.9** Form Severance X Agreement, amended, restated Jan. 7, 1994 10.10** Form of Amended and Re- X stated Employment Agree- ments with ALC, Allnet and John M. Zrno, Marvin C. Moses, William H. Oberlin, Jan. 7, 1994 10.11** Form of Director Exhibit 10.4 to Indemnification Agr. Second Quarter 1992 Form 10-Q 10.12 Master Lease Agreement Exhibit 10.1 to Meridian Leasing Corp., Second Quarter Allnet Dec. 19, 1985 1989 Form 10-Q 10.13 Mastergroup Route Exhibit 10.8 to Facilities Lease Agr. Registration No. Allnet, Times 33-1578 Mirror Microwave Communications Co. June 14, 1983 10.14 Transmission Capacity Exhibit 10.14 to Lease: Times Mirror Registration No. Microwave Communications 33-1578 Co., Lexitel Corp., October 8, 1985 10.15 Fiber Optic Lease Agree- Exhibit 10.3 to ment; Mutual Signal First Quarter Corporation, Lexitel 1991 Form 10-Q Corporation Nov. 5, 1985 10.16 Amendment No. 4, Option Exhibit 10.1 to Agreement and Consent: Third Quarter Allnet, MSM Associates, 1992 Form 10-Q GECLC August 7, 1992 10.17 Master Service Agreement Exhibit 10.2 Allnet, Western to Third Quarter Tele-Communications 1992 Form 10-Q Inc. May 5, 1992 CONFIDENTIAL TREATMENT GRANTED
_______________ ** Management contract or compensation plan or arrangement required to be identified by Item 14(a)(3) of this report 45 47
Incorporated Page Exhibit Filed Herein by Number Number Description Herewith Reference to: Herein - ------- ----------- -------- --------------- ------ 10.18 Termination Agreement Exhibit 10.39 to Allnet, Western 1992 Form 10-K Tele-Communications, Inc. Feb. 19, 1993 10.19 Digital Service Exhibit 10.2 to Agreement CTI, First Quarter 1993 Allnet, as amended Form 10-Q February 10, 1989 Exhibit 28.4 to June 7, 1990 Form 8-K Exhibit 10.6 to Third Quarter 1991 Form 10-Q 10.20 Digital Service Exhibit 10.5 to Agreement, ALC, Second Quarter 1992 CTGI June 4, 1992 Form 10-Q 10.21 Second Amended and Exhibit 10.9 to Restated Loan Agree- Second Quarter 1992 ment Allnet, ALC, Form 10-Q Banks, August 6, 1992 10.22 Form of 1992 Note Exhibit 10.10 to ALC, Star Bank, N.A. Second Quarter July 1, 1992 1992 Form 10-Q 10.23 Revolving Credit and Exhibit 10.3 to Security Agreement Second Quarter Bank One, Columbus, NA, 1993 Form 10-Q Star Bank, NA, Allnet, CONFIDENTIAL ALC June 30, 1993 TREATMENT GRANTED 10.24 Amended and Restated Exhibit 28.2 to General Loan and June 7, 1990 Security Agreement Form 8-K Allnet, Foothill Exhibits 10.11, June 1, 1990, 10.12 and 10.13 to as amended Second Quarter 1992 Form 10-Q 10.25 Real Estate Lease, Exhibit 10.45 to Allnet, Balcor Allnet Second Quarter Equity Pension 1992 Form 10-Q Investors, Ltd. Exhibit 10.6 to March 26, 1987, Second Quarter as amended 1991 Form 10-Q
46 48
Incorporated Page Exhibit Filed Herein by Number Number Description Herewith Reference to: Herein - ------- ----------- -------- --------------- ------ 10.26 Real Estate Lease, Exhibit 10.47 to ALC, Kirco-Oak Allnet Second Quarter Hollow-Limited 1992 Form 10-Q Partnership Exhibit 10.5 to Feb. 25, 1987, Second Quarter as amended 1991 Form 10-Q 11.1 Computation of Per X Share Earnings 21.1 Subsidiary List X 23.1 Consent of X Ernst & Young
DEFINITIONS: ALLNET: Allnet Communication Services, Inc. ALC: ALC Communications Corporation BANKS: NationsBank of Texas, N.A.; First National Bank of Chicago; First Union National Bank of North Carolina; CoreStates Bank, N.A.; and National Westminster Bank USA CTGI: Communications Transmission Group, Inc. CTI: Communications Transmission, Inc. CTI CREDITORS: Nissho Iwai American Corporation; MNC Leasing; Societe Generale Financial Corporation (f/k/a Sogelease Corporation); General Electric Capital Corporation; Ford Equipment Leasing Company; ALC; and Prudential FOOTHILL: Foothill Capital Corporation FORM OF NOTE AND WARRANT AGREEMENT: Form of Note and Warrant Purchase Agreement among ALC, Allnet and (i) GE Trust ($3,500,000), (ii) Prudential ($3,000,000), (iii) Grumman Hill and Grumman Hill LP ($650,000) FORM OF STOCK SUBSCRIPTION WARRANT: Form of Stock Subscription Warrant granted to: (i) GE Trust (2,305,105 shares); (ii) Prudential (1,975,804 shares); (iii) Grumman Hill (98,790 shares) and (iv) Grumman Hill LP (329,300 shares) FORM OF AMENDED/RESTATED STOCK SUBSCRIPTION WARRANT: Form of Stock Subscription Warrant granted to: (i) GE Trust (2,305,105 shares); (ii) Prudential (1,975,804 shares); (iii) Grumman Hill (98,790 shares) and (iv) Grumman Hill LP (329,300 shares) GECLC: General Electric Credit and Leasing Corporation
47 49 GE TRUST: Trustees of General Electric Pension Trust GRUMMAN HILL: Grumman Hill Associates, Inc. GRUMMAN HILL LP: Grumman Hill Investments, L.P. MSM ASSOCIATES: MSM Associates, Limited Partnership PRUDENTIAL: The Prudential Insurance Company of America
The Registrant hereby agrees to furnish the Commission a copy of each of the Indentures or other instruments defining the rights of security holders of the long-term debt securities of the Registrant and any of its subsidiaries for which consolidated or unconsolidated financial statements are required to be filed. (b) Reports on Form 8-K A report on Form 8-K was filed by the Company on December 29, 1993 to describe the redemption of the Class A Preferred Stock on December 31, 1993 and to summarize the contents of the letter of resignation dated December 28, 1993 of Saulene M. Richer, the former Director elected by holders of the Class A Preferred. (c) Refer to Item 14(a)(3) above for Exhibits required by Item 601 of Regulation S-K. (d) Schedules other than those set forth in response to Item 14(a)(2) above for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 48 50 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the duly authorized, undersigned individual on the 29th day of March, 1994. ALC Communications Corporation Registrant By: /s/ John M. Zrno John M. Zrno, Director, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons in their respective capacities on behalf of the registrant as of the 29th day of March, 1994. Signature Title --------- ----- /s/ John M. Zrno President, Chief Executive - ---------------------------- Officer, Director John M. Zrno /s/ Richard D. Irwin Chairman of the Board, - ---------------------------- Director Richard D. Irwin /s/ Marvin C. Moses Executive Vice President and - ---------------------------- Chief Financial Officer, Marvin C. Moses Director (Principal Financial Officer) /s/ Marilyn M. Lesnau Vice President, Controller - --------------------------- Marilyn M. Lesnau (Principal Accounting Officer) /s/ William H. Oberlin Executive Vice President and - --------------------------- Chief Operating Officer, William H. Oberlin Director /s/ Richard J. Uhl Director - --------------------------- Richard J. Uhl /s/ Michael E. Faherty Director - --------------------------- Michael E. Faherty 49 51 REPORT OF INDEPENDENT AUDITORS BOARD OF DIRECTORS AND STOCKHOLDERS ALC COMMUNICATIONS CORPORATION We have audited the accompanying consolidated balance sheets of ALC Communications Corporation and subsidiary as of December 31,1993 and 1992, and the related consolidated statements of operations, cash flows, and preferred stock and stockholders' equity for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ALC Communications Corporation and subsidiary at December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects the information set forth therein. /s/ ERNST & YOUNG Ernst & Young Detroit, Michigan January 25, 1994 F-1 52 ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
ASSETS December 31, December 31, 1993 1992 ------------ ------------ (In Thousands) Current Assets: Cash $ 1,819 $ 112 Accounts receivable, less allowance for doubtful accounts of $3,974,000 and $3,334,000 (Note D) 58,761 45,327 Other current assets 4,543 3,000 ------------ ------------ Total Current Assets $ 65,123 $ 48,439 Fixed Assets (Notes A, D & H): Communication systems $ 81,752 $ 74,002 Other equipment and leasehold improvements 29,785 28,371 Construction in progress 6,722 3,443 ------------ ------------ $118,259 $105,816 Less accumulated depreciation and amortization 69,918 63,872 ------------ ------------ Total Fixed Assets $ 48,341 $ 41,944 Cost in excess of net assets acquired less accumulated amortization of $12,198,000 and $10,673,000 (Note A) 48,792 50,317 Deferred income taxes (Note F) 10,240 Intangibles and other assets (Note A) 21,045 2,566 ------------ ------------ Total Assets $193,541 $143,266 ------------ ------------ ------------ ------------
F-2 53 ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS LIABILITIES, CLASS A PREFERRED STOCK AND STOCKHOLDERS' EQUITY
December 31, December 31, 1993 1992 ------------ ------------ (In Thousands) Current Liabilities: Accounts payable $ 1,397 $ 3,508 Accrued liabilities 16,855 11,895 Accrued network costs 33,482 28,676 Taxes other than income 11,592 9,889 Revolving Credit Facility (Note B) 14,802 Notes payable, capitalized leases and other long-term debt (Notes B, D, H, & I) 392 11,417 ----------- ----------- Total Current Liabilities $ 63,718 $ 80,187 Notes payable,capitalized leases and other long-term debt (Notes B, D, H & I) 3,263 12,308 Subordinated Notes (Notes B & D) 84,335 Senior Subordinated Debentures (Note B) 61,983 Class A Preferred Stock, $0.01 par value; authorized, issued and outstanding -- 356,000 shares in 1992, aggregate redemption value of $7,119,000 less discount of $364,000 plus accrued but undeclared dividends of $2,904,000 (Notes B & E) 9,659 Stockholders' Equity: Class B Preferred Stock, $0.01 par value; authorized, issued and outstanding -- 1,000,000 shares in 1992 (Note I) $ 10 Class C Preferred Stock, $0.01 par value; authorized, issued and outstanding -- 1,000,000 shares in 1992 (Note I) 10 Preferred Stock, $0.01 par value; authorized -- 14,784,000 shares; issued and outstanding -- none Common Stock, par value $0.01; authorized -- 200,000,000 shares; issued and outstanding -- 32,948,000 and 23,794,000 shares (Notes B & E) $ 329 238 Capital in excess of par value 132,378 110,146 Paid-in capital--Warrants (Notes G & I) 12,129 17,022 Accumulated deficit (102,611) (148,297) ------------ ------------ Total Stockholders' Equity $ 42,225 $(20,871) ------------ ------------ Total Liabilities, Class A Preferred Stock and Stockholders' Equity $193,541 $143,266 ------------ ------------ ------------ ------------
See notes to consolidated financial statements F-3 54 ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, ----------------------------------------- 1993 1992 1991 ---------- ---------- ----------- (In Thousands Except Per Share Amounts) Revenue $436,432 $376,064 $346,873 Operating Expenses: Cost of communication services, including amounts with related parties of $16,004,000 in 1992 and $18,000,000 in 1991 (Note I) $234,849 $216,889 $212,716 Sales, general and administrative 119,841 107,294 97,964 Depreciation and amortization 12,840 11,197 12,343 ---------- ---------- ----------- Total Operating Expenses $367,530 $335,380 $323,023 ---------- ---------- ----------- Operating Income $ 68,902 $ 40,684 $ 23,850 Interest expense including amounts with related parties of $5,000,000 in 1992 and $4,640,000 in 1991 10,476 17,158 18,128 ---------- ---------- ----------- Income Before Income Taxes, Extraordinary Items and Cumulative Effect of Accounting Change $ 58,426 $ 23,526 $ 5,722 Income taxes (Note F) 18,750 9,700 3,005 ---------- ---------- ----------- Income Before Extraordinary Items and Cumulative Effect of Accounting Change $ 39,676 $ 13,826 $ 2,717 Extraordinary Items: Loss related to early retirement of debt (net of income tax benefit of $4,000,000) (Note B) (7,490) Utilization of operating loss carryforward 7,000 2,630 Cumulative effect of change in method of accounting for income taxes (Note F) 13,500 ---------- ---------- ----------- Net Income $ 45,686 $ 20,826 $ 5,347 ---------- ---------- ----------- ---------- ---------- ----------- Earnings per common and common equivalent share (Note G): Income (loss) before extraordinary items and cumulative effect of accounting change $ 1.07 $ 0.43 $ (0.17) Extraordinary Items: Loss related to early retirement of debt $ (0.21) Utilization of operating loss carryforward $ 0.31 $ 0.15 Cumulative effect of change in method of accounting for income taxes $ 0.37 ---------- ---------- ----------- Net Income (Loss) $ 1.23 $ 0.74 $ (0.02) ---------- ---------- ----------- ---------- ---------- ----------- Weighted average common and common equivalent shares 36,348 22,141 17,216 ---------- ---------- ----------- ---------- ---------- -----------
See notes to consolidated financial statements F-4 55 ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ----------------------------------------- 1993 1992 1991 ---------- ---------- ----------- (In Thousands) Operating Activities Net income $ 45,686 $ 20,826 $ 5,347 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 9,810 10,094 10,603 Amortization of intangible assets and bond discount 3,858 4,415 3,520 Provision for deferred income taxes (Note F) (11,838) Accrued interest converted to debentures 7,998 Loss (gain) on retirement of debt, net of tax 7,490 (59) (Increase) decrease in accounts receivable and other current assets (13,680) (3,371) 2,558 Increase (decrease) in current liabilities 18,033 (1,523) (2,774) ---------- ---------- ----------- Net Cash Provided by Operating Activities $ 59,359 $ 30,382 $ 27,252 Financing Activities Proceeds from (payments on) Revolving Credit Facility (Note B) $(14,802) $ 5,400 $ (9,896) Proceeds from subordinated notes (Notes B & D) 84,335 1,321 Payments on long-term debt (19,602) (22,818) (12,562) Proceeds from issuance of stock (Note B) 12,776 607 109 Payment to Preferred A Stockholders (1,286) Redemption of Class A Preferred Stock (7,119) Payment of dividends on Class A Preferred Stock (3,357) Payment of stock issuance costs (620) Retirement of debentures (Note B) (947) Retirement of senior subordinated notes (Notes B & D) (72,380) ---------- ---------- ----------- Net Cash Used in Financing Activities $(20,149) $(19,664) $(21,028) Investing Activities Expenditures for fixed assets $(16,207) $(10,233) $ (6,276) Increase in other non-current assets (1,686) (596) (67) Purchase of Customer Base (Note C) (19,610) ---------- ---------- ----------- Net Cash Used in Investing Activities $(37,503) $(10,829) $ (6,343) ---------- ---------- ----------- Increase (Decrease) in Cash During Year $ 1,707 $ (111) $ (119) Cash at beginning of year 112 223 342 ---------- ---------- ----------- Cash at end of year $ 1,819 $ 112 $ 223 ---------- ---------- ----------- ---------- ---------- ----------- Interest paid $ 9,686 $ 15,572 $ 9,945 ---------- ---------- ----------- ---------- ---------- ----------- Income taxes paid $ 7,464 $ 1,862 $ 225 ---------- ---------- ----------- ---------- ---------- -----------
See notes to consolidated financial statements F-5 56 ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF CLASS A PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Years Ended December 31, 1993, 1992 and 1991 (In Thousands) Stockholders' Equity ------------------------------------------ Class A Preferred Class B Preferred Class C Preferred ------------------------------------------------------------------- Shares Amount Shares Amount Shares Amount ------ ------- ------- -------- -------- -------- Balance, December 31, 1990 2,500 $57,766 1,000 $10 1,000 $10 Accretion of discount on Class A Preferred Stock 1,043 Employee Stock Purchase Accrued undeclared dividends on Class A Preferred Stock (Note E) 4,000 Accretion of contract payment to certain Class A Preferred Stockholders 643 Exercise of Stock Options (Note G) Net income for the year ended December 31, 1991 ------ ------- ------- ------ ------- ------ Balance, December 31, 1991 2,500 $63,452 1,000 $10 1,000 $10 Accretion of discount on Class A Preferred Stock 860 Accrued undeclared dividends on Class A Preferred Stock (Note E) 3,254 Accretion of contract payment to certain Class A Preferred Stockholders 268 Contract payment to certain Class A Preferred Stockholders (1,286) Exercise of Stock Options (Note G) Issuance of warrants Repricing of warrants Conversion of Class A Preferred Stock to Common Stock (Notes B & E) (2,144) (56,889) Issuance of Common Stock (Notes B & G) Stock Issuance costs Net income for the year ended December 31, 1992 ------ ------- ------- ------ ------- ------ Balance, December 31, 1992 356 $ 9,659 1,000 $10 1,000 $10 Stockholders' Equity ------------------------------------------------------------------------------------- Common Stock Capital in excess Paid-in Capital Warrants Accumlated --------------- ------------------------ Shares Amount of par value Shares Amount Deficit Total ------ ------ ------------ ------ ------ --------- -------- Balance, December 31, 1990 17,141 $171 $ 63,296 5,469 $ 8,913 ($174,470) ($102,070) Accretion of discount on Class A Preferred Stock (1,043) (1,043) Employee Stock Purchase 71 1 79 80 Accrued undeclared dividends on Class A Preferred Stock (Note E) (4,000) (4,000) Accretion of contract payment to certain Class A Preferred Stockholders (643) (643) Exercise of Stock Options (Note G) 9 29 29 Net income for the year ended December 31, 1991 5,347 5,347 ------ ------ ------------ ------ ------ --------- -------- Balance, December 31, 1991 17,221 $172 $ 57,718 5,469 $ 8,913 ($169,123) ($102,300) Accretion of discount on Class A Preferred Stock (860) (860) Accrued undeclared dividends on Class A Preferred Stock (Note E) (3,254) (3,254) Accretion of contract payment to certain Class A Preferred Stockholders (268) (268) Contract payment to certain Class A Preferred Stockholders Exercise of Stock Options (Note G) 174 2 605 607 Issuance of warrants 3,400 3,400 3,400 Repricing of warrants 4,709 4,709 Conversion of Class A Preferred Stock to Common Stock (Notes B & E) 56,825 56,825 Issuance of Common Stock (Notes B & G) 6,399 64 64 Stock Issuance costs (620) (620) Net income for the year ended December 31, 1992 20,826 20,826 ------ ------ ------------ ------ ------ --------- -------- Balance, December 31, 1992 23,794 $238 $110,146 8,869 $17,022 ($148,297) $(20,871)
F-6 57 ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF CLASS A PREFERRED STOCK AND STOCKHOLDERS' EQUITY Years Ended December 31, 1993, 1992 and 1991 (In Thousands)
Stockholders' Equity ---------------------------------------------------- Class A Preferrd Stock Class B Preferred Stock Class C Preferred Stock ---------------------- ----------------------- ----------------------- Shares Amount Shares Amount Shares Amount --------- ------- ------ ------- -------- ------- Balance, December 31, 1992 356 $9,659 1,000 $10 1,000 $10 Accretion of discount on Class A Preferred Stock 364 Accrued dividends on Class A Preferred Stock (Note E) 453 Dividends paid (3,357) Conversion of Class B Preferred to Common Stock (Notes B & G) (1,000) (10) Conversion of Class C Preferred to Common Stock (Notes B & G) (1,000) (10) Exercise of Stock Options (Note G) Tax benefit from exercise of stock options (Note F) Exercise of Warrants Redemption of Class A Preferred Stock (Notes B & E) (356) (7,119) Net income for the year ended December 31, 1993 ---- ------ ---- ------ ------- ----- Balance, December 31, 1993 0 $ 0 0 $ 0 0 $ 0 ---- ------ ---- ------ ------- ----- ---- ------ ---- ------ ------- ----- Stockholders' Equity --------------------------------------------------------------------------------------- Common Stock Capital in excess Paid-in Capital Warrants ------------------- of par value ------------------------- Accumulated Shares Amount Shares Amount Deficit Total ------ ------- ----------------- ------- -------- ---------- ----- Balance, December 31, 1992 23,794 $238 $110,146 8,869 $17,022 $(148,297) $(20,871) Accretion of discount on Class A Preferred Stock (364) (364) Accrued dividends on Class A Preferred Stock (Note E) (453) (453) Dividends paid Conversion of Class B Preferred to Common Stock (Notes B & G) 1,898 19 (9) 0 Conversion of Class C Preferred to Common Stock (Notes B & G) 1,898 19 (9) 0 Exercise of Stock Options (Note F) 755 7 2,796 2,803 Tax benefit from exercise of stock options (Note F) 5,452 5,452 Exercise of Warrants 4,603 46 14,819 (4,603) (4,893) 9,972 Redemption of Class A Preferred Stock (Notes B & E) Net income for the year ended December 31, 1993 45,686 45,686 ------ ------ --------- ------- ---------- ---------- -------- Balance, December 31, 1993 32,948 $329 $132,378 4,266 $12,129 $(102,611) $ 42,225 ------ ------ --------- ------- ---------- ---------- -------- ------ ------ --------- ------- ---------- ---------- --------
See notes to consolidated financial statements F-7 58 ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993 AND 1992 Note A -- Summary of Significant Accounting Policies Description of Business Allnet Communication Services, Inc. ("Allnet"), the operating subsidiary of ALC Communications Corporation ("ALC" or the "Company"), provides long distance telecommunications services primarily to commercial and, to a lesser extent, residential subscribers in a majority of the United States and completes subscriber calls to all directly dialable locations worldwide. The Company transmits long distance telephone calls through its network facilities over transmission lines which are leased from other long haul transmission providers. All of the transmission facilities utilized by the Company are digital. Basis of Consolidation The consolidated financial statements include the accounts of ALC and its wholly-owned subsidiary, Allnet Communication Services, Inc. Intercompany transactions have been eliminated. Fixed Assets Fixed assets are stated at cost. Depreciation is provided on the straight-line method over the estimated useful lives or lease terms of the assets. Maintenance and repairs are charged to operations as incurred. Intangible Assets The cost in excess of net assets acquired of $61.0 million, resulting from the acquisition of Lexitel is being amortized on a straight line basis over 40 years. In July 1993, the Company acquired the customer base of Call Home America, Inc. ("CHA") (Note C). The purchase price has been allocated between the value of the customer base acquired and the covenant not to compete which are being amortized over seven years and 42 months, respectively. Additionally, the Company is amortizing over five years the costs incurred under a marketing agreement with CHA. Amortization expense related to the acquisition and marketing agreement totaled $1.2 million in 1993. F-8 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Amortization expense, including amortization of cost in excess of net assets acquired and cost associated with the issuance of debentures and the Revolving Credit Facility as well as amortization associated with CHA, totaled $3.1 million, $1.8 million and $1.8 million for the years ended December 31, 1993, 1992 and 1991, respectively. Revenue Recognition Customers are billed as of monthly cycle dates. Revenue is recognized as service is provided and unbilled usage is accrued. Accrued Facility Costs In the normal course of business, the Company estimates its accrual for facility costs. Subsequently, the accrual is adjusted based on invoices received from local exchange carriers. Income Taxes The Company adopted Statement of Financial Standards No. 109 "Accounting for Income Taxes" as of January 1, 1993, the required implementation date (Note F). Prior to January 1, 1993, income taxes were accounted for in accordance with Accounting Principles Board Opinion No. 11 ("APB 11"). Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. NOTE B -- Refinancing Events During 1992, the Company completed a comprehensive refinancing plan ("Refinancing") which included the rescheduling of substantially all debt and resulted in significantly reduced or deferred debt service obligations. The Refinancing resulted in a simplified equity structure and a revised redemption and maturity schedule. The Company anticipates it will be able to meet these obligations from expected cash flow from operations. Highlights of the Refinancing include the following: * A Note Exchange Offer was completed in August 1992 whereby the Company's Original Debentures, Replacement Debentures, PIK Debentures, and accrued interest on the F-9 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) nonconsenting Debentures totalling $73.3 million were replaced by 11 7/8% Subordinated Notes of Allnet ("1992 Notes"). As part of the Note Exchange Offer, 3,400,000 Common Stock warrants ("1992 Warrants") were issued representing 10.2% of the fully diluted equity of ALC at an exercise price of $5.00 per share of Common Stock. * In August 1992, the Restructured Promissory Note was restated and extended to June 30, 1995 and a $5.0 million principal prepayment was made. The note was subsequently paid in full in May 1993. * In August 1992, 14,324,000 shares of ALC Common Stock and the ALC Class B and Class C Preferred Stock ("Preferred Stock") held by Communications Transmission Inc. ("CTI") were transferred to a group of five banks ("Banks"). Subsequently, the Preferred Stock was converted into 3,796,000 shares of Common Stock. * In October 1992 an equity offering for 9,863,600 shares of ALC Common Stock at $5.50 per share was completed. A portion of the 1992 equity offering relating to 3,464,373 shares was to facilitate the sale of shares for existing major holders. * The remaining 6,399,227 shares of the equity offering were issued in conjunction with an Exchange Agreement with the major holders of the Class A Preferred Stock ("Class A Preferred"). The major holders of the Class A Preferred agreed to exchange the 2,144,044 shares of Class A Preferred with an aggregate redemption value of $58.7 million, including all accrued and unpaid dividends, for shares of ALC Common Stock at an effective 40% discount. * The 1990 Note Agreements with a principal balance of approximately $8.0 million were paid in full by December 1992. Financing activities in 1993 included: * In March 1993, an equity offering was completed in which an aggregate of 10,350,000 shares of ALC Common Stock were sold at $14.25 per share. ALC did not receive the proceeds from the sale of these shares by existing major holders, although it did receive $1.9 million upon exercise of 963,784 warrants. * In May 1993, the Company completed an offering of $85.0 million 9% Senior Subordinated Notes ("1993 Notes"). F-10 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The net proceeds of $84.3 million were used to repay the outstanding 11 7/8% Senior Subordinated Notes of Allnet aggregating $72.4 million and to reduce the amount outstanding under the short term Revolving Credit Facility. The early retirement of the 1992 Notes resulted in an extraordinary loss of $7.5 million, net of the related tax effect of $4.0 million. * As of June 30, 1993, the Company executed an agreement for a $40.0 million long term line of credit, replacing the previous Revolving Credit Facility. * In September 1993, an equity offering was completed in which an aggregate of 7,763,391 shares of ALC Common Stock were sold at $25.50 per share. This offering included the exercise of 3,240,025 warrants. ALC did not receive any proceeds from the sale of these shares by existing major holders, but did receive $6.9 million from the exercise of warrants. * As of December 31, 1993, the Company redeemed the remaining 355,956 shares of Class A Preferred for a total of $10.4 million including $3.2 million of accrued dividends. 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 future payment to be made based on certain average monthly revenue generated by the customers in April, May and June 1994. The Company is also acquiring additional customers from CHA under a marketing agreement from August 1993 through 1994. Under this agreement, an additional $4.1 million has been allocated to the purchase price for customers acquired during 1993. The following unaudited proforma summary presents the Company's revenue and income as if the transaction occurred at the beginning of the periods presented. The proforma financial data is not necessarily indicative of the results that actually would have occurred had the transactions taken place on the dates presented and do not project the Company's results of operations.
