-----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, rQ/CdTgcE6juhUR5zmThLv9sQztmZTiqDdma7nvRWl8Hg7LciLFWZcED643w1TBz 87CpCPN0kGwqZArBniJiQQ== 0000950124-94-000465.txt : 19940314 0000950124-94-000465.hdr.sgml : 19940314 ACCESSION NUMBER: 0000950124-94-000465 CONFORMED SUBMISSION TYPE: 424B3 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19940311 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: 424B3 SEC ACT: 33 SEC FILE NUMBER: 033-57146 FILM NUMBER: 94515697 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 424B3 1 PROSPECTUS SUPPLEMENT NO. 4 1 Prospectus Supplement No. 4 Filed Pursuant to Rule 424(b)(3) (to Prospectus dated March 18, 1993) Registration No. 33-57146 125,353 SHARES ALC COMMUNICATIONS CORPORATION COMMON STOCK The Common Stock is traded on the American Stock Exchange ("AMEX") under the symbol "ALC". The last reported sale price of the Common Stock on March 10, 1994 was $36.50 per share. This Prospectus Supplement supplements the Prospectus of ALC dated March 18, 1993, a copy of which is attached, and covers a sale by Electra Communications Holding Corporation ("ECHC") of an aggregate of up to 125,353 shares of Common Stock. ECHC intends to sell these shares from time to time in one or more transactions by means of (i) ordinary brokers' transactions, (ii) block transactions (which may involve crosses) to one or more dealers or (iii) a combination of any such methods of sale, such sales to be, in the case of transactions on the AMEX, at market prices prevailing at the time of sale and, in the case of transactions off the floor of the AMEX, at negotiated prices related to prevailing market prices. In connection therewith, distributors' or sellers' commissions may be paid or allowed, which will not exceed those customary in the types of transactions involved. ECHC has advised that it is an assignee of Prudential as to the Common Stock (and accompanying registration rights) covered hereby, in its capacity as an assignee of equipment lessors of CTGI as more particularly described in the Prospectus under the caption "Certain Relationships and Related Transactions -- Banks and CTI Ownership in the Company." ------------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------------------- Attached hereto are the Prospectus of ALC dated March 18, 1993 (which describes the underlying registration statement and pertinent arrangements) and a Prospectus of ALC dated September 20, 1993 (which describes a sale of Common Stock other than the sales to be made pursuant to this Supplement and is provided solely as a means to provide updated information concerning ALC). Also attached hereto for the purpose of providing updated information concerning the Company is the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, which includes, among other things, the unaudited consolidated financial statements of the Company for the nine months ended September 30, 1993 and Management's Discussion and Analysis of Financial Condition and Results of Operations for the nine months ended September 30, 1993. Subsequent to the filing of the Form 10-Q for the quarter ended September 30, 1993, and 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. ------------------------------------- The date of this Prospectus Supplement is March 11, 1994 2 =========================== FORM 10-Q U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: September 30, 1993 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 1-10831 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 48025-4510 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (313) 647-4060
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of October 29, 1993, the registrant had 32,842,566 shares of Common Stock outstanding. =========================== 3 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY CONSOLIDATED BALANCE SHEETS ASSETS
Sept. 30, December 31, 1993 1992 --------- ------------ (Unaudited) (In Thousands) Current Assets: Cash $112 $112 Accounts receivable, less allowance for doubtful accounts of $3,608,000 and $3,334,000 63,620 45,327 Other current assets 10,845 3,000 ------- ------- Total Current Assets $74,577 $48,439 Fixed Assets: Communication systems $77,147 $74,002 Other equipment and leasehold improvements 30,890 28,371 Construction in progress 9,167 3,443 ------- ------- $117,204 $105,816 Less accumulated depreciation and amortization 70,195 63,872 ------- ------- Total Fixed Assets $47,009 $41,944 Cost in excess of net assets acquired 49,173 50,317 Deferred tax assets 8,846 Intangibles and other assets 15,964 2,566 ------- ------- Total Assets $195,569 $143,266 ------- ------- ------- -------
See notes to consolidated financial statements 4 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY CONSOLIDATED BALANCE SHEETS LIABILITIES, CLASS A PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Sept. 30, December 31, 1993 1992 ---------- ------------- (Unaudited) (In Thousands) Current Liabilities: Accounts payable $1,728 $3,508 Accrued liabilities 22,589 11,895 Accrued network costs 35,134 28,676 Taxes other than income 11,799 9,889 Revolving Credit Facility 14,802 Notes payable, capitalized leases and other long-term debt 581 11,417 -------- -------- Total Current Liabilities $71,831 $80,187 Revolving Credit Facility 1,000 Notes payable, capitalized leases and other long-term debt 3,445 12,308 Senior Subordinated Notes 84,324 Subordinated Notes 61,983 Class A Preferred Stock, $0.01 par value; authorized-- 2,500,000 shares; issued and outstanding-- 356,000 shares, aggregate redemption value of $7,119,000 less discount of $297,000 and $364,000 plus accrued but undeclared dividends of $3,125,000 and $2,904,000 9,947 9,659 Stockholders' Equity (Deficit): Class B Preferred Stock, $0.01 par value; authorized, issued and outstanding -- none and 1,000,000 shares $10 Class C Preferred Stock, $0.01 par value; authorized, issued and outstanding -- none and 1,000,000 shares 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 -- 32,384,000 and 23,794,000 shares $324 238 Capital in excess of par value 127,291 110,146 Paid-in capital--Warrants 12,444 17,022 Accumulated deficit (115,037) (148,297) -------- -------- Total Stockholders' Equity (Deficit) $25,022 ($20,871) -------- -------- Total Liabilities, Class A Preferred Stock and Stockholders' Equity (Deficit) $195,569 $143,266 -------- -------- -------- --------
See notes to consolidated financial statements 5 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Nine Months Ended -------------------------- -------------------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, 1993 1992 1993 1992 --------- --------- --------- --------- (In Thousands Except Per Share Amounts) Revenue $113,098 $95,673 $319,175 $280,374 Operating Expenses: Cost of communication services $60,561 $52,730 $172,852 $164,016 Sales, general and administrative 30,915 28,396 89,005 79,650 Depreciation and amortization 3,318 2,823 8,998 8,396 --------- -------- --------- -------- Total Operating Expenses $94,794 $83,949 $270,855 $252,062 --------- -------- --------- -------- Operating Income $18,304 $11,724 $48,320 $28,312 Interest expense (net of interest & other income (expense) of $45,000, ($352,000), $176,000 and ($215,000)) 2,050 4,631 8,570 13,044 --------- -------- --------- -------- Income Before Income Taxes, Extraordinary Items and Cumulative Effect of Accounting Change $16,254 $7,093 $39,750 $15,268 Income taxes 5,400 2,903 12,500 6,425 --------- -------- --------- -------- Income Before Extraordinary Items and Cumulative Effect of Accounting Change $10,854 $4,190 $27,250 $8,843 Extraordinary Items: Loss on early retirement of debt (net of income tax benefit of $4,000,000) (7,490) Utilization of operating loss carryforward 1,692 4,740 Cumulative effect of change in method of accounting for income taxes 13,500 --------- -------- --------- -------- Net Income $10,854 $5,882 $33,260 $13,583 --------- -------- --------- -------- --------- -------- --------- -------- Earnings per common and common equivalent share: Income before extraordinary items and cumulative effect of accounting change $0.29 $0.15 $0.75 $0.23 Extraordinary items: Loss on early retirement of debt Utilization of operating loss carryforward $0.05 ($0.21) $0.23 Cumulative effect of change in method of accounting for income taxes $0.38 --------- -------- --------- -------- Net Income $0.29 $0.20 $0.92 $0.46 --------- -------- --------- -------- --------- -------- --------- -------- Weighted Average Common and Common Equivalent Shares 36,856 28,663 35,847 20,711 --------- -------- --------- -------- --------- -------- --------- --------
See notes to consolidated financial statements 6 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended ------------------------------- Sept. 30, Sept. 30, 1993 1992 --------- --------- (In Thousands) Operating Activities Net income $33,260 $13,583 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 9,948 9,435 Loss on sale of assets 482 Cumulative effect of change in accounting principle (13,500) Extraordinary loss on early retirement of debt 7,490 Gain on debenture retirement (60) Tax benefit from exercise of stock options 2,250 Increase in accounts receivable and other current assets (17,412) (6,744) Increase (decrease) in current liabilities 23,538 (1,853) ---------- ---------- Net Cash Provided by Operating Activities $45,574 $14,843 Financing Activities Proceeds from (payments on) revolving credit agreement ($13,803) $9,361 Proceeds from long-term debt 440 706 Payments on long-term debt (20,995) (16,598) Proceeds from issuance of stock 10,786 104 Payment to Preferred A Stockholders (1,286) Retirement of debentures (74,319) (75) Proceeds from issuance of debentures 84,309 ---------- ---------- Net Cash Used in Financing Activities ($13,582) ($7,788) Investing Activities Expenditures for fixed assets ($12,252) ($6,374) Change in other non-current assets (4,200) (680) Purchase of Call Home America (15,426) Preferred A Dividends paid (114) ---------- ---------- Net Cash Used in Investing Activities ($31,992) ($7,054) ---------- ---------- Increase (decrease) in Cash During Period $0 $1 Cash at beginning of period 112 223 ---------- ---------- Cash at end of period $112 $224 ---------- ---------- ---------- ---------- Interest paid $8,836 $12,114 ---------- ---------- ---------- ---------- Income taxes paid $2,237 $1,067 ---------- ---------- ---------- ----------
See notes to consolidated financial statements 7 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY CONSOLIDATED STATEMENT OF CLASS A PREFERRED STOCK AND STOCKHOLDERS' EQUITY Nine Months Ended September 30, 1993 (In Thousands) (Unaudited)
Stockholders' Equity ---------------------------------------------------------------- Class A Class B Class C Preferred Stock Preferred Stock Preferred Stock Common Stock ---------------- ---------------- ---------------- ---------------- Shares Amount Shares Amount Shares Amount Shares Amount ------ ------ ------ ------ ------ ------ ------ ------ Balance, December 31, 1992 356 $9,659 1,000 $10 1,000 $10 23,794 $238 Accretion of discount on Class A Preferred Stock 67 Accrued dividends on Class A Preferred Stock 335 Dividends Paid (114) Conversion of Class B Preferred to Common Stock (1,000) (10) 1,898 19 Conversion of Class C Preferred to Common Stock (1,000) (10) 1,898 19 Exercise of options 490 5 Tax benefit from stock option exercises Exercise of Warrants 4,304 43 Net income for the nine months ended September 30, 1993 --- ------ ------ --- ------ --- ------- ---- Balance, September 30, 1993 356 $9,947 0 $0 0 $0 32,384 $324 --- ------ ------ --- ------ --- ------- ---- --- ------ ------ --- ------ --- ------- ----
Stockholders' Equity ------------------------------------------------------------------ Paid-in capital -- Warrants Capital in ----------------- excess of Accumulated Shares Amount par value deficit Total ------ ------ --------- ----------- ----- Balance, December 31, 1992 8,869 $17,022 $110,146 ($148,297) ($20,871) Accretion of discount on Class A Preferred Stock (67) (67) Accrued dividends on Class A Preferred Stock (335) (335) Dividends Paid 114 114 Conversion of Class B Preferred to Common Stock (9) 0 Conversion of Class C Preferred to Common Stock (9) 0 Exercise of options 1,657 1,662 Tax benefit from stock option exercises 2,250 2,250 Exercise of Warrants (4,304) (4,578) 13,544 9,009 Net income for the nine months ended September 30, 1993 33,260 33,260 ------ ------- -------- --------- ------- Balance, September 30, 1993 4,565 $12,444 $127,291 ($115,037) $25,022 ------ ------- -------- --------- ------- ------ ------- -------- --------- -------
See notes to consolidated financial statements 8 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 NOTE A -- MANAGEMENT'S REPRESENTATION The consolidated financial statements included herein have been prepared by ALC management, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Certain prior year amounts have been reclassified to conform to current year presentation. In the opinion of ALC management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature, and the accompanying consolidated financial statements present fairly the financial position as of September 30, 1993 and December 31, 1992, and the results of operations and cash flows for the three and nine month periods ended September 30, 1993 and 1992. The balance sheet at December 31, 1992 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes included in the Company's Form 10-K for the fiscal year ended December 31, 1992. NOTE B -- 1993 FINANCING ACTIVITIES 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. A group of five banks ("Banks") sold 8,386,216 shares of this ALC Common Stock, of which 3,796,000 were received upon conversion of all the Class B and Class C Preferred Stock. Upon completion of this offering, the Banks held an aggregate of 4,321,784 shares of ALC Common Stock, representing 15.0% of the total voting power of ALC capital stock (10.9% assuming the exercise of certain warrants and options). Prudential Insurance Company of America ("Prudential") sold the remaining 1,963,784 shares of which 963,784 represented the exercise of certain 1990 Warrants. ALC did not receive any of the proceeds from the sale of these shares in the 1993 equity offering, although it did receive $1.9 million upon Prudential's exercise of certain 1990 Warrants. The Banks have further 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. 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In May 1993, the Company completed an offering of $85.0 million 9.0% Senior Subordinated Notes ("1993 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. In the event of a change of control, the holders have the right to require the Company to purchase all or part of the 1993 Notes. Management used the $84.3 million of proceeds of this offering to repay the outstanding 1992 Notes in the aggregate amount of $72.4 million, and to reduce the amount outstanding under the Revolving Credit Facilty. As a result of repaying the 1992 Notes, an extraordinary loss of $11.5 million was recorded on the early retirement. The loss reflected the difference between the carrying value and the redemption value of the debt as well as the write off of issuance costs. The reported loss of $7.5 million was net of the related tax effect of $4.0 million. Additionally, 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 the Revolving Credit Facility, the Company is able to minimize interest expense by structuring the borrowings under any of three alternatives. Each alternative has a varying interest rate calculation associated with it. Costs to the Company during the third quarter of 1993 approximated 6% per annum. The agreement includes financial covenants which may allow the Company to further reduce interest expense 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 eligible receivables. As of September 30, 1993, the Company had $39.0 million of availability under the line. 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 stockholders of ALC at $25.50 per share. This offering included the exercise of 3,240,025 1990 Warrants including 2,128,005 held by General Electric Pension Trust, 1,012,020 held by Prudential and 100,000 held by a major lessor. In addition, the equity offering included the sale of 4,523,366 shares held by Prudential. As the result of the sale of their shares, Prudential no longer has a substantial equity position in ALC. ALC did not receive any proceeds from the sale of these shares in this offering, but did receive $6.6 million from the exercise of the 1990 Warrants. NOTE C -- PURCHASE OF CUSTOMER BASE During July 1993, the Company acquired the specialized 800 customer base of Call Home America, Inc. The purchase price was 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) comprised of: (1) approximately $15 million paid in July 1993 and (2) a payment to be made based on 150% of average monthly revenue generated by the customers in April, May and June 1994. Call Home America, Inc. has approximately 50,000 customers, including parents of college students and frequent travelers, who will continue to receive services under the Call Home America (R) name. The current level of annualized revenue is approximately $20 million. These customers will be offered other telecommunication services by Allnet. The purchase price has been allocated between the value of the customer base acquired and the covenant not to compete agreement which are being amortized over seven years and 42 months, respectively. The following unaudited proforma summary presents the results of operations as if the transaction had occurred at the beginning of the period presented. The proforma financial data are 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 financial position or results.
Nine Months Ended September 30, 1993 1992 -------- -------- Revenue $329,820 $286,561 Income Before Extraordinary Items and Cumulative Effect of Accounting Change 29,031 8,488 Net Income 35,041 13,010 Earnings Per Common and Common Equivalent Share: Income before extraordinary items and cumulative effect of accounting change $0.80 $0.20 Net income $0.97 $0.43
NOTE D -- INCOME TAXES Effective January 1, 1993, the Company adopted the Financial Accounting Standards Board Statement 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 financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when those differences are expected 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) to reverse. Prior to the adoption of Statement 109, income tax expense was determined using the deferred method. 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 increased net income by $13.5 million or $0.38 per share as of January 1, 1993. 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 an Internal Revenue Code Section 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 net operating losses ("NOLs") and investment tax credits which can be utilized for federal income tax purposes in 1993 and future years are limited to approximately $130 million. For financial reporting purposes, the deferred tax assets were restated to $52.9 million during the quarter ended September 30, 1993 to reflect the change in the federal statutory tax rate representing primarily the future tax benefits related to those carryforwards and a valuation allowance of $39.8 million has been recognized to offset these deferred tax assets. The resulting net asset recorded represents three years of NOL benefit. The Company has taken a conservative position that realization of the benefit of the NOLs beyond the three year period is difficult to predict and therefore was not recorded. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of September 30, 1993 are as follows:
(In Thousands) Net operating loss carryforwards $49,297 Allowance for doubtful accounts 1,267 Depreciation 890 Compensation liabilities 701 Capital leases 604 Other 131 -------- Total deferred tax assets 52,892 Valuation allowance (39,027) -------- Net deferred tax assets $13,865 -------- --------
The difference between the newly enacted statutory federal income tax rate of 35.0% and the effective rate for the nine months ended September 30, 1993 of 31.4% results primarily from state income taxes, goodwill amortization, and the utilization of NOLs. The difference between the effective rate for the nine months ended 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) September 30, 1993 and the year ended December 31, 1992 results primarily from recognizing the NOL tax benefits in accordance with Statement 109 along with reflecting the federal rate adjustment resulting from the Revenue Reconciliation Act of 1993 during the quarter ended September 30, 1993. The tax benefit from the exercise of stock options is added to capital in excess of par value during the period of exercise. During the quarter ended September 30, 1993, $2,250,000 was added to capital in excess of par value to reflect the reduction in the tax liability from the exercise of stock options. NOTE E -- PREFERRED A STOCK In each of July and October 1993, the Company declared a quarterly dividends of $0.32 per share on each of the 355,956 outstanding shares of Class A Preferred Stock. The July dividend was paid on September 30, 1993 to stockholders of record at the close of business September 13, 1993. The October dividend is payable December 31, 1993 to stockholders of record at the close of business December 13, 1993. The dividends were determined according to the Company's Restated Certificate of Incorporation. 13 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations For the three month period ended September 30, 1993, the Company reported net income of $10.9 million on revenue of $113.1 million. This compares to net income of $5.9 million on revenue of $95.7 million for the same period in 1992. For the nine months ended September 30, 1993, the Company reported income of $27.3 million before both the extraordinary loss (recorded in the second quarter of 1993) and the cumulative effect of an accounting change (recorded in the first quarter of 1993) on revenue of $319.2 million. This compares to net income of $13.6 million on revenue of $280.4 million for the nine months ended September 30, 1992. Gross margin as a percent of net revenue increased for both the three and nine months ended September 30, 1993 compared to the year earlier periods, while operating income increased $6.6 million and $20.0 million for the three and nine month periods ended September 30, 1993 compared to the same periods one year earlier. The improved operating results were primarily due to an increase in long distance traffic and network cost reductions as a percent of revenue. Operating Results as a Percent of Revenue
Three Months Ended Nine Months Ended September 30, September 30, --------------- ------------------ 1993 1992 1993 1992 ------ ------ ------ ------ Revenue 100.0% 100.0% 100.0% 100.0% Communication svcs. (53.6) (55.1) (54.2) (58.5) ------ ------ ------ ------ Gross Margin 46.4 44.9 45.8 41.5 Sales, gen'l & admin. (27.3) (29.7) (27.9) (28.4) Depreciation & amort. (2.9) (2.9) (2.8) (3.0) ------ ------ ------ ------ Operating Income 16.2% 12.3% 15.1% 10.1%
During the first quarter of 1993, the Company adopted Financial Accounting Standards Board Statement No. 109 "Accounting for Income Taxes" ("Statement 109") which resulted in the recording of a net deferred tax asset related primarily to future tax benefits which are expected to be realized upon utilization of a portion of the Company's tax net operating loss carryforwards. The cumulative effect of the change in method of accounting for income taxes increased net income $13.5 million for the nine months ended September 30, 1993. In May 1993, the Company completed an offering of $85.0 million principal amount 9.0% Senior Subordinated Notes ("1993 Notes") and in June 1993 redeemed all of the 11 7/8% Subordinated Notes ("1992 Notes") then outstanding. As a result, the Company recorded an extraordinary loss on the early retirement of debt of 14 $7.5 million, net of tax. Net income, which reflects both the extraordinary item and the change in method of accounting, was $33.3 million for the nine months ended September 30, 1993. Billable minutes of long distance service have continued to increase since the third quarter of 1990 when compared to the same quarter in the prior year and, this quarter, reached the highest level in the Company's history. The increase in billable minutes results from traffic growth generated by new customers, minutes from the acquisition of a customer base, increased minutes per customer and a decrease in billable minutes lost through attrition of existing customers. The results of operations for the three months ended September 30, 1993 reflect a continuation of the trend of strong financial performance as indicated by an 84.5% increase in net income from the comparable quarter of 1992. Revenue Revenue increased by 18.2% and 13.8% for the three and nine months ended September 30, 1993 from the comparable periods of 1992. This increase is the result of several factors. Most importantly, billable minutes for the three months ended September 30, 1993 reached the highest level in the Company's history, increasing by 21.3% and 16.4% for the three and nine months ended September 30, 1993 over the comparable periods in 1992. The additional billable minutes related to the acquisition of the Call Home America, Inc. customer base in July 1993 represented 3.1% of the increase of the quarter ended September 30, 1993 compared to the same quarter in the prior year. The increased revenue from new sales along with growth in revenue from existing customers continues to outpace revenue lost from the attrition of customers. The provision for uncollectible revenue was 2.0% of gross revenue for the nine months ended September 30, 1993 and 3.1% for the same period of 1992. The improved bad debt percentages result from strong controls and procedures implemented to improve the collection process and provide earlier detection of credit risks. Operating Expenses The Company's primary cost is for communication services, which represents the access costs for originating and terminating calls via local exchange carriers (primarily Bell Operating Companies). Also included in communication services are the cost of owning and leasing fixed price long-haul transmission capacity and the costs of obtaining lesser amounts of usage sensitive transmission capacity. The cost of communication services increased during the three and nine month periods ended September 30, 1993 compared to the same periods in 1992. This cost, however, declined as a percent of net revenue for the comparable periods. Through a combination of 15 the use of high volume fixed price leased facilities to transmit traffic and reduced international costs through contractual arrangements, the Company has successfully reduced its network costs as a percent of revenue. The Company continues to monitor its network configuration to provide better economics. Sales, general and administrative expenses increased by 8.9% and 11.7% (but were lower as a percent of revenue) for the three and nine months ended September 30, 1993 from the same periods one year earlier. The increase reflects increased commissions and other expenses related to higher sales. Management continues to emphasize its cost containment programs. Interest Expense Net interest expense decreased by $2.6 million and $4.5 million for the three and nine months ended September 30, 1993 compared to the same periods in 1992. This resulted from principal payments, reduced interest related to the replacement of the 1992 Notes with the 1993 Notes, as well as capital lease expirations. Income Taxes Application of Statement 109 as of January 1, 1993 resulted in the recording of a net deferred tax asset of approximately $13.9 million (restated at September 30, 1993 to reflect the higher federal statutory rate), 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 recording of the deferred tax assets representing three years of NOL benefit is conservative given the existing limitation of such benefit to approximately $10 million per year by Internal Revenue Code Section 382 and the likelihood of exceeding the pre-tax income levels necessary to realize the benefit given the Company's current operating results. The Company believes that realization of the benefit of the NOLs beyond the three-year period is difficult to predict and therefore is not recorded. The Company intends to evaluate the propriety of the deferred tax asset on an ongoing basis. The Company has not applied Statement 109 retroactively and thus did not restate prior year financial statements to reflect adoption of the new rules. The tax provision for the three and nine months ended September 30, 1993 includes the tax benefit of utilizing NOLs. These provisions also reflect the impact of the higher federal statutory rate resulting from the Revenue Reconciliation Act of 1993. 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 three and nine months ended 16 September 30, 1992 include amounts that would have been payable except for the availability of NOLs. The tax benefits of the loss carryforwards utilized were reported as extraordinary items for the three and nine months ended September 30, 1992. In 1992 the Company was subject to regular tax and due to Internal Revenue Code Section 382 "ownership change", the utilization of NOLs was limited. Seasonality The Company's long distance revenue is subject to 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, particularly during the fourth quarter. Liquidity and Capital Resources For the nine months ended September 30, 1993 and 1992, the Company's operations were profitable and generated positive cash flow from operations of $45.6 million and $14.8 million, respectively. The positive cash flow reflects thirteen consecutive quarters of increased revenue and operating profits compared to prior year comparable quarters. The positive cash flow from operations resulted in working capital of $2.7 million at September 30, 1993 compared to deficit working capital of $31.7 million at December 31, 1992. The increase in working capital is largely attributable to (a) the new Revolving Credit Facility which resulted in the reclassification of the facility to a long term liability, (b) the increase in accounts receivable due to the increase in revenue (c) the increase in other current assets attributable to the $5.0 million current portion of the deferred tax asset recorded to reflect the adoption of Statement 109 and (d) the increase in other current assets due to the current portion of the Call Home America, Inc. customer base. In addition to the positive cash flow from operations, the Company's liquidity position is further strengthened by the unused availability under its new 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 any of three alternatives. Each alternative has a varying interest rate calculation associated with it. Costs to the Company during the third quarter of 1993 approximated 6% per annum. The agreement includes financial covenants which allow the Company to further reduce interest expense 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 eligible receivables. As of September 30, 1993, the Company had 17 availability of $39.0 million under the line. Further evidence of the Company's strong liquidity position was the Company's ability to finance the cash needs of $15 million for the customer base acquisition from net cash flow from operations during the three months ended September 30, 1993. Because the Company has chosen to lease rather than own its transmission facilities, the Company's requirements for capital expenditures are relatively modest. Capital expenditures totaled $12.3 million for the first nine months of 1993 and $10.3 million for the year ended 1992. Capital expenditures during the nine months ended September 30, 1993 included projects for enhanced efficiency and technical advancement in the network, information systems and customer service. The future requirements for capital expenditures relate substantially 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 1993 is expected to be approximately $18 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. The Banks sold 8,386,216 shares of this ALC Common Stock, of which 3,796,000 were received upon conversion of all the Class B and Class C Preferred Stock. Upon completion of this offering, the Banks held an aggregate of 4,321,784 shares of ALC Common Stock, representing 15.0% of the total voting power of ALC capital stock (10.9% assuming the exercise of certain warrants and options). Prudential Insurance Company of America ("Prudential") sold the remaining 1,963,784 shares of which 963,784 represented the partial exercise of its 1990 Warrants. ALC did not receive any of the proceeds from the sale of these shares in the 1993 equity offering, although it did receive $1.9 million upon Prudential's partial exercise of 1990 Warrants. 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 by four of the five banks. In May 1993, the Company completed an offering of $85.0 million of 9.0% 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 in the aggregate amount of $72.4 million, and to reduce the amount outstanding under the Revolving Credit Facility. As a result of repaying the 1992 Notes an extraordinary loss of $7.5 million, net of tax, was recorded. The 1993 Notes provide additional benefits on both short and long term liquidity by reducing interest expense as well as deferring redemption requirements. 18 During July 1993, the Company acquired the specialized 800 customer base of Call Home America, Inc. The purchase price was comprised of: (1) approximately $15 million paid in July, and (2) a payment to be made based on 150% of monthly average revenue generated by the customers in April, May and June 1994. Call Home America, Inc. has approximately 50,000 customers, including parents of college students and frequent travelers, who will continue to receive services under the Call Home America (R) name. The current level of annualized revenue is approximately $20 million. These customers will also be offered other telecommunication services by Allnet. 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 stockholders of ALC at $25.50 per share. This offering included the exercise of 3,240,025 1990 Warrants including 2,128,005 held by General Electric Pension Trust, 1,012,020 held by Prudential and 100,000 held by a major lessor. In addition, the equity offering included the sale of 4,523,366 shares held by Prudential. As a result of the sale of their shares, Prudential no longer has a significant equity position in ALC. ALC did not receive any proceeds from the sale of these shares in this offering, but did receive $6.6 million from the exercise of the 1990 Warrants. Management believes that the Company's cash flow from operations, along with the availability of the Revolving Credit Facility will provide adequate sources of liquidity to meet the Company's anticipated short and long term liquidity needs. 