Years Ended December 31, -------------------------------- 1993 1992 ---------- ---------- (in thousands except per share amounts) Revenue $447,077 $385,591
F-11 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Income Before Extraordinary Items and Cumulative Effect of Accounting Change 41,457 13,655 Net Income 47,467 20,655 Earnings Per Common and Common Equivalent Share: Income before extraordinary items and cumulative effect of accounting change $1.12 $0.42 Net Income $1.28 $0.73
NOTE D - Long Term Debt and Other Financing Long-term debt, including amounts due within one year, consists of:
December 31, ------------------------------ 1993 1992 --------- -------- (In Thousands) Restructured Promissory Note $ 12,566 11 7/8% Subordinated Notes of Allnet due 1999 - face value of $72,380,000 less discount of $10,397,000 61,983 9% Senior Subordinated Notes due 2003 - face value of $85,000,000 less discount of $665,000 $ 84,335 Capitalized lease obligations (Note H) 541 8,851 Other long-term debt 3,114 2,308 -------- ------- $ 87,990 $ 85,708 Due within one year 392 11,417 -------- ------- $ 87,598 $ 74,291 -------- -------- -------- --------
Revolving Credit Facility The Company has a $40.0 million Revolving Credit Facility which expires on June 30, 1995. Under this Facility, the Company is able to minimize interest expense by structuring borrowings under three alternatives. Each alternative has a varying interest rate calculation associated with it. The effective rate under the Facility during 1993 approximated 5.8%. The agreement includes financial covenants which allow the Company to further reduce interest expense on outstanding borrowings beginning in July 1994. F-12 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A .375% per annum charge is made on the unused portion of the line. Availability under the Facility is based on the level of eligible accounts receivable. As of December 31, 1993, the Company had $39.8 million of availability under the line. Borrowings under the facility (none at December 31, 1993) are collateralized by accounts receivable. 9% Senior Subordinated Notes In May 1993, the Company issued the 1993 Notes with a face value of $85.0 million. Interest on the 1993 Notes is payable semi-annually commencing November 15, 1993. The Notes will mature on May 15, 2003, but are redeemable at the option of the Company, in whole or in part, on or after May 15, 1998. In the event of an ownership change, the holders have the right to require the Company to purchase all or part of the 1993 Notes. The 1993 Notes contain restrictive covenants which could limit additional indebtedness and restrict the payment of dividends. Other Long-Term Debt Other long-term debt represents deferred liabilities relating to certain operating leases. Future Maturities The future maturities of long-term debt at December 31, 1993 are as follows:
(In Thousands) Year Ended December 31: 1994 $ 392 1995 1,449 1996 808 1997 716 1998 108 1999 and thereafter 85,182 ------- $88,655 Less discount on 1993 Notes 665 ------- $87,990 ------- -------
NOTE E - Redeemable Preferred Stock As of December 31, 1991, the Company had 2,500,000 shares of Class A Preferred outstanding with a redemption value of $48.9 million plus accrued dividends. In October 1992, pursuant to the F-13 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Exchange Agreement with the major holders of the Class A Preferred the Company exchanged 2,144,044 shares of Class A Preferred for 6,399,227 shares of ALC Common Stock at an effective 40% discount. In September 1992, ALC paid approximately $1.3 million to certain major holders of the Class A Preferred in connection with a concession agreement entered into in June 1990. In July 1993, a dividend of $0.32 per share was declared which was subsequently paid September 30, 1993. In December 1993, the Company redeemed the remaining 355,956 shares of Class A Preferred for $10.4 million including $3.2 million of accrued dividends. NOTE F - Taxes on Income Effective as of January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("Statement 109"). Under Statement 109, the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when those differences are expected to reverse. As permitted by Statement 109, the Company has elected not to restate the financial statements of any prior years. The cumulative effect of the change resulted in recording net deferred tax assets and increasing net income in 1993 by $13.5 million. Income tax expense and the extraordinary item as shown in the Consolidated Statement of Operations are composed of the following:
Statement 109 APB 11 ------------- ------------------------------- 1993 1992 1991 -------- -------- -------- (in thousands) Federal - ------- Income tax expense $16,150 $8,075 $2,240 Extraordinary item $6,445 $2,095 State - ----- Income tax expense $ 2,600 $1,625 $ 765 Extraordinary item $ 555 $ 535
Due to the change of ownership which occurred in August 1992 and the resulting limitation on the utilization of net operating loss carryforwards ("NOLs"), the Company is subject to the regular tax, resulting in federal taxes currently payable of $6.7 million F-14 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) for 1993 and $1.6 million for 1992. In 1991, the Company was subject to alternative minimum tax which was imposed at a 20% rate on the Company's alternative minimum taxable income. NOLs were used to offset 90% of the taxable income resulting in federal taxes currently payable of $100,000 for 1991. The provisions for state and local income taxes reflect the effect of filing separate company state and local income tax returns for members of the consolidated group. This amount is reduced, where appropriate, by the availability to utilize state and local portions of operating loss carryforwards. State and local income taxes currently payable were $1.2 million, $1.1 million, and $200,000 in 1993, 1992, and 1991, respectively. The $5.5 million tax benefit realized from the exercise of stock options in 1993 was added to capital in excess of par value and is not reflected in operations. A reconciliation between the statutory federal and the effective income tax rates follows:
Percentage of pre-tax income 1993 1992 1991 ------ ------ ------ Income tax at statutory rate 35.0% 34.0% 34.0% Goodwill amortization 0.9 2.2 9.1 State taxes (net of federal benefit) 2.8 4.6 8.9 Utilization of operating loss carryforwards under Stmt. 109 (5.9) Other ( .7) .4 .5 ----- ----- ----- Income tax expense 32.1% 41.2% 52.5% Extraordinary item, utilization of operating loss carryforwards under APB 11 (29.8) (46.0) ------ ------- ------ Income tax expense, net of extraordinary item 32.1% 11.4% 6.5% ------ ------- ------ ------ ------- ------
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. Significant components of the Company's deferred taxes as of December 31, 1993 are as follows (in thousands): Deferred tax liability: Prepaid expenses $ (1,500) Deferred tax assets: Future tax benefit of NOL carryforward $ 44,700 Bad debt expense 1,500
F-15 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Compensation 900 Depreciation and other 1,138 -------- $ 48,238 Valuation allowance for deferred tax assets (34,900) --------- Total deferred tax assets $ 13,338 --------- Net deferred tax assets $ 11,838 --------- ---------
The Company has tax net operating loss, alternative tax net operating loss and investment tax credit ("ITC") carryforwards which can be utilized annually to offset future taxable income. Because of the "ownership changes" which occurred in 1989 and 1992 under provisions of Internal Revenue Code Section 382, the utilization of carryforwards is presently limited to approximately $10 million per year through 2005. This annual limitation, coupled with the 15 year carryforward limitation, results in a maximum cumulative NOL and ITC carryforward which may be utilized of approximately $120 million as of December 31, 1993. Because it is difficult to predict the realization of the NOL benefit beyond a period of three years, the Company has established a valuation allowance of $34.9 million as of December 31, 1993. NOTE G - Earnings Per Share and Stockholders' Equity Earnings per share Earnings per share are computed using weighted average shares outstanding, adjusted for the one for five reverse stock split in 1991, and common stock equivalents. To arrive at income available for common stockholders, the Company's net income is adjusted by amounts relating to the accretion of discount and dividends accrued on Class A Preferred, and in 1992 and 1991, the accretion of a contract payment to certain major holders of the Class A Preferred. Anti-dilutive securities for 1992 were warrants and options and for 1991 also included Class B and Class C Preferred Stock. Earnings per share for the third and fourth quarters of 1992 and for all of 1993 include the impact of the exercise of outstanding stock options and warrants utilizing the Treasury Stock Method. Common Stock Warrants As of December 31, 1993, warrants for the purchase of 428,090 shares of Common Stock at $2.00 per share, 3,177,856 shares at $5.00 per share and 660,000 shares at $63.75 per share were outstanding. The warrants expire in June 2005, June 1997 and December 1995, respectively. The $2.00 and $5.00 warrants were issued in connection with the Company's refinancings and the difference between the exercise price and the fair value of the warrants at F-16 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the time of issuance was recorded as a discount on the related notes and an increase to Paid-in-capital - warrants. Employee Stock Options The Company has two Employee Stock Option Plans. The maximum number of shares for which options may be granted under both plans is 6,000,000 (adjusted for certain events such as a recapitalization). The plans provide for the granting of stock options and stock appreciation rights to key employees. Shares under option are summarized below:
Number Option Price of ---------------- Shares Per Share Total ------ --------- ------ (Totals in thousands) Shares under option December 31, 1990 2,999,353 $ 3.50 - $48.75 $13,455 Options Terminated (294,799) $ 3.50 - $48.75 (3,986) Options Granted 106,000 $ 3.50 - $ 4.40 448 Options Exercised (8,838) $ 3.50 (31) ---------- ---------------- -------- Shares under option December 31, 1991 2,801,716 $ 3.50 - $ 4.40 $ 9,886 Options Terminated (72,219) $ 3.50 - $ 5.88 (297) Options Granted 1,080,876 $ 4.38 - $ 7.69 5,796 Options Exercised (173,345) $ 3.50 (607) --------- ---------------- -------- Shares under option December 31, 1992 3,637,028 $ 3.50 - $ 7.69 $14,778 Options Terminated (17,318) $ 3.50 - $ 5.88 (90) Options Granted 1,630,500 $25.06 - $26.25 40,973 Options Exercised (755,265) $ 3.50 - $ 7.69 (2,803) --------- --------------- -------- Shares under option December 31, 1993 4,494,945 $ 3.50 - $26.25 $52,858 ---------- --------------- -------- ---------- --------------- -------- Options exercisable, December 31, 1991 1,009,002 $ 3.50 $ 3,532 ---------- --------------- -------- ---------- --------------- -------- Options exercisable, December 31, 1992 2,012,566 $ 3.50 - $ 4.68 $ 7,131 ---------- -------- ---------- -------- Options exercisable, December 31, 1993 1,893,888 $ 3.50 - $ 5.88 $ 7,078 ---------- --------------- -------- ---------- --------------- --------
NOTE H - Leases F-17 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Future minimum rental payments under non-cancelable operating leases with initial or remaining terms of one or more years are $36.4 million, $24.8 million, $20.2 million, $14.7 million, $11.6 million and $15.0 million for 1994, 1995, 1996, 1997, 1998 and 1999 and thereafter, respectively. The Company's lease arrangements frequently include renewal options and/or bargain purchase or fair market value purchase options, and for leases relating to office space, rent increases based on the Consumer Price Index or similar indices. Non-cancelable operating leases relate primarily to intercity transmission facilities, building and office space, and office equipment. Rental expense was $49.9 million, $52.3 million, and $56.9 million for the years ended December 31, 1993, 1992 and 1991, respectively. Fixed assets include amounts financed by capital leases of $600,000 net of $400,000 of accumulated depreciation, and $11.4 million, net of $9.4 million of accumulated depreciation as of December 31, 1993 and 1992, respectively. NOTE I - Transactions with Related Parties The Company leases transmission capacity, multiplexing and various other technical equipment on both capital and operating leases from an affiliate of CTI, a major shareholder through August 1992. Amounts paid under the leases were $17.7 million and $19.7 million for the years ended December 31, 1992 and 1991, respectively. In June 1992, the Company paid $2.0 million to CTI for the purchase of certain assets including an $800,000 note from a major holder of Class A Preferred which was paid in full upon closing of the 1992 equity offering. Consideration for the transaction also included $1.2 million of prepaid transmission capacity to be utilized over a 37 month period. During August 1992, CTI conveyed 14,324,000 shares of ALC Common Stock, 1,000,000 shares of Class B Preferred Stock and 1,000,000 shares of Class C Preferred Stock to the Banks in exchange for the release of certain obligations of CTI. This exchange effected a transfer of controlling interest in the Company from CTI to the Banks. Pursuant to this transfer, The Prudential Insurance Company of America ("Prudential") became a related party through beneficial ownership of options on the stock held by the Banks. During 1992, Prudential held $3.4 million of 1990 Notes which were paid in full in August 1992. As of December 31, 1992, Prudential owned 1990 Warrants to purchase F-18 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1,975,804 shares of ALC Common Stock. During the March 1993 equity offering Prudential sold 1,963,784 shares of which 963,784 represented the exercise of a portion of their warrants. Prudential exercised their remaining 1,012,020 warrants during the September 1993 equity offering and as a result of these sales, no longer has a substantial equity position in ALC. The transfer of stock during August 1992 from CTI to the Banks gave NationsBank of Texas, N.A. and The First National Bank of Chicago related party status through their ownership of Common, Class B Preferred Stock and Class C Preferred Stock. The March 1993 equity offering facilitated the sale by the Banks of 8,386,216 shares of which 3,796,000 were received upon the conversion of all the Class B and Class C Preferred Stock. The Banks further reduced their ownership interest in the Company to a minimal position through subsequent sales and the transfer of other shares to Prudential. The Banks held the Restructured Promissory Note which was paid in full in May 1993. As of December 31, 1993, Grumman Hill Associates, Inc. and Grumman Hill Investments L.P., of which Richard D. Irwin (the Chairman of the Board of Directors of the Company) is the General Partner, held an aggregate of 622,486 warrants to purchase shares of Common Stock. Additionally, Grumman Hill Investments, L.P. holds options to purchase 153,163 shares of Common Stock. F-19 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE J - Selected Quarterly Financial Data (Unaudited)
Three Months Ended ----------------------------------------------------------------- March 31, June 30, Sept. 30, Dec.31, 1993 1993 1993 1993 --------- --------- --------- ---------- (in thousands except per share amounts) Revenue $101,844 $104,233 $113,098 $117,257 Gross Margin $ 46,377 $ 47,409 $ 52,537 $ 55,260 Income before extraordinary item and cumulative effect of accounting change $ 8,004 $ 8,392 $ 10,854 $ 12,426 Net income $ 21,504 $ 902 $ 10,854 $ 12,426 Income per common and common equivalent share before extraordinary item and cumulative effect of accounting change $ 0.23 $ 0.23 $ 0.29 $ 0.32 Net income per common and common equivalent share $ 0.61 $ 0.02 $ 0.29 $ 0.32
Three Months Ended ----------------------------------------------------------------- March 31, June 30, Sept. 30, Dec.31, 1992 1992 1992 1992 --------- --------- --------- ---------- (in thousands except per share amounts) Revenue $ 92,043 $ 92,659 $ 95,673 $ 95,689 Gross Margin $ 35,993 $ 37,423 $ 42,943 $ 42,816 Income before extraordinary item $ 1,941 $ 2,712 $ 4,190 $ 4,983 Net income $ 3,267 $ 4,434 $ 5,882 $ 7,243 Income per common and common equivalent share before extraordinary item $ 0.03 $ 0.07 $ 0.15 $ 0.16 Net income per common and common equivalent share $ 0.09 $ 0.15 $ 0.20 $ 0.23
F-20 71 ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY SCHEDULE V Property and Equipment
Balance at beginning of Balance at Description period Additions Retirements end of period - ------------------------------- ------------- ------------ ------------ ------------- Year ended December 31, 1993 Furniture & fixtures $ 6,662,000 $ 414,000 ($1,261,000) $ 5,815,000 Office equipment 18,695,000 3,907,000 (1,929,000) 20,673,000 Leasehold improvements 7,100,000 333,000 (379,000) 7,054,000 Switch equipment 34,444,000 5,679,000 35,000 40,158,000 Ancillary equipment 18,578,000 597,000 (198,000) 18,977,000 Transmission systems 16,589,000 1,834,000 (19,000) 18,404,000 Construction in progress 3,443,000 3,279,000 6,722,000 Transportation equipment 305,000 164,000 (13,000) 456,000 ------------- ------------ ------------ ------------- $105,816,000 $16,207,000 ($3,764,000) $118,259,000 ------------- ------------ ------------ ------------- ------------- ------------ ------------ ------------- Year ended December 31, 1992 Furniture & fixtures $ 6,748,000 $ 190,000 ($ 276,000) $ 6,662,000 Office equipment 17,753,000 2,339,000 (1,397,000) 18,695,000 Leasehold improvements 7,518,000 41,000 (459,000) 7,100,000 Switch equipment 32,171,000 3,158,000 (885,000) 34,444,000 Ancillary equipment 18,009,000 1,168,000 (599,000) 18,578,000 Transmission systems 15,713,000 1,313,000 (437,000) 16,589,000 Construction in progress 1,349,000 2,094,000 3,443,000 Transportation equipment 167,000 138,000 305,000 ------------- ------------ ------------ ------------- $ 99,428,000 $10,441,000 ($4,053,000) $105,816,000 ------------- ------------ ------------ ------------- ------------- ------------ ------------ ------------- Year ended December 31, 1991 Furniture & fixtures $ 7,322,000 $ 176,000 ($ 750,000) $ 6,748,000 Office equipment 18,353,000 1,730,000 (2,330,000) 17,753,000 Leasehold improvements 8,037,000 52,000 (571,000) 7,518,000 Switch equipment 32,027,000 2,400,000 (2,256,000) 32,171,000 Ancillary equipment 18,975,000 976,000 (1,942,000) 18,009,000 Transmission systems 14,293,000 918,000 502,000 15,713,000 Construction in progress 728,000 621,000 1,349,000 Transportation equipment 167,000 167,000 ------------- ------------ ------------ ------------- $ 99,735,000 $ 7,040,000 ($7,347,000) $ 99,428,000 ------------- ------------ ------------ ------------- ------------- ------------ ------------ ------------- Depreciable lives used are as follows: Years ------------- Furniture & fixtures 10 Office equipment 3 - 5 Leasehold improvements 1 - 10 Switch equipment 10 Ancillary equipment 10 Transmission systems 10 Transportation equipment 3
F-21 72 ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY SCHEDULE VI Accumulated Depreciation on Property and Equipment
Balance at Additions Retirements beginning of charged to and Balance at Descriptions period expense transfers end of period ------------ ------------ ------------ -------------- Year ended December 31, 1993 Furniture & Fixtures $4,701,000 $ 495,000 ($1,287,000) $ 3,909,000 Office Equipment 14,133,000 2,244,000 (1,898,000) 14,479,000 Leashold Improvements 6,522,000 228,000 (377,000) 6,373,000 Switch Equipment 15,245,000 3,640,000 16,000 18,901,000 Ancillary Equipment 13,045,000 1,527,000 (195,000) 14,377,000 Transmission Systems 10,128,000 1,532,000 (16,000) 11,644,000 Transportation Equipment 98,000 144,000 (7,000) 235,000 ------------ ------------ ------------ -------------- $63,872,000 $9,810,000 ($3,764,000) $69,918,000 ------------ ------------ ------------ -------------- ------------ ------------ ------------ -------------- Year ended December 31, 1992 Furniture & Fixtures $ 4,427,000 $ 503,000 ($ 229,000) $ 4,701,000 Office Equipment 13,875,000 1,653,000 (1,395,000) 14,133,000 Leashold Improvements 6,592,000 351,000 (421,000) 6,522,000 Switch Equipment 12,464,000 3,409,000 (628,000) 15,245,000 Ancillary Equipment 11,442,000 1,982,000 (379,000) 13,045,000 Transmission Systems 8,950,000 1,437,000 (259,000) 10,128,000 Transportation Equipment 11,000 87,000 98,000 ------------ ------------ ------------ -------------- $57,761,000 $9,422,000 ($3,311,000) $63,872,000 ------------ ------------ ------------ -------------- ------------ ------------ ------------ -------------- Year ended December 31, 1991 Furniture & Fixtures $ 4,404,000 $ 746,000 ($ 723,000) $ 4,427,000 Office Equipment 14,231,000 1,849,000 (2,205,000) 13,875,000 Leashold Improvements 6,688,000 442,000 (538,000) 6,592,000 Switch Equipment 11,001,000 3,291,000 (1,828,000) 12,464,000 Ancillary Equipment 10,733,000 2,616,000 (1,907,000) 11,442,000 Transmission Systems 6,924,000 1,949,000 77,000 8,950,000 Transportation Equipment 11,000 11,000 ------------ ------------ ------------ -------------- $53,981,000 $10,904,000 ($7,124,000) $57,761,000 ------------ ------------ ------------ -------------- ------------ ------------ ------------ --------------
F-22 73 ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY SCHEDULE VIII Valuation and Qualifying Accounts and Reserves
Additions Additions Balance at charged to charged to Balance at beginning cost and other end of Description of period expenses accounts Deductions (3) period ------------ ------------- ------------ ------------- ------------ Year ended December 31, 1993 Allowance for doubtful accounts $3,334,000 $12,638,000 (1) $11,998,000 $ 3,974,000 ------------ ------------- ------------ ------------- ------------ ------------ ------------- ------------ ------------- ------------ Deferred tax asset $ 0 $37,000,000 (2) $ 2,100,000 $34,900,000 ------------ ------------- ------------ ------------- ------------ ------------ ------------- ------------ ------------- ------------ Year ended December 31, 1992 Allowance for doubtful accounts $3,676,000 $14,551,000 (1) $14,893,000 $ 3,334,000 ------------ ------------- ------------ ------------- ------------ ------------ ------------- ------------ ------------- ------------ Year ended December 31, 1991 Allowance for doubtful accounts $3,229,000 $14,649,000 (1) $14,202,000 $ 3,676,000 ------------ ------------- ------------ ------------- ------------ ------------ ------------- ------------ ------------- ------------
- ----------------------- (1) Amounts accounted for as a reduction of revenue. (2) In connection with the Company's adoption of Statement of Financial Standards No. 109, "Accounting for Income Taxes", a valuation allowance for deferred tax assets of $37,000,000 was recorded January 1, 1993. (See Note F to the Consolidated Financial Statements). (3) Uncollectible accounts written off, net of recoveries. F-23 74 ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY SCHEDULE IX Short-term Borrowings
Weighted Maximum Average average Weighted amount amount interest Balance at average outstanding outstanding rate Category of aggregate end of interest during during during short-term borrowings (4) period rate the period the period the period ------------ ------------ ------------ ------------ ------------- (1) (2) Year ended December 31, 1993 Notes payable $ 0 $12,500,000 $ 3,899,653 12.30% ------------ ------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------ ------------- Line of Credit (3) $ 0 $22,633,000 $11,637,000 13.20% ------------ ------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------ ------------- Year ended December 31, 1992: Notes payable $12,500,000 $27,985,000 $19,801,364 10.19% ------------ ------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------ ------------- Line of Credit $14,802,000 $21,791,000 $12,077,000 12.36% ------------ ------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------ ------------- Year ended December 31, 1991: Notes payable $27,985,000 $27,985,000 $16,325,000 8.00% ------------ ------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------ ------------- Line of Credit $ 9,402,000 $19,298,000 $14,114,000 14.11% ------------ ------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------ -------------
(1) Based on month end amounts outstanding during the period (2) Based on total interest expense for the period and average amount outstanding during the period (3) Line of Credit was classified as short-term through May 1993, upon refinancing the line in June 1993, the balance was transfered to long-term. F-24 EX-3.1 2 RESTATED CERT. OF INC. 1 PAGE 1 Exhibit 3.1 State of Delaware Office of the Secretary of State I, WILLIAM T. QUILLEN, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF RESTATED CERTIFICATE OF INCORPORATION OF "ALC COMMUNICATIONS CORPORATION" FILED IN THIS OFFICE ON THE ELEVENTH DAY OF JANUARY, A.D. 1994, AT 12 O'CLOCK P.M. A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO KENT COUNTY RECORDER OF DEEDS ON THE ELEVENTH DAY OF JANUARY, A.D. 1994 FOR RECORDING. * * * * * * * * * [LOGO] /s/ WILLIAM T. QUILLEN William T. Quillen, Secretary of State AUTHENTICATION: *4237400 DATE: 01/11/1994 940115156 2 RESTATED CERTIFICATE OF INCORPORATION OF ALC COMMUNICATIONS CORPORATION ALC Communications Corporation, a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: 1. The name of the corporation is ALC Communications Corporation. ALC Communications Corporation was originally incorporated under the name Alex Corporation, and the original Certificate of Incorporation of the corporation was filed with the Secretary of State of the State of Delaware on August 26, 1985 as amended on November 19, 1985, December 13, 1985, June 1, 1987, August 5, 1988, October 12, 1990, September 3, 1991 and March 25, 1993. 2. Pursuant to Section 245(b) of the General Corporation Law of the State of Delaware, this Restated Certificate of Incorporation only restates and integrates and does not further amend, the provisions of the Certificate of Incorporation of this corporation as heretofore amended and supplemented, and there is no discrepancy between those provisions and the provisions of this Restated Certificate of Incorporation. 3. The text of the Restated Certificate of Incorporation as heretofore amended or supplemented is hereby restated to read in its entirety as follows: ARTICLE FIRST The name of the corporation is ALC COMMUNICATIONS CORPORATION (the "Corporation"). ARTICLE SECOND The registered office of the Corporation in the State of Delaware is located at 32 Loockerman Square, Suite L-100 in the City of Dover, County of Kent. The name of its registered agent at such address is The Prentice-Hall Corporation System, Inc. ARTICLE THIRD The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law. ARTICLE FOURTH Chapter 1. Authorized Capital Stock The Corporation shall have authority to issue 215-1/2 million shares of its capital stock, which shall consist of (a) 200 million shares designated "Common Stock," having a par value of $0.01 per share ("Common Stock"); and (b) 15-1/2 million shares designated "Preferred Stock," having a par value of $0.01 per share ("Preferred Stock"). The voting powers, designations, preferences and relative, 3 participating, optional or other special rights of, and the qualifications, limitations or restrictions on, each class and series of capital stock of the Corporation shall be as set forth in this Article Fourth and as provided by law. Chapter 2. No Pre-Emptive Rights No holder of any capital stock, or holder of any security or obligation convertible into or entitling any person to purchase any capital stock, shall be entitled as a matter of right, to purchase or subscribe for any unissued capital stock of the Corporation of any class or series now or hereafter authorized or any security or obligation convertible into such stock, and such stock, securities and obligations may be issued for such consideration and to such persons as the Board of Directors may determine and as permitted by law without causing the holders of any such stock or convertible securities or obligations to have any purchase rights or other rights of any kind. Chapter 3. Classes and Series The Board of Directors shall have the authority to fix by resolution or resolutions the voting powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions of any class or classes of stock of the Corporation, and shall have the authority to specify the number of shares of any series of a class so authorized. Chapter 4. Common Stock Each holder of Common Stock shall be entitled to one vote for each Common Share held by such holder on all matters upon which holders of Common Stock shall be entitled or afforded the opportunity to vote (whether at a meeting or by written consent). Every share of Common Stock shall have the same relative rights as and be identical in all respects with every other share of Common Stock. In the event of any liquidation, dissolution or winding up of the Corporation, after there shall have been paid to or set aside for the holders of any capital stock having preference over the Common Stock in the event of liquidation, dissolution or winding up the full preferential amounts to which they are respectively entitled, the holders of the Common Stock and of any class or series of stock entitled to participate therewith, in whole or in part, as to distribution of assets, shall be entitled to receive the remaining assets of the Corporation available for distribution, in cash or in kind pro rata based on the number of such shares outstanding. -2- 4 Chapter 5. Preferred Stock Preferred Stock may be issued, from time to time, in one or more classes and series, and each such class and series shall be known and designated by such designations as may be stated and expressed in a resolution or resolutions adopted by the Board of Directors and as shall be set forth in a certificate made, executed, acknowledged, filed and recorded in the manner required by the General Corporation Law of the State of Delaware in order to make such certificate effective. Each such class and series shall consist of such number of shares as shall be stated and expressed in such resolution or resolutions providing for the issue of the stock of such class or series together with such additional number of shares as the Board of Directors by resolution or resolutions may from time to time determine to issue as a part of such class or series. All shares of any one class or series shall be identical to each other in all respects, except that shares of any one class or series issued at different times may differ as to the dates from which dividends thereon, if cumulative, shall be cumulative and except that any class may be subdivided into series and each series may vary from any other series in such class in such manner as shall be specified in the terms governing such series. The Board of Directors shall have the power and authority to state and determine, in the resolution or resolutions providing for the issue of each class or series of Preferred Stock, the following attributes: (a) The voting powers, if any, of the shares of such class or series; (b) The dividend rights, if any, of the shares of such class or series (including the rates at which, the conditions upon which, and the times at which dividends are payable on such shares), the dividend preferences, if any, as between such class or series and any other class or series of stock, whether and the extent to which dividends on such class or series shall be cumulative, and any limitations, restrictions or conditions on the payment of such dividends; (c) The consideration for which, the time or times during which the price or prices or the rate or rates at which, the manner in which, and any other terms or conditions upon which the shares of such class or series may be redeemed, if redeemable; (d) The rights of such class or series upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation. (e) The terms, if any, upon which shares of such class or series shall be convertible into, or exchangeable for, shares of stock of any other class or classes or of any other series of the same or any other class or classes, including the price or prices or the rate or rates of conversion or exchange and provisions of readjustments if any; and -3- 5 (f) All other designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof so far as they are not inconsistent with any provision of this Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") and to the full extent now, or hereafter permitted by the General Corporation Law of the State of Delaware. The foregoing provisions of this Chapter 5 with respect to the creation or issuance of classes and series of Preferred Stock shall be subject to any additional conditions with respect thereto which may be contained in any resolutions then in effect which shall have previously been adopted in accordance with the foregoing provisions of this Chapter 5 with respect to any then outstanding class or series of Preferred Stock. ARTICLE FIFTH The number of directors of the Corporation shall be fixed by or as prescribed in the bylaws and may be altered from time to time as provided therein, but in no event shall the number of directors of the Corporation be less than one nor more than 21. Election of directors need not be by ballot unless the bylaws so provide. The bylaws of the Corporation may be adopted, amended or repealed by the affirmative vote of the holders of at least a majority of the voting power of the Corporation's stock outstanding at the record date for such vote. The bylaws may also be amended by the Board of Directors by the affirmative vote of such number of the members of the Board as constituted at the time such vote shall be taken as shall be prescribed by the bylaws as constituted at the time such vote shall be taken. The bylaws may contain any provision for the regulation and management of the affairs of the Corporation and the rights or powers of its stockholders, directors, officers or employees not inconsistent with Delaware General Corporation Law or this Certificate of Incorporation. ARTICLE SIXTH The Corporation is to have perpetual existence. ARTICLE SEVENTH Meetings of stockholders may be held within or without the State of Delaware, as the bylaws may provide. The books of the Corporation may be kept outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in or pursuant to the bylaws of the Corporation. ARTICLE EIGHTH The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Restated Certificate of Incorporation in any manner now or hereafter prescribed herein and by the laws of the State of Delaware, and all rights conferred upon stockholders herein are granted subject to this reservation. -4- 6 ARTICLE NINTH (a) A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director except for liability: (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. (b) Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer, of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended, against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith, and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in paragraph (c) of this Article Ninth, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors. The right to indemnification conferred in this Article Ninth shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the Delaware General Corporation Law requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Article Ninth or otherwise. The Corporation may, by action of its Board of Directors, provide indemnification to employees and agents of the Corporation with the same scope and effect as the foregoing indemnification of directors and officers. (c) If a claim under paragraph (b) of this Article Ninth is not paid in full by the Corporation within 30 days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required -5- 7 undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. (d) The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article Ninth shall not be exclusive of any right which any person may have or hereafter acquire under any statute, provision of the Certificate or Incorporation, Bylaws, agreement, vote of stockholders or disinterested directors or otherwise. (e) The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. ARTICLE TENTH This Certificate of Incorporation supersedes and takes the place of the heretofore existing Certificate of Incorporation and all amendments thereto. IN WITNESS WHEREOF, the Corporation has caused this Restated Certificate of Incorporation to be executed and attested and its corporate seal to be affixed hereto this 7th day of January, 1994. ATTEST: ALC COMMUNICATIONS CORPORATION /s/ CONNIE R. GALE By: /s/ JOHN M. ZRNO Connie R. Gale Secretary -6- EX-3.3 3 RETIREMENT CLASS A STOCK 1 EXHIBIT 3.3 Page 1 STATE OF DELAWARE OFFICE OF THE SECRETARY OF STATE ----------------------------------- I, WILLIAM T. QUILLEN, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF RETIREMENT OF STOCK OF "ALC COMMUNICATIONS CORPORATION" FILED IN THIS OFFICE ON THE FOURTH DAY OF JANUARY, A.D. 1994, AT 3:30 O'CLOCK P.M. A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO KENT COUNTY RECORDER OF DEEDS ON THE FOURTH DAY OF JANUARY, A.D. 1994 FOR RECORDING. [SEAL] /s/ WILLIAM T. QUILLEN ------------------ William T. Quillen, Secretary of State Authentication: *4228064 Date: 01/04/1994 2 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 03:30 PM 01/04/1994 940045244-2069840 CERTIFICATE OF RETIREMENT OF THE CLASS A PREFERRED STOCK OF ALC COMMUNICATIONS CORPORATION Pursuant to Section 243(b) of the General Corporation Law of the State of Delaware ALC Communications Corporation, a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), hereby certifies as follows: 1. On December 10, 1993, the Board of Directors of the Corporation duly adopted resolutions providing for the redemption of all outstanding shares of the Corporation's Class A Preferred Stock, par value $0.01 per share ("Class A Stock") on December 31, 1993. 2. The Class A Stock was redeemed on December 31, 1993. 3. The Restated Certificate of Incorporation of the Corporation prohibits the reissuance of any shares of the Class A Stock and requires that all such shares shall be cancelled or retired. 4. Accordingly, pursuant to the provisions of Section 243(b) of the General Corporation Law of the State of Delaware, upon the filing of this Certificate of Retirement, the Restated Certificate of Incorporation of the Corporation shall be amended so as to eliminate all reference to the Class A Stock, thereby reducing the total number of shares that the Corporation is authorized to issue by 2-1/2 million. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Retirement to be executed and attested and its corporate seal to be affixed hereto this 3rd day of January, 1994. ALC COMMUNICATIONS CORPORATION Attest: /s/ CONNIE R. GALE --------------- Connie R. Gale, Secretary By: /s/ MARVIN C. MOSES ---------------------------- Marvin C. Moses, Executive Vice President and Chief Financial Officer EX-10.1 4 1986 OPTION PLAN 1 EXHIBIT 10.1 ALC COMMUNICATIONS CORPORATION 1986 OPTION PLAN PART 1: IDENTIFICATION OF THE PLAN Section 1.1 Title. The Plan described herein shall be known as the "ALC Communications Corporation 1986 Option Plan" and is referred to herein as this "Plan". Section 1.2 Purpose. The purpose of this Plan is (i) to provide certain key employees of the Company and its subsidiaries with an additional incentive to promote the Company's financial success and (ii) to provide an incentive which the Company may use to induce able persons to enter into or remain in the employment of the Company or a subsidiary. Section 1.3 Adoption of this Plan. This Plan was initially approved by the Company's Board of Directors on December 5, 1986. Options may be granted under this Plan before it is approved by the Company's stockholders but no option granted under this Plan may be exercised until and unless this Plan shall be approved by the Company's stockholders. This Plan and all options granted under this Plan shall automatically terminate and expire on December 5, 1987 unless this Plan shall be approved by the Company's stockholders not later than December 5, 1987. Section 1.4 Defined Terms. Certain terms used in this Plan have the meaning indicated for such terms in Section 11.1 of this Plan. 2 PART 2: ADMINISTRATION OF THE PLAN Section 2.1 Committee's Powers. This Plan shall be administered by a committee (herein called the "Committee") composed of persons appointed by the Company's Board of Directors in accordance with the provisions of Section 2.2. The Committee shall have full power and authority to prescribe, amend and rescind rules and procedures governing administration of this Plan. Each action of the Committee which shall be within the scope of the authority delegated to the Committee by this Plan or by the Company's Board of Directors shall be binding on all persons. Section 2.2 Committee Membership. The Board of Directors shall have the power to determine the number of members which the Committee shall have and to change the number of membership positions on the Committee from time to time. The Board of Directors shall appoint all members of the Committee. The Board of Directors may from time to time appoint members to the Committee in substitution for, or in addition to, members previously appointed and may fill vacancies, however caused, on the Committee. Any member of the Committee may be removed from the Committee by the Board of Directors at any time without cause. No person may be appointed to the Committee who is not a director of the Company at the time of such appointment or who shall not be disinterested at the time of such appointment. For the purpose of this Plan, a person shall be deemed to be "disinterested" at any given time if at all times during the period of one year -2- 3 preceding the given time such person shall not have been eligible to be granted any option under this Plan or to be granted or allocated any stock or option under any other plan of the Company or any of its affiliates entitling the participants therein to acquire stock, stock purchase options, or stock appreciation options relating to the stock of the Company or any affiliate of the Company. A person's membership on the Committee shall automatically cease when such person ceases to be a director of the Company or ceases to be disinterested. At any time at which no special Committee shall have been constituted by the Board especially for the purposes of this Plan, all disinterested members of the Compensation Committee established pursuant to the Company's By-Laws shall have all powers and rights delegated to the "Committee" under this Plan. Section 2.3 Committee Procedures. The Committee shall hold its meetings at such times and places as it may determine. The Committee may make such rules and regulations for the conduct of its business as it shall deem advisable. Unless the Board or the Committee shall expressly decide to the contrary, a majority of the members of the Committee shall constitute a quorum and any action taken by a majority of the Committee members at a meeting at which a quorum of committee members shall be present shall be deemed an act of the Committee. Section 2.4 Indemnification. No member of the Committee shall be liable, in the absence of bad faith, for any act or omission with respect to his service on the Committee relating to -3- 4 this Plan. Service on the Committee shall constitute service as a director of the Company so that the members of the Committee shall be entitled to indemnification and reimbursement as directors of the Company for any action or any failure to act in connection with service on the Committee to the full extent at any time provided for or permitted by the Company's Certificate of Incorporation or By-Laws or by any insurance policy or other agreement intended for the benefit of the Company's directors or by any applicable law. PART 3: PERSONS ELIGIBLE TO RECEIVE OPTIONS A person shall be eligible to be granted an option under this Plan only if on the proposed Granting Date for such option or at some time between the Granting Date of such option and the exercise of such option, such person either holds an officership position with the Company expressly provided for in the Company's By-Laws as then constituted or meets the following standards: (i) such person is employed by the Company or a subsidiary, (ii) such person has managerial, supervisory or similar responsibilities, and (iii) such person is not covered by any collective bargaining agreement binding on such person's employer. A person eligible to be granted an option under this Plan is herein called a "key employee". A director of the Company or a subsidiary who is not also such an employee of the Company or a subsidiary shall not be eligible to receive options under this Plan. Options may not be granted to any person under this Plan at a time when such person is serving as a member of the Committee. -4- 5 PART 4: PURCHASE OPTIONS Section 4.1 Power to Grant Purchase Options. The Committee shall have the right and the power to grant at any time to any key employee an option entitling such person to purchase Common Stock from the Company in such quantity, at such price, on such terms and subject to such conditions consistent with the provisions of this Plan as may be established by the Committee on or prior to the Granting Date for such option. Each option to purchase Common Stock which shall be granted by the Committee pursuant to the provisions of this Part 4 is herein called a "purchase option." Section 4.2 Purchase Price. Except as otherwise provided in Part 9, the price at which each share may be purchased upon exercise of any stock purchase option granted under this Plan may not be less than 80% of the per share market value on the Granting Date for such option, provided that if a replaceable option held by a key employee (whether or not granted under this Plan) shall be surrendered to the Company or otherwise be terminated or expire, then an option may be granted under this Plan not later than seven months after such surrender, termination or expiration covering a number of shares not greater than the shares subject to the surrendered, terminated or expired option which shall not have been purchased by means of such option at an initial purchase price per share equal to the purchase price per share prescribed by the surrendered, terminated or expired option at the time of the surrender, -5- 6 termination or expiration. For purposes of this Plan, an option shall be deemed "replaceable" if: (i) it shall have been granted under this Plan, under the ALC Communications Corporation 1982 Incentive Stock Option Plan, the ALC Communications Corporation 1983 Incentive Stock Option Plan, the ALC Communications Corporation 1984 Incentive Stock Option Plan, the ALC Communications Corporation Employee Stock Option Plan, the ALC Communications Corporation Non-Qualified Stock Option Plan, the ALC Communications Corporation Employee Stock Purchase Plan or any other plan or program hereafter or previously approved by the Company's stockholders; or (ii) the option shall have been granted in the manner prescribed in this Section 4.2 to substitute for a replaceable option; or (iii) the option shall have been originally granted under a plan or arrangement that prohibited the grant of options for an exercise price of less than 80% of the fair market value of the stock subject to such option (determined as prescribed in such plan or arrangement); or (iv) the board of directors of the corporation which shall have granted such option, a committee of such board or the Committee existing under this Plan shall have concluded in good faith that at the time such option was originally granted the exercise price of such option was not less than 80% of the fair market value at the time of such original grant of the shares subject to such option. Section 4.3 Purchase Option Terms. The Committee shall have the power to determine the key employees to whom purchase -6- 7 options shall be granted under this Plan, the number of shares to be subject to each purchase option granted under this Plan, the number of purchase options to be awarded to each key employee and the time at which each purchase option under this Plan shall be granted. Except as otherwise expressly provided in this Plan, the Committee shall also have the power to determine, at the time of the grant of each purchase option, all terms and conditions governing the rights and obligations of the holder with respect to such option, including but not limited to: (a) the exercise price per share or the method by which the exercise price per shall shall be determined; (b) the length of the period during which the option may be exercised and any limitations on the number of shares purchasable with the option at any given time during such period; (c) the times at which the option may be exercised; (d) any conditions precedent to be satisfied before the option may be exercised; (e) any restrictions on resale of any shares purchased upon exercise of the option; and (f) whether the option will or will not constitute an incentive stock option under Section 422A of the Internal Revenue Code. Section 4.4 ISO Share Limitation. No person may be granted incentive stock options under this Plan in any year entitling such person to purchase a number of shares greater than the maximum number permitted by Section 422A of the Internal Revenue Code as in effect on the date of grant. This Section 4.4 shall not be deemed to limit the quantity of shares which the Company may grant the right to purchase in any year under options granted -7- 8 under this Plan which are not intended to be incentive stock options. Section 4.5 Other ISO Terms. Whenever possible, each provision in this Plan and in every option at any time granted under this Plan which is evidenced by an option agreement which expressly states such option is intended to constitute an incentive stock option under Section 422A of the Internal Revenue Code (herein called an "intended ISO") shall be interpreted in such manner as to entitle such intended ISO to the tax treatment afforded by such Code to options which do constitute incentive stock options under Section 422A of such Code, but if any provision of this Plan or any intended ISO at any time granted under this Plan shall be held to be contrary to the requirements necessary to entitle such intended ISO to the tax treatment afforded by such Code to options which do constitute incentive stock options under Section 422A of such Code, then (i) such provision shall be deemed to have contained from the outset such language as shall be necessary to entitle such intended ISO to the tax treatment afforded by the Code to options which do constitute incentive stock options under Section 422A of such Code, and (ii) all other provisions of this Plan and such intended ISO shall remain in full force and effect. If any agreement covering an intended ISO granted under this Plan shall not explicitly include any terms required to entitle such intended ISO to the tax treatment afforded by such Code to options which do constitute incentive stock options under Section 422A of such -8- 9 Code, then all such terms shall be deemed implicit in the intention to afford such treatment to such option and such option shall be deemed to have been granted subject to all such terms. PART 5: APPRECIATION OPTIONS Section 5.1 Power to Grant Appreciation Options. The Committee shall have the right and the power to grant to any key employee at any time an option having such terms consistent with the provisions of this Plan as the Committee shall establish on the Granting Date for such option permitting the holder of such option to elect to receive with respect to any share subject to such option a payment from the Company payable as provided in Section 5.5 in an amount (herein called such share's "incremental value") equal to the remainder derived by subtracting (i) the "exercise price" established for such share in accordance with the provisions of this Plan from (ii) the per share market value on the date such option shall be exercised by its holder with respect to such share. Each option which shall be granted by the Committee pursuant to the provisions of this Part 5 is herein called an "appreciation option." Section 5.2 Tandem Options. The Committee is hereby authorized to grant to any key employee at any time an appreciation option consistent with the provisions of this Plan covering any share which is at the time of such grant also covered by a purchase option granted to the same employee either prior to or simultaneously with the grant to such employee of the appreciation option in such share, provided: (i) any purchase option -9- 10 covering any share shall expire and not be exercisable after the exercise of any related appreciation option with respect to the same share; (ii) any appreciation option covering any share shall not be exercisable after the exercise of any related purchase option with respect to the same share; and (iii) a purchase option and an appreciation option covering the same share may not be exercised simultaneously. The Committee is also authorized to grant at any time to any key employee an appreciation option consistent with the provisions of this Plan covering shares not simultaneously covered by a purchase option. Section 5.3 Appreciation Option Terms. The Committee shall have the right and power to determine the key employees to whom appreciation options shall be granted under this Plan, the number of shares to be subject to each appreciation option granted under this Plan, the number of appreciation options to be granted to each key employee, and the time at which each appreciation option under this Plan shall be granted. Except as otherwise expressly provided in this Plan, the Committee shall also have the right and power to determine, at or prior to the time of the grant of each appreciation option, all terms and conditions governing the rights and obligations of the holder with respect to such option, including but not limited to: (a) the exercise price for the shares covered by such option or the method by which such exercise price shall be determined; (b) the length of the period during which such option may be exercised and any limitations on the number of shares with respect to which such option shall be -10- 11 exercisable at any given time during such period; (c) any conditions precedent which must be satisfied before the option may be exercised; and (d) the mix of cash and Common Stock, or other consideration, to be used to make any payment of incremental value which shall become due under such option. Section 5.4 Exercise Price. (a) Except as otherwise provided in paragraph (b) of this Section 5.4 or in Part 9, the exercise price established under any appreciation option granted under this Plan shall not be less than 80% of the per share market value on the Granting Date of such appreciation option. If no exercise price shall be established under the terms of the agreement granting any appreciation option, then the exercise price for each share covered by such option shall be equal to the per share market value on the Granting Date of such option. (b) Except as otherwise provided in Part 9, the exercise price established under any appreciation option granted to any key employee covering any share which shall also be subject to a purchase option which shall have been granted to the same employee earlier than the grant of such appreciation option shall not be less than the lower of (i) the per share purchase price in effect under such option at the time such appreciation option shall be granted or (ii) 80% of the per share market value on the Granting Date of such appreciation option. Section 5.5 Payment of Incremental Value. Any payment of incremental value which may become due from the Company by reason -11- 12 of any exercise of any appreciation option may be paid (i) all in cash, (ii) all in Common Stock, (iii) in any combination of cash and Common Stock, or (iv) in such other consideration as the Committee may approve. In the event any Common Stock shall be delivered to satisfy all or any part of the incremental value obligation arising by reason of any exercise of any appreciation option, the dollar amount of such obligation deemed to have been satisfied by such delivery of Common Stock shall be equal to the product derived by multiplying the per share market value as of the date of exercise times the number of shares delivered. The Committee may determine at the time each appreciation option is granted the mix of cash and stock, or other consideration, to be used to make any payment of incremental value which may become due by reason of any exercise of any option, but in the absence of any such express determination by the Committee to the contrary at the time of the grant of any given appreciation option, the incremental value shall be payable entirely in cash. No fractional share of Common Stock shall be issued to make any payment of incremental value, and the mix of cash and stock payable in each case shall be adjusted in such manner as shall be prescribed by the Committee to avoid the issuance of any fractional share. PART 6. TERMS APPLICABLE TO ALL OPTIONS GRANTED UNDER THE PLAN Section 6.1 Plan Provisions Control Option Terms. The terms of this Plan shall govern all options granted under this -12- 13 Plan, and in no event shall the Committee have the power to grant any option under this Plan which is contrary to any of the provisions of this Plan. In the event any provision of any option granted under this Plan shall conflict with any term in this Plan as constituted on the Granting Date of such option, the term in this Plan as constituted on the Granting Date of such option shall control. Except as provided in Part 9, the terms of any option granted under this Plan may not be changed after the Granting Date of such option without the express approval of the option holder. Section 6.2 Granting Date. An option shall be deemed to have been granted under this Plan