19 PART II: OTHER INFORMATION Item 3. Defaults Upon Senior Securities Under the ALC Restated Certificate of Incorporation, as amended (the "Certificate"), shares of ALC Class A Preferred Stock ("Class A Preferred") were entitled to quarterly, cumulating (without interest) dividends of $0.40 per share commencing with the quarter ended September 30, 1987 through the quarter ended December 31, 1991. Thereafter, dividends on the Class A Preferred are calculated according to a formula set forth in the Certificate which is as follows: After December 31, 1991, the amount of the dividend which shall accrue on any given day during the period (the "Accrual Period") for such share shall be equal to the following: (a) With respect to any given day during the period of January 1, 1992, through December 31, 1992, (i) an amount equal to interest, at the daily rate equivalent (based upon a 365-day year) of "Adjusted Prime Rate" (as defined below) in effect on such day, on $6,000,000, plus (ii) an amount equal to (A) the quotient derived by dividing $0.40 by the number of days in the quarterly dividend period within which the given day shall occur, multiplied by (B) the difference between the total number of Class A Preferred shares outstanding on such day and 300,000 shares, divided by (iii) the total number of Class A Preferred shares outstanding on such day; and (b) With respect to any given day after December 31, 1992, (i) an amount equal to interest, at the daily rate equivalent of "Adjusted Prime Rate" (as defined below) in effect on such day, on $12,000,000, plus (ii) an amount equal to (A) the quotient derived by dividing $0.40 by the number of days in the quarterly dividend period within which the given day shall occur, multiplied by (B) the difference between the total number of Class A Preferred shares outstanding on such day and 600,000 shares, divided by (iii) the total number of Class A Preferred shares outstanding on such day; and (c) For purposes of this formula, the term "Adjusted Prime Rate" shall mean one percent (1%) plus the "prime rate" published in The Wall Street Journal 20 on the first business day of the quarterly dividend period within which the given day shall occur. ALC paid $1.5 million in cash dividends to the Class A Preferred holders in 1988. On July 22, 1993, the Board of Directors of ALC declared a current quarterly dividend of $0.32 per share on each of the 355,956 issued and outstanding shares of Class A Preferred. The dividend was paid September 30, 1993 to stockholders of record at the close of business September 13, 1993. On October 21, 1993, the Board of Directors of ALC declared a current quarterly dividend of $0.32 per share on each of the 355,956 issued and outstanding shares of Class A Preferred. The dividend is payable on December 31, 1993 to stockholders of record at the close of business December 13, 1993. As of September 30, 1993, the dividend arrearage on the Class A Preferred was approximately $3,125,000. Should the Company ever declare a dividend on the Class A Preferred but then fail to pay within a given time frame a certain minimum of such declared dividend (according to procedures set forth in the Company's Certificate), additional dividends shall accrue. The Certificate provides that ALC must redeem the shares of Class A Preferred at $20.00 per share plus accrued dividends. If ALC does not make a scheduled redemption,, the Class A Preferred holders can elect to convert the amount of accrued and unpaid dividends thereon to ALC Common Stock. Future redemption obligations relating to the Class A Preferred consist of one scheduled payment of approximately $7.1 million (plus accrued and unpaid dividends on the shares then being redeemed) at December 31, 1996. Item 4. Submission of Matters to a Vote of Security Holders During the third quarter of the fiscal quarter ended September 30, 1993, a Proxy Statement dated June 14, 1993 was furnished to the Company's stockholders in connection with the uncontested election of directors as well as approval of an amendment to the Company's 1990 Stock Option Plan at the Annual Meeting of Shareholders held July 22, 1993. (a) Election of directors In accordance with the Certificate, the holders of the Class A Preferred and the holders of the ALC Common Stock, each voting as a separate class, are each entitled to one vote per share and are entitled to elect one and two members, respectively, of the Board of Directors. In addition, the affirmative vote of a majority of all the votes entitled to be cast by all holders of shares of the ALC Class A Preferred and the ALC Common Stock (collectively, the "ALC Stock") is required to elect in the aggregate four members of the Board of Directors; provided, however, as to the election of such directors, (i) each outstanding share of ALC Common Stock is entitled to one vote and (ii) each outstanding share of the Class A Preferred is entitled to 0.166 of one vote. The name of each director elected at the meeting, and a separate tabulation with respect to each nominee, are set forth below: 21
Class Nominee Votes for Votes Withheld - ----- ------- --------- -------------- All Richard D. Irwin 22,806,357 524,835 All Marvin C. Moses 22,805,461 525,731 All John M. Zrno 22,805,757 525,435 All William H. Oberlin 22,805,222 525,970 Common Richard J. Uhl 22,752,083 528,539 Common Michael E. Faherty 22,752,695 527,988 Class A Saulene M. Richer 301,555 3,069
(b) Approval of an amendment to the Company's 1990 Stock Option Plan* Number of votes cast FOR such approval 12,767,881 Number of votes cast AGAINST such approval 7,119,835 Number of ABSTENTIONS 1,678,051 Number BROKER NON-VOTES 1,765,425 - ------------------- * (i) Each outstanding share of ALC Common Stock is entitled to one vote and (ii) each outstanding share of the Class A Preferred is entitled to 0.166 of one vote. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits required by Item 601 of Regulation S-K EXHIBIT INDEX
Incorporated Page Exhibit Filed Herein by Number Number Description Herewith Reference to: Herein - ------ ----------- -------------- ------------- ------ 11.1 Computation of Earnings Per Share X
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/A was filed by the Company on September 16, 1993 to amend the Form 8-K previously filed by the Company on July 15, 1993 to describe the acquisition of the customer base of Call Home America, Inc. closed on July 3, 1993. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALC COMMUNICATIONS CORPORATION (Registrant} By: /s/ Marvin C. Moses Marvin C. Moses, Executive Vice President and Chief Financial Officer By: /s/ Marilyn M. Lesnau Marilyn M. Lesnau, Vice President, Controller and Chief Accounting Officer Dated: November 12, 1993 23 7,040,491 SHARES [ALLNET LOGO] [LOGO] COMMUNICATIONS CORPORATION COMMON STOCK ------------------------ The 7,040,491 shares of Common Stock of ALC Communications Corporation offered hereby are being sold by the Selling Stockholders. ALC will not receive any of the proceeds from the sale of the shares of Common Stock, other than the proceeds it will receive upon the exercise of certain warrants by the Selling Stockholders. See "Use of Proceeds" and "Selling Stockholders." Of the 7,040,491 shares of Common Stock offered, 5,635,491 shares are being offered hereby in the United States (the "U.S. Shares") and 1,405,000 shares are being offered in a concurrent international offering outside the United States and Canada. The price to the public and aggregate underwriting discounts and commissions per share will be identical for both offerings. See "Underwriting." The Common Stock is traded on the American Stock Exchange under the symbol "ALC." The last reported sale price of the Common Stock on September 20, 1993 was $25.50 per share. See "Price Range of Common Stock." SEE "RISK FACTORS" FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- Underwriting Proceeds Price to Discounts and to Selling Public Commissions(1) Stockholders(2) - ------------------------------------------------------------------------------------------------- Per Share......................... $25.50 $.96 $24.54 - ------------------------------------------------------------------------------------------------- Total............................. $179,532,520.50 $6,758,871.36 $172,773,649.14 - ------------------------------------------------------------------------------------------------- Total Assuming Full Exercise of Over-Allotment Option(3)........ $202,482,520.50 $7,622,871.36 $194,859,649.14 - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
(1) See "Underwriting." (2) Before deducting expenses estimated at $100,000, which are payable by ALC. (3) Assuming exercise in full of the 45-day option granted by the Selling Stockholders to the Underwriters to purchase up to 900,000 additional shares, on the same terms, solely to cover over-allotments. See "Underwriting." ------------------------ The U.S. Shares are offered by the U.S. Underwriters, subject to prior sale, when, as and if delivered to and accepted by the U.S. Underwriters, and subject to their right to reject orders in whole or in part. It is expected that delivery of the Common Stock will be made in New York City on or about September 27, 1993. ------------------------ PAINEWEBBER INCORPORATED GOLDMAN, SACHS & CO. WHEAT FIRST BUTCHER & SINGER CAPITAL MARKETS ------------------------ THE DATE OF THIS PROSPECTUS IS SEPTEMBER 20, 1993. 24 MAP OF THE ALLNET(R) NETWORK (AS OF MARCH 31, 1993) [MAP] DIGITAL SWITCH - ALLNET(R) SALES SITE - --- 100% DIGITAL TRANSMISSION AVAILABLE INFORMATION ALC Communications Corporation is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and, in accordance therewith, files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). These materials can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois, 60661-2511; and 7 World Trade Center, 13th Floor, New York, New York, 10008. Copies of such materials can also be obtained from the Commission's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C., 20549, at prescribed rates. The Common Stock is listed on the American Stock Exchange and reports and other materials also may be inspected at the offices of the American Stock Exchange. ------------------------- THE U.S. SHARES MAY NOT BE OFFERED OR SOLD, DIRECTLY OR INDIRECTLY, OUTSIDE THE UNITED STATES OR TO ANY PERSON WHO IS NOT A U.S. PERSON, AS PART OF THE DISTRIBUTION OF THE U.S. SHARES. FOR A DESCRIPTION OF THIS AND OTHER RESTRICTIONS ON THE OFFERING AND SALE OF THE SHARES, SEE "UNDERWRITING." ------------------------- IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 25 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. All information set forth herein has been adjusted to reflect a one-for-five reverse stock split of the Common Stock effected in September 1991. Unless otherwise indicated, the information in this Prospectus assumes that the Underwriters' over-allotment option will not be exercised. Investors should carefully consider the information set forth under the caption "Risk Factors." THE COMPANY ALC Communications Corporation ("ALC") is the holding company for Allnet Communication Services, Inc., and conducts no other business. ALC and Allnet Communication Services, Inc. are collectively referred to herein as "Allnet" or the "Company." Allnet 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. Allnet is one of a few nationwide carriers of long distance services and in 1992 carried in excess of 600 million calls over its network. The Company transmits long distance telephone calls through its network facilities over transmission lines which are primarily leased from other long haul transmission providers. All of the transmission facilities utilized by the Company are digital, allowing it to offer the highest quality transmission currently available. Each call is routed through at least one of the Company's 16 digital switching centers, which select the most efficient and highest quality transmission alternative among those available to the Company to complete the call. 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 approximately $65 billion, comprise the first tier. Allnet is positioned in the second tier with four other companies with annual revenues of $250-$800 million each (without giving effect to the recent merger of LDDS Communications, Inc., Resurgens Communications Group, Inc. and Metromedia Communications Corporation (the "LDDS Merger")). The third tier consists of more than 300 companies with annual revenues of less than $250 million each, the majority being 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 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. 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. Several of the Company's second tier competitors and all of the third tier 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. The Company currently serves approximately 144,000 commercial customers which account for approximately 89% of the Company's revenue. In order to take advantage of its non-peak hour capacity, the Company also provides long distance services to approximately 100,000 residential customers (excluding customers of Call Home America, Inc., recently acquired by the Company) and is working with a variety of companies, trade associations and special interest groups to increase the size of its residential customer base while minimizing the cost of such residential customer acquisition. Competition in the industry is based on pricing, customer service, network quality and value-added services. The prices and promotions offered for the Company's services are designed to be competitive with other long distance telephone carriers. The Company markets its products and services through approximately 445 field sales representatives who provide face-to-face contact with current and potential customers. Allnet has made steady improvements in its financial performance since the beginning of 1990. After five years of losses, Allnet has generated ten consecutive quarters of profit as of June 30, 1993. This performance is a result of increases in traffic volume ("billable minutes") and an improvement in controlling network costs and sales, general and administrative expense. The increase in billable minutes is a result of several factors, including an increase in both the size and productivity of the field sales organization, expanded product offerings, and a reduction in customer attrition. 3 26 REFINANCING, CLASS A EXCHANGE, 1992 EQUITY OFFERING AND 1993 EQUITY OFFERING In August 1992, Allnet completed a two phase refinancing begun in 1990, consisting of a 1990 phase and a 1992 phase (together, the "Refinancing"). As a result of the Refinancing it rescheduled substantially all of its funded debt. See "The Refinancing." In June 1990, The Prudential Insurance Company of America ("Prudential") and the Trustees of General Electric Pension Trust ("General Electric") were issued warrants ("1990 Warrants") to purchase 1,975,804 and 2,305,105 shares of Common Stock, respectively, pursuant to the 1990 Note Agreements (as defined in "The Refinancing"). Shares to be acquired upon exercise of the 1990 Warrants and sold in this Offering have been included in this Prospectus pursuant to the Registration Rights Agreement among Prudential, General Electric and ALC (and certain other parties) dated June 4, 1990. In June 1990, in exchange for certain lease concessions DSC Communications Corporation ("DSC"), a major switch vendor, received from ALC warrants to purchase 100,000 shares of Common Stock. Such shares have been included in this Prospectus pursuant to the Registration Rights Agreement between DSC and ALC dated June 1, 1990. Prior to August 18, 1992, Communications Transmission, Inc. ("CTI") owned 14,324,000 shares of Common Stock and all of the outstanding shares of the Class B Senior Convertible Preferred Stock ("Class B Preferred") and the Class C Senior Convertible Preferred Stock ("Class C Preferred") of ALC, all of which had been pledged to secure loans CTI owed to five banks (the "Banks"). As part of a restructuring of CTI, which was accomplished in conjunction with the 1992 phase of the Refinancing, CTI transferred all of these shares pro rata to the Banks. Subsequent to that transfer, in October 1992, the Banks in the aggregate sold 3,000,000 shares of Common Stock in the 1992 Equity Offering (as defined in "The Refinancing"). See "Certain Relationships and Related Transactions -- Banks and CTI Stock Ownership in the Company." In addition, pursuant to an agreement between ALC and certain holders of Class A Preferred Stock (the "Class A Preferred Group"), the Class A Preferred Group exchanged $58.7 million aggregate redemption value (including accrued dividends) of ALC Class A Preferred Stock (the "Class A Preferred") for 6,399,227 shares of Common Stock (the "Class A Exchange"). The shares of Common Stock received by the Class A Preferred Group were sold to the public in the 1992 Equity Offering. As a result of the Class A Exchange, the Company's aggregate dividend and redemption obligations relating to the shares of Class A Preferred were significantly reduced, and the stockholders' deficit was improved by approximately $56 million. In March 1993, the Banks and Prudential sold an aggregate of 10,350,000 shares of Common Stock to the public (the "1993 Equity Offering"). Immediately following the 1993 Equity Offering, Prudential received 1,412,000 shares of Common Stock from the Banks. Subsequently, the Banks (except for one Bank) sold a sufficient number of shares of Common Stock to result in their realizing full repayment of debts owed to them by CTI, and transferred the balance of shares of Common Stock held by them (3,111,366 shares) to Prudential. Certain of these shares are subject to an escrow agreement. See "Certain Relationships and Related Transactions." THE OFFERING Common Stock offered by the Selling Stockholders: Prudential....................................... 4,905,386 shares(1) General Electric................................. 2,035,105 shares(2) DSC.............................................. 100,000 shares(2) Total......................................... 7,040,491 shares Common Stock to be outstanding after the Offering......................................... 32,198,415 shares(3) Use of Proceeds.................................... ALC will not receive any of the proceeds from the sale of the shares of Common Stock. The proceeds it receives upon exercise of warrants by the Selling Stockholders will be used for general corporate purposes. American Stock Exchange Symbol..................... ALC
- ------------------------- (1) These shares consist of 3,893,366 shares of Common Stock Prudential received from the Banks, of which 1,378,626 shares are subject to an escrow agreement, and 1,012,020 shares it will receive upon exercise of 1990 Warrants. See "Certain Relationships and Related Transactions." (2) These shares will be received pursuant to the exercise of warrants. (3) Does not include 7,869,467 shares of Common Stock which may be acquired pursuant to the exercise of other outstanding warrants and options. See "Principal Stockholders." 4 27 SUMMARY FINANCIAL INFORMATION
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------------------------- -------------------- 1988 1989 1990 1991 1992 1992 1993 -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Revenue..................... $394,115 $333,765 $326,004 $346,873 $376,064 $184,702 $206,077 Operating income (loss)..... (7,765) (1,351) (2,753) 23,850 40,684 16,588 30,016 Interest expense............ 22,178 21,338 21,250 18,128 17,158 8,413 6,520 Income (loss) before income taxes, extraordinary items and the cumulative effect of accounting change...... (29,943) (22,689) (19,643) 5,722 23,526 8,175 23,496 Income (loss) before extraordinary items and cumulative effect of accounting change......... (29,943) (22,689) (19,643) 2,717 13,826 4,653 16,396 Net income (loss)........... (29,943) (21,324) (19,643) 5,347 20,826 7,701 22,406 Net income (loss) available for Common Stockholders(1)........... (35,951) (27,156) (25,402) (339) 16,444 4,918 22,140 Income (loss) per common and common equivalent share before extraordinary items and the cumulative effect of accounting change...... $ (13.21) $ (10.43) $ (2.29) $ (0.17) $ 0.43 $ 0.09 $ 0.46 Net income (loss) per common and common equivalent share.......... $ (13.21) $ (9.93) $ (2.29) $ (0.02) $ 0.74 $ 0.24 $ 0.63 Weighted average common and common equivalent shares outstanding............... 2,723 2,735 11,074 17,216 22,141 20,633 35,058
JUNE 30, 1993 ----------------------------- DECEMBER 31, 1992 ACTUAL AS ADJUSTED(2) ----------------- -------- -------------- (IN THOUSANDS) BALANCE SHEET DATA: Total assets................................... $ 143,266 $166,614 $168,137 Total debt(3).................................. 100,510 93,499 88,628 Class A Preferred.............................. 9,659 9,925 9,925 Stockholders' equity (deficit)................. (20,871) 4,574 10,968
- ------------------------- (1) To arrive at net income (loss) available for Common Stockholders, the Company's net income (loss) is adjusted by amounts relating to the accretion of discount on Class A Preferred, the accretion of a contract payment to certain members of the Class A Preferred Group and dividends on Class A Preferred accrued but not declared. (2) As adjusted to reflect the exercise of warrants by the Selling Stockholders. (3) Excludes trade debt. 5 28 RISK FACTORS Investors should carefully consider the following risk factors, in addition to the other information contained in this Prospectus, before purchasing the Common Stock offered hereby. HISTORICAL LOSSES; HIGH DEGREE OF LEVERAGE For the years ended December 31, 1992 and 1991, Allnet had net income of $20.8 million and $5.3 million, respectively. Allnet had income, before extraordinary items and the cumulative effect of an accounting change, of $16.4 million for the six months ended June 30, 1993 and income before extraordinary items of $4.7 million for the six months ended June 30, 1992. From its formation in 1985 through the year ended December 31, 1990, the Company incurred substantial cumulative financial losses. The total accumulated deficit at June 30, 1993 was $125.9 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." At June 30, 1993, the Company's total funded debt aggregated $93.5 million, excluding $9.9 million in payment obligations relating to the Class A Preferred. This amount of debt relative to the Company's Stockholders' Equity ($4.6 million at June 30, 1993) could affect the rates and terms should additional financing be necessary. In mid-1992, the Company completed the Refinancing, as described under the caption "The Refinancing." Although Allnet historically has had negative working capital, the Company's working capital position at June 30, 1993 was positive $4.3 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPETITION The long distance telecommunications industry is highly competitive. Competition is based upon pricing, customer service, network quality and value-added services. AT&T is a dominant competitor in the long distance segment of the telecommunications services market. In addition to AT&T, Allnet competes with other national and regional long distance carriers. The Company believes that there are more than 300 companies in the long distance telecommunications market. The first tier companies and some of the second tier companies have substantially greater market share and financial resources than the Company. The ability of Allnet to compete effectively with other carriers depends upon its continued ability to maintain high quality services at prices that generally are comparable to those charged by its competitors. Various regulatory factors can also have an impact on the Company's ability to compete. GOVERNMENT REGULATION Allnet is regulated at the federal level by the Federal Communications Commission ("FCC") and at the state level by various state public utility commissions. Allnet is required to file tariffs for its services. The current trend at both the federal and state level is toward less regulation for Allnet 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. Regulation can also affect the costs of business for Allnet and its long distance competitors. In order to provide their services, long distance carriers such as Allnet must purchase "access services" from local exchange carriers to originate and terminate calls. Presently, pricing of those "access services" is on an equal rate per minute ("equal per unit") basis for "local transport." On September 17, 1992, the FCC announced it would (1) maintain the existing "equal per unit" pricing rules until late 1993, (2) implement an interim rate structure and pricing plan during the subsequent two years, and (3) commence further rulemaking for consideration of a permanent rate structure beginning no earlier than late 1995. See "Business -- Regulation." 6 29 CUSTOMER TURNOVER A high level of customer attrition is inherent in the long distance industry. Attrition (defined as the average of the last three months' revenue from customers that have terminated or dropped to zero usage as a percentage of total revenue) averaged 1.9% per month for the six months ended June 30, 1993, 1.8% per month for the year ended December 31, 1992, 2.0% per month for the year ended December 31, 1991 and 2.2% per month for the year ended December 31, 1990. To retain its commercial and residential customer base, the Company implements programs and enhancements such as value-added services, agent and association sales to residential users, improved customer service and competitive price adjustments. AVAILABILITY OF TRANSMISSION CIRCUITS The future profitability of the Company is based upon its ability to transmit long distance telephone calls over transmission facilities leased from others on a cost-effective basis. The Company owns only a minor portion of its transmission facilities, and its long distance telephone business historically has been dependent upon lease arrangements with facilities-based carriers for the transmission of calls. While the Company believes that it now has ample access to transmission facilities at attractive rates and expects to continue to have such access in the foreseeable future, this ongoing availability cannot be assured. See "Business -- Transmission Facilities" and "Certain Relationships and Related Transactions -- CTI Transactions." FUTURE SALES OF COMMON STOCK ALC is not able to estimate the amount, timing or nature of future sales of Common Stock held by the Selling Stockholders or other holders of significant amounts of Common Stock, because such sales and option exercise decisions depend on market conditions, individual circumstances of the holders and other conditions. Any sales of substantial amounts of Common Stock in the open market may significantly reduce the market price of the outstanding shares of Common Stock. Certain of the Company's stockholders and warrantholders have the right to require the Company to register restricted securities held by them. The Company has filed a "shelf" registration statement (of which this Offering is a part) that will permit the sale from time to time, in addition to the shares being sold in this Offering, of up to 1,370,088 shares of Common Stock, including 630,000 shares owned by Prudential and 270,000 shares which General Electric may acquire upon exercise of 1990 Warrants. Of these, 900,000 shares will be sold in this Offering to the extent the over-allotment option is exercised. ALC, its directors and officers, and the Selling Stockholders have agreed, except under certain limited circumstances, not to dispose of any shares of Common Stock during a period of 180 days (or in the case of the Selling Stockholders with respect to an underwritten public offering as to which a registration statement has become effective, 120 days) after the date of this Prospectus without the prior written consent of the Underwriters. See "Shares Eligible for Future Sale" and "Underwriting." 7 30 USE OF PROCEEDS ALC will not receive any of the proceeds from the sale of the Common Stock. Proceeds to ALC from exercise of warrants by the Selling Stockholders of $6.4 million will be added to working capital and used for general corporate purposes. PRICE RANGE OF COMMON STOCK The Common Stock has been traded on the American Stock Exchange ("AMEX") since September 4, 1991 and is listed under the symbol ALC. From July 15, 1990 until September 4, 1991, the Common Stock was traded over-the-counter and listed on the Over-the-Counter Bulletin Board under the symbol ALCC. The table below sets forth: (1) the best approximation of the high and low bid prices of the Common Stock on the over-the-counter market for the first eight months in 1991; and (2) the ranges of high and low closing sales prices of the Common Stock as reported on the AMEX composite tape for the last four months of 1991, calendar year 1992 and the first six months of calendar year 1993. The over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
1991 1992 1993 -------------- -------------- ---------------- HIGH LOW HIGH LOW HIGH LOW ----- ----- ----- ----- ------ ------ 1st quarter....................... $3.15 $1.05 $7.00 $4.25 $16.13 $12.50 2nd quarter....................... 4.50 2.85 6.00 4.25 20.00 15.50 3rd quarter....................... 5.00 3.10 6.38 5.00 -- -- 4th quarter....................... 5.00 3.75 14.13 5.13 -- --
As of September 17, 1993, there were 2,179 holders of record of the Common Stock. The high and low closing sales prices per share of the Common Stock for the period from July 1, 1993 to September 20, 1993, as reported by AMEX, were $27.00 and $19.75, respectively. The last reported sale price of the Common Stock on September 20, 1993 was $25.50 per share. DIVIDEND POLICY ALC has never declared or paid any cash dividends on the Common Stock. ALC has paid certain dividends on the Class A Preferred. See "Description of Capital Stock." Except as otherwise required under the terms of the Class A Preferred, ALC currently intends to retain its earnings to service debt and finance future growth and does not anticipate paying any cash dividends on the Common Stock in the foreseeable future. In addition, the documents governing certain indebtedness of the Company limit the payment of cash dividends. 8 31 THE COMPANY ALC is the holding company for Allnet Communication Services, Inc., and conducts no other business. Allnet 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. Allnet is one of the few nationwide carriers of long distance services and in 1992 carried in excess of 600 million calls over its network. The Company's predecessor, Combined Network, Inc., was founded in Chicago, Illinois in 1980. Its name was changed in November 1983 to Allnet Communication Services, Inc. In 1985, Allnet Communication Services, Inc. merged with Lexitel Corporation, a smaller regional long distance company, and became the wholly owned subsidiary of ALC. Following the merger, difficulties experienced in integrating the two companies resulted in revenue declines and net losses. In addition to internal problems, the industry as a whole was going through rapid changes, including severe price competition from the three major carriers, AT&T, MCI and Sprint. In 1988, CTI purchased preferred stock of ALC for a total equity investment of $30.0 million, thereby acquiring a controlling interest in ALC, and in 1989 loaned $20.0 million to the Company. CTI's revenue was dependent to a significant degree upon Allnet as a customer of CTI's transmission services. Communications Transmission Group, Inc. ("CTGI"), then a wholly owned subsidiary of CTI, was (and remains) a provider of a significant portion of the Company's transmission network. In late 1988, the Company's present management team was installed by CTI with the goal of restoring the Company to profitability. The management team was led by former senior executives of Cable and Wireless North America, Inc. ("C&W"), a subsidiary of Cable & Wireless plc, the Great Britain based telecommunications group, who had built C&W's presence in the long distance industry in the United States. The management team implemented a number of changes commencing in 1989, including the following: (i) redirection of sales and marketing efforts to focus on face-to-face sales to small-and medium-sized commercial customers; (ii) enhancement of existing product offerings and introduction of new products with a focus on value-added services; (iii) increase in training for the sales force and customer service personnel; (iv) implementation of a comprehensive quality program; (v) consolidation and upgrade of the transmission network and switching equipment to become 100% digital, resulting in improved quality and reduced costs; and (vi) renegotiation of transmission contracts which further reduced costs. In June 1990, the Company began the Refinancing which was undertaken in order to allow the operating changes to take effect without the added burden of significant near term debt retirement schedules. The basic components of the 1990 phase of the Refinancing are outlined under the caption "The Refinancing." In connection with the 1990 phase of the Refinancing, CTI acquired 14,324,000 shares of Common Stock in addition to its earlier equity interest. In late 1991, CTI sold the $20.0 million loan due from the Company, to the Banks, CTI's lenders. In August 1992, CTI conveyed all of its equity interest in ALC to the Banks in exchange for the release of certain of its obligations to the respective Banks pro rata, in proportion to these obligations. See "Certain Relationships and Related Transactions -- Banks and CTI Stock Ownership in the Company." In June and August 1992, the Company concluded the Refinancing and rescheduled substantially all of its funded debt to reduce its debt service requirements over the next several years. The basic components of the 1992 phase of the Refinancing are outlined under the caption "The Refinancing." Immediately following the 1993 Equity Offering, Prudential received 1,412,000 shares of Common Stock from the Banks. In the 1992 Equity Offering, the 1993 Equity Offering and in subsequent market transactions, the Banks (except for one Bank) sold a sufficient number of shares of Common Stock to require the transfer of the remaining shares held by them (3,111,366 shares) to Prudential pursuant to a prior agreement. In May 1993, the Company paid in full amounts owing under the Restructured Promissory Note (the $20.0 million loan originally made by CTI). Allnet has made steady improvements in its financial performance since June 30, 1990. After five years of losses, Allnet has generated ten consecutive quarters of profit as of June 30, 1993. This performance is a result of increases in the amount of billable minutes and an improvement in controlling network costs and sales, general and administrative expense. The increase in billable minutes is a result of several factors, including an 9 32 increase in both the size and productivity of the field sales organization, expanded product offerings, and a reduction in customer attrition. 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, AT&T, MCI and Sprint, which generate an aggregate of approximately 88% of the nation's long distance revenue of approximately $65 billion and which comprise the first tier. Allnet is positioned in the second tier with four other companies with annual revenues of $250-$800 million each (without giving effect to the LDDS Merger). The third tier consists of more than 300 companies with annual revenues of less than $250 million each, the majority being below $50 million each. Allnet and its second tier competitors target 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 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. 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. Several of the Company's second tier competitors and all of the third tier 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. The Company currently serves approximately 144,000 commercial customers which account for approximately 89% of the Company's revenue. In order to take advantage of non-peak capacity, the Company also provides long distance services to approximately 100,000 residential customers (excluding customers of Call Home America, Inc., recently acquired by the Company) and is working with a variety of companies, trade associations and special interest groups to increase the size of its residential customer base while minimizing the cost of such residential customer acquisition. The prices and promotions offered for the Company's services are designed to be competitive with other long distance telephone carriers. The Company markets its products and services through face-to-face contact with an emphasis on pricing, customer service, network quality and value-added services. The successful implementation of this strategy over the past several years has resulted in increased sales, increased operating profit margins, reduced customer attrition and more efficient use of the Company's network. The Company's principal executive offices are located at 30300 Telegraph Road, Suite 350, Bingham Farms, Michigan 48025. The Company has sales offices and operations facilities throughout the United States. The Company's telephone number is (313) 647-4060. 10 33 CAPITALIZATION The following table sets forth the consolidated capitalization of ALC as of June 30, 1993, and as adjusted.