on the date (herein called the "Granting Date") designated by the Committee at the time it shall approve such option as the Granting Date of such option, provided that the Committee may not designate a Granting Date with respect to any option which shall be earlier than the date on which the granting of such option shall have been approved by the Committee. Section 6.3 Option Agreement. No person shall have any rights under any option granted under this Plan unless and until the Company and the person to whom such option shall have been granted shall have executed and delivered an agreement expressly granting the option to such person and containing provisions setting forth the terms of the option. Section 6.4 Ten Year Maximum Term. No option may be granted under this Plan which may be exercised more than ten -13- 14 years after the Granting Date of such option; provided that if an appreciation option shall be granted with respect to any share subject to a purchase option and if pursuant to paragraph (b) of Section 5.4 the exercise price for such share shall be set lower than the per share market value on the date of grant of such appreciation option, then the expiration date of such appreciation option shall be set not later than the expiration date for the related purchase option. Section 6.5. Modification of Option After Grant. Each option granted under this Plan may be modified after the date of its grant by express written agreement between the Company and its holder provided that any such change (i) shall not be inconsistent with the terms of this Plan and (ii) shall be approved by the Committee. Section 6.6 Limitations on Transfer. No option granted under this Plan shall be transferable otherwise than by will or the laws of descent and distribution, and any option granted under this Plan may be exercised during the lifetime of the person to whom the option shall initially have been granted only by such person or by such person's guardian or legal representative. For purposes of this Plan, the "holder" of any option granted under this Plan shall during the life of the person to whom such option shall originally have been granted be deemed to be such person or any guardian or legal representative for such person to whom the right to exercise such option shall pass during such person's lifetime and after the death of such -14- 15 original grantee shall be deemed to be the person to whom the original grantee's rights shall pass by reason of the original grantee's death. Section 6.7 Taxes. The Company shall be entitled, if the Committee deems it necessary or desirable, to withhold (or secure payment from the option holder in lieu of withholding) the amount of any withholding or other tax due from the Company with respect to any amount payable and/or shares issuable under such holder's option, or with respect to any income recognized upon a disqualifying disposition of shares received pursuant to the exercise of an incentive stock option, and the Company may defer such payment or issuance unless indemnified to its satisfaction against any liability for any such tax. Section 6.8 No Right to Employment Conferred. Nothing in this Plan (or in the absence of any express provision to the contrary) in any option granted pursuant to this Plan, shall confer on any person any right to continue in the employment of the Company or any subsidiary or interfere in any way with the right of the Company or any subsidiary to terminate such person's employment at any time. PART 7: PROVISIONS GOVERNING OPTION EXERCISE Section 7.1 Normal Option Term. Except as otherwise provided in Section 7.3 or Section 7.5, the right to exercise any option granted under this Plan shall terminate at whichever of the following times shall earlier occur: (i) the date which shall occur three months after the employment termination date of -15- 16 the holder of the option, or (ii) the expiration date of the option. Section 7.2 Acceleration of Exercise Time. The Committee in its sole discretion shall have the right (but shall not in any case be obligated) (i) to permit purchase of shares under any purchase option prior to the time such shares shall be purchasable under the terms of the agreement granting such option, and (ii) to permit exercise of an appreciation option prior to the time such option shall be exercisable under the terms of the agreement granting such option. Section 7.3 Extension of Exercise Time. The Committee in its sole discretion shall have the right (but shall not in any case be obligated) to permit any option granted under this Plan to be exercised more than three months after the employment termination of the holder of such option, provided that the Committee shall not have the right to permit exercise of any option after its expiration date. Section 7.4 Exercise Procedures. Each option granted under this Plan shall be exercised by written notice to the Company. An option holder shall not have any rights as a stockholder with respect to shares issuable under any option granted under this plan until the exercise of that option with respect to those shares. The purchase price of shares purchased upon the exercise of a purchase option granted under this Plan shall be paid in full in cash by the option's holder at the time of the delivery of such shares provided that the Committee (or any Company -16- 17 officer to whom the Committee shall delegate the authority) may (but need not) permit payment to be made by delivery to the Company of either (i) shares of Common Stock, (ii) any combination of cash and shares of Common Stock permitted by the Committee (or any such officer), or (iii) such other consideration permitted by the Committee. In the event any Common Stock shall be transferred to the Company to satisfy all or any part of the exercise price, the part of the exercise price deemed to have been satisfied by such transfer of Common Stock shall be equal to the product derived by multiplying the per share market value as of the date of exercise times the number of shares transferred. The option holder may not transfer to the Company in satisfaction of the exercise price (i) a number of shares which when multiplied times the per share market value as of the date of exercise would result in a product greater than the exercise price or (ii) any fractional share of Common Stock. Any part of the exercise price paid in cash upon the exercise of any option granted under this Plan shall be added to the general funds of the Company and may be used for any proper corporate purpose. Unless the Board of Directors shall otherwise determine, any Common Stock transferred to the Company as payment of all or part of the purchase price upon the exercise of any option granted under this Plan shall be utilized as soon as possible to supply the Common Stock deliverable by reason of the subsequent exercise of options under this Plan and until such use shall be held as treasury shares. -17- 18 Section 7.5 Death of Option Holder. (a) Upon the death of the holder of an option granted under this Plan who shall have been an employee of the Company or one or more subsidiaries of the Company at the date of such holder's death, the right to exercise all unexpired installments of such option shall be accelerated and shall accrue as of the date of death, and the person or persons to whom such holder's rights under the option shall pass by reason of such person's death may exercise the option with respect to any or all of the shares subject to such option until the earlier of (i) one year after the original holder's death or (ii) the expiration date of the option. (b) If the holder of an option granted under this Plan shall die after such holder's employment termination date and if such option shall still have been exercisable at the time of such holder's death, then the person or persons to whom such holder's rights under such option shall pass by reason of such holder's death, may, until one year after such holder's death or the expiration date of the option, whichever is earlier, exercise such option to the extent it would have been exercisable if such holder had exercised the option immediately prior to such holder's death or to such greater extent as may be permitted by the Committee. Any restrictions placed on the exercise of an option which is intended to constitute an incentive stock option in order to comply with the requirements of Section 422A(b)(7) of the Internal Revenue Code prior to amendment by the Tax Reform -18- 19 Act of 1986 shall be disregarded in determining the extent to which an option could have been exercised immediately prior to the option holder's death but shall apply to govern the required sequence of the exercise of the deceased holder's options after such holder's death. Section 7.6 Option Surrender. Any purchase option granted under this Plan may be surrendered to the Company on such terms as the Committee and holder of such option approve, including, but not limited to, terms which provide that upon such surrender the Company will pay to such holder cash or Common Stock issued by the Company, or a combination of cash and Common Stock having a value equal to the amount by which the the product derived by multiplying the number of shares (herein called the "number of unexercised shares") subject to the option on the date (herein called the "Surrender Date") as of which such option shall be surrendered times the per share market value on the Surrender Date shall exceed the product derived by multiplying the number of unexercised shares times the purchase price per share prescribed by the surrendered option. PART 8: SHARES SUBJECT TO THIS PLAN Except as otherwise provided in Part 9, the options granted under this Plan shall be limited so that the sum of the following shall never exceed 5,000,000 shares: (i) all shares which shall be purchased after 1986 upon the exercise of purchase options at any time granted under ALC Communications Corporation 1982 Incentive Stock Option Plan, the ALC Communications Corporation -19- 20 1983 Incentive Stock Option Plan, the ALC Communications Corporation 1984 Incentive Stock Option Plan, the ALC Communications Corporation Employee Stock Option Plan, the ALC Communications Corporation Non-Qualified Stock Option Plan or the ALC, Communications Corporation Employee Stock Purchase Plan. (ii) all shares which shall be purchased upon the exercise of purchase options at any time granted under this Plan, (iii) all shares for which payment of incremental value shall be made by reason of the exercise of appreciation options at any time granted under this Plan, and (iv) the number of shares determined by dividing the value of the cash or other consideration issued by the Company pursuant to Section 7.6 of this Plan by reason of the surrender of any option by the per share market value on the surrender date (provided that if a new option shall be substituted for the surrendered option, the new option shall (regardless of the exercise price prescribed therein) be deemed to have a value of zero for purposes of this clause (iv)). In the event any option at any time granted under this Plan shall be surrendered to the Company, be terminated or expire before it shall have been fully exercised, then (except as otherwise provided in clause (iv) in the first sentence in this paragraph) all shares formerly subject to such option as to which such option shall not have been exercised shall be available for any option subsequently granted in accordance with the provisions of this Plan. -20- 21 PART 9: ADJUSTMENTS TO REFLECT CAPITAL CHANGES The number and kind of shares subject to outstanding options, the price for which shares may be purchased upon the exercise of outstanding purchase options, the exercise price for shares covered by outstanding appreciation options and the number and kind of shares available for options, subsequently granted under this Plan shall be appropriately adjusted to reflect any stock dividend, stock split, combination or exchange of shares, merger, consolidation or other change in capitalization determined by the Board of Directors to be similar to any of the changes expressly indicated in this sentence in its substantive effect upon this Plan or the options granted under this Plan. The Committee shall have the power to determine the amount of the adjustment to be made in each case, but no adjustment approved by the Committee shall be effective until and unless it is approved by the Company's Board of Directors. PART 10: AMENDMENT AND TERMINATION OF THIS PLAN Section 10.1 Amendment. Except as provided in the following sentence, the Board of Directors shall have complete power and authority to amend this Plan at any time and no approval by the Company's stockholders or by any other person, committee or other entity of any kind shall be required to make any amendment approved by the Company's Board of Directors effective. The Board shall not, however, do any of the following without the affirmative approval of the Company's stockholders: (i) increase the maximum number of shares available for options granted under -21- 22 this Plan except as provided in Part 9; or (ii) lower the minimum purchase price permitted by this Plan for any option granted under this Plan; or (iii) amend the requirements of this Plan as to the class of persons eligible to receive options. No termination or amendment of this Plan may, without the consent of the individual to whom any option shall theretofore have been granted under this Plan, adversely affect the rights of such individual under such option. For the purposes of this Section 10.1, an amendment to this Plan shall be deemed to have the affirmative approval of the Company's stockholders if such amendment shall have been submitted for vote by the Company's stockholders at a duly called and constituted meeting of such stockholders at which a quorum is present and a majority of the votes cast with respect to such amendment at such meeting shall have been cast in favor of such amendment. Section 10.2 Termination. The Board of Directors shall have the right and the power to terminate this Plan at any time. If this Plan is not earlier terminated, this Plan shall terminate on December 5, 1996. No options shall be granted under this Plan after termination of this Plan, but the termination of this Plan shall not have any other effect and any option outstanding at the time of the termination of this Plan may be exercised after termination of this Plan at any time prior to the expiration date of such option to the same extent such option would have been exercisable had this Plan not terminated. -22- 23 PART 11: INTERPRETATION OF THIS PLAN Section 11.1 Definitions. Each term defined in this Section 11.1 has the meaning indicated in this Section 11.1 whenever such term is used in this Plan: Appreciation Option - The term "appreciation option" has the meaning such term is given in Section 5.1 of this Plan. Board of Directors - The term "Board of Directors" and the term "Board" each means the Company's Board of Directors as constituted at the time as of which term shall be applied. Committee - The term "Committee" has the meaning such term is given in Section 2.1 of this Plan. Common Stock - The term "Common Stock" means common stock issued or issuable by the Company. Company - The term "Company" as applied as of any given time means ALC Communications Corporation except that if prior to the given time any corporation or other entity shall have acquired (directly or by means of a subsidiary) all or a substantial part of the assets of the "Company" (as herein defined), and shall have agreed to assume the obligations of the "Company" under this Plan, then such corporation or other entity shall be deemed to be the "Company" at the given time. Employment Termination Date - The term "employment termination date" as applied to the holder of any option -23- 24 granted under this Plan means the first date on which such option holder shall not be employed by either the Company or any subsidiary for any reason (including but not limited to voluntary termination of employment, involuntary termination of employment, retirement, disability or death). The Committee may specify in the original terms of any option granted under this Plan, or if not so specified, shall determine whether an authorized leave of absence or absence on military or government service or absence for any other reason shall constitute a termination of employment for the purposes of this Plan. Exercise Price - The term "exercise price" as applied to any purchase option granted under this Plan means the price at which stock may be purchased upon exercise of such option established as prescribed in this Plan. The term "exercise price" as applied to any appreciation option granted under this Plan means the "exercise price" established for such option under or pursuant to the provisions of Section 5.3, Section 5.4, and Part 9 of this Plan as of the given time. Expiration Date - The term "expiration date" as applied to any option granted under this Plan means the date specified in the option agreement between the Company and the holder as the expiration date of such option. If no expiration date shall be specified in the option agreement relating to any option, then the expiration date of such option -24- 25 shall be the day prior to the tenth anniversary of the Granting Date of such option. Granting Date - The term "Granting Date" has the meaning given such term in Section 6.2 of this Plan. Incremental Value - The term "incremental value" has the meaning such term is given in Section 5.1 of this Plan. Key Employee - The term "key employee" has the meaning such term is given in Part 3 of this Plan. Option - The term "option" means any purchase option or appreciation option granted under this Plan. Per Share Market Value - The term "per share market value" on any given date shall be the fair market value of one share of Common Stock on the given date determined in such manner as shall be prescribed by the Committee, provided that in the absence of any specific instructions from the Committee to the contrary, the "per share market value" on any given date shall be equal to the last per share sales price reported for the Common Stock for the given date in the Wall Street Journal (if sales for the Common Stock shall be reported for the given date in the Wall Street Journal) or (if no sales of the Common Stock shall be reported for the given date in the Wall Street Journal) for the first date prior to the given date for which sales of the Common Stock shall be reported in the Wall Street Journal. Purchase Option - The term "purchase option" has the meaning such term is given in Section 4.1 of this Plan. -25- 26 Share - The term "share" means a share of Common Stock. Subsidiary - Any corporation shall be deemed to be a "subsidiary" if (i) securities issued by such corporation entitling the owner thereof to elect a majority of the corporation's board of directors are owned and controlled directly or indirectly by the Company and (ii) the ownership requirements of Section 425(f) of the Internal Revenue Code are satisfied. Section 11.2 Board Action. For the purposes of this Plan, the Board of Directors shall be deemed to have approved any amendment to or termination of this Plan or to have taken any other action with the Board is authorized to take with respect to this Plan or any option granted under this Plan if such amendment, termination or other action is approved (i) by a majority of the directors present at a duly called and constituted meeting of the Board of Directors at which a quorum is present, or (ii) by written consent executed by all persons who are members of the Board of Directors at the time of the execution of such consent, or (iii) in any other manner which at the time the Board's actions shall be taken shall be sufficient under applicable law to constitute approval by the Board of routine matters. Section 11.3 Captions. The captions (i.e. all underlined words) used in this Plan are for convenience only, do not constitute a part of this Plan, and shall not be deemed to limit, characterize or affect in any way any provisions of this Plan, -26- 27 and all provisions of this Plan shall be construed as if no captions had been used in this Plan. Section 11.4 Severability. Whenever possible, each provision in this Plan and every option at any time granted under this Plan shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Plan or any option at any time granted under this Plan shall be held to be prohibited by or invalid under applicable law, then (i) such provision shall be deemed amended to accomplish the objectives of the provision as original written to the fullest extent permitted by law and (ii) all other provisions of this Plan and every other option at any time granted under this Plan shall remain in full force and effect. Section 11.5 No Strict Construction. No rule of strict construction shall be implied against the Company, the Committee, or any other person in the interpretation of any of the terms of this Plan, any option granted under this Plan or any rule or procedure established by the Committee. Section 11.6. Choice of Law. Every option at any time granted under this Plan shall be deemed to be a contract made under the laws of the State of Illinois. For all purposes, both this Plan and every option granted under this Plan shall be construed in accordance with and governed by the laws of the State of Illinois. Section 11.7 Committee's Interpretations Conclusive. The Committee shall have full power and authority to interpret the -27- 28 terms of this Plan, the terms of options granted under this Plan, and the rules and procedures established by the Committee. Any determination made by the Committee as to the meaning of or requirements imposed by or rights of any persons under this Plan, any option granted under this Plan, or any rule or procedure established by the Committee shall be binding upon all persons concerned. -28- 29 AMENDMENT TO ALC COMMUNICATIONS CORPORATION 1986 OPTION PLAN (approved by the shareholders at the Annual Meeting of Shareholders, October 20, 1988) The number 5,000,000 was substituted for the number 2,046,450 in the following section of the Company's 1986 Option Plan: PART 8: SHARES SUBJECT TO THIS PLAN "Except as otherwise provided in Part 9, the options granted under this Plan shall be limited so that the sum of the following shall never exceed 5,000,000 shares." 30 AMENDMENT TO THE 1986 OPTION PLAN ADOPTED BY THE BOARD OF DIRECTORS OF ALC COMMUNICATIONS CORPORATION JUNE 29, 1990 SECTION 11.1 - ADD THE FOLLOWING DEFINITION "Change of Control Event - The term, "Change of Control Event" means the sale or transfer of all or a portion of the equity ownership by the majority stockholder of the Company, as a result of which the majority stockholder no longer controls more than 50% of the outstanding equity securities of the Company and the power to elect a majority of the Board of Directors of the Company; and" SECTION 6.9 - ADD AS A NEW SECTION "Change of Control Event. Unless otherwise specified by the Committee at the time of grant of each option, and subject to such terms and conditions as the Committee may establish at the time of grant, upon the occurrence of a Change of Control Event, irrespective of whether or not an option is then exercisable, the holder shall have the right to exercise any unexpired option in full to the extent not theretofore exercised or terminated." EX-10.2 5 OPTION PLAN 1 EXHIBIT 10.2 ALC COMMUNICATIONS CORPORATION 1990 STOCK OPTION PLAN AS AMENDED AND RESTATED EFFECTIVE AS OF OCTOBER 21, 1993 ARTICLE I PURPOSE AND ADOPTION OF THE PLAN 1.01 PURPOSE. The purpose of the ALC Communications Corporation 1990 Stock Option Plan is to provide certain key employees of ALC and its Subsidiaries with an additional incentive to promote the financial success of ALC and to provide an incentive which ALC may use to induce able persons to enter into or remain in the employment of ALC or a Subsidiary. 1.02 ADOPTION AND TERM. The Plan became effective as of May 10, 1990 following approval by stockholders of ALC. The Plan as amended and restated herein is effective as of October 21, 1993 and will remain in effect until December 31, 2000 unless earlier terminated or abandoned by action of the Board; provided, however, that no Incentive Stock Option may be granted after May 9, 2000. ARTICLE II DEFINITIONS 2.01 ADMINISTRATOR means the group of persons having authority to administer the Plan pursuant to Section 3.01. 2.02 ALC means ALC Communications Corporation, a Delaware corporation. 2.03 AWARD means any one or combination of Non-Qualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, or any other award made under the terms of the Plan. 2.04 AWARD AGREEMENT means a written agreement between ALC and Participant or a written acknowledgment from ALC specifically setting forth the terms and conditions of an Award granted under the Plan. 2.05 AWARD PERIOD means, with respect to an Award, the period of time set forth in the Award Agreement during which specified conditions set forth in the Award Agreement must be satisfied. 2.06 BENEFICIARY means (a) an individual, trust or estate who or which, by will or by operation of the laws of descent and distribution, succeeds to the rights and obligations of the Participant under the Plan and Award Agreement upon the Participant's death; or (b) an individual, who by designation of the Participant, succeeds to the rights and obligations of the Participant under the Plan and Award Agreement upon the Participant's death. 2 2.07 BOARD means the Board of Directors of ALC. 2.08 CHANGE OF CONTROL EVENT means (a) an event or series of events by which any Person or other entity or group (as such term is used in Section 13(d) and 14(d) of the Exchange Act) of Persons or other entities acting in concert as a partnership or other group (a "Group of Persons") (other than Persons who are, or Groups of Persons entirely made up of, (i) management personnel of ALC or its wholly-owned Subsidiary, Allnet Communication Services, Inc. ("Allnet") or (ii) any affiliates of any such management personnel) shall, as a result of a tender or exchange offer or offers, an open market purchase or purchases, a privately negotiated purchase or purchases or otherwise, become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act, except that a Person shall be deemed to have "beneficial ownership" of all securities that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 40% or more of the combined voting power of the then outstanding voting stock of ALC or Allnet; (b) ALC or Allnet consolidates with, or merges with or into, another Person (other than ALC or Allnet), or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any Person (other than ALC or Allnet), or any Person (other than ALC or Allnet) consolidates with, or merges with or into, ALC or Allnet, in any such event pursuant to a transaction in which the outstanding voting stock of ALC or Allnet is converted into or exchanged for cash, securities or other Property; (c) during any consecutive two-year period, individuals who at the beginning of such period constituted either the Board or (if ALC does not own all of the voting stock of Allnet) the Board of Directors of Allnet (together with any new directors whose election by such Board of Directors or whose nomination for election by the stockholders of ALC or Allnet, as the case may be, was approved by a vote of 66-2/3% of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board or the Board of Directors of Allnet then in office; or (d) any liquidation or dissolution of ALC or Allnet (other than a liquidation of Allnet into ALC that is not otherwise a Change of Control Event). 2.09 CODE means the Internal Revenue Code of 1986, as amended. References to a section of the Code shall include that section and any comparable section or sections of any future legislation that amends, supplements or supersedes that section. 2.10 COMPANY COMMON STOCK means the Common Stock of ALC, par value $.01 per share. 2.11 DATE OF GRANT means the date designated by the Administrator as the date as of which it grants an Award, which shall not be earlier than the date on which the Administrator approves the granting of such Award. - 2 - 3 2.12 DIRECTOR means a member of the Board of Directors of ALC or its Subsidiaries. 2.13 EXCHANGE ACT means the Securities Exchange Act of 1934, as amended. 2.14 EXERCISE PRICE means, with respect to a Stock Appreciation Right, the amount established by the Administrator, in accordance with Section 7.03 hereunder, and set forth in the Award Agreement, which is to be subtracted from the Fair Market Value on the date of exercise in order to determine the amount of the Incremental Value to be paid to the Participant. 2.15 EXPIRATION DATE means the date specified in an Award Agreement as the expiration date of such Award. 