JUNE 30, 1993 --------------------------- ACTUAL AS ADJUSTED(1) --------- -------------- (IN THOUSANDS) Total Short Term Obligations........................................ $ 860 $ 860 --------- -------------- --------- -------------- Long Term Debt: Revolving Credit Facility......................................... $ 4,871 $ 0 Notes payable, capitalized leases and other long term debt........ 3,455 3,455 Senior Subordinated Notes......................................... 84,313 84,313 --------- -------------- Total Long Term Debt......................................... 92,639 87,768 --------- -------------- Class A Preferred................................................... 9,925 9,925 Stockholders' Equity: Common Stock...................................................... 289 320 Capital in excess of par value.................................... 114,221 123,909 Paid-in capital warrants.......................................... 15,955 12,630 Accumulated deficit............................................... (125,891) (125,891) --------- -------------- Total Stockholders' Equity................................... 4,574 10,968 --------- -------------- Total Capitalization.................................... $ 107,138 $ 108,661 --------- -------------- --------- --------------
- ------------------------- (1) As adjusted to reflect the exercise of warrants by the Selling Stockholders. 11 34 SELECTED FINANCIAL DATA The selected financial data presented below for, and as of the end of, each of the years in the five year period ended December 31, 1992, are derived from the consolidated financial statements of ALC. Consolidated financial statements for ALC for the three fiscal years ended December 31, 1992, are included elsewhere in this Prospectus. The selected financial data as of and for the six months ended June 30, 1993 and 1992 have been derived from the unaudited consolidated financial statements of ALC included elsewhere in this Prospectus and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the information set forth therein. The selected financial data should be read in conjunction with the financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------------------- ----------------------- 1988 1989 1990 1991 1992 1992 1993 -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) INCOME STATEMENT DATA: Revenue.................................... $394,115 $333,765 $326,004 $346,873 $376,064 $184,702 $206,077 Operating expenses: Cost of communication services........... 263,149 215,555 209,612 212,716 216,889 111,286 112,291 Sales, general and administrative........ 119,954 103,647 102,838 97,964 107,294 51,255 58,090 Depreciation and amortization............ 18,777 15,914 13,320 12,343 11,197 5,573 5,680 Financial restructuring.................. 2,987 -------- -------- -------- -------- -------- -------- -------- Total operating expenses............. 401,880 335,116 328,757 323,023 335,380 168,114 176,061 -------- -------- -------- -------- -------- -------- -------- Operating income (loss).............. (7,765) (1,351) (2,753) 23,850 40,684 16,588 30,016 Interest expense........................... 22,178 21,338 21,250 18,128 17,158 8,413 6,520 Gain on sale of subsidiary................. 4,360 -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes, extraordinary items and cumulative effect of accounting change..................... (29,943) (22,689) (19,643) 5,722 23,526 8,175 23,496 Income taxes............................... 3,005 9,700 3,522 7,100 -------- -------- -------- -------- -------- -------- -------- Income (loss) before extraordinary items and cumulative effect of accounting change................................... (29,943) (22,689) (19,643) 2,717 13,826 4,653 16,396 Extraordinary items(1)..................... 1,365 2,630 7,000 3,048 (7,490) Cumulative effect of change in method of accounting for income taxes............ 13,500 -------- -------- -------- -------- -------- -------- -------- Net income (loss).................... $(29,943) $(21,324) $(19,643) $ 5,347 $ 20,826 $ 7,701 $ 22,406 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) available for Common Stockholders(2).......................... $(35,951) $(27,156) $(25,402) $ (339) $ 16,444 $ 4,918 $ 22,140 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) per common and common equivalent share before extraordinary items and the cumulative effect of accounting change........................ $ (13.21) $ (10.43) $ (2.29) $ (0.17) $ 0.43 $ 0.09 $ 0.46 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) per common and common equivalent share.................. $ (13.21) $ (9.93) $ (2.29) $ (0.02) $ 0.74 $ 0.24 $ 0.63 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Weighted average common and common equivalent shares........................ 2,723 2,735 11,074 17,216 22,141 20,633 35,058 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- BALANCE SHEET DATA (AT END OF PERIOD): Total assets............................... $167,887 $161,015 $149,375 $140,846 $143,266 $144,480 $166,614 Total debt................................. 101,998 126,323 135,884 124,579 100,510 125,408 93,499 Class A Preferred.......................... 46,175 52,007 57,391 62,434 9,659 66,235 9,925 Stockholders' equity (deficit)............. (51,201) (78,122) (102,070) (102,300) (20,871) (97,352) 4,574
- ------------------------- (1) Extraordinary item for the year ended December 31, 1989 pertains to gain on early retirement of debt and for the years ended December 31, 1991 and 1992, and for the six months ended June 30, 1992, to utilization of net operating loss carryforwards and for the six months ended June 30, 1993 to the loss on early retirement of debt. (2) To arrive at net income (loss) available for Common Stockholders, the Company's net income (loss) is adjusted by amounts relating to the accretion of discount on Class A Preferred, the accretion of a contract payment to certain members of the Class A Preferred Group and dividends on Class A Preferred accrued but not declared. 12 35 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW ALC was formed in 1985 in connection with the merger of Allnet Communication Services, Inc. and Lexitel Corporation, and the surviving entity became a wholly-owned subsidiary of ALC. The Company incurred significant losses for the years ended December 31, 1986 through December 31, 1990. As the result of these losses, the Company experienced cash flow shortages which required external cash to fund operations. During this period, CTI made an equity investment of $30.0 million (in 1988), acquiring a controlling interest in the Company, and loaned the Company $20.0 million (in 1989). Subsequent to its equity investment, CTI put in place a new management team, which implemented a number of changes commencing in 1989, including the following: (i) redirection of sales and marketing efforts to focus on face-to-face sales to small-and medium-sized commercial customers; (ii) enhancement of existing product offerings and introduction of new products with a focus on value-added services; (iii) increase in training for the sales force and customer service personnel; (iv) implementation of a comprehensive quality program; (v) consolidation and upgrade of the transmission network and switching equipment to become 100% digital, resulting in improved quality and reduced costs; and (vi) renegotiation of transmission contracts which further reduced costs. In June 1990, the Company began the Refinancing which allowed for the continued operation of the Company while providing the interim resources necessary for financial stability. The 1990 phase of the Refinancing included the components set forth in the following paragraph, which provided for additional sources of capital and reduction or deferral of debt payments. The Note and Warrant Purchase Agreements ("1990 Note Agreements") provided $7.2 million and included warrants to purchase up to 4,708,999 shares of ALC Common Stock at $3.00 per share ("1990 Warrants"). Interest and principal payments were rescheduled for approximately 96% of the Company's outstanding 11 7/8% Senior Subordinated Debentures ("Original Debentures"). The $30.0 million Revolving Credit Facility was renewed until June 1992. The $20.0 million loan (the "Restructured Promissory Note") from CTI to Allnet was extended until June 1992 with a reduction in interest rates. A significant transmission contract between the Company and CTGI, an affiliate of CTI, was modified to significantly reduce service costs payable by ALC to CTGI. In consideration for concessions, ALC issued 716,200 shares of ALC Class D Convertible Preferred Stock ("Class D Preferred") to CTI which was subsequently converted to 14,324,000 shares of ALC Common Stock. Finally, a major equipment lease was modified to reduce monthly payments. As a result of the 1990 phase of the Refinancing, the Company had significant principal and interest payments scheduled in 1992. At the conclusion of the 1990 phase of the Refinancing, management believed that cash flow from operations would be inadequate to meet the debt service requirements as scheduled. 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. The 1992 phase of the Refinancing provided a revised redemption and maturity schedule that the Company believes can be met from expected cash flow from operations. The principal components of the 1992 phase of the Refinancing are outlined below: - A "Note Exchange Offer" was completed as of August 6, 1992 whereby the Company's Original Debentures, Replacement Debentures, PIK Debentures, and accrued interest on the nonconsenting Debentures totalling $73.2 million were replaced by 11 7/8% Subordinated Notes of Allnet Communication Services, Inc. ("11 7/8% Subordinated Notes"). The Note Exchange Offer was agreed to by 98.8% of the Debentureholders. The revised redemption schedule of the 11 7/8% Subordinated Notes effectively rescheduled the earliest redemption from June 30, 1992 to September 30, 1995. As part of the Note Exchange Offer, 3,400,000 ALC 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 ALC Common Stock. 13 36 - The Company's prior $30.0 million revolving credit facility (the "Previous Revolving Credit Facility") was extended to June 30, 1993 and modifications included a new participant and a reduction in the interest rate. - The Restructured Promissory Note was restated and extended to June 30, 1995 and a $5.0 million principal prepayment was made. The amended terms provide for continuation of the 12% interest rate and quarterly principal payments of $1.3 million commencing on September 15, 1992. In May 1993, the Restructured Promissory Note was paid in full. - The 1990 Note Agreements with a principal balance of approximately $8.0 million were paid down and extended in conjunction with the Refinancing and subsequently paid in full in December 1992. - In consideration for participating in the Refinancing, the 4,708,999 1990 Warrants held by General Electric, Grumman Hill Investments, L.P., Grumman Hill Associates, Inc. and Prudential were amended to reduce the exercise price from $3.00 to $2.00 per share. - Equipment leases with a major switch vendor were renegotiated to be repaid over 24 months until May 1, 1994 with no change in the interest rate of 14%. - The Company paid $2.0 million on June 4, 1992 to CTI and received an $0.8 million note from a then major holder of Class A Preferred (which note was subsequently paid in full) and $1.2 million of prepaid transmission capacity from CTGI to be utilized over a period of 37 months. - On August 18, 1992, the 14,324,000 shares of ALC Common Stock, 1,000,000 shares of ALC Class B Senior Convertible Preferred Stock (the "Class B Preferred"), and 1,000,000 shares of ALC Class C Senior Convertible Preferred Stock (the "Class C Preferred") held by CTI were transferred to a group of five banks ("Banks") in exchange for the release of certain portions of CTI's obligations to each of the Banks. The Class B Preferred and Class C Preferred were subsequently converted into 3,796,000 shares of ALC Common Stock. - Effective October 16, 1992, ALC completed a stock offering ("1992 Equity Offering") of 9,863,600 shares of ALC Common Stock at $5.50 per share. A portion of the 1992 Equity Offering relating to 3,464,373 shares was to facilitate the sale of shares for existing major holders including 3,000,000 shares held by the Banks. - The remaining 6,399,227 shares that were part of the 1992 Equity Offering were issued in conjunction with an Exchange Agreement ("Class A Exchange") with the major holders of the Class A Preferred ("Class A Preferred Group"). The members of the Class A Preferred Group exchanged the 2,144,044 Class A Preferred shares held by them 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. Subsequent to the Class A Exchange, the Company has 355,956 shares of Class A Preferred outstanding with a redemption value of $7.1 million, plus accrued and undeclared dividends of $2.9 million as of December 31, 1992. - In March 1993, ALC completed a stock offering (the "1993 Equity Offering") whereby the Banks and Prudential, a holder of 1990 Warrants, sold an aggregate of 10,350,000 shares of ALC Common Stock to the public. As part of the 1993 Equity Offering, the Banks converted all outstanding shares of Class B Preferred and Class C Preferred to ALC Common Stock. The Class B Preferred and Class C Preferred were retired effective March 25, 1993. Subsequent financing activities included: - In May 1993, the Company completed an offering of $85.0 million principal amount 9.0% Senior Subordinated Notes ("1993 Notes") and in June 1993 redeemed all of the 11 7/8% Subordinated Notes then outstanding. - As of June 30, 1993, the Company executed an agreement for a $40.0 million line of credit (the "Revolving Credit Facility"), replacing the Previous Revolving Credit Facility. The Revolving 14 37 Credit Facility expires on June 30, 1995 and has lower stated interest rates than the Previous Revolving Credit Facility. During 1992, the Company achieved both the successful completion of the Refinancing and a significant financial turnaround. After five consecutive years of losses and declining revenues, the Company achieved profitability for 1991, 1992 and the first half of 1993 reflecting an increase in both billable minutes and revenue and a significant reduction in operating expenses as a percent of revenue. RESULTS OF OPERATIONS Three and Six Months Ended June 30, 1993 Compared to Three and Six Months Ended June 30, 1992 For the three month period ended June 30, 1993, the Company reported income of $8.4 million before extraordinary loss (related to early retirement of debt) on revenue of $104.2 million. This compares to net income of $4.4 million on revenue of $92.7 million for the same period in 1992. For the six months ended June 30, 1993, the Company reported income of $16.4 million before both the extraordinary loss and the cumulative effect of an accounting change (which was recorded in the first quarter of 1993) on revenue of $206.1 million. This compares to $7.7 million on revenue of $184.7 million for the six months ended June 30, 1992. Gross margin as a percent of net revenue increased for both the three and six months ended June 30, 1993 compared to the year earlier periods, while operating income increased $6.1 million and $13.4 million for the three and six month periods ended June 30, 1993 compared to the same periods one year earlier. The improved operating results were primarily due to an increase in long distance traffic and network cost reductions as a percent of revenue. OPERATING RESULTS AS A PERCENT OF REVENUE
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------- ---------------- 1993 1992 1993 1992 ----- ----- ----- ----- Revenue................................................... 100.0% 100.0% 100.0% 100.0% Communication services.................................... (54.5) (59.6) (54.5) (60.2) ----- ----- ----- ----- Gross Margin............................................ 45.5 40.4 45.5 39.8 Sales, general & administrative........................... (28.4) (27.7) (28.2) (27.8) Depreciation.............................................. (2.7) (3.1) (2.7) (3.0) ----- ----- ----- ----- Operating Income........................................ 14.4 9.6 14.6 9.0 ----- ----- ----- ----- ----- ----- ----- -----
During the first quarter of 1993, the Company adopted Financial Accounting Standards Board Statement No. 109 "Accounting for Income Taxes" ("Statement 109") which resulted in the recording of a net deferred tax asset related primarily to future tax benefits which are expected to be realized upon utilization of a portion of the Company's tax net operating loss carryforwards. The cumulative effect of the change in method of accounting for income taxes increased net income $13.5 million for the six months ended June 30, 1993. In May 1993, the Company completed the offering of the 1993 Notes and in June 1993 redeemed all of the 11 7/8% Subordinated Notes then outstanding. As a result, the Company recorded an extraordinary loss on the early retirement of debt of $7.5 million, net of tax. Net income, which reflects both the extraordinary item and the change in method of accounting, was $902,000 and $22.4 million for the three and six months ended June 30, 1993, respectively. Billable minutes have continued to increase since the third quarter of 1990 when compared to the same quarter in the prior year and reached the highest level this quarter since the second quarter of 1988. The increase in billable minutes results from traffic growth generated by new customers, increased minutes per customer and a decrease in billable minutes lost through attrition of existing customers. The results of operations for the three months ended June 30, 1993 reflect a continuation of the trend of strong financial performance as indicated by an 89.3% increase in net income (excluding the loss on the early retirement of 15 38 debt) from the comparable quarter of 1992. This was accomplished despite a 25 percentage point increase (31% versus 6%) in the net effective tax rate. Revenue Revenue increased by 12.5% and 11.6% for the three and six months ended June 30, 1993 from the comparable periods of 1992. This increase is the result of several factors. Most importantly, billable minutes reached the highest level since the second quarter of 1988, increasing by 15.0% and 13.9% for the three and six months ended June 30, 1993 over the comparable periods in 1992. The increased revenue from new sales along with growth in revenue from existing customers continues to outpace revenue lost from the attrition of customers. The provision for uncollectible revenue was 2.0% of gross revenue for the six months ended June 30, 1993 and 3.3% for the same period of 1992. Controls and procedures have been tightened to improve the collection process and provide earlier detection of credit risks. Operating Expenses The Company's primary cost is for communication services, which represents the access costs for originating and terminating calls via local exchange carriers (primarily Bell Operating Companies). Also included in communication services are the cost of owning and leasing fixed price long-haul transmission capacity and the costs of obtaining lesser amounts of usage sensitive transmission capacity. The cost of communication services increased slightly during the three and six month periods ended June 30, 1993 compared to the same periods in 1992. This cost, however, declined as a percent of net revenue for the comparable periods. Through a combination of the use of high volume fixed price leased facilities to transmit traffic and reduced international costs through contractual arrangements, the Company has successfully reduced its network costs as a percent of revenue. The Company continues to monitor its network configuration to provide better economics. Sales, general and administrative expenses increased by 15.2% and 13.3% for the three and six months ended June 30, 1993 from the same periods one year earlier (but was only slightly higher as a percent of revenue). The increase reflects increased commissions and other expenses related to higher sales as well as approximately $0.5 million of costs incurred due to the 1993 equity offering. Management continues to emphasize its cost containment programs. Interest Expense Net interest expense decreased by $1.3 million and $1.9 million for the three and six months ended June 30, 1993 compared to the same periods in 1992. This resulted from principal payments, reduced interest related to the replacement of the 11 7/8% Subordinated Notes with the 1993 Notes, as well as capital lease expirations. These improvements were partially offset, in the first quarter, by higher balances on the Revolving Credit Facility and by interest expense on the Restructured Promissory Note, which was paid in full in May 1993. Years ended December 31, 1992, 1991 and 1990 The Company had net income of $20.8 million on revenue of $376.1 million for the year ended December 31, 1992. This compares to net income of $5.3 million on revenue of $346.9 million and net loss of $19.6 million on revenue of $326.0 million for the years ended December 31, 1991 and 1990, respectively. Operating results for 1990 included a gain of $4.4 million from the sale of CTI Telecommunications, Inc. and included restructuring costs of $3.0 million. Operating results improved from an operating loss of $2.8 million for the year ended December 31, 1990 to operating income of $23.9 million in 1991 and $40.7 million in 1992. This improvement is the result of increased revenue, improved gross margin and for 1991, reduced sales, general and administrative expenses. 16 39 OPERATING RESULTS AS A PERCENT OF REVENUE
YEAR ENDED DECEMBER 31, --------------------------- 1992 1991 1990 ----- ----- ----- Revenue........................................................... 100.0% 100.0% 100.0% Communication services............................................ (57.7) (61.3) (64.3) ----- ----- ----- Gross Margin............................................... 42.3 38.7 35.7 Sales, general & administrative................................... (28.5) (28.2) (31.5) Depreciation...................................................... (3.0) (3.6) (4.1) Financial restructuring........................................... -- -- (0.9) ----- ----- ----- Operating Income........................................... 10.8 6.9 (0.8) ----- ----- ----- ----- ----- -----
Revenue Revenue increased 8.4% to $376.1 million from 1991 to 1992 resulting from a 9.6% increase in billable minutes offset somewhat by a slight 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 percentage of revenue. 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 the highest level in 1992 since the year ended December 31, 1988. The increase in billable minutes results from traffic generated by new customers, increased minutes per customer and a decrease in billable minutes lost through attrition of existing customers. Revenue increased from $326.0 million in 1990 to $346.9 million in 1991. The 6.4% increase in revenue represents a 7.1% increase in billable minutes. The increase in billable minutes was a result of several factors, including the increase in the size of the field sales organization which resulted in increased new sales, the increased minutes per customer which resulted from expanded product offerings, and the decrease in billable minutes lost through the attrition of existing customers. During 1992, the Company introduced several strategic services to upgrade existing products. The Company enhanced Allnet Voice Mail by adding additional features including message notification, and introduced Allnet Broadcast FAX, which allows the customer to send a fax document to multiple locations simultaneously. Allnet also introduced a new streamlined dialing method known as "00 Platform" to reach a long distance operator, customer service, or Allnet special features. Customers with multi-locations now have a new "800" enhancement available which connects "800" calls automatically to the customer's location closest to the originating call. The Company's field sales representatives have increased from 363 at the beginning of 1990 to 451 as of December 1992. Management has been successful in adding field sales representatives in order to increase revenue while still maintaining control over sales and marketing expenses. The revenue generated from customers' first full month of service in 1992 was 7.5% higher than in 1991 and 13.8% higher than in 1990. The increased revenue from new sales along with revenue from existing customers outpaced revenue lost from customer attrition. Attrition has improved from 2.2% in 1990 to 2.0% in 1991 to 1.8% in 1992. The provision for uncollectible revenue, which is deducted from gross revenue to arrive at reported revenue, was 3.0% for the year ended 1992 and 3.4% for the years ended December 31, 1991 and 1990. 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. Cost of Communication Services The cost of communication services increased slightly from $209.6 and $212.7 to $216.9 for the years 1990, 1991, and 1992, respectively. The increase in cost of communication services is due to the 9.6% and 17 40 7.1% increase in billable minutes in 1992 and 1991. These increases were offset by cost reductions for transmission capacity experienced in 1991 and even further reductions during 1992. The cost of communication services decreased, however, as a percent of revenue to the lowest rate in the Company's history. The Company has successfully negotiated the reduction of rates under contracts with various transmission carriers including CTGI. In addition, the Company has continued to reconfigure its network to provide better long-term economics. 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 driven down 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 $102.8 million, $98.0 million and $107.3 million for the years 1990, 1991 and 1992, respectively. Sales, general and administrative expense for 1992 increased $9.3 million or 9.5% compared to 1991. This increase resulted in sales, general and administrative expense increasing as a percent of revenue. 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 have continued to decrease as a percent of net revenue. Sales, general and administrative expense for 1991 declined $4.9 million or 4.7% compared to 1990. This decrease resulted in sales, general and administrative expense declining as a percent of revenue. This reduction includes the impact of a slight increase of 4.4% in total corporate head count. Despite a 13% increase in the average number of field sales representatives for 1991 over 1990, sales expense remained relatively constant from 1990 to 1991. The overall decrease in general and administrative expenses reflects management's continuing focus on cost containment. Procedures implemented to improve efficiencies and contain expenses included improved budgeting techniques; regular, periodic review of actual expenses against budgeted levels; incentive programs tied directly to achievement of budget objectives; and enhanced review of general programs and benefit costs. The decrease in depreciation and amortization from $13.3 million in 1990 to $12.3 million in 1991 and further to $11.2 million in 1992 is primarily the result of 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 have been partially offset by depreciation on newly capitalized assets during the three-year period. Interest Expense Interest expense decreased from $18.1 million in 1991 to $17.2 million in 1992. This resulted from a lower prime rate impacting the interest expense on the Revolving Credit Facility as well as a decrease in interest related to debt principal payments made in connection with the Refinancing. These improvements were partially offset by increased expense on the Debentures and the Restructured Promissory Note. Interest expense for 1992 would have been reduced by $3.5 million if the $85.0 million aggregate principal amount of Notes had been outstanding during the entire year and the existing 11 7/8% Subordinated Notes had been repaid effective December 31, 1991. Interest expense decreased from $21.3 million in 1990 to $18.1 million in 1991. This decrease was primarily due to reduced interest on the Revolving Credit Facility resulting from lower average balances and the expiration of capital leases. Cash flow was impacted by interest payments beginning in 1991 on the 1990 Notes and the Restructured Promissory Note, which had been previously deferred. Interest on the Debentures continued to be converted into PIK Debentures through December 1991. PIK Debentures were exchanged for 11 7/8% Subordinated 18 41 Notes in the Note Exchange Offer or paid off in September 1992. Interest payments on the 11 7/8% Subordinated Notes began in July 1992 and are paid quarterly. 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 of approximately $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 utilization of such NOLs is "more likely than not." Management believes that recording of the deferred tax assets representing three years of NOL benefit is conservative given the existing limitation of such NOLs to $10.0 million per year by Internal Revenue Code Section 382 and the likelihood of exceeding the necessary pre-tax income levels to realize the benefit given the Company's current operating results. The Company believes that realization of the benefit of the NOLs beyond the three-year period is difficult to predict and therefore is not recorded. The Company intends to evaluate the propriety of the deferred tax asset on an ongoing basis. The Company has not applied the Statement 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 three and six months ended June 30, 1993 and 1992 and the years ended December 31, 1992 and 1991 include 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 years ended 1992 and 1991 and the three and six months ended June 30, 1992. In 1992 the Company was subject to regular tax and due to an Internal Revenue 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 tax. Due to the operating loss sustained for the year ended December 31, 1990, no provision for income taxes was necessary. 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"). As of December 31, 1992, the Company had approximately $147.8 million of NOLs, $147.8 million of alternative NOLs and $3.6 million of investment tax credit carryforwards which expire beginning December 31, 1998 through 2005. 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 $10.0 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 1993 and future years are limited to approximately $130.0 million, assuming no future ownership change or built-in gain recognition. The Company is also subject to numerous state income tax laws. Many states limit the utilization of NOLs after an ownership change. Investors are cautioned that 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 382 Limitation would be reduced to zero if the Company fails to satisfy the continuity of business enterprise requirement for the two-year period 19 42 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. SEASONALITY The Company's long distance revenue is subject to 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, which is primarily commercial, has declined slightly during the fourth quarter due to the November and December holiday periods. However, in 1992 this trend was more than offset by strong traffic growth, which was up 12.3% from the fourth quarter of 1991. LIQUIDITY AND CAPITAL RESOURCES For the six months ended June 30, 1993 and 1992, the Company's operations were profitable and generated positive cash flow from operations of $26.7 million and $4.2 million, respectively. The positive cash flow reflects twelve consecutive quarters of increased revenue and operating profits compared to prior year comparable quarters. In addition to the positive cash flow from operations, the Company's liquidity position is further strengthened by the unused availability under its new 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 Agreement, the Company is able to minimize interest expense by structuring the borrowings under any of three alternatives. Each alternative has a varying interest rate calculation associated with it. Costs to the Company currently approximate 6% per annum. The agreement includes financial covenants which may allow the Company to further reduce interest rates 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 eligible receivables. As of July 31, 1993, the Company had availability of $22.9 million under the line. The Company had working capital of $4.3 million at June 30, 1993 compared to deficit working capital of $31.7 million at December 31, 1992. The increase in working capital is largely attributable to (a) the Revolving Credit Facility which resulted in the reclassification of the Revolving Credit Facility to a long term liability, (b) the increase in accounts receivable due to the increase in revenue and (c) the increase in other current assets attributable to the $4.9 million current portion of the deferred tax asset recorded to reflect the adoption of Statement 109. Because the Company has chosen to lease rather than own its transmission facilities, the Company's requirements for capital expenditures are modest. Capital expenditures totaled $4.0 million for the first half of 1993 and $10.3 million for the year ended 1992. Capital expenditures during the year ended December 31, 1992 included projects for enhanced efficiency and technical advancement in the network, information systems and customer service. The future requirements for capital expenditures relate substantially 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 1993 is expected to be between $15 and $18 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. The Banks sold 8,386,216 shares of this ALC Common Stock, of which 3,796,000 were received upon conversion of all the Class B and Class C Preferred Stock. Upon completion of this offering, the Banks held an aggregate of 4,321,784 shares of ALC Common Stock, representing 15.0% of the total voting power of ALC capital stock (10.9% assuming the exercise of certain warrants and options). Prudential sold the remaining 1,963,784 shares of which 963,784 represented the partial exercise of its 1990 Warrants. ALC did not receive any of the proceeds from the sale of these shares in the 1993 Equity Offering, although it did receive $1.9 million upon Prudential's partial exercise 20 43 of 1990 Warrants. The Banks have further 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 May 1993, the Company completed an offering of $85.0 million of 9.0% Senior Subordinated Notes (the "1993 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. The net proceeds of this offering were used to repay the outstanding 11 7/8% Subordinated Notes in the aggregate amount of $72.4 million, and to reduce the amount outstanding under the Previous Revolving Credit Facility. As a result of repaying the 11 7/8% Subordinated Notes an extraordinary loss of $7.5 million, net of tax, was recorded. The issuance of the 1993 Notes provides additional short and long term liquidity benefits by reducing interest expense as well as deferring redemption requirements. During July 1993, the Company acquired the specialized 800 customer base of Call Home America, Inc. The purchase price was comprised of: (1) approximately $15 million paid in July, and (2) a payment to be made based on 150% of monthly average revenue generated by the customers in April, May and June 1994. Call Home America, Inc. has approximately 50,000 customers, including parents of college students and frequent travelers, who will continue to receive services under the Call Home America(R) name. The current level of annualized revenue is approximately $20 million. These customers will also be offered other telecommunications services by Allnet. Management believes that the Company's cash flow from operations, along with the availability of the Revolving Credit Facility will provide adequate sources of liquidity to meet the Company's anticipated short and long term liquidity needs. 21 44 BUSINESS ALC is the holding company for Allnet Communication Services, Inc., and conducts no other business. Allnet 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. Allnet is one of the few nationwide carriers of long distance services and in 1992 carried in excess of 600 million calls over its network. INDUSTRY AND COMPETITION Since 1984, when AT&T was forced to divest its 22 local telephone companies, (the "AT&T Divestiture Decree") the long distance business has undergone a transformation. AT&T is a dominant long distance competitor in the telecommunications services market, with the major alternative long distance telephone carriers being MCI and Sprint. 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: AT&T, MCI and Sprint. AT&T, MCI and Sprint, which generate an aggregate of approximately 88% of the nation's long distance revenue of approximately $65 billion, comprise the first tier. Allnet is positioned in the second tier with four other companies with annual revenues of $250-$800 million each (without giving effect to the LDDS Merger). The third tier consists of more than 300 companies with annual revenues of less than $250 million each, the majority being 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. The Company believes it is, in one important aspect, in an advantageous position vis-a-vis the first tier carriers because it 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. Allnet 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. 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. Several of the Company's second tier competitors and all of the third tier 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. Despite significant recessionary pressure throughout the United States, long distance telecommunications traffic grew at an annual rate of approximately 6.5% in 1992 over 1991. Although the industry as a whole grew more slowly than in prior periods, growth remained positive. The Company's performance has outpaced industry trends with an increase in traffic of 9.6% and revenue of 8.4% during 1992. Traffic grew by 7.1% and revenue grew by 6.4% during 1991. In the long distance telecommunications industry, a certain level of customer attrition is inherent. Attrition averaged 1.9% per month for the six months ended June 30, 1993, 1.8% per month for the year ended December 31, 1992, 2.0% per month for the year ended December 31, 1991 and 2.2% per month for the year ended December 31, 1990. The modest increase in attrition for the six months ended June 30, 1993 results from increased attrition among 800 customers due to 800 portability. The net impact of 800 portability, however, is an increase in both revenue and the number of customers. See "-- Products and Services -- 800 Services." To retain its commercial and residential customer base, Allnet continues to implement programs and enhancements such as value-added services, agent and association sales to residential users, improved customer service and competitive price adjustments. PRODUCTS AND SERVICES Allnet 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, 22 45 differ from those of certain of its second tier and third tier competitors due to the level of value-added services Allnet offers, the flexibility of product pricing to maintain competitiveness and the broader geographic reach of Allnet. In addition, because of the Company's size, the concentration of its commercial accounts and its aggressive management team, Allnet has been able to rapidly develop and implement new products. The variety of products offered are categorized by Allnet 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 75 regions which Allnet 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 domestic pricing and two time-of-day period rates, along with aggressive international pricing options. The Allnet 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. Due to the high losses experienced by the industry with "700" and "900" numbers which require that charges be paid by the caller, the Company does not provide these services to its customers. Value-added Services. When customers subscribe to value-added services on the Company's network, their calls follow different routes and 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 Allnet 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 calendar year 1992 Allnet 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 23 46 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 international pricing to accommodate short duration facsimile traffic. During 1993 Allnet 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, Allnet currently plans to introduce PageLine, a nationwide paging resale and consolidated billing product, in the fourth quarter of 1993. Reporting. Allnet 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 at Allnet, the customer is offered the opportunity to custom design the format of its reports. For example, Allnet 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. The Company also launched its proprietary personal computer reporting service, Allnet Invoice ManagerSM ("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 ConnectionSM 800, fractional 800 service which allows residential customers to acquire 800 service utilizing a 4-digit security Personal Identification Number ("PIN"); Multi-PointSM 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 telephone; and TargetlineSM 800, which routes calls to the closest location and provides custom prompts based upon a customer specific database. To supplement the Company's continued internal growth in this market, the Company seeks strategic external growth opportunities. For example, in July 1993, the Company acquired the specialized 800 customer base of Call Home America, Inc. Call Home America, Inc. has approximately 50,000 customers, including parents of college students and frequent travelers, who will continue to receive services under the Call Home America(R) name. These customers, who are currently generating annualized revenue of approximately $20 million, will also be able to utilize a wide range of other telecommunications services from Allnet. MARKETING Approximately 60% of the Company's employees are engaged in sales, marketing or customer services. Allnet 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 49 offices in the United States. The Company employs 921 sales, marketing and customer service individuals, of which 445 are field sales representatives. 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. 24 47 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, Allnet 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. Allnet 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. Allnet opened a second customer service center in Columbus, Ohio to process calls from customers with significant usage levels who have been enrolled in the Company's "select service" programs. Second, corporate account specialists provide proactive telephonic support to mid-sized commercial accounts. Third, communications specialists provide personal service to larger commercial accounts. Allnet services more than 244,000 customers, excluding Call Home America, Inc. customers recently acquired. Of these customers, approximately 144,000 are commercial accounts, with the remainder being residential accounts. During the past two years, Allnet has become more geographically diversified, adding new markets as necessary. Allnet is currently focusing on an agent and association program to increase customer acquisition in specific target markets and small remote markets. Allnet continues to explore ways to increase traffic on its network during non-peak hours, including marketing strategies to tap specific residential target markets such as association with popular consumer items or cultural events and organizations. TRANSMISSION FACILITIES The ability of Allnet to operate profitably is largely dependent on utilizing transmission circuits at cost effective rates. Allnet has generally avoided the large capital requirements of building its own network by entering into low cost fixed price contracts for bulk transmission capacity. Allnet transmits its nationwide long distance services through state-of-the-art transmission equipment. Allnet has sufficient switching capacity, local access circuits and long distance circuits to permit subscribers to obtain access to its switching centers and its long distance circuits on a basis which the Company believes exceeds industry standards regarding clarity, busy signals or delays. The Company has end-to-end control of each long distance call through surveillance equipment located at each switching center and major points of presence. The Allnet network utilizes fiber optic and digital microwave transmission circuits to complete long distance calls. With the exception of twelve digital microwave links located in California for which Allnet holds the FCC licenses, such facilities are leased on a fixed price basis under both short and long term contracts. 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 area or areas 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 area. 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 June 30, 1993, the Company had 16 network switching centers which 25 48 originate traffic in 193 Local Access Transport Areas ("LATAs"). International service is provided through participation in the International Carrier Group ("ICG") with three other second tier 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. REGULATION Generally, the current trend is toward lessened regulation for both Allnet 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"), Allnet 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 Company believes that the potential impact of the Court of Appeals decision on Allnet will be 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 Company believes that it has operated and continues to operate in compliance with all applicable tariffing and related requirements of the Communications Act of 1934, as amended. On August 18, 1993, the FCC announced its intention to reduce the requirements regarding the filing of tariffs for non-dominant carriers, including Allnet. 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, 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 Facilities"), 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 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 inter-LATA (local access transport areas) long distance 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. If the BOCs ultimately are permitted to provide inter-LATA long distance telecommunications services, existing IXCs, including Allnet, 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 its inconsistent 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 transition plan would then begin. In a press release issued on the date of the FCC's vote, the FCC stated that it was taking a cautious approach by adopting an interim rate structure and pricing plan that has minimal effects on medium and small long-distance carriers. The text of the FCC Decision provides generic descriptions of how access rates should be assessed. Based on the aforementioned, Allnet does not anticipate a material impact during 1994 and 1995; however, further information, including 26 49 the actual access rates, will have to be made available to better assess any impact. The local exchange carriers are expected to file the rates for the interim plan on September 1, 1993, for effectiveness on December 1, 1993. 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 paid are conditioned on the outcome of the appeals. In addition Allnet has pending claims for overcharges during the 1989-1990 period. At this time, Allnet is not aware of any pending rulings on these additional claims. The intrastate long distance telecommunications operations of Allnet are also subject to various state laws and regulations, including certification requirements. Generally, Allnet 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, Allnet can provide originating "Dial 1" Service 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. Of the states in which Allnet provides originating service, only 31 have public utility commissions that actively assert regulatory oversight over the services currently offered by Allnet. Like the FCC, many of these regulating jurisdictions are relaxing the regulatory restrictions currently imposed on telecommunication carriers for intrastate service. In addition, some of these states restrict the offering of intra-LATA long distance services by Allnet and other IXCs. However, the general trend is toward opening up these markets to Allnet 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 places Allnet and other IXCs at a disadvantage as compared to LEC intra-LATA toll service which generally requires no access code. There can be no assurance that the regulatory authorities in one or more states or the FCC will not take action having an adverse effect on the business or financial condition of Allnet. 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 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. 27 50 EMPLOYEES As of June 30, 1993, Allnet had 1,537 employees, none of whom were subject to any collective bargaining agreements. PROPERTIES On June 30, 1993, Allnet had under lease approximately 113,000 square feet of office space in Bingham Farms, Michigan for executive and administrative functions, approximately 43,000 square feet in Southfield, Michigan for customer service, collections, and data processing. Allnet also leases approximately 458,000 square feet in the aggregate for sales and administrative offices, network switching centers and unmanned operations sites in 101 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 Allnet are suitable, well maintained and equipped for the purposes for which they are used. MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The Board of Directors of ALC consists of seven positions: one elected by the holders of Class A Preferred; two by the holders of Common Stock (in each case, voting as a separate class); and four elected by all stockholders voting together as one class. All of those positions are presently filled. The following table sets forth the executive officers and directors of the Company as of August 25, 1993. Executives are elected annually and serve at the pleasure of the Board.