2.16 FAIR MARKET VALUE means, on any given date, the average of the highest and lowest selling price for the Company Common Stock as quoted on NASDAQ/NMS or NASDAQ (whichever is applicable) for the given date or (if no sales of the Company Common Stock shall be reported for the given date) for the first date prior to the given date for which sales of the Company Common Stock shall be quoted; if the Company Common Stock is not eligible for quotation on NASDAQ/NMS or NASDAQ at the time of any Award hereunder, the Fair Market Value shall be the quoted selling price for the Company Common Stock available for the most recent given date in "The Pink Sheets." Notwithstanding the foregoing, if the Company Common Stock is, on the given date, listed on a national securities exchange, the Fair Market Value shall be the average of the highest and lowest selling price for the given date, or the most recent date upon which a sale occurred. 2.17 INCENTIVE STOCK OPTION means a stock option described in Section 422 of the Code. 2.18 INCREMENTAL VALUE has the meaning given such term in Section 7.01 of the Plan. 2.19 INTERESTED ADMINISTRATOR has the meaning given such term in Section 3.01 of the Plan. 2.20 NON-QUALIFIED STOCK OPTION means a stock option which is not an Incentive Stock Option. 2.21 OFFICER means a president, vice president, treasurer, secretary, controller, and any other person who performs functions corresponding to the foregoing officers for ALC, any member of the Board or the board of directors of a Subsidiary of ALC or any person performing similar functions with respect to ALC, and any other participant who is deemed to be an officer or director of ALC or a Subsidiary of ALC for purposes of - 3 - 4 Section 16 of the Exchange Act and the rules thereunder, as currently in effect or as amended from time to time. 2.22 OPTIONS means all Non-Qualified Stock Options and Incentive Stock Options granted at any time under the Plan. 2.23 PARTICIPANT shall have the meaning set forth in Section 5.01. 2.24 PLAN means the ALC Communications Corporation 1990 Stock Option Plan, as described herein and as may be amended from time to time. 2.25 PURCHASE PRICE, with respect to options, shall have the meaning set forth in Section 6.02. 2.26 RULE 16B-3 means Rule 16b-3 promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act, as currently in effect and as it may be amended from time to time, and any successor rule. 2.27 STOCK APPRECIATION RIGHT means an Award granted in accordance with Article VII. 2.28 SUBSIDIARY shall have the meaning set forth in Section 424(f) of the Code. 2.29 TERMINATION OF EMPLOYMENT means the voluntary or involuntary termination of a Participant's employment with ALC or a Subsidiary for any reason, including death, disability, retirement or as the result of the divestiture of the Participant's employer or any other similar transaction in which the Participant's employer ceases to be ALC or one of the Subsidiaries of ALC. Whether an authorized leave of absence or absence on military or government service, absence due to disability, or absence for any other reason shall constitute Termination of Employment shall be determined in each case by the Administrator in its sole discretion. ARTICLE III ADMINISTRATION 3.01 ADMINISTRATION. The Administrator of the Plan shall be either: (i) the Board or (ii) a committee of three or more Directors with authority to act as provided in Rule 16b-3 elected or appointed by the Board. If the Administrator (either the Board or the committee described above) does not meet the "disinterested person" requirements of Rule 16b-3(b) and 16b-3(d)(3), the Administrator also may be referred to herein as the "Interested Administrator". The Administrator shall administer the Plan in accordance with this provision and shall have the sole discretionary authority to interpret the Plan, to establish and modify administrative rules for the Plan, to impose such conditions and restrictions on Awards as it determines appropriate, to cancel Awards (including those - 4 - 5 made pursuant to other plans of ALC) and to substitute new options (including options granted under other plans of ALC) with the consent of the recipient, and to take such steps in connection with the Plan and Awards granted thereunder as it may deem necessary or advisable. The Administrator may, with respect to Participants who are not Officers, delegate such of its powers and authority under the Plan as it deems appropriate to designated officers or employees of ALC. 3.02 INDEMNIFICATION. Members of the Administrator shall be entitled to indemnification and reimbursement from ALC for any action or any failure to act in connection with service as Administrator to the full extent provided for or permitted by the certificate of incorporation or bylaws of ALC or by any insurance policy or other agreement intended for the benefit of officers, directors or employees of ALC or by any applicable law. ARTICLE IV COMPANY COMMON STOCK ISSUABLE PURSUANT TO THE PLAN 4.01 SHARES ISSUABLE. Shares to be issued under the Plan may be authorized and unissued shares or issued shares which have been reacquired by ALC. Except as provided in Section 4.03, the Awards granted under the Plan shall be limited so that the sum of the following shall never exceed 5,000,000 shares of Company Common Stock: (i) all shares which shall be issued upon the exercise of outstanding Options or other Awards granted under the Plan, (ii) all shares for which payment of Incremental Value shall be made by reason of the exercise of Stock Appreciation Rights at any time granted under the Plan, and (iii) the number of shares otherwise issuable under an Award which are applied by ALC to payment of the withholding or tax liability discussed in Section 8.11. In addition, up to 822,884 shares remaining available for grant as of June 6, 1990 (including shares presently subject to outstanding options, in the event such options terminate without being exercised) under the terms of the ALC Communications 1986 Option Plan shall be available for issuance under this Plan. 4.02 SHARES SUBJECT TO TERMINATED AWARDS. In the event that any Award at any time granted under the Plan shall be surrendered to ALC, be terminated or expire before it shall have been fully exercised, then all shares formerly subject to such Award as to which such Award shall not have been exercised shall be available for any Award subsequently granted in accordance with the Plan. Shares of Company Common Stock subject to Options, or portions thereof, which have been surrendered in connection with the exercise of tandem Stock Appreciation Rights shall not be available for subsequent Awards under the Plan, and shares of Company Common Stock issued in payment of such Stock Appreciation Rights shall be charged against the number of shares of Company Common Stock available for the grant of Awards. Any shares of Company Common Stock issued by ALC pursuant to its assumption or substitution of outstanding grants from acquired companies shall not reduce the number of shares available for Awards under this Plan unless issued under this Plan. - 5 - 6 4.03 ADJUSTMENTS TO REFLECT CAPITAL CHANGES. (a) RECAPITALIZATION. The number and kind of shares subject to outstanding Awards, the Purchase Price or Exercise Price for such shares, and the number and kind of shares available for Awards subsequently granted under the Plan shall be appropriately adjusted to reflect any stock dividend, stock split combination or exchange of shares, merger, consolidation or other change in capitalization with a similar substantive effect upon the Plan or the Awards granted under the Plan. The Administrator shall have the power to determine the amount of the adjustment to be made in each case. (b) SALE OR REORGANIZATION. After any reorganization, merger or consolidation in which ALC is a surviving corporation, each Participant shall, at no additional cost, be entitled upon exercise of an Award to receive (subject to any required action by stockholders), in lieu of the number of shares of Company Common Stock receivable or exercisable pursuant to such Award, a number and class of shares of stock or other securities to which such Participant would have been entitled pursuant to the terms of the reorganization, merger or consolidation if, at the time of such reorganization, merger or consolidation, such Participant had been the holder of record of a number of shares of stock equal to the number of shares receivable or exercisable pursuant to such Award. Comparable rights shall accrue to each Participant in the event of successive reorganizations, mergers or consolidations of the character described above. (c) DISSOLUTION OR CONSOLIDATION. Unless otherwise stated in the Award Agreement and subject to such other terms and conditions as the Administrator may establish in the Award Agreement, in the event of the dissolution or liquidation of ALC, or any merger or consolidation in which ALC is not the surviving corporation, irrespective of whether or not an Award is then exercisable, the Participant shall have the right, immediately prior to such dissolution, liquidation or consolidation, to exercise in full any unexpired Award to the extent not theretofore exercised or terminated, provided, however, that any Stock Appreciation Right so exercised must have a Date of Grant at least six months prior to the date of exercise. All Options and Stock Appreciation Rights shall terminate upon the dissolution, liquidation, merger or consolidation. (d) OPTIONS TO PURCHASE STOCK OF ACQUIRED COMPANIES. After any reorganization, merger or consolidation in which ALC or a Subsidiary of ALC shall be a surviving corporation, the Administrator may grant substituted Options under the provisions of the Plan, pursuant to Section 424 of the Code, replacing old options granted under a plan of another party to the reorganization, merger or consolidation, where such party's stock may no longer be issued following such merger or consolidation. The foregoing adjustments and manner of application of the foregoing provisions shall be determined by the Administrator in its sole - 6 - 7 discretion. Any adjustments may provide for the elimination of any fractional shares which might otherwise have become subject to any Awards. ARTICLE V PARTICIPATION 5.01 Participants in the Plan shall be the Officers who are employees of ALC or a Subsidiary of ALC and other employees of ALC or a Subsidiary of ALC having managerial, supervisory or similar responsibilities or who are key administrative employees or sales managers, and who are not covered by any collective bargaining agreement binding on such persons' employer, as the Administrator, in its sole discretion, may designate from time to time. The Administrator's designation of a Participant in any year shall not require the Administrator to designate such person to receive Awards in any other year. The Administrator shall consider such factors as it deems pertinent in selecting Participants and in determining the type and amount of their respective Awards. 5.02 Notwithstanding the foregoing, while there is an Interested Administrator, the number of shares subject to Awards to be made to all Officers shall not exceed 2,700,000; of such amount, the number of shares subject to Awards to be made to all Directors shall not exceed 1,600,000. ARTICLE VI OPTION AWARDS 6.01 POWER TO GRANT OPTIONS. The Administrator may grant, to such Participants as the Administrator may select, Options entitling the Participant to purchase Company Common Stock from ALC in such quantity, at such price, and on such terms and subject to such conditions, not inconsistent with the terms of this Plan, as may be established by the Administrator. The terms of any Option granted under this Plan shall be set forth in an Award Agreement. Notwithstanding the foregoing, while there is an Interested Administrator, Options granted to Directors shall not be exercisable for a period of at least six months from the Date of Grant, except that Options which are granted to Directors which are replacements for existing options previously granted under this Plan or another plan of ALC may become exercisable in accordance with the terms of the previously granted option. 6.02 PURCHASE PRICE OF OPTIONS. The Purchase Price of each share of Company Common Stock which may be purchased upon exercise of any Option granted under the Plan shall be determined by the Administrator, provided that such Purchase Price shall not be less than the Fair Market Value on the Date of Grant, and provided further that the Purchase Price for shares of Company Common Stock purchased pursuant to Stock Options designated by the Administrator as Incentive Stock Options shall be equal to or greater than the Fair Market Value on the Date of Grant as required under Section 422 of the Code. - 7 - 8 6.03 DESIGNATION OF INCENTIVE STOCK OPTIONS. Except as otherwise expressly provided in the Plan, the Administrator may designate, at the Date of Grant of each Option, that the Option is an Incentive Stock Option under Section 422 of the Code. (a) INCENTIVE STOCK OPTION SHARE LIMITATION. No Participant may be granted Incentive Stock Options under the Plan (or any other plans of ALC) which would result in stock with an aggregate Fair Market Value (measured on the Date of Grant) of more than $100,000 first becoming exercisable in any one calendar year, or which would entitle such Participant to purchase a number of shares greater than the maximum number permitted by Section 422 of the Code as in effect on the Date of Grant. (b) OTHER INCENTIVE STOCK OPTION TERMS. Whenever possible, each provision in the Plan and in every Option granted under this Plan which is designated by the Administrator as an Incentive Stock Option shall be interpreted in such a manner as to entitle the Option to the tax treatment afforded by Section 422 of the Code. If any provision of this Plan or any Option designated by the Administrator as an Incentive Stock Option shall be held not to comply with requirements necessary to entitle such Option to such tax treatment, then (i) such provision shall be deemed to have contained from the outset such language as shall be necessary to entitle the Option to the tax treatment afforded under Section 422 of the Code, and (ii) all other provisions of this Plan and the Award Agreement shall remain in full force and effect. If any agreement covering an Option designated by the Administrator to be an Incentive Stock Option under this Plan shall not explicitly include any terms required to entitle such Incentive Stock Option to the tax treatment afforded by Section 422 of the Code, all such terms shall be deemed implicit in the designation of such Option and the Option shall be deemed to have been granted subject to all such terms. 6.04 RIGHTS AS A STOCKHOLDER. The Participant or any transferee of an Option pursuant to Section 8.04 shall have no rights as a stockholder with respect to any shares of Company Common Stock covered by an Option until the Participant or transferee shall have become the holder of record of any such shares, and no adjustment shall be made for dividends and cash or other property or distributions or other rights with respect to any such shares of Company Common Stock for which the record date is prior to the date on which the Participant or a transferee of the Option shall have become the holder of record of any such shares covered by the Option. ARTICLE VII STOCK APPRECIATION RIGHTS 7.01 POWER TO GRANT STOCK APPRECIATION RIGHTS. The Administrator is authorized to grant to any Participant, on such terms established by the Administrator on or prior to the Date of Grant and subject to and not inconsistent with the provisions of this - 8 - 9 Plan, the right to receive the payment from ALC, payable as provided in Section 7.04, of an amount equal to the Incremental Value of the Stock Appreciation Rights, which shall be an amount equal to the remainder derived from subtracting (i) the Exercise Price for the right established in the Award Agreement from (ii) the Fair Market Value of a share of Company Common Stock on the date of exercise. The terms of any Stock Appreciation Right granted under the Plan shall be set forth in an Award Agreement. 7.02 TANDEM STOCK APPRECIATION RIGHTS. The Administrator may grant to any Participant a Stock Appreciation Right consistent with the provisions of this Plan covering any share of Company Common Stock which is, at the Date of Grant of the Stock Appreciation Right, also covered by an Option granted to the same Participant, either prior to or simultaneously with the grant to such Participant of the Stock Appreciation Right, provided: (i) any Option covering any share of Company Common Stock shall expire and not be exercisable upon the exercise of any Stock Appreciation Right with respect to the same share; (ii) any Stock Appreciation Right covering any share of Company Common Stock shall not be exercisable upon the exercise of any related Option with respect to the same share; and (iii) an Option and Stock Appreciation Right covering the same share of Company Common Stock may not be exercised simultaneously. 7.03 EXERCISE PRICE. The Exercise Price established under any Stock Appreciation Right granted under this Plan shall be determined by the Administrator and shall not be less than the lower of (i) the Purchase Price of the related Option, in the case of a tandem Stock Appreciation Right or (ii) the Fair Market Value on the Date of Grant of the Stock Appreciation Right. Upon exercise of the Stock Appreciation Rights, the number of shares subject to exercise under a related Option shall automatically be reduced by the number of shares of Company Common Stock represented by the Option or portion thereof which is surrendered as a result of the exercise of such Stock Appreciation Rights. 7.04 PAYMENT OF INCREMENTAL VALUE. Any payment which may become due from ALC by reason of Participant's exercise of a Stock Appreciation Right may be paid to the Participant as determined by the Administrator (i) all in cash, (ii) all in Company Common Stock, or (iii) in any combination of cash and Company Common Stock. In the event that all or a portion of the payment is made in Company Common Stock, the number of shares of the Company Common Stock delivered in satisfaction of such payment shall be determined by dividing the amount of the payment by the Fair Market Value on the date of exercise. The Administrator may determine whether payment upon exercise of a Stock Appreciation Right will be made in cash or in stock, or a combination thereof, upon or at any time prior to the exercise of such Stock Appreciation Right. No fractional share of Company Common Stock shall be issued to make any payment; if any fractional shares would be issuable, the mix of cash and Company Common Stock payable to the Participant shall be adjusted as directed by the Administrator to avoid the issuance of any fractional share. Payment may be made in cash to Officers only if the - 9 - 10 Stock Appreciation Right is exercised during the "window period" required under Rule 16b-3(e)(3)(iii) and otherwise in accordance with Rule 16b-3. Notwithstanding the foregoing, while there is an Interested Administrator, payment of Incremental Value to Officers shall be made only in Company Common Stock, and any fractional shares payable to Officers shall be rounded off to the nearest whole share and shall not be payable in cash. ARTICLE VIII TERMS OF OPTIONS AND STOCK APPRECIATION RIGHTS 8.01 AWARD AGREEMENT. No person shall have any rights under any Award granted under the Plan unless and until the Administrator has adopted a resolution granting the Award. The grant and the terms and conditions of the Award shall be set forth in an Award Agreement between the Company and the Participant. In the event of the loss or destruction of the Award Agreement, or any inconsistency between the Award Agreement and the resolution of the Administrator documenting the grant of the Award, the resolution of the Administrator shall control. 8.02 PLAN PROVISIONS CONTROL AWARD TERMS. The terms of the Plan shall govern all Awards granted under the Plan, and in no event shall the Administrator have the power to grant any Award under the Plan which is contrary to any of the provisions of the Plan. In the event any provision of any Award granted under the Plan shall conflict with any term in the Plan as constituted on the Date of Grant of such Award, the term in the Plan as constituted on the Date of Grant of such Award shall control. Except as provided in Section 4.03, (i) the terms of any Award granted under the Plan may not be changed after the granting of such Award without the express approval of the Participant and (ii) no modification may be made to an Award granted to an Officer except in compliance with Rule 16b-3. 8.03 DURATION OF OPTIONS AND STOCK APPRECIATION RIGHTS. Options and Stock Appreciation Rights shall terminate after the first to occur of the following events: (a) Expiration Date of the Award as provided in the Award Agreement; or (b) Termination of the Award as provided in Section 8.04; or (c) In the case of an Incentive Stock Option, ten years from the Date of Grant; or (d) Solely in the case of tandem Stock Appreciation Rights, upon the Expiration Date of the related Option. - 10 - 11 Except as provided in Section 8.04, while there is an Interested Administrator, all Awards granted under this Plan to Directors must provide that the Awards terminate no later than ten (10) years after the Date of Grant. 8.04 EXERCISE ON DEATH OR TERMINATION OF EMPLOYMENT. (a) Unless otherwise provided in the Award Agreement, in the event of the death of a Participant while an employee of ALC or a Subsidiary, the right to exercise all unexpired Awards shall be accelerated and shall accrue as of the date of death, and the Participant's Awards may be exercised by his Beneficiary at any time within one year after the date of the Participant's death. (b) Unless otherwise provided in the Award Agreement, in the event of Participant's Termination of Employment at any time for any reason other than death (including disability or retirement), an Award may be exercised, but only to the extent it was otherwise exercisable, on the date of Termination of Employment, within ninety days after the date of Termination of Employment. In the event of the death of the Participant within the ninety-day period following Termination of Employment, his Award may be exercised by his Beneficiary within one year after the date of the Participant's death. (c) With respect to an Award which is intended to constitute an Incentive Stock Option, upon Termination of Employment, such Award shall be exercisable as provided in Section 422 of the Code. 8.05 ACCELERATION OF EXERCISE TIME. The Administrator, in its sole discretion, shall have the right (but shall not in any case be obligated) to permit purchase of shares under any Award prior to the time such Award would otherwise become exercisable under the terms of the Award Agreement, except for Awards held by Directors while there is an Interested Administrator. 8.06 EXTENSION OF EXERCISE TIME. The Administrator, in its sole discretion, shall have the right (but shall not in any case be obligated) to permit any Award granted under this Plan (except for Awards held by Directors while there is an Interested Administrator) to be exercised after its Expiration Date or after the ninety day period following Termination of Employment, subject, however, to the limitations described in Section 8.03 (c) and (d). 8.07 MODIFICATION OF AWARD AFTER GRANT. Each Award granted under the Plan to a Participant other than an Officer may be modified after the date of its grant by express written agreement between ALC and the Participant, provided that such change (i) shall not be inconsistent with the terms of the Plan and (ii) shall be approved by the Administrator. No modifications may be made to any Awards granted to an Officer except in compliance with Rule 16b-3. - 11 - 12 8.08 CONDITIONS FOR EXERCISE. An Award Agreement may contain such waiting periods, exercise dates and restrictions on exercise (including, but not limited to, periodic installments which may be cumulative) as may be determined by the Administrator at the Date of Grant. Where payment is to be made in whole or in part in cash, no Stock Appreciation Right may be exercised prior to six months from the Date of Grant. 8.09 CHANGE OF CONTROL EVENT. Unless otherwise provided in the Award Agreement, and subject to such other terms and conditions as the Administrator may establish in the Award Agreement, upon the occurrence of a Change of Control Event, irrespective of whether or not an Award is then exercisable, the Participant shall have the right to exercise in full any unexpired Award to the extent not theretofore exercised or terminated, provided, however, that any Stock Appreciation Right so exercised must have a Date of Grant at least six months prior to the date of exercise. 8.10 EXERCISE PROCEDURES. Each Option and Stock Appreciation Right granted under the Plan shall be exercised by written notice to ALC which must be received by the representative of ALC designated in the Award Agreement on or before the Expiration Date of the Award. The Purchase Price of shares purchased upon exercise of an Option granted under the Plan shall be paid in full in cash by the Participant pursuant to the Award Agreement; provided, however, that the Administrator may (but need not) permit payment to be made by delivery to ALC of either (a) shares of Company Common Stock (including shares issuable to the Participant pursuant to the exercise of the Option provided that Officers may elect to make payment with such shares only within the "window period" required under Rule 16b-3(e)(iii) and otherwise in accordance with Rule 16b-3, and provided further that while there is an Interested Administrator, Officers may deliver only shares owned by such Officer for at least six months prior to exercise) or (b) any combination of cash and shares of Company Common Stock, or (c) such other consideration as the Administrator deems appropriate and in compliance with applicable law (including payment in accordance with a cashless exercise program under which, if so instructed by the Participant, shares of Company Common Stock may be issued directly to the Participant's broker or dealer upon receipt of the Purchase Price in cash from the broker or dealer.) In the event that any Company Common Stock shall be transferred to ALC to satisfy all or any part of the Purchase Price, the part of the Purchase Price deemed to have been satisfied by such transfer of Company Common Stock shall be equal to the product derived by multiplying the Fair Market Value as of the date of exercise times the number of shares transferred. The Participant may not transfer to ALC in satisfaction of the Purchase Price (y) a number of shares which when multiplied times the Fair Market Value as of the date of exercise would result in a product greater than the Purchase Price or (z) any fractional share of Company Common Stock. Any part of the Purchase Price paid in cash upon the exercise of any Option shall be added to the general funds of ALC and used for any proper corporate purpose. Unless the Administrator shall otherwise determine, any Company Common Stock transferred to ALC as payment of all or part of the Purchase Price upon the exercise of any Option shall be held as treasury shares. - 12 - 13 8.11 TAXES. ALC shall be entitled, if the Administrator deems it necessary or desirable, to withhold (or secure payment from the Participant in lieu of withholding) the amount of any withholding or other tax required by law to be withheld or paid by ALC with respect to any amount payable and/or shares issuable under such Participant's Award, or with respect to any income recognized upon a disqualifying disposition of shares received pursuant to the exercise of an Incentive Stock Option, and ALC may defer payment or issuance of the cash or stock upon exercise or vesting of an Award unless indemnified to its satisfaction against any liability for such tax. The amount of such withholding or tax payment shall be determined by the Administrator and, unless otherwise provided by the Administrator, shall be payable by the Participant at the time of issuance or payment in accordance with the following rules: (a) A Participant, other than an Officer, shall have the right to elect to meet his or her withholding requirement by: (1) having ALC withhold from such Award the appropriate number of shares of Company Common Stock, rounded out to the next whole number, whose Fair Market Value is equal to such amount, or, in the case of the cash payment, the amount of cash, as is determined by ALC to be sufficient to satisfy applicable tax withholding requirements; or (2) direct payment to ALC in cash of the amount of any taxes required to be withheld with respect to such Award. (b) Except when there is a Interested Administrator, an Officer shall have the right to elect to meet his or her withholding requirement by: (1) making an election within the "window period" required under Rule 16b-3(e)(3)(iii) to have ALC withhold from such Award the appropriate number of shares of Company Common Stock, rounded out to the next whole number, whose Fair Market Value is equal to such amount, or, in the case of the cash payment, the amount of cash, as is determined by ALC to be sufficient to satisfy applicable tax withholding requirements; or (2) direct payment to ALC in cash of the amount of any taxes required to be withheld with respect to such Award. With respect to this section, any options exercised by Officers must be held for at least six months after the Date of Grant. (c) Notwithstanding anything to the contrary contained in this Section 8.11, while there is an Interested Administrator, an Officer shall meet his or her withholding requirement by direct payment to ALC in cash of the amount of any taxes required to be withheld with respect to such Award. (d) In the event that an Award or property received upon exercise of an Award has already been transferred to the Participant on the date upon which withholding requirements apply, the Participant shall pay directly to ALC the cash amount determined by ALC to be sufficient to satisfy applicable federal, state or local withholding requirements. The Participant shall provide to ALC such - 13 - 14 information as ALC shall require to determine the amounts to be withheld and the time such withholding requirements become applicable. (e) ELECTION TO BE TAXED UNDER SECTION 83(B) OF THE CODE. If permitted under applicable federal income tax laws, a Participant may elect to be taxed in the year in which an Award is exercised or received, even if it would not otherwise have become taxable to the Participant. If the Participant makes such an election, the Participant shall promptly notify ALC in writing and shall provide ALC with a copy of the executed election form as filed with the Internal Revenue Service no later than thirty days from the date of exercise or receipt. Promptly following such notification, the Participant shall pay directly to ALC the cash amount determined by ALC to be sufficient to satisfy applicable federal, state or local withholding tax requirements. 