NAME AGE POSITION - ------------------------------------- --- ------------------------------------------------ Richard D. Irwin..................... 58 Chairman of the Board of Directors John M. Zrno......................... 55 President, Chief Executive Officer and Director Marvin C. Moses...................... 48 Executive Vice President, Chief Financial Officer, Assistant Secretary and Director William H. Oberlin................... 48 Chief Operating Officer, Executive Vice President -- Sales and Marketing and Director Gregory M. Jones..................... 43 Senior Vice President Dennis R. Banks...................... 50 Vice President -- Field Operations Stephen G. Canton.................... 37 Vice President -- Sales S. Danielle Conroyd.................. 46 Vice President -- Human Resources Steven A. Fernald.................... 46 Vice President -- Engineering Connie R. Gale....................... 47 Vice President, General Counsel and Secretary Charles I. Gragg, III................ 35 Vice President -- Marketing Marilyn M. Lesnau.................... 40 Vice President, Controller (Chief Accounting Officer) Thomas A. Marino..................... 51 Vice President -- Administrative and Technical Services David C. Patterson................... 48 Vice President -- Management Information Systems David J. Thomas...................... 42 Vice President, Treasurer Richard J. Uhl....................... 52 Director Michael E. Faherty................... 58 Director Saulene M. Richer.................... 47 Director
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 Mountain Medical Equipment, 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 28 51 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 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 -- Sales and Marketing 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. 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 including director of marketing for MCI Midwest in Chicago, senior manager of telemarketing, and senior manager of customer service. DENNIS R. BANKS has held the position of Vice President -- Field Operations since January 1992 and formerly served as director of Eastern region operations since November 1982. Mr. Banks commenced his employment with the Company July 1982 as manager of transmission and switch engineering. From June 1978 through June 1982 Mr. Banks was a manager of the Network Management Center for ITT. From 1973 through May 1978 Mr. Banks held various positions with MCI, the most recent of which was field operations manager, Northeast Ohio. STEPHEN G. CANTON has held the position of Vice President -- Sales since May 1991 and formerly served as Regional Vice President -- East at the Washington D.C. sales office since November 1989 and as regional sales director since December 1988. Mr. Canton was a sales executive with Cable & Wireless North America, Inc. from 1983 through 1986 and 1987 through 1988 as well as with Bell Atlantic during the interim period between 1986 and 1987. S. DANIELLE CONROYD has held the position of Vice President -- Human Resources since April 1989. From October 1987 to April 1989 Ms. Conroyd was a Senior Vice President, Human Resources for Mercy Hospitals of Detroit. From March 1980 to September 1987 Ms. Conroyd was Vice President, Human Resources for Mount Carmel Hospital in Detroit. STEVEN A. FERNALD has held the position of Vice President -- Engineering since May 1991 and formerly served as director of the Network Control Center since January 1989 and manager of the Network Control Center since June 1986. Mr. Fernald was a manager at Sprint from June 1975 to June 1986. 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 in 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 29 52 Resources, Inc. from February 1980 to March 1981. Ms. Gale was Associate General Counsel at Federal-Mogul Corporation from April 1981 to November 1986. CHARLES I. GRAGG, III has held the position of Vice President -- Marketing since September 1992 and formerly served as director of marketing since September 1991. Mr. Gragg was previously Vice President, Marketing for Phase II Corporation, a telecommunications consulting firm specializing in overseas cellular and paging systems, where he served in a number of positions since November 1986. From November 1985 to November 1986, Mr. Gragg was Vice President Marketing and a director of Kensington Communications, a microcomputer accessories and software firm. Mr. Gragg has also held senior management positions with Computer Sciences Corporation's Infonet division and Western Union. MARILYN M. LESNAU has held the position of Vice President since May 1993 and has held the position of Controller since March 1988, commencing her employment with the Company in September 1986 as director, corporate accounting. From 1984 to March 1986 Ms. Lesnau served as director of sales and director of finance for Dayton Hudson Corporation. Ms. Lesnau's previous experience included seven years with Ernst & Young, a certified public accounting firm. THOMAS A. MARINO has held the position of Vice President -- Administrative and Technical Services since April 1992 and formerly served as director of network administration since January 1987, commencing his employment in June 1986 as director of programs and projects. From February 1974 to June 1986, Mr. Marino held various operations and management positions with Sprint, the most recent of which was Eastern area director -- network operations. From January 1964 to January 1974, Mr. Marino held various positions with Western Union Telegraph Company, the most recent of which was technical services supervisor. DAVID C. PATTERSON has held the position of Vice President -- Management Information Systems since January 1991. Mr. Patterson had previously served as a director of data processing since the commencement of his employment with the Company in August 1989. From February 1972 through August 1989, Mr. Patterson was a data processing manager for Electronic Data Systems, a subsidiary of General Motors Corporation. DAVID J. THOMAS has held the position of Vice President since January 1991 and has held the position of Treasurer since October 1989. Mr. Thomas served in a variety of managerial capacities in the areas of network cost management, revenue protection and credit and collections since the commencement of his employment with the Company in January 1983. Mr. Thomas previously was employed by Ford Motor Company as assistant to the Controller and by Abbott Laboratories in several analytical capacities. 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 since 1985 of Chicago Holdings, Inc. ("CHI"), a privately owned company which manages several lease portfolios owned by it and its subsidiaries and which invests in operating companies on a selective basis, generally taking a controlling equity position. Since November 1990 he has also been the Chief Executive Officer and a member of the Board of Directors of Hurrah Stores, Inc. ("Hurrah"). Hurrah is a subsidiary of CHI, which through a wholly-owned subsidiary operates approximately 125 junior women's clothing stores, principally in the midwest. Mr. Uhl has also been President of Steiner Financial Corporation, another subsidiary of CHI, since December 1987. 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 currently serves as the President and Chief Executive Officer of Shared Financial Systems, Inc., having held those positions since January 1992. Shared Financial Systems, Inc. is a worldwide provider of software and consulting services to data processing market segments that utilize on-line transaction processing. 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 30 53 also a member of the Board of Directors of BancTec, Inc., Biomagnetic Technologies, Inc. and Davox Corporation. SAULENE M. RICHER has held the position of director since July 22, 1993. Ms. Richer has held the position of Senior Vice President -- Marketing, Technology & Retail Operations of Brenton Bank, N.A. since March 1990. From March 1973 through February 1990, Ms. Richer held various executive sales and marketing positions with International Business Machines Corporation, the most recent of which was director, Opportunity Development. Ms. Richer is also a member of the Board of Directors of United Way of Central Iowa. The Board of Directors held twelve regularly scheduled and special meetings in the aggregate during the fiscal year from January 1, 1992 through December 31, 1992. 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 1992 fiscal year were, prior to July 24, 1992, Ralph J. Swett, Richard D. Irwin and Richard J. Uhl; prior to August 17, 1992, Ralph J. Swett, Richard D. Irwin, Richard J. Uhl and Michael E. Faherty; and, subsequent to August 17, 1992, Richard D. Irwin, Richard J. Uhl and Michael E. Faherty. During 1992, the Audit Committee met four times. Ralph J. Swett resigned from the Board of Directors and its committees effective August 17, 1992. 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 1992, prior to July 24, 1992, were Ralph J. Swett, Richard D. Irwin and Richard J. Uhl; prior to August 17, 1992, Ralph J. Swett, Richard D. Irwin, Richard J. Uhl and Michael E. Faherty, and, subsequent to August 17, 1992, Richard D. Irwin, Richard J. Uhl and Michael E. Faherty. During 1992, the Compensation Committee met five times. The Board of Directors does not have a standing committee responsible for nominating individuals to become directors. OFFICER AND DIRECTOR COMPENSATION Director Compensation From 1988 through 1991, the Company's practice was that directors who are not employees of ALC would receive remuneration of up to $12,000 per year for their services as Board members (one-half of the fee is dependent upon per meeting attendance at the four regularly scheduled Board meetings). For 1992, and to be continued for 1993, Richard J. Uhl and Michael E. Faherty 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. Ralph J. Swett and Richard D. Irwin waived their right to fees throughout their respective 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. The option vested 25% on each of January 1, 1992, June 1, 1992, January 1, 1993 and June 1, 1993 and expires on 31 54 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. The option vested 25% on June 23, 1992, 50% on January 1, 1993 and 25% on June 1, 1993 and expires on the earlier of 60 days subsequent to Mr. Faherty's death, resignation or removal as a director and June 23, 1998. In addition, Grumman Hill, of which Richard D. Irwin is President, entered into an Advisory Agreement with Stock Option (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 will receive an annual fee of $100,000 and was initially granted a stock option to purchase at a price of $11.25 per share 153,163 shares of Common Stock. In conjunction with the 1990 phase of the Refinancing, this 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. The Company anticipates that the Common Stock issuable upon the exercise of the option may be registered under the Securities Act. The option will expire on September 7, 1998. Grumman Hill received an additional advisory fee of $150,000 due to its efforts in the 1990 phase of the Refinancing, which then was reinvested in the Company as part of the 1990 phase of the Refinancing. The Company paid Grumman Hill an advisory fee of $250,000 in connection with its efforts in the 1992 phase of the Refinancing. Executive Compensation SUMMARY COMPENSATION TABLE The following table summarizes the total compensation paid to the Chief Executive Officer and the four most highly compensated executive officers at the end of calendar year 1992 for each of the past three fiscal years during which the named executive acted as an executive officer.
LONG TERM COMPENSATION ----------------------- ANNUAL COMPENSATION -------------------------------------------- AWARDS OTHER ------- ANNUAL OPTION/ ALL OTHER COMPENSATION SARS COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) (#)(2) ($)(3) - -------------------------------- ---- -------- -------- ------------ ------- ------------ John M. Zrno.................... 1992 $307,755 $175,000 284,983 $500 President, Chief Executive 1991 292,025 105,000 -- Officer, Director 1990 282,994 68,000 637,231 Marvin C. Moses................. 1992 $234,998 $135,000 217,398 $500 Executive Vice President, 1991 223,256 81,000 -- Chief Financial Officer, 1990 214,837 51,000 524,838 Assistant Secretary, Director William H. Oberlin.............. 1992 $234,893 $135,000 217,398 $500 Chief Operating Officer, 1991 223,172 81,000 -- Executive Vice President-Sales 1990 215,288 38,000 524,838 and Marketing Gregory M. Jones................ 1992 $135,090 $ 49,708 $ 860(4) 55,092 $500 Senior Vice President 1991 128,260 25,425 -- 1990 118,250 19,965 71,102 Connie R. Gale.................. 1992 $130,250 $ 48,280 47,385 $500 Vice President, General 1991 122,000 28,750 10,000 Counsel and Secretary
- ------------------------- (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 1992 in the amount of $500 for each officer listed. (4) Represents gross up for income taxes relating to a perquisite. 32 55 Stock Option Awards During Last Fiscal Year The following table sets forth information about stock option awards granted to the Chief Executive Officer and the four most highly compensated executive officers during 1992.
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED - ------------------------------------------------------------------------------------- ANNUAL RATES OF % OF TOTAL STOCK PRICE OPTIONS/SARS APPRECIATION FOR GRANTED TO EXERCISE OR OPTION TERM* OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION -------------------- NAME GRANTED(#)(1) FISCAL YEAR ($/SH) DATE(6) 5%($) 10%($) - -------------------------- ------------ ------------ ----------- ---------- -------- -------- John M. Zrno.............. 137,214(2)(3) 8.60% $3.50 6/6/2000 $302,557 $763,596 52,657(4) 3.30% $4.50 5/14/2002 $149,283 $376,761 95,112(5) 5.96% $5.88 7/24/2002 $352,333 $889,221 Marvin C. Moses........... 114,236(2)(3) 7.16% $3.50 6/6/2000 $251,890 $635,723 36,762(4) 2.31% $4.50 5/14/2002 $104,220 $263,032 66,400(5) 4.16% $5.88 7/24/2002 $245,972 $620,787 William H. Oberlin........ 114,236(2)(3) 7.16% $3.50 6/6/2000 $251,890 $635,723 36,762(4) 2.31% $4.50 5/14/2002 $104,220 $263,032 66,400(5) 4.16% $5.88 7/24/2002 $245,972 $620,787 Gregory M. Jones.......... 15,102(2)(3) 0.95% $3.50 6/6/2000 $ 33,300 $ 84,043 15,000(4) 0.94% $4.50 5/14/2002 $ 42,525 $107,325 24,990(5) 1.57% $5.88 7/24/2002 $ 92,573 $233,637 Connie R. Gale............ 9,390(2)(3) 0.59% $3.50 6/6/2000 $ 20,705 $ 52,255 13,500(4) 0.85% $4.50 5/14/2002 $ 38,273 $ 96,593 24,495(5) 1.54% $5.88 7/24/2002 $ 90,739 $229,009
- ------------------------- * 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 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) The options become exercisable over a three year period, 50% on June 6, 1992, 25% on each of June 6, 1993 and June 6, 1994. (3) Amendment of options granted in 1990 at the same exercise price, but which were formerly exercisable only upon the occurrence of certain events as provided in the option agreement. (4) 25% of the options become exercisable each year over a four year period with vesting beginning on May 14, 1993. (5) 25% of the options become exercisable each year over a four year period with vesting beginning on July 24, 1993. (6) Unless earlier terminated due to such events as termination of employment or death. OPTION EXERCISES AND FISCAL YEAR END OPTION VALUES Neither the Chief Executive Officer nor any of the four most highly compensated executive officers exercised any options during 1992. The following table shows the number of exercisable and unexercisable 33 56 options held at the end of 1992 by the named executive officers, and the aggregate value of in-the-money, unexercised options held by each named officer.