8.12 LIMITATIONS ON TRANSFER. A Participant's rights and interest under the Plan may not be assigned or transferred other than by will or the laws of descent and distribution, and during the lifetime of a Participant only the Participant personally (or the Participant's personal representative) may exercise the Participant's rights under the Plan. The Participant's Beneficiary may exercise a Participant's rights to the extent they are exercisable under the Plan following the death of the Participant. 8.13 SURRENDER OF AWARDS. Any Award granted under the Plan may be surrendered to ALC for cancellation on such terms as the Administrator and Participant approve, including, but not limited to, terms which provide that upon such surrender ALC will pay to the Participant cash or Company Common Stock, or a combination of cash and Company Common Stock. Notwithstanding the foregoing, while there is an Interested Administrator, Awards held by Directors may not be surrendered or cancelled for consideration other than the granting of replacement options or awards granted under this Plan or another plan of ALC for a lower exercise price or purchase price and/or subject to an extended expiration date (within the limits set forth under Sections 6.02, 7.03 and 8.03 of this Plan). ARTICLE IX OTHER STOCK BASED AWARDS 9.01 GRANT OF OTHER AWARDS. Other Awards of Company Common Stock or other securities of ALC and other Awards that are valued in whole or in part by reference to, or are otherwise based on, Company Common Stock ("Other Awards") may be granted either alone or in addition to or in conjunction with Options or Stock Appreciation Rights under the Plan; provided, however, that Company Common Stock (including Company Common Stock upon conversion, exchange or otherwise) shall be issued either as a bonus award, free or at a price no greater than its par value, or for a price equal to at least its fair market value on the Date of Grant or issuance date as specified in the Award Agreement. Subject to the provisions of the Plan, the Administrator shall - 14 - 15 have the sole and complete authority to determine the persons to whom and the time or times at which Other Awards shall be made, the number of shares of Company Common Stock or other securities, if any, to be granted pursuant to such Other Awards, and all other conditions of such Other Awards. Notwithstanding the foregoing, while there is an Interested Administrator, there shall be no grants of Other Awards made to Directors. Any Other Award shall be confirmed by an Award Agreement executed by the Administrator and the Participant, which agreement shall contain such provisions as the Administrator determines to be necessary or appropriate to carry out the intent of this Plan with respect to the Other Award. 9.02 TERMS OF OTHER AWARDS. In addition to the terms and conditions specified in the Award Agreement, Other Awards made pursuant to this Article IX shall be subject to the following: (a) Any shares of Company Common Stock subject to such Other Awards may not be sold, assigned, transferred or otherwise encumbered prior to the date on which the shares are issued, or, if later, the date on which any applicable restriction, performance or deferral period lapses; and (b) As specified by the Administrator and the Award Agreement, the recipient of an Other Award shall be entitled to receive, currently or on a deferred basis, interest or dividends or dividend equivalents with respect to the Company Common Stock or other securities covered by the Other Award; and (c) The Award Agreement with respect to any Other Award shall contain provisions providing for the disposition of such Other Award in the event of Termination of Employment prior to the exercise, realization or payment of such Other Award, with such provisions to take account of the specific nature and purpose of the Other Award. ARTICLE X GENERAL PROVISIONS 10.1 AMENDMENT AND TERMINATION OF PLAN. (a) AMENDMENT. The Board shall have complete power and authority to amend the Plan at any time and to add any other stock based Award or other incentive compensation programs to the Plan as it deems necessary or appropriate and no approval by the stockholders of ALC or by any other person, committee or entity of any kind shall be required to make any amendment; provided, however, that the Board shall not, without the requisite affirmative approval of stockholders of ALC, make any amendment which requires stockholder approval under any applicable law, including Rule 16b-3 or the Code, unless such compliance, if discretionary, is no longer desired. No termination or amendment of the Plan may, - 15 - 16 without the consent of the Participant to whom any Award shall theretofore have been granted under the Plan, adversely affect the right of such individual under such Award. For the purposes of this section, an amendment to the Plan shall be deemed to have the affirmative approval of the stockholders of ALC if such amendment shall have been submitted for a vote by the stockholders at a duly called meeting of such stockholders at which a quorum was present and the majority of votes cast with respect to such amendment at such meeting shall have been cast in favor of such amendment, or if the holders of outstanding stock having not less than a majority of the outstanding shares consent to such amendment in writing in the manner provided under the bylaws of ALC. (b) TERMINATION. The Board shall have the right and the power to terminate the Plan at any time. If the Plan is not earlier terminated, the Plan shall terminate on December 31, 2000. No Award shall be granted under the Plan after the termination of the Plan, but the termination of the Plan shall not have any other effect and any Award outstanding at the time of the termination of the Plan may be exercised after termination of the Plan at any time prior to the expiration date of such Award to the same extent such Award would have been exercisable if the Plan had not been terminated. 10.02 NO RIGHT TO EMPLOYMENT. No employee or other person shall have any claim or right to be granted an Award under this Plan. Neither the Plan nor any action taken hereunder shall be construed as giving any employee any right to be retained in the employ of ALC or any of its Subsidiaries. 10.03 COMPLIANCE WITH RULE 16B-3. It is intended that the Plan be applied and administered in compliance with Rule 16b-3. If any provision of the Plan would be in violation of Rule 16b-3 if applied as written, such provision shall not have effect as written and shall be given effect so as to comply with Rule 16b-3, as determined by the Administrator. The Board is authorized to amend the Plan and to make any such modifications to Award Agreements to comply with Rule 16b-3, as it may be amended from time to time, and to make any other such amendments or modifications as it deems necessary or appropriate to better accomplish the purposes of the Plan in light of any amendments made to Rule 16b-3. 10.04 SECURITIES LAW RESTRICTIONS. The shares of Company Common Stock issuable upon the exercise of any Awards granted under the Plan may not be issued by ALC without registration or qualification of such shares under the Securities Act of 1933, as amended, or under various state securities laws or without an exemption from such registration requirements. Unless the shares to be issued under the Plan have been registered and/or qualified as appropriate, ALC shall be under no obligation to issue shares of Company Common Stock upon exercise of an Award unless and until such time as there is an appropriate exemption available from the registration or qualification requirements of federal or state law as determined by the Administrator in its sole - 16 - 17 discretion. The Administrator may require any person who is granted an award hereunder to agree with ALC to represent and agree in writing that if such shares are issuable under an exemption from registration requirements, the shares will be "restricted" securities which may be resold only in compliance with applicable securities laws, and that such person is acquiring the shares issued upon exercise of the Award for investment, and not with the view toward distribution. 10.05 CAPTIONS. The captions (i.e., all section headings) used in the Plan are for convenience only, do not constitute a part of the Plan, and shall not be deemed to limit, characterize or affect in any way any provisions of the Plan, and all provisions of the Plan shall be construed as if no captions have been used in the Plan. 10.06 SEVERABILITY. Whenever possible, each provision in the Plan and every Award at any time granted under the Plan shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of the Plan or any Award at any time granted under the Plan shall be held to be prohibited or invalid under applicable law, then (a) such provision shall be deemed amended to accomplish the objectives of the provision as originally written to the fullest extent permitted by law and (b) all other provisions of the Plan and every other Award at any time granted under the Plan shall remain in full force and effect. 10.07 NO STRICT CONSTRUCTION. No rule of strict construction shall be implied against ALC, the Administrator, or any other person in the interpretation of any of the terms of the Plan, any Award granted under the Plan or any rule or procedure established by the Administrator. 10.08 CHOICE OF LAW. All determinations made and actions taken pursuant to the Plan shall be governed by the laws of the State of Michigan and construed in accordance therewith. - 17 - EX-10.6 6 ADVISORY AGREEMENT W/STOCK OPTION 1 EXHIBIT 10.6 ADVISORY AGREEMENT WITH STOCK OPTION Advisory Agreement with Stock Option made this 7th day of September 1988 by and between ALC Communications Corporation, a Delaware corporation with principal offices at 30300 Telegraph Road, Suite 350, Birmingham, Michigan 48010 ("ALC") and Grumman Hill Associates, Inc., 264 Riverside Avenue, Westport, Connecticut 06880 ("Grumman Hill"). WHEREAS, the Board of Directors of ALC intends to call upon the services of Grumman Hill from time to time relating to the corporate affairs of ALC; and WHEREAS, Grumman Hill desires to provide the aforementioned services to ALC on the terms hereinafter set forth. NOW THEREFORE, in consideration of the mutual promises and agreements hereinafter set forth, the parties agree as follows: 1. Duties. During the term of the Advisory Agreement, Grumman Hill may be called upon to perform such advisory services with respect to the management, operations and business development activities of ALC and its wholly-owned subsidiary, Allnet Communication Services, Inc., an Illinois corporation ("Allnet") as shall be requested from time to time by the Board of Directors of ALC or Allnet. Such advisory services shall be provided at times convenient to the parties. When rendering advisory services pursuant to this Advisory Agreement, Grumman Hill shall not be deemed to be an agent of either ALC or Allnet (nor shall any Grumman Hill employees be deemed to be an employee of either ALC or Allnet) or to have any power or authority to bind either ALC or Allnet, but shall rather be deemed an independent contractor acting solely for the account of Grumman Hill. The advisory services performed by any individual associated with Grumman Hill shall be in addition to and not a part of any duties and services rendered by such individual as a Director of either ALC or Allnet. Any compensation or reimbursement of expenses which such individual might receive by virtue of such individual's position as a Director or Officer of either ALC or Allnet shall be in addition to, and not in lieu of, the compensation and reimbursement of expenses to be paid to Grumman Hill pursuant to this Advisory Agreement. Notwithstanding anything to the contrary herein, Richard D. Irwin, Director of ALC and Allnet, hereby expressly waives compensation for his services as Chairman of the Board of ALC and Director of ALC and Allnet for the duration of this Advisory Agreement. 2 Page two Advisory Agreement 2. Compensation and Expenses. As compensation for the advisory services rendered hereunder, ALC hereby agrees to pay Grumman Hill $100,000 per annum and to grant a stock option in ALC's common stock. The monetary compensation shall be paid in quarterly installments in arrears commencing November 30, 1988 or in such other manner as may be mutually agreed. The stock option shall be in accordance with the terms of Section 3. herein. ALC hereby agrees (upon submission of reasonable documentation) to reimburse Grumman Hill for any reasonable and necessary out-of-pocket expenses incurred by Grumman Hill in connection with the performance of Grumman Hill's advisory services under this Advisory Agreement. 3. Stock Option. Effective on the date hereof, ALC hereby grants to Grumman Hill a nontransferable option (other than to a successor or assign in its entirety of Grumman Hill) to purchase, at a price of $2.25 per share, a number of shares of the ALC common stock equal to the sum of (i) 340,325 shares (equal to approximately 2.5% of the total number of such shares now issued and outstanding) plus (ii) a number of shares equal to 2.5% of ALC's common stock issuable upon conversion of all shares of ALC's Class B and Class C Preferred Stock that are issued and outstanding as of December 31, 1988. Grumman Hill shall be entitled to exercise the option granted herein to the extent of 68,065 shares of ALC common stock subject therto on and after the date hereof, and as of September 8, 1989, 1990, 1991 and 1992, respectively, Grumman Hill shall be entitled to exercise such option to the extent of an additional 25% of the remainder of such stock. Notwithstanding anything to the contrary herein, upon any purported termination of this Advisory Agreement by ALC during its initial five-year term (whether lawful or otherwise, and whether upon a merger, sale of assets, change of control or reorganization involving ALC or otherwise), the option granted hereby shall be accelerated to the extent necessary to become fully vested. The option shall expire at the close of business on September 7, 1998. The option, to the extent then vested, may be exercised by Grumman Hill by giving written notice of exercise accompanied by payment for the shares being purchased. Upon exercise, ALC shall promptly issue certificates to Grumman Hill representing the shares acquired upon such exercise. The ALC common stock issuable on exercise of the option will not be registered under the Securities Act of 1933 (the "Act"), and Grumman Hill agrees that it will make no disposition of any of such stock in violation of the Act. If ALC shall require, the certificate or certificates representing such stock shall bear an appropriate legend concerning the restrictions on sale or transfer under the Act. 3 Page three Advisory Agreement In the event of any merger, consolidation, stock dividend, split-up, combination or exchange of shares or recapitalization, the number or kind of shares that are subject to the option and the option price per share immediately prior to such event shall be proportionately and appropriately adjusted, without increase or decrease in the aggregate option price to be paid upon exercise of the option. The determination of the Board of Directors of ALC as to the terms of any such adjustment shall be binding and conclusive on Grumman Hill and any other person or persons who are at any time entitled to exercise the option. 4. Term. The term of this Advisory Agreement shall commence on and as of the date hereof and shall continue until midnight on the fifth anniversary of the date hereof, except that the options granted herein may continue to be exercised until September 7, 1998. This Advisory Agreement shall be automatically renewed after the expiration of the initial term for subsequent one year periods unless either party provides written notice of termination to the other party at least 30 days prior to the expiration of the initial term or any subsequent one year term. 5. Confidential Information. Grumman Hill will not, without the express written consent of the Company, communicate or divulge to, or use for its own benefit or for the benefit of any other person, firm, association or corporation, any of ALC's or its subsidiaries' trade secrets or proprietary information which were communicated to or otherwise learned of or acquired by Grumman Hill during the term of this Advisory Agreement, except that Grumman Hill may disclose such information to the extent that (a) disclosure is required in the course of performing services pursuant to this Advisory Agreement or by a court or other governmental agency of competent jurisdiction or (b) such information is of general knowledge in the industry. Grumman Hill further agrees to the best of its ability to have any individuals associated with Grumman Hill agree to comply with the terms herein. 6. Miscellaneous. This Advisory Agreement shall be binding upon and enforceable by the successors and assigns of the parties. The failure of any of the parties to insist in any one or more instances upon the performance of any term, convenant or condition of this Advisory Agreement shall not be construed as a waiver of further performance of that or any other term, convenant or condition hereof, and the obligations of the parties concerning the performance hereof shall continue in full force and effect in all respects. This Advisory Agreement shall not be changed, modified or amended 4 Page four Advisory Agreement in any respect except by written instrument signed by both parties. This Advisory Agreement shall be governed by and construed in accordance with the internal laws of the State of Michigan. If any term, convenant, restriction or provision of this Advisory Agreement is determined to be void, invalid or unenforceable, the remainder of the terms, covenants, restrictions and provisions hereof shall remain in full force and effect and shall in no way be affected, impaired or restricted, and this Advisory Agreement shall be enforceable to the fullest extent permitted by applicable law. In Witness Whereof, the parties have entered into this Advisory Agreement as of the day and year first above written by their duly authorized representatives in two copies, each of which shall be deemed an original without production of the other copy. ALC Communications Corporation Allnet Communication Services, Inc. By: /s/ JOHN M. ZRNO By: /s/ JOHN M. ZRNO ------------------- --------------------- John M. Zrno, President John M. Zrno, President and Chief Executive Officer and Chief Executive Officer Grumman Hill Associates, Inc. By: /s/ RICHARD D. IRWIN ------------------------ Richard D. Irwin Executing solely for purposes of the waiver specified in Section 1 of this Advisory Agreement /s/ RICHARD D. IRWIN -------------------- Richard D. Irwin 5 AMENDMENT ONE TO ADVISORY AGREEMENT WITH STOCK OPTION DATED SEPTEMBER 7, 1988 Amendment made as of the 6th day of June, 1990 to the Advisory Agreement with Stock Option dated September 7, 1988 between ALC Communications Corporation ("ALC") and Grumman Hill Associates, Inc. ("Grumman Hill"). WHEREAS, ALC entered into a series of agreements with various parties including Grumman Hill for the purpose of achieving a financial restructuring of ALC (the "Restructuring"); and WHEREAS, as part of the Restructuring, the Company agreed that the Advisory Agreement with Stock Option dated September 7, 1988 (the "Agreement") would be amended to reduce the exercise price of the Stock Option granted pursuant to that Agreement and to provide for additional compensation to Grumman Hill; and WHEREAS, the parties agreed to set as the exercise price for the Stock Option granted pursuant to that Agreement, the same exercise price granted for stock options to ALC Management this date, June 6, 1990; and WHEREAS, the exercise price granted for the above-referenced stock options to ALC Management was established at $0.70 per share. NOW THEREFORE, in consideration of the mutual promises and agreements hereinafter set forth, the parties agree to the following amendments to the Agreement: 1. Section 1. is amended by inserting the following sentence at the end of the second paragraph: "Notwithstanding anything to the contrary herein, ALC had paid to Grumman Hill $150,000 as additional consulting fees for its services in connection with the financial restructuring of ALC during fiscal year 1990." 2. Section 3. is amended by substituting the price of $0.70 for the price of $2.25 set forth in the fourth line of Section 3. 3. Section 3. is amended by adding the following paragraph: "Grumman Hill may assign this Stock Option to Grumman Hill Investments, L.P. with written notice to ALC of the effective date of same." 6 Page two Amendment to Advisory Agreement In Witness Whereof, the parties have entered into this Amendment on the day and year first above written by their duly authorized representatives in three copies, each of which shall be deemed an original without production of the other copies. ALC Communications Corporation Allnet Communication Services, Inc. By: /s/ JOHN M. ZRNO By: /s/ JOHN M. ZRNO ---------------------------- ---------------------------- John M. Zrno, President John M. Zrno, President and Chief Executive Officer and Chief Executive Officer Grumman Hill Associates, Inc. By: /s/ RICHARD D. IRWIN ---------------------------- Richard D. Irwin EX-10.7 7 ADMIN. GUIDELINES 1 EXHIBIT 10.7 ADMINISTRATION ELIGIBILITY The Allnet(R) Executive Perquisite program applies to executives of the Company who are assigned to eligible positions. Eligible positions include the President and Chief Executive Officer, Executive Vice Presidents, Senior Vice Presidents and Vice Presidents designated as "officers" of the Company. Certain other positions may be designated as eligible by the President and Chief Executive Officer. TERM OF PROGRAM The effective date of the program is January 1, 1994. Each calendar year is a program year. The program is automatically renewable on January 1, 1995 and each year after unless it is terminated by the President and Chief Executive Officer. As with all Allnet(R) benefit plans, the Company expects and intends to continue this program indefinitely, but reserves the right to end or amend it. If this program is terminated by the Company, any eligible requests for reimbursement received by the program administrator prior to termination of the program will be paid. ALLOWANCE The allowance is an annual sum you can apply to the cost of approved menu items. (The approved "menu" section is attached at the end of this document.) The Company will reimburse you for items or services from the menu, up to your allowance maximum. Any portion of the allowance not utilized in a program year will not be carried forward or used for any other purpose. The annual amount of the allowance varies according to your position level as follows:
POSITION LEVEL ANNUAL ALLOWANCE --------------- ---------------- President and CEO $16,000 Executive Vice President $12,500 Senior Vice Presidents, Vice Presidents $ 8,000 Any other eligible employee As determined by CEO
ALLNET(R) EXECUTIVE PERQUISITE PROGRAM ADMINISTRATIVE GUIDELINES P. 1 2 REIMBURSEMENT PROCEDURE (WITH EXCEPTION OF AUTOMOBILE ALLOWANCE) STEP 1. You purchase an item, or pay a fee for a service, that appears on your menu. STEP 2. You staple the bill and proof of payment (canceled personal check or credit card receipt) to a completed Reimbursement Authorization Form. This is mailed or delivered to Vicki Hobson-Adams in Human Resources. STEP 3. Your allowance will be debited the gross cost of an approved menu item for which you submit documentation, up to the balance of your annual maximum as coordinated with any expenses reimbursed under the reimbursement procedure for the automobile allowance. STEP 4. You will receive reimbursement, less applicable withholding taxes. REIMBURSEMENT PROCEDURE (AUTOMOBILE ALLOWANCE ONLY) STEP 1. You can submit documentation along with a completed Reimbursement Authorization Form to Vicki Hobson-Adams in Human Resources indicating the average monthly cost of your leasing agreement, purchase agreement and automobile insurance. You will receive an automatic monthly allowance to reimburse you for your automobile costs. STEP 2. Your annual allowance will be debited the average monthly automobile allowance each month automatically for the remainder of the year, up to the balance of your annual maximum. This will be coordinated with any expenses reimbursed under the reimbursement procedure for non automobile expenses. STEP 3. You will receive reimbursement monthly, less applicable withholding taxes. NEW PARTICIPANTS Employees who become eligible to enter the Allnet(R) Executive Perquisite program during a program year will participate on the following schedule: Entry any time during the first calendar quarter - The full allowance is available for the program year. Entry any time during the second or third calendar quarter - The allowance is pro rated for the number of COMPLETE months in the program. ALLNET(R) EXECUTIVE PERQUISITE PROGRAM ADMINISTRATIVE GUIDELINES P. 2 3 Entry during the fourth calendar quarter - Eligible employees will enter the program on January 1 of the next program year. PROMOTION Current participants promoted to a position eligible for a higher level of program participation will enter the new level on the same schedule as described above for new participants. TERMINATION Your executive perquisite allowance will cease on the date of termination. FOR MORE INFORMATION The Allnet(R) Executive Perquisite program is administered and interpreted by Human Resources. Questions pertaining to the program should be directed to Bill Norris, (313) 433-4996. TAX CONSIDERATIONS There are income tax considerations associated with executive perquisites and benefits. It is important to note that the gross reimbursement from this program will be included in your W-2 for the year in which the reimbursement is made. As such, it will be taxed as regular income for federal, state and local income tax purposes as well as for FICA. Note: Certain amounts may be deductible on your income tax return for the year in which you pay them. You should consult your personal tax advisor concerning the tax impact of your perquisite benefits. ALLNET(R) EXECUTIVE PERQUISITE PROGRAM ADMINISTRATIVE GUIDELINES P. 3 4 MENU OF EXECUTIVE PERQUISITES This portion of the Allnet(R) Executive Perquisite program is designed to afford you optimal flexibility in creating your own, personalized plan. As a participant of the program, you have an annual allowance to apply to the cost of certain perquisites. The program specifies a list, or menu, of items and services from which you may build the program most valuable to you and your family. The program is effective for a one year period beginning January 1, 1994 and is automatically renewable on each January 1st after that. Your annual allowance under the program varies depending upon your level as an officer of the Company. In the case of Vice President and Senior Vice President level employees, the annual allowance is $8,000.00; in the case of Executive Vice Presidents, the annual allowance is $12,500.00 and in the case of the President and Chief Executive Officer, the annual allowance is $16,000.00. Following is your approved menu: TENNIS CLUB, ATHLETIC CLUB OR FITNESS CENTER ANNUAL DUES This includes annual dues for athletic clubs or fitness center memberships including tennis, swimming, squash or racquetball clubs or local YMCA-YWCAs. Related annual fees, such as a locker fee or seasonal court rental, are also included. Incidental costs are your personal responsibility. BUSINESS ASSOCIATION OR UNIVERSITY CLUB This includes annual dues for luncheon clubs sponsored by, or affiliated with, professional or alumni organizations. Incidental costs are your personal responsibility. PERSONAL EXCESS LIABILITY INSURANCE This insurance, also referred to as "umbrella" or "catastrophic" insurance, supplements your normal coverage. You can puchase excess liability insurance to meet your personal needs. ALLNET(R) EXECUTIVE PERQUISITE PROGRAM ADMINISTRATIVE GUIDELINES P. 4 5 SUPPLEMENTAL LIFE INSURANCE You can purchase additional life insurance, beyond that provided by the Company, for yourself and/or purchase life insurance for your dependents. TAX PREPARATION FEES This includes a reputable firm's or professional's annual fees for preparing your federal, state and local income tax returns. The Company will not recognize statements for services rendered from employees of the Company, nor from relatives of the participating executive. HOME COMPUTER AND ACCESSORIES You can purchase a home computer, additional hardware or software and accessories for a new or existing home computer. SOCIAL CLUB INITIATION FEE AND ANNUAL DUES You can apply a portion or all of your annual allowance towards membership in a social club. The allowance can be used to pay non equity initiation fees, annual dues and related annual fees, such as fees for a locker or golf club storage. Incidental costs are your personal responsibility. LEGAL OR FINANCIAL COUNSELING This includes counseling from a reputable firm or individual pertaining to financial, estate or legal matters. The Company will not recognize statements for services rendered from employees of the Company, nor from relatives of the participating executive. Of course, this service is not available to pay fees incurred in any action in which your interest is inimical to the Company's. MOBILE PHONE This includes the purchase, installation, repair and monthly fee for a mobile telephone in your automobile. ALLNET(R) EXECUTIVE PERQUISITE PROGRAM ADMINISTRATIVE GUIDELINES P. 5 6 ANNUAL PHYSICAL EXAMINATION The Company is concerned about you maintaining your good health and therefore covers an annual comprehensive physical examination to help you detect, and correct early, medical conditions. Results are confidential and solely for your benefit. AUTOMOBILE ALLOWANCE You can apply a portion or all of your annual allowance toward the costs of your primary automobile. Automobile expenses directly related to leasing agreements, purchase agreements and insurance are covered. Fuel and maintenance expenses are your own responsibility. ALLNET(R) EXECUTIVE PERQUISITE PROGRAM ADMINISTRATIVE GUIDELINES P. 6 EX-10.8 8 SHORT TERM INCENTIVE PLAN 1 EXHIBIT 10.8 ALLNET COMMUNICATION SERVICES, INC. 1994 SHORT TERM INCENTIVE PROGRAM FOR DIRECTORS AND OFFICERS Subject to Board of Directors approval, the Short Term Incentive (STI) program for Directors and Vice Presidents shall be renewed. The target awards are a percentage of base salary. The percentage of base salary varies according to the participant's level and whether or not he or she is separately compensated based upon a sales compensation plan. Applicable target awards, shown as percentages of base salary, are displayed in the table below:
Target Award as % of STI Participant's Level and Category Base Pay ------------------------------------ ------------ Directors and non-officer level Vice Presidents, not covered by a Sales Compensation Plan 18% Directors and non-officer level Vice Presidents, covered by a Sales Compensation Plan 9% Officers, not covered by a Sales Compensation Plan 30% Officers, covered by a Sales Compensation Plan 15%
Target awards will be prorated to the nearest full month for participants hired or promoted after January 1, 1994 and on or before October 1, 1994. Any Director, Vice President or Senior Vice President hired or promoted into an eligible position for the first time after the beginning of the fourth calendar quarter (on or after October 2, 1994) will not be eligible for the 1994 STI bonus. Participants are also required to continue active employment with Allnet(R) through the time of the STI bonus payout which will likely be in February or March of 1995 (provided STI goals are achieved). To the extent that special circumstances need to be taken into consideration (such as periods of extended leave, job changes and so forth), eligibility for 1994 SHORT TERM INCENTIVE PLAN P. 1 2 the STI program must be specifically negotiated with the Chief Executive Officer. Participation will be subject to the CEO's approval, at his sole discretion. TARGET AWARD DOLLARS WILL BE DISTRIBUTED BETWEEN THREE CATEGORIES - ONE BASED UPON INDIVIDUAL PERFORMANCE, ONE BASED UPON TEAM PERFORMANCE AND A THIRD BASED UPON COMPANY PERFORMANCE. The first category - based upon individual performance - is weighted most heavily. One half (50%) of each participant's target award will be based upon his or her performance relative to three to five strategic or programmatic objectives. The second and third categories are each weighted at 25% of a participant's target award. For the second category, participants will be assigned to "teams" consisting of an officer-level Vice President and his or her subordinates. Performance in this category will be measured based upon the team's contribution to the Company's 1994 Quality Plan. The third category will be based upon Company performance as measured by the Customer Satisfaction Survey index. Additionally, once bonus awards have been calculated, actual payouts (if any) will be based upon a multiplier determined by the Company's financial performance. The financial multiplier may serve to increase, decrease or eliminate actual STI payouts. CATEGORY 1: STRATEGIC AND PROGRAMMATIC OBJECTIVES (ONE HALF (50%) OF TARGET AWARD) This category is based upon individual performance relative to three to five individual strategic or programmatic objectives. In as much as possible, individual strategic or programmatic objectives should be designed to further the organization's strategic plan for success through quality. The objectives should improve quality of service or products, take advantage of economies-of-scale or in some other way directly impact Company performance. In addition, individual objectives must directly support the Company's 1994 Quality Plan. This goal will be accomplished by linking individual objectives to specific requirements under section 5.0 ("The Management of Process Quality") of the Company's 1994 Quality Plan. Section 5.0 requires each Vice President to document and improve at least one key process in addition to the four key processes selected by the Corporate Quality Council for documentation and improvement. (The four key processes selected by the Quality Council include: Sales Acquisition, Order Fulfillment, New Product Development or Customer Service.) If the Vice President is not involved with any of the four key processes selected by the Quality Council, the Vice President must select at least two key processes for documentation and improvement. 1994 SHORT TERM INCENTIVE PLAN P. 2 3 Vice President-level STI participants must develop at least one strategic or programmatic objective directly related to each of the key processes selected for documentation and improvement in conformance with section 5.0 of the Company's 1994 Quality Plan. In the case of Director-level STI participants, at least one strategic or programmatic objective must be developed to support each key process selected by the Director's Vice President that relates to the Director's functional responsibilities. STI PARTICIPANTS ARE ALSO ENCOURAGED TO DEVELOP STRATEGIC CROSS FUNCTIONAL PARTNERSHIPS IN SUPPORT OF INDIVIDUAL STI OBJECTIVES. SUCH PARTNERSHIPS CAN AND SHOULD INCLUDE JOINT OR COMMON STRATEGIC AND PROGRAMMATIC OBJECTIVES. Further, strategic and/or programmatic objectives should be "stretch" objectives. That is, they should represent efforts that go beyond baseline job responsibilities. Objectives should be quantitative to facilitate evaluation of the participant's performance. Qualitative measures, however, should be used if they make more sense. The objective should be phrased so that a naive reader can understand what the key performance indicator happens to be. Participants and their first-level reviews must agree on the participant's 1994 strategic or programmatic objectives and determine what weight should be attached to each objective. These objectives must be submitted to Bill Norris, Director of Human Resources Planning and Organizational Development, no later than the close of business March 15, 1994. Bill will review the objectives for consistency, "stretch" and measurability and will submit a summary to Senior Management. In addition, the STI summary will be submitted to the Quality Council. The Quality Council will review the objectives to ensure linkages between STI objectives and Section 5.0 of the Company's 1994 Quality Plan. IF CHANGING BUSINESS CONDITIONS OR OTHER EXIGENCIES NECESSITATE A MID-YEAR RECONSIDERATION OF INDIVIDUAL PRIORITIES, STI OBJECTIVES MAY BE MODIFIED. THE MODIFICATION MUST HAVE THE APPROVAL OF TWO LEVELS OF MANAGEMENT AND A COPY OF THE MODIFICATION SHOULD BE FORWARDED TO BILL NORRIS IN HUMAN RESOURCES. During the first quarter of 1995, performance relative to individual objectives will be evaluated by each participant's first level review based upon a scale of "0.00" to "1.50" with "1.0" indicating that an individual achieved his or her objectives. Second level approval of the evaluation will be required. Senior Management and Human Resources will then check each evaluation for consistency and validity. The individual performance rating of outstanding performers should average about 1.00, although some participants may score as high as 1.50 or as low as 0.00 on certain individual objectives. The guidelines shown in the following table should be used in determining scores, but evaluators are free to interpolate between levels as appropriate. 1994 SHORT TERM INCENTIVE PLAN P. 3 4
INDIVIDUAL PERFORMANCE LEVEL RATING ---------------------------- ------ Missed objective, performance unacceptable 0.00 Missed objective, performance acceptable 0.50 Largely achieved objective, minor shortfall 0.75 Achieved objective 1.00 Exceeded objective 1.25 Significantly exceeded objective 1.50
Once each objective has been rated based upon this scale, the objectives will be weighted and an overall rating based upon the scale will be calculated. STI bonuses for this portion of the program will be determined by multiplying a participant's total target award by .5 (the portion of the target award assigned to the strategic and/or programmatic objectives category) and then multiplying that product by the participant's overall individual performance rating. CATEGORY 2: "TEAM" CONTRIBUTION TO COMPANY'S 1994 QUALITY PLAN (ONE QUARTER (25%) OF TARGET AWARD) Each Officer-level Vice President and his or her subordinate non-Officer level Vice Presidents and/or Directors will be considered a "team" responsible for making a contribution to the Company's 1994 Quality Plan. STI program participants will only be eigible for this portion of the Target Award if they achieve an overall rating of at least .50 on the first component of the STI program. That is, participants who do not achieve overall "acceptable performance" on the individual strategic and/or programmatic objectives component will not be eligible for the "Team Contribution to Company's 1994 Quality Plan" component of the STI program. Each Officer's "team" must submit a "1994 Quality Plan Assessment Report" outlining the team's contributions relative to the Company's 1994 Quality Plan by January 16, 1995. The Assessment Report must indicate the team's approach, deployment and results with regards to each of the seven sections of the 1994 Quality Plan. "Team" scores will be determined based upon the Assessment Reports and the team's score will apply individually to each STI participant on the Officer's team. 1994 SHORT TERM INCENTIVE PLAN P. 4 5 The Quality Council will review each of the Assessment Reports in a three stage process: o The first stage will consist of an independent review by individual Quality Council members of the written documentation submitted by each Officer's "team." o The second stage will consist of a group discussion of each Assessment Report. The "team leader" (normally the involved Vice President) will be invited to this discussion. This will provide Quality Council members with an opportunity to ask the team leader clarifying questions. In addition, the team leader will have an opportunity to present additional information during this group discussion. o The third stage will be a Quality Council meeting during which group consensus will result in assigning final ratings to each team's performance. Quality Council members will not participate in group consensus discussions when their own team is being evaluated. The seven sections of the 1994 Quality Plan will be weighted as shown in the table below:
SECTION CATEGORY WEIGHT ------- -------- ----- 1.0 Leadership 20% 2.0 Information and Analysis 10% 3.0 Strategic Quality Planning 5% 4.0 Human Resource Development and Management 20% 5.0 The Management of Process Quality 25% 6.0 Quality Results 10% 7.0 Customer Focus and Satisfaction 10%
Ratings will be based upon a 0.00 to 1.50 scale similar to the one used to evaluate individual performance. Teams will not be compared to each other; instead Quality Council members will be looking for progress and commitment. The Quality Council will generally follow the guidelines shown in the following rating scale, but may interpolate between levels as appropriate. 1994 SHORT TERM INCENTIVE PLAN P. 5 6
TEAM PERFORMANCE LEVEL RATING - ---------------------- ------ Missed requirements, team performance unacceptable 0.00 Missed requirements, team performance acceptable 0.50 Largely achieved requirements, minor shortfall 0.75 Achieved requirements 1.00 Exceeded requirements 1.25 Significantly exceeded requirements 1.50
Once each section has been rated based upon this scale, an overall rating based upon the preceding "weight" scale will be calculated. STI bonuses for this portion of the program will be determined by multiplying individual total target awards by .25 (the portion of the target award assigned to this category) and then multiplying that product by the team's overall Quality Contribution rating. As previously noted, the team's overall rating will apply individually to each member of each Officer's "team" of subordinate non-Officer level Vice Presidents and/or Directors. THAT IS, INDIVIDUAL SCORES ON THIS SECTION WILL BE SAME FOR EVERYONE ON THE "TEAM." TEAM MEMBERS WILL THUS BE ENCOURAGED TO WORK TOGETHER TO ENSURE A SIGNIFICANT CONTRIBUTION TO THE COMPANY'S 1994 QUALITY PLAN. CATEGORY 3: CUSTOMER SATISFACTION SURVEY GOALS (ONE QUARTER (25%) OF TARGET AWARD) This category is based upon Company performances measured by the Customer Satisfaction Survey conducted by the Service Quality Department. STI program participants will only be eligible for this portion of the Target Award if they achieve an overall rating of at least .50 on the first component of the STI program. That is, participants who do not achieve overall "acceptable performance" on the individual strategic and/or programmatic objectives component will not be eligible for the "Customer Satisfaction Survey Goals" component of the STI program. Customer satisfaction is measured on a monthly basis via the Customer Satisfaction Survey. In 1994, customer satisfaction is being measured based upon a "one tailed test" for significance at the 95% confidence level. In 1993, this method produced an overall customer satisfaction score of 83.9. 1994 SHORT TERM INCENTIVE PLAN P. 6 7 Based upon the Company goal of continuous improvement, the 1994 payouts for this portion of the Short Term Incentive program will be as shown in the following table:
CUSTOMER SATISFACTION 1994 SURVEY RESULTS PERCENTAGE OF --------------------- SURVEY GOAL FROM... ...TO DOLLARS AWARDED - ---------------------- ---------------------- --------------- Major unfavorable change 80.9% or less 0% (No payout) Unfavorable change 81.0% 82.9% 50% No material change 83.0% 84.4% 75% Favorable change 84.5% 86.9% 100% Major favorable change 87.0% 88.9% 125% Outstanding favorable change 89.0% or higher 150%
STI bonuses for this portion of the program will be determined by multiplying a participant's total target award by .25 (the portion of the target award assigned to the Customer Satisfaction Survey category) and then multiplying that product by the percentage corresponding to the Company's actual 1994 performance as measured by the Customer Satisfaction Survey. FINANCIAL MULTIPLIER The STI Bonus amount based upon a combination of Category 1, 2 and 3 performance will be paid out according to a financial multiplier. The financial multiplier will be based upon the Company's actual 1994 operating income relative to operating income goals. This financial multiplier could double an individual's STI bonus or could result in the elimination of the bonus depending on the results. The Board of Directors will determine the 1994 operating income goal or goals to be used in the financial multiplier and the performance levels that will result in increased or decreased STI bonuses. The specifics will be communicated to individual STI participants in a memorandum from the President shortly after the Board of Directors makes its determination. 1994 SHORT TERM INCENTIVE PLAN P. 7 EX-10.9 9 AGREEMENT 1 EXHIBIT 10.9 JANUARY 7, 1994 [Name] Allnet Communication Services, Inc. 30300 Telegraph Road, Suite 350 Bingham Farms, MI 48025-4510 Dear [Name]: The purpose of this letter ("Agreement") is to state the terms and conditions applicable to the continuation and termination of your employment by Allnet Communication Services, Inc., ("Allnet"). Accordingly, in consideration of services to be rendered by you in the future, we propose the following: 1) Applicability. The terms and conditions set forth in the subsequent sections of this Agreement shall become applicable to your employment and the termination of such employment, should such occur, during the period commencing with January 1, 1994 and ending December 31, 1995 (the "Term"). 2) Employment. Subject to the provisions of Section 4 hereof, during the Term, Allnet will continue to employ you, and you will continue to serve Allnet, either in your current capacity or in such other capacity as Allnet shall determine from time to time. 3) Compensation. (a) Salary and Bonus or Incentive Compensation. For your services under this Agreement, during the Term your compensation, including both salary and bonus or incentive compensation, shall be fixed from time to time by Allnet, but the salary portion thereof shall not be less than in effect as of the date of this Agreement. You will be afforded the opportunity to earn salary increases and an annual bonus or incentive compensation on a basis consistent with that afforded to other employees of similar stature at Allnet. (b) Benefits. For your services under this Agreement, during the Term you will continue to participate in all employee benefits or perquisites as may be made applicable to employees of similar stature by Allnet. 2 Page two January 7, 1994 4) Termination. If your employment is terminated within the Term, the following conditions apply: (a) Death. In the event of your death, this Agreement shall terminate as of the date of your death, provided, however, that if your death occurs subsequent to a termination pursuant to Section 4(d), the obligations of Allnet set forth in Section 4(d) shall remain in full force and effect. (b) Termination by Allnet for Cause. Allnet may terminate this Agreement and your employment for cause immediately upon notice to you if it is established that there has been continued and willful neglect or material breach of your duties under this Agreement; willful misconduct by you including, without limitation, misappropriation of funds or property of Allnet or its affiliates, or material violation by you of Allnet policies; or if you are convicted of a felony. (c) Voluntary Termination. You may terminate this Agreement and your employment at any time upon at least thirty days written notice to Allnet. After giving such notice and until the effective date of the termination specified in such notice, you will render reasonable assistance in training a replacement and in concluding your business affairs at Allnet. (d) Other Terminations. Allnet may terminate this Agreement or your employment at any time with or without cause. If Allnet terminates this Agreement or your employment other than for cause as stated in Section 4(b), or if you terminate your employment with Allnet as a result of either (a) a breach by Allnet of this Agreement or (b) as a result of Allnet or any of its affiliates offering you employment but requiring relocation or a substantial decrease in your then current compensation, then Allnet agrees, for a period of TWELVE months following the date of such termination: (i) To continue to pay your basic salary to you or to your estate at the rate in effect at the time of such termination, and in no event less than that in effect as of the date of this Agreement and to pay you the amount of any 3 Page three January 7, 1994 bonuses which you have an unconditional right to receive pursuant to any bonus plan or incentive plan in effect at the time of such termination. (ii) Except as specifically set forth in Section 5 hereof, to continue to provide you with all employee benefits to which you were entitled prior to such termination, other than any officer perquisites, and upon substantially the same terms and conditions including, but not limited to, Life and Health insurance coverage; provided, however, that if you obtain full-time employment prior to the expiration of the applicable TWELVE-month period, the provision of these benefits shall terminate. If you become entitled to the benefits of this Section 4(d), then such benefits shall be in lieu of any benefits to which you would otherwise be entitled under any policy of Allnet providing for separation payments or benefits. 5. Other Employee Benefits. If your employment is terminated pursuant to Section 4, you shall cease to be an employee for all purposes including, but not limited to: (1) your participation in the 401(K) plan; (2) your right to exercise stock options beyond the (a) vesting schedule and (b) the term allowed in the option for exercise, upon termination of employment; and (3) your right to continue to participate in any ALC option or stock purchase plans, notwithstanding the fact that other rights granted to you in this Agreement may continue past the date on which your employment terminates. 6. Waiver of Claims. In consideration of this Agreement, you agree to waive the claims and otherwise hold Allnet harmless as set forth in Schedule 6, attached hereto and made a part hereof. 7. Other Agreements. During such period as you continue to receive payments from or through Allnet pursuant to Section 4(d)(i) or 4(d)(ii) hereof, you agree to refrain from directly soliciting any of Allnet and its affiliates' customers or from suggesting, persuading or inducing any other employeee of Allnet and its affiliates to leave Allnet or its affiliates' employ. Any other agreements between Allnet or its affiliates and you relating to confidentiality shall remain in effect. 8. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and, in your case, to your personal representatives and, in the case of Allnet, to its affiliates, successors and assigns including, but not limited to, any successor in interest by 4 Page four January 7, 1994 merger or any person, firm or corporation which acquires substantially all of the assets of Allnet. 9. Governing Law. This Agreement shall be governed by the law of the State of Michigan. If the foregoing is entirely satisfactory to you, please execute one copy of this letter in the place provided for your signature and return it to us whereupon this letter shall constitute an agreement between us as of the date first above written. Very truly yours, By:___________________ Accepted and Agreed to this ____ day of _____________, 1994. ______________________ 5 Schedule 6 WAIVER AND COMPLETE RELEASE OF ALL CLAIMS I accept the terms and conditions of the attached letter from Allnet Communication Services, Inc. (the "Company") to which this Waiver and Complete Release of All Claims is attached (the "Offer"), and hereby do release the Company, and its affiliated Companies and their current and former directors, officers, agents and employees from and waive any claims relating to or based in any way upon my employment with, or termination of employment from, the Company, including but not limited to any claim or claims in contract or tort or public policy or under any federal or state or local law dealing with discrimination in employment including but not limited to the 1964 Civil Rights Act, the Employee Retirement Income Security Act, the Elliott-Larson Civil Rights Act, and the Age Discrimination in Employment Act, except claims for any vested pension benefits to which I am entitled, if any. I understand that in return for the promises made to me by the Company in this Offer, I am waiving all discrimination in employment claims on the bases of race, sex, age, national origin, religion, height, weight, pregnancy, disability, handicap, and marital status which I have or may have against the Company and any right I have or may have to any relief to which I might otherwise be entitled as a result of any proceedings that are or might be instituted by the Equal Employment Opportunity Commission or any other similar enforcement authority. I understand that this is a binding legal document. My release and waiver is for any relief, no matter how denominated, including but not limited to back pay, front pay, severance pay, compensatory damages, exemplary damages, punitive damages, and damages for pain and suffering. I have carefully reviewed the contents of the Offer and, with a full and complete understanding of its terms, voluntarily accept all of the terms and conditions described. I further declare that I have been given a full and fair opportunity to discuss this matter with any attorney or advisor of my choice and that no promise not written in this letter has been made to me and that this letter contains the entire agreement between me and the Company. As a material provision of this agreement, I agree not to divulge the terms of this agreement and its above-referenced payment to anyone except my immediate family and, or, legal counsel or advisor of my choice. I understand and agree that the Company may enforce this agreement and, or, stop or recover payments or benefits provided to me because of this agreement if I do not honor my obligations as described above. 6 Page two Waiver and Complete Release of All Claims Notice: Various state and federal laws prohibit employment discrimination based on age, sex, race, color, national origin, religion, handicap or veteran status. These laws are enforced through the Equal Employment Opportunity Commission, Department of Labor and State Human Rights Agencies. You may also want to discuss this Waiver and Complete Release of All Claims with your lawyer. In any event, you should thoroughly review and understand the effect of this Agreement and Complete Release before acting on it. Therefore, please take this Agreement and Complete Release home and consider it for at least five (5) working days before you decide to sign it. Agreed: ___________________________________ date:___________________ Notary Public_______________________________ date:__________________ EX-10.10 10 AMEND. & RESTATED EMPLOY. AGREEMENT 1 EXHIBIT 10.10 AMENDED AND RESTATED EMPLOYMENT AGREEMENT AMENDED AND RESTATED EMPLOYMENT AND OPTION AGREEMENT dated as of January 7, 1994 by and between ALC Communications Corporation, a Delaware corporation, Allnet Communication Services, Inc., a Michigan corporation (collectively referred to as the "Company"), and [Employee name], an individual currently residing in [city/state] (the "Employee"). This AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Agreement") amends and restates the Employment and Option Agreement dated as of [original agreement date], as amended, entered into by and between ALC Communications Corporation and [Employee name]. WITNESSETH: WHEREAS, both the Employee and the Company desire to state the terms and conditions of the Employee's employment in a written agreement which will supersede all prior agreements of employment, either written or oral; NOW, THEREFORE, it is mutually agreed by and between the parties hereto as follows: 1. Employment 1.1 Employment Term. The Company hereby employs the Employee as [Employee title] of the Company or in such other senior executive capacity as the Company, with the Employee's consent, may from time to time designate. The term of such employment (the "Employment Term") shall commence on January 7, 1994 and shall continue until December 31, 1996 unless earlier terminated in accordance with Section 7. After the Employment Term, the Company shall continue the employment of Employee from year to year on the terms hereof unless the Company gives 60 days' written notice to the Employee that such employment is terminated. 1.2 Duties and Responsibilities. The Employee shall perform all duties incidental to his position with the Company, or as may be assigned to him by the [Board of Directors/President] of the Company, and shall cooperate fully with the executive officers of the Company. Notwithstanding the foregoing or anything else contained in this Agreement to the contrary, (i) Employee may from time to time devote such time as he may determine reasonable to various charitable and other community activities, (ii) Employee may from time to time devote a portion of his time to his own, personal investments and projects (for which he may or may not receive compensation), provided the amount of time he devotes does not materially affect his duties under this Agreement, (iii) Employee shall not be obligated to move his residence from the Metropolitan Detroit, Michigan area in order to perform his duties under this Employment Agreement, -1- 2 and (iv) all duties and responsibilities to be performed by Employee shall be consistent with his position with the Company. 1.3 Extent of Service. The Employee agrees to use his best efforts in the business of the Company and to devote his full time, attention and energy to the business of the Company. The Employee shall not work, including on either a part-time or independent contracting basis, for any other business or enterprise during the Employment Term without the Company's prior written consent. 1.4 Base Compensation. For all services rendered by the Employee hereunder as an employee of the Company, the Company shall pay the Employee (i) a salary, in installments at such times as the Company customarily pays its employees holding comparable positions (but not less often than monthly), at an annual rate from [anniversary month] 1, 1993 through [anniversary month] 1, 1994 of [salary] and at an annual rate thereafter as shall be determined each year by the Compensation Committee and/or the Board of Directors of the Company after review of the performance of the Company and the Employee during the prior year provided that such annual rate for any year shall be not less than the prior year's annual rate plus 5% of the annual rate paid the Employee in the immediately preceding year, plus (ii) incentive compensation in the amount specified in Section 1.5, less (iii) withholding required by law or agreed to by the Employee. In addition, the Employee shall be entitled to an annual paid vacation in accordance with the Company's policy in effect from time to time and such fringe benefits of the Company offered to employees holding comparable positions. The Employee shall not be entitled to any additional compensation from the Company. 1.5 Incentive Compensation. The Compensation Committee and/or the Board of Directors of the Company shall establish and review with the Employee from time to time performance goals ("Performance Goals") for the Company which shall be a range of performance objectives mutually agreed to by the Employee and the Company with a specific level of objectives to be the targeted Performance Goal. The Performance Goals shall include levels of objectives above and below the targeted Performance Goal and the amount of the incentive compensation payable to the Employee in lieu of the targeted Performance Goal upon meeting those objectives. Incentive compensation shall be payable to the Employee by the Company as soon as practicable after the preparation of the Company's audited annual financial statements, but no later than March 15 of the following calendar year. 2. Expenses. The Company shall reimburse the Employee for the reasonable expenses incurred by him in connection with his performance of services hereunder during the Employment Term upon presentation to the Company of an itemized account and written proof of such expenses. -2- 3 3 . Developments. All developments, including trade secrets, discoveries, improvements, ideas and writings which either directly or indirectly relate to or may be useful in the business of the Company or any subsidiary of the Company (the "Developments") which the Employee, either by himself or in conjunction with any other person or persons, shall conceive, make, develop, acquire or acquire knowledge of during the Employment Term, shall become and remain the sole and exclusive property of the Company. The Employee hereby assigns, transfers and conveys, and agrees to so assign, transfer and convey, all of his right, title and interest in and to any and all such Developments and to disclose fully as soon as practicable, in writing, all Developments to the Board of Directors of the Company. At any time and from time to time, upon the request of the Company, the Employee will execute and deliver to the Company any and all instruments, documents and papers, give evidence and do any and all other acts which, in the opinion of counsel for the Company, are or may be necessary or desirable to document such transfer or to enable the Company to file and prosecute applications for and to acquire, maintain and enforce any and all patents, trademark registrations or copyrights under United States or foreign law with respect to any such Developments or to obtain any extension, validation, reissue, continuance or renewal of any such patent, trademark or copyright. The Company will be responsible for the preparation of any such instruments, documents and papers and for the prosecution of any such proceedings and will reimburse the Employee for all reasonable expenses incurred by him in compliance with the provisions of this Section 3. 4. Confidential Information. The Employee acknowledges that by reason of his employment by and service to the Company he will have access to confidential information of the Company and its subsidiaries including, without limitation, information and knowledge pertaining to products and services, methods of operation, sales and profit figures, customer lists and relationships between the Company and its customers, suppliers and others who have business dealings with it. The Employee covenants that, either during or after the Employment Term, he will not disclose any such information to any person without the prior written authorization of the Board of Directors of the Company. 5. Non-Competition. During the Employment Term the Employee shall not, unless acting pursuant hereto or with the prior written consent of the Board of Directors of the Company, directly or indirectly, (i) own, manage, operate, finance, join, control or participate in the ownership, management, operation, financing or control of, or be associated as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise with, or use or permit his name to be used in connection with, any business or enterprise that is engaged in any business that is competitive with the business conducted during the Employment Term by the Company or any of its subsidiaries, or, during the Employment Term and for six -3- 4 months thereafter, (ii) offer or provide employment (whether such employment is with the Employee or any other business or enterprise), either on a full-time or part-time or consulting basis, to any person who then currently is, or who within three months prior thereto had been, employed by the Company or any of its subsidiaries; provided, however, that this provision shall not be construed to prohibit the ownership by the Employee of not more than 1% of any class of securities of any corporation which is engaged in a business competitive with the Company and has a class of securities registered pursuant to the Securities Exchange Act of 1934. In the event that the provisions of this Section 5 should ever be adjudicated to exceed the time, geographic, or other limitations permitted by applicable law in any jurisdiction, then such provisions shall be deemed reformed in such jurisdiction to the maximum time, geographic or other limitations permitted by applicable law. 6. Indemnification A. ALC Communications Corporation and Employee agree to bind themselves to the provisions of the Amended and Restated Bylaws of ALC Communications Corporation, attached hereto and made a part hereof as Exhibit 6.A., as a contractual agreement between them. B. Allnet Communication Services, Inc. and Employee agree to bind themselves to the provisions of the Amended and Restated Bylaws of Allnet Communication Services, Inc., attached hereto and made a part hereof as Exhibit 6.B., as a contractual agreement between them. 7. Termination 7.1 Disability or Death. In the event that the Employee shall die or is unable to perform his duties and responsibilities hereunder to the full extent required by the Board of Directors of the Company by reason of illness, injury or incapacity for six consecutive months, during which time he shall continue to be compensated hereunder, the Employee's employment hereunder shall be terminated and the Company shall have no further liability or obligation to the Employee, or to his executors, administrators, heirs, assigns or any other person claiming under or through him hereunder, except for unpaid salary, incentive compensation (including for partial periods) and benefits as well as unreimbursed expenses accrued to the date of termination. The Employee agrees, in the event of any dispute under this Section 7.1 regarding his health, to submit to a physical examination by a licensed physician selected by the Company, the cost of such examination to be borne by the Company. 7.2 Cause. With or without cause, the Employee may terminate his employment hereunder at any time upon 60 days' prior written notice to the Company; in such event, the Company shall pay the Employee his salary through the effective date of termination, and if the Employee terminated -4- 5 his employment due to cause against the Company, the Company shall also pay incentive compensation in respect of periods (including partial periods) prior to termination. The Employee's employment hereunder may be terminated by the Board of Directors of the Company at any time for "cause." "Cause" shall mean the failure of the Employee to observe or perform (other than by reason of illness, injury or incapacity) any of the terms or provisions of this Agreement, dishonesty, willful misconduct, conviction of a felony or other crime involving moral turpitude, misappropriation of funds, habitual insobriety, use of controlled substances (other than under the supervision of a licensed physician), or other proper cause. Except as otherwise specified, the Company shall have no liability or obligation to the Employee hereunder upon termination under this Section 7.2 except for (i) unpaid salary, (ii) incentive compensation in respect of full annual, but not partial, periods ended prior to the date of termination, and (iii) benefits accrued to the date of termination and which are payable upon termination. 7.3 Failure to Meet Goals. The Board of Directors of the Company may terminate the Employee's employment hereunder at any time for material failure to meet the Performance Goals. The Company shall have no liability or obligation to the Employee hereunder upon termination under this Section 7.3 except for (i) unpaid salary, (ii) incentive compensation in respect of periods (including partial periods) ended prior to the date of termination, (iii) benefits accrued to the date of termination and which are payable upon termination, and (iv) the salary to which the Employee would have been entitlted for the succeeding twelve months, payable in installments at the times the same would have become due but for the termination, as well as during such time period all employee benefits to which Employee was entitled prior to such termination, other than any officer perquisites, and upon substantially the same terms and conditions including, but not limited to, Life, Health and Long-Term Disability Insurance coverage; provided, however, that if Employee obtains full-time employment prior to the expiration of the twelve-month period, the provision of these benefits shall terminate although the salary shall continue for the remainder of the period. 7.4 Without Cause. The Company may terminate the Employee's employment hereunder at any time, without cause, after which termination the Company shall not have any liability or obligation to the Employee hereunder except for (i) unpaid salary, (ii) incentive compensation in respect of periods (including partial periods) prior to termination, (iii) benefits accrued to the date of termination and which are payable upon termination, and (iv) the salary to which the Employee would have been entitled for the succeeding twenty-four months, payable in installments at the time the same would have become due but for the termination, as well as during such time period all employee benefits to which Employee was entitled prior to such termination, other than any officer perquisites, and upon substantially the same -5- 6 terms and conditions including, but not limited to, Life, Health and Long-Term Disability Insurance coverage; provided, however, that if Employee obtains full-time employment prior to the expiration of the applicable period, the provision of these benefits shall terminate, although the salary shall continue for the remainder of the period. Upon termination under this Section 7.4 any stock options previously granted to Employee and not yet exercised shall be accelerated to the extent necessary to become fully vested and the Employee shall be entitled to exercise the same in full for twelve months following the date of termination of employment hereunder or under the terms of the Company's 1990 Stock Option Plan, whichever is longer. 7.5 Survival. Notwithstanding the expiration or termination of the Agreement, the obligations of the Company with respect to payment of compensation (Section 1.4), incentive compensation (Section 1.5) and expenses (Section 2.) earned or otherwise owed to Employee prior to the expiration of the Agreement as well as salary and benefit continuation with respect to the applicable periods set forth in this Section 7 of the Agreement shall survive and remain in full force and effect. Notwithstanding either the expiration or termination of the Agreement, or the termination of the Employee's employment under this Section 7, the obligations of the Employee under Sections 3, 4 and 5 shall survive and remain in full force and effect, and the Company shall be entitled to equitable relief against the Employee pursuant to the provisions of Section 8. Further, upon termination of the Employee's employment under this Section 7, Employee shall have no restriction hereunder from owning, managing, operating, financing, joining, controlling or participating in the ownership, management, operation, financing or control of, or be associated as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise with, or use or permit his name to be used in connection with any business or enteprise that is engaged in any business that is competitive with the business conducted during the Employment Term by the Company or any of its subsidiaries. The liability of the Company, if any, for payments to the Employee by virtue of any wrongful termination of the Employee's employment hereunder shall not exceed the amount that would be payable to the Employee if the termination had been made under Section 7.4. 8. Equitable Relief. The Employee acknowledges that the restrictions contained in Sections 3, 4 and 5 are, in view of the nature of the business, of the Company, reasonable and necessary to protect the legitimate interests of the Company, and that any violation of the provisions of those Sections will result in irreparable injury to the Company. The Employee also acknowledges that the Company shall be entitled to preliminary and permanent injunctive relief, without the necessity of proving actual damages, and to an equitable accounting of all earnings, profits and other benefits arising from any such violation, which rights shall -6- 7 be cumulative and in addition to any other rights or remedies to which the Company may be entitled. The Employee hereby agrees that in the event of any such violation the Company shall be entitled to commence an action for any such preliminary and permanent injunctive relief and other equitable relief in any court of competent jurisdiction and further irrevocably submits, for himself and in respect of his property, generally and unconditionally, to the jurisdiction of any Michigan state court located in Wayne or Oakland Counties or the United States court for the Eastern District of Michigan over any suit, action or proceeding arising out of or relating to this Section 8. The Employee hereby waives, to the fullest extent permitted by law, any objection that he may now or hereafter have to such jurisdiction or to the venue of any such suit, action or proceeding brought in such a court and any claim that such suit, action or proceeding has been brought in an inconvenient forum. The Employee agrees that effective service of process may be made upon him by mail under the notice provisions contained in Section 11. 9. Litigation Expenses. In the event of a lawsuit by either party to enforce the provisions of this Agreement, the prevailing party shall be entitled to recover reasonable costs, expenses and attorneys' fees from the other party. 10. Life Insurance. The Company agrees to insure the life of the Employee, and to pay the entire premium, under a term life insurance policy continuing during the duration of the Employment Term in an amount of at least $500,000, with the Employee having the sole right to designate one or more beneficiaries under such insurance policy. 11. Notice. All notices and other communications required or permitted hereunder or necessary or convenient in connection herewith shall be in writing and shall be deemed to have been given when mailed by registered or certified mail, return receipt requested, as follows (provided that notice of change of address shall be deemed given only when received): If to the Company, to: ALC Communications Corporation Allnet Communication Services, Inc. 30300 Telegraph Road, Suite 350 Bingham Farms, Michigan 48025 Attention: [Chairman of the Board/ President] If to the Employee, to his residence as shown from time to time on the records of the Company -7- 8 or to such other name or address as the Company or the Employee, as the case may be, shall designate by notice to the other party hereto in the manner specified in this Section. 12. Contents of Agreement, Amendment and Assignment. This Agreement sets forth the entire understanding between the parties hereto with respect to the subject matter hereof and cannot be changed, modified or terminated except upon written amendment. All of the terms and provisions of this Agreement shall be binding upon, inure to the benefit of and be enforceable by the respective heirs, representatives, successors and assigns of the parties hereto, except that the duties and responsibilities of the Employee hereunder are of a personal nature and shall not be assignable in whole or in part by the Employee; provided, however, that in the event that the Company effects a merger with any corporation, or in the event that the business of the Company is otherwise combined with the business of any corporation or entity, then, notwithstanding anything herein to the contrary, the provisions of Section 1 hereof shall be applicable only with respect to the division or other unit of the Company or of such other corporation or entity that conducts the business previously conducted by the Company. 13. Severability. If any provision of this Agreement or application thereof to anyone or under any circumstances is adjudicated to be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect any other provisions or applications of this Agreement which can be given effect without the invalid or unenforceable provision or application and shall not invalidate or render unenforceable such provision in any other jurisdiction. 14. Remedies Cumulative; No Waiver. No remedy conferred upon the Company by this Agreement is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to any other remedy given hereunder or now or hereafter existing at law or in equity. No delay or omission by the Company in exercising any right, remedy or power hereunder or existing at law or in equity shall be construed as a waiver thereof, and any such right, remedy or power may be exercised by the Company from time to time and as often as may be deemed expedient or necessary by the Company in its sole discretion. -8- 9 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. _______________________________ [Employee Name], "Employee" [Corporate Seal] ALC COMMUNICATIONS CORPORATION BY:____________________________ John M. Zrno, President and Chief Executive Officer [Corporate Seal] ALLNET COMMUNICATION SERVICES, INC. BY:____________________________ John M. Zrno, President and Chief Executive Officer -9- EX-11.1 11 COMPUTATION OF EARNINGS 1
ALC COMMUNICATIONS CORPORATION AND SUBSIDIARY Exhibit 11.1 COMPUTATION OF EARNINGS PER SHARE (Unaudited) Year ended December 31, ------------------------------------------ 1993 1992 1991 ---------- ----------- ---------- (in thousands except per share amounts) Earnings Per Share Income before extraordinary items and cumulative effect of accounting change $39,676 $13,826 $ 2,717 Accretion of discount on Class A Preferred Stock (364) (860) (1,043) Accrued dividends on Class A Preferred Stock (453) (3,254) (4,000) Accretion of payment to certain Class A Preferred Stockholders (268) (643) ---------- ----------- ---------- Income before extraordinary items and cumulative effect of accounting change available for Common Stockholders $38,859 $ 9,444 $ (2,969) Extraordinary items: Loss related to early retirement of debt (7,490) Utilization of operating loss carryforward 7,000 2,630 Cumulative effect of change in method of accounting for income taxes 13,500 ---------- ----------- ---------- Net Income (Loss) Available for Common Stockholders $44,869 $16,444 $ (339) ---------- ----------- ---------- ---------- ----------- ---------- Weighted average common shares outstanding during the period 28,864 18,603 17,216 ---------- ----------- ---------- ---------- ----------- ---------- Earnings per common and common equivalent share: Income (loss) before extraordinary items and cumulative effect of accounting change $ 1.35 $ 0.51 $ (0.17) Extraordinary items: Loss related to early retirement of debt (0.26) Utilization of operating loss carryforward 0.37 0.15 Cumulative effect of change in method of accounting for income taxes 0.47 ---------- ----------- ---------- Net Income (Loss) $ 1.56 $ 0.88 $ (0.02) ---------- ----------- ---------- ---------- ----------- ---------- Primary Earnings Per Share Income before extraordinary items and cumulative effect of accounting change $39,676 $13,826 $ 2,717 Accretion of discount on Class A Preferred Stock (364) (860) (1,043) Accrued dividends on Class A Preferred Stock (453) (3,254) (4,000) Accretion of payment to certain Class A Preferred Stockholders (268) (643) ---------- ----------- ---------- Income before extraordinary items and cumulative effect of accounting change available for Common Stockholders $38,859 $ 9,444 $ (2,969) Extraordinary items: Loss related to early retirement of debt (7,490) Utilization of operating loss carryforward 7,000 2,630 Cumulative effect of change in method of accounting for income taxes 13,500 ---------- ----------- ---------- Net Income (Loss) Available for Common Stockholders $44,869 $16,444 $ (339) ---------- ----------- ---------- ---------- ----------- ---------- Weighted average common shares outstanding during the period 28,864 18,603 17,216 Common Stock Equivalents: Average amount of Class B and Class C Preferred prior to conversion to Common Stock 875 3,538 3,404 ---------- ----------- ---------- Weighted Average Common and Common Equivalent Shares 29,739 22,141 20,620 ---------- ----------- ---------- ---------- ----------- ---------- Earnings per common and common equivalent share: Income (loss) before extraordinary items and cumulative effect of accounting change $ 1.31 $ 0.43 $ (0.14) Extraordinary items: Loss related to early retirement of debt (0.25) Utilization of operating loss carryforward 0.31 0.12 Cumulative effect of change in method of accounting for income taxes 0.45 ---------- ----------- ---------- Net Income (Loss) $ 1.51 $ 0.74 $ (0.02) ---------- ----------- ---------- ---------- ----------- ----------
2
1993 1992(1) 1991(1) --------- --------- --------- (in thousands except per share amounts) Primary Earnings Per Share -- Modified Treasury Stock Method Income before extraordinary items and cumulative effect of accounting change $39,676 $13,826 $2,717 Accretion of discount on Class A Preferred Stock (364) (860) (1,043) Accrued dividends on Class A Preferred Stock (453) (3,254) (4,000) Accretion of payment to certain Class A Preferred Stockholders (268) (643) Effect of Modified Treasury Stock Method: Reduction in interest (net of tax) 4,404 7,431 --------- --------- --------- Income before extraordinary items and cumulative effect of accounting change available for Common Stockholders $38,859 $13,848 $4,462 Extraordinary items: Loss related to early retirement of debt (7,490) Utilization of operating loss carryforward 8,569 4,315 Cumulative effect of change in method of accounting for income taxes 13,500 --------- --------- --------- Net Income Available for Common Stockholders $44,869 $22,417 $8,777 --------- --------- --------- --------- --------- --------- Weighted average common shares outstanding during the period 28,864 18,603 17,216 Common Stock Equivalents: Average amount of Class B and Class C Preferred prior to conversion to Common Stock 875 3,538 3,404 Effect of Modified Treasury Stock Method: Assumed exercise of all option and warrants 10,581 10,162 8,107 Assumed repurchase of up to 20% of Common Stock outstanding (3,972) (3,721) (3,443) --------- --------- --------- Weighted Average Common and Common Equivalent Shares 36,348 28,582 25,284 --------- --------- --------- --------- --------- --------- Earnings per common and common eqivalent share: Income before extraordinary items and cumulative effect of accounting change $ 1.07 $ 0.48 $ 0.18 Extraordinary items: Loss related to early retirement of debt (0.21) Utilization of operating loss carryforward 0.30 0.17 Cumulative effect of change in method of accounting for income taxes 0.37 --------- --------- --------- Net Income $ 1.23 $ 0.78 $ 0.35 --------- --------- --------- --------- --------- ---------
Year ended December 31, 1993 ----------------- Fully Diluted Earnings Per Share (2) Weighted average common shares outstanding during the period 28,864 Common Stock Equivalents: Average amount of Class B and Class C Preferred prior to conversion to Common Stock 875 Effect of Modified Treasury Stock Method: Assumed exercise of all option and warrants 10,581 Assumed repurchase of up to 20% of Common Stock outstanding (2,878) --------- Weighted Average Common and Common Equivalent Shares 37,442 --------- --------- Income before extraordinary items and cumulative effect of accounting change $ 1.04 Extraordinary items: Loss related to early retirement of debt (0.20) Utilization of operating loss carryforward Cumulative effect of change in method of accounting for income taxes 0.36 --------- Net Income $ 1.20 --------- ---------
(1) Modified Treasury Stock Method is not used because the net effect is anti-dilutive. (2) This calculation is submitted in accordance with regulation S-K item 601(b)(11), although it is contrary to paragraph 40 of APB Opinion No. 15, because it results in dilution of less than 3%. The fully diluted earnings per share for 1992 and 1991 do not differ from the primary earnings per share. Shading denotes reported earnings per share. EX-21.1 12 SELECTED FIN. DATA 1 EXHIBIT 21.1 The following is the only significant subsidiary (as such term is defined in Rule 1-02(v) of SEC Regulation S-X) of ALC Communications Corporation as of December 31, 1993 and is wholly owned by ALC. Allnet Communication Services, Inc. incorporated in Michigan EX-23.1 13 CONSENT OF IND. AUDITORS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in the Registration Statement (Form S-8 No. 33-39649) pertaining to the 1990 Stock Option Plan of ALC Communications Corporation and to the incorporation by reference in that Registration Statement and in the Registration Statements, (Form S-8 No. 33-13624) pertaining to the 1986 Option Plan and (Form S-8 No. 33-25737) pertaining to the Amendment to the 1986 Option Plan of ALC Communications Corporation and in the related Prospectuses of our report dated January 25, 1994, with respect to the consolidated financial statements and schedules of ALC Communications Corporation included in the Annual Report (Form 10-K) for the year ended December 31,1993. Detroit, Michigan March 29, 1994 -----END PRIVACY-ENHANCED MESSAGE-----