VALUE OF UNEXERCISED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS/SARS OPTIONS/SARS AT FY END(#) AT FY END ($)(1) ------------------------------ ------------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ----------- ------------- ----------- ------------- John M. Zrno..................... 450,041 334,959 $4,725,431 $ 3,238,041 Marvin C. Moses.................. 359,694 268,306 3,776,787 2,622,419 William H. Oberlin............... 359,694 268,306 3,776,787 2,622,419 Gregory M. Jones................. 63,551 47,541 667,286 424,704 Connie R. Gale................... 49,695 42,690 512,798 376,447
- ------------------------- (1) Values are calculated by determining the difference between the fair market value of the Common Stock at December 31, 1992 and the exercise price of the options. 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 have initial four year terms, amended in 1991 to extend for an additional two years. One of the provisions of each employment agreement is 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. Effective February 1, 1990, 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 from six-to-twelve months should an officer be terminated from employment prior to January 31, 1991. These agreements were renewed in February 1991, August 1992 and July 1993. As amended, the agreements cover termination from employment prior to December 31, 1995. Mr. Jones and Ms. Gale have entered into such agreements. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION 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 will receive an annual fee of $100,000 and was initially granted a stock option to purchase 153,163 shares of Common Stock at a price of $11.25 per share. In conjunction with the 1990 phase of the Refinancing, this 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 may be registered under the Securities Act. The option will expire on September 7, 1998. Grumman Hill and Grumman Hill, L.P. participated in the cash financing as part of the 1990 phase of the Refinancing. These entities held 1990 Notes in the aggregate original principal amount of $650,000 and were issued 1990 Warrants to purchase up to 428,090 shares in the aggregate of the Common Stock. 34 57 Grumman Hill received an additional advisory fee of $150,000 due to its efforts in the 1990 phase of the Refinancing, which then was reinvested in the Company (and was included in the aggregate principal amount of the $650,000 of 1990 Notes) as part of the 1990 phase of the Refinancing. The Company paid Grumman Hill an advisory fee of $250,000 in connection with its efforts in the 1992 phase of the Refinancing. The Grumman Hill and Grumman Hill, L.P. 1990 Notes were amended and replaced in August 1992. Such amended and restated 1990 Notes, in the principal amounts of $167,516 and $558,386, respectively, were paid in full as of December 1992. Prior to the Note Exchange Offer, 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 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 additional 1992 Warrants (as defined in "The Refinancing"). 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. On January 28, 1993, Grumman Hill L.P. sold $1.0 million in principal amount of 1992 Notes. In June 1993, the 1992 Notes were paid in full. As of the date of this Prospectus, Mr. Irwin, Mr. Faherty (as general partner of a family-owned partnership), Mr. Uhl, Mr. Zrno and Mr. Moses own $500,000, $600,000, $200,000, $75,000 and $25,250, respectively, in principal amount of 1993 Notes which they acquired either in the 1993 Note Offering or in open-market transactions. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS BANKS AND CTI STOCK OWNERSHIP IN THE COMPANY On June 20, 1988, ALC entered into a Securities Purchase Agreement with CTI, pursuant to which CTI purchased 1,000,000 shares of Class B Preferred and 1,000,000 shares of Class C Preferred for an aggregate of $30.0 million. Each share of Class B Preferred and Class C Preferred was convertible into shares of Common Stock as described below. In addition, the holders of Class B Preferred and Class C Preferred had the right to elect two and one directors of ALC, respectively, thereby controlling election of three of the seven Board members. As part of the 1993 Equity Offering, all shares of Class B Preferred and Class C Preferred were converted to Common Stock, and the Company took appropriate action whereby the directors previously elected by the holders of Class B Preferred and Class C Preferred are elected by all stockholders voting as a single class. CTI's purchases of the Class B Preferred and the Class C Preferred were financed by advances under its credit arrangements with the Banks and Prudential. In 1989, CTI loaned $20.0 million to the Company. In conjunction with the 1990 phase of the Refinancing, ALC issued 716,200 shares of newly created Class D Preferred Stock (the "Class D Preferred") to CTI in exchange for certain financing and lease concessions and for a waiver by CTI of certain anti-dilution rights under the Certificate relating to the shares of Class B Preferred and Class C Preferred. All outstanding shares of the Class D Preferred were subsequently converted into 14,324,000 shares of Common Stock. In August 1992, CTI conveyed the Common Stock, Class B Preferred and Class C Preferred owned by it to each of the Banks pro-rata in exchange for the release of certain portions of CTI's obligations to each of the Banks. Thus, the Banks, in the aggregate, acquired all of the Class B Preferred and Class C Preferred of ALC, as well as 14,324,000 shares of Common Stock. In October 1992, the Banks sold, in the aggregate, 3,000,000 shares of Common Stock in the 1992 Equity Offering. Each share of Class B Preferred and Class C Preferred was convertible at the option of the holder into 1.898 shares of Common Stock. As owners of 1,000,000 shares of Class B Preferred, 1,000,000 shares of Class C Preferred and 11,324,000 shares of Common Stock, the Banks were entitled to an aggregate of 15,120,000 votes, which represented 54.4% of the total voting power of ALC capital stock (or 38.3% assuming 35 58 the exercise of certain warrants and options). In the 1993 Equity Offering, 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). 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 upward to reflect costs incurred by the Banks in connection with the Banks' ownership of the securities of ALC or otherwise arising as a result of the original loan to CTI and to adjust for proceeds of dispositions which are shared with Prudential (as described below), and downward to reflect proceeds realized after such date by the Banks from the securities of ALC owned by them or otherwise received as a result of components of the original loan to CTI, including net proceeds received by the Banks from the 1993 Equity Offering. Upon the sale by the Banks of shares of Common Stock in the 1993 Equity Offering, the Residual Option terminated. Prudential agreed with a group of CTGI's equipment lessors to allow them to share in up to half of the shares of ALC stock acquired by Prudential pursuant to the 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 stock owned by them. In addition, each Bank agreed that after each Bank has 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 stock owned by it as a result of the August 1992 transactions and to deliver to Prudential any remaining shares of such ALC 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 (10% of the shares of Common Stock subject to the Residual Option on such date) to Prudential as a consequence of the 1993 Equity Offering. Subsequently, all of the Banks (except for one Bank) 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 transferred all of their remaining shares of Common Stock (3,111,366 shares) to Prudential. 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, 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 which Prudential is subject contained in one or more underwriting agreements relating to ALC stock, the Escrow Agent has the power to sell the Escrow Shares under certain circumstances. In August 1992, Prudential entered into an agreement with ALC whereby Prudential agreed that neither it nor its affiliates would sell shares of ALC stock acquired pursuant to the Residual Option prior to the earlier to occur of (i) June 1, 1993, or (ii) the Company experiencing a significant decrease in results of operations from previous levels, or in the event of a bankruptcy proceeding, except (a) in a public offering, (b) pursuant to Rule 144 promulgated by the Commission pursuant to the Securities Act of 1933, as amended (the 36 59 "Securities Act"), (c) pursuant to its agreement with CTGI's equipment lessors, (d) to certain types of institutional buyers, so long as no one institutional buyer (and its affiliates) purchases more than 10% of the shares subject to the Residual Option and so long as the institutional buyers do not act in concert, or (e) to any affiliates of Prudential, provided that such affiliates agree to the foregoing sales restrictions. This agreement expired on June 1, 1993. In addition, the Banks agreed with ALC that the Banks would not sell any shares of ALC stock owned by them prior to July 31, 1993 except (a) for the 3,000,000 shares of Common Stock sold in the 1992 Equity Offering, (b) pursuant to exercise of the Options, (c) in a public offering or (d) if the Company experiences a significant decrease in results of operations from previous levels or in the event of a bankruptcy proceeding. 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 hold 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. Pursuant to a Registration Rights Agreement dated June 4, 1990, the Banks, Prudential, General Electric and Grumman Hill (and their transferees of securities covered by such agreement) each had the right to require ALC to register the 1990 Warrants, shares of Common Stock issuable upon exercise of the 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 of 1933 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 an Assignment of Rights Agreement dated August 6, 1992 among the Banks and ALC (the "Assignment of Rights"), ALC agreed to register the 1992 Equity Offering and to prepare and file the registration statement of which the 1993 Equity Offering was, and this Prospectus is, a part and comply with applicable state securities laws within 90 days after the consummation of the 1992 Equity Offering, to permit a public sale by the Banks from time to time of the shares of Common Stock held by the Banks after the 1992 Equity Offering or issuable to them upon conversion of the Class B Preferred and Class C Preferred, subject to certain lock-up restrictions. 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. Pursuant to the Registration Rights Agreement, both Prudential and General Electric have included in the registration statement of which this Prospectus is a part, the shares of Common Stock which are being sold in this Offering, and which may be sold by them, upon exercise of their 1990 Warrants. CTI TRANSACTIONS Allnet leases a significant portion of its digital service transmission capacity from CTGI pursuant to a Digital Service Agreement dated February 10, 1989. The Digital Service Agreement provided for a minimum monthly payment of $1.5 million through November, 1992 and $1.2 million through the ten year term of the Digital Service Agreement. As part of the 1990 phase of the Refinancing, Allnet and CTGI entered into an Amendment which amended the digital phase of the Service Agreement to (a) provide for a credit to reduce the service cost payable by Allnet to CTGI by $500,000 per month for the period from May 1, 1990 to December 31, 1990 and by $700,000 per month thereafter; (b) if necessary, commencing in June 1991, adjust the credit further to reflect the market rate at the time of such adjustment, provided that the credit shall not be less than $700,000 per month; (c) give Allnet the right to relocate its circuits out of available inventory on the CTGI owned system; and (d) terminate the Digital Service Agreement on June 1, 1999. A further favorable market rate adjustment of $114,000 was applied to the monthly credit, effective June 1991 through May 1993. The parties subsequently agreed to additional favorable market rate adjustments effective June 1993 through May 1994. On August 10, 1989, ALC executed a note with CTI for financing of $5.0 million. On September 29, 1989 ALC renewed the existing note and executed a second note for an additional $15.0 million. The notes were to expire the earlier of September 25, 1990 or the date on which ALC secured additional financing or 37 60 consummated a private debt placement. As part of the 1990 phase of the Refinancing, the notes were restructured into the Restructured Promissory Note (as defined in "The Refinancing"), a single promissory note from Allnet in the amount of $20.0 million. During the third quarter of 1991, the Restructured Promissory Note owed to CTI was sold to the Banks. In June and August 1992, Allnet and the Banks extended the due date on the Restructured Promissory Note, and certain defaults and covenants were waived to permit Allnet and ALC to make the Note Exchange Offer. See "The Refinancing." The Restructured Promissory Note was paid in full in May 1993. In June 1992, Allnet bought certain assets from CTI for $2.0 million, which CTI then paid to the Banks to be applied against debt owed by CTI to the Banks. In this purchase, Allnet purchased from CTI the "Founder's Refund" for $1.2 million and a promissory note with a balance of approximately $0.8 million in principal and interest payable from Melvyn Goodman, secured by 53,777 shares of Class A Preferred. The "Founder's Refund" is the right set forth in that certain lease agreement between MSM Associates (as successor to Mutual Signal Corporation by assignment), and Allnet (as successor to Lexitel Corporation by merger), dated December 5, 1985, that provides that Allnet shall receive an annual payment based upon the net cash flow and revenue from the fiber optic system of MSM Associates, subject, however to MSM Associates having sufficient cash or cash equivalents on hand at April 30 of the following year, the date when such annual payment is due. Allnet in turn assigned the Founder's Refund to CTGI for $1.2 million in prepaid transmission services. The promissory note and related interest payable was paid in full upon closing of the 1992 Equity Offering. In December 1985, a predecessor to Allnet entered into a fiber optic lease agreement with Mutual Signal Corporation for an initial term of twelve years for capacity over a fiber optic system linking major metropolitan centers in Michigan. In 1989, CTI acquired all of the outstanding stock of Mutual Signal Corporation and subsequently had the fiber optic lease agreement assigned to MSM Associates of which Mutual Signal Corporation is a 50.0% owner and general partner. In 1991 and 1992, Allnet paid approximately $3.7 million and $2.3 million, respectively, for services under that lease. As part of the 1992 phase of the Refinancing, MSM Associates and Allnet entered into an amendment to the lease to provide Allnet certain credits reducing the service cost payable by Allnet thereunder and to provide MSM Associates with a 120-day option to further amend the lease to (a) give Allnet the right to request reconfiguration of its circuits thereunder; (b) provide that Allnet will be paid commissions and act as consultant under certain circumstances; and (c) provide an option to extend the lease. This option to amend was exercised by MSM Associates effective November 1992. Also as part of a 1992 restructuring of CTI, CTI transferred its interest in Mutual Signal Corporation to TIFD VII, Inc., a wholly owned indirect subsidiary of General Electric Capital Corporation. 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 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 the Note Exchange Offer, through subsequent purchases, General Electric held $23.8 million in principal amount of the outstanding Original and Replacement Debentures (as defined in "The Refinancing") (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 (as defined in "The Refinancing"), which, when added to the 1990 Warrants, give General Electric the right to purchase up to a total of 3,799,950 shares of Common Stock. General Electric subsequently 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. Also as a consequence of the Note Exchange Offer, General Electric owned $31.8 million in principal amount of 1992 Notes (which the Company was informed were subsequently sold by General Electric). All of the 1992 Notes were paid in full in June 1993. Pursuant to the 1990 Note Agreement between ALC and General Electric, as amended in August 1992, General Electric also has 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 38 61 Stockholders. 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. General Electric continues to have the right to nominate one person for election to the ALC Board of Directors based on the terms of the 1990 Note Agreement, as amended in August 1992, due to its equity ownership. Subsequent to this Offering, General Electric will no longer have equity ownership sufficient to maintain this right. 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. After its sale of shares in the 1993 Equity Offering, Prudential retained the right to purchase up to 1,012,020 shares of the Common Stock pursuant to 1990 Warrants. These shares will be sold in this Offering. FINANCIAL SERVICES Richard D. Irwin has been a director of CTI since June 1986 and is President of Grumman Hill. See "Compensation Committee Interlocks and Insider Participation." CLASS A EXCHANGE In an Exchange Agreement dated September 8, 1992 (the "Class A Exchange Agreement"), the members of the Class A Preferred Group agreed to exchange all or any portion of the shares of Class A Preferred held by them (2,144,044 shares) (with accrued and unpaid dividends thereon) for shares of Common Stock, according to a formula based on the $5.50 offering price for the shares of Common Stock being sold in the 1992 Equity Offering and the then present redemption value for the Class A Preferred being exchanged at a 40% discount. Pursuant to the Class A Exchange Agreement, ALC was allowed to choose the amount of shares of Class A Preferred to be exchanged by the Class A Preferred Group, which were exchanged for shares of Common Stock. As part of the 1992 Equity Offering, ALC exchanged 2,144,044 shares of Class A Preferred for the 6,399,227 shares of Common Stock the Class A Preferred Group sold in the 1992 Equity Offering. 39 62 THE REFINANCING In 1990, the Company began an overall refinancing of substantially all of its funded debt. The 1990 phase provided for a two year period (until June 1992) during which the Company could attempt to improve operations without the near term demands on cash flow associated with most elements of its funded debt. As a result of the 1990 phase, approximately $78 million of debt was due to be paid between June and December 1992. Although it was the Company's expectation that a subsequent renegotiation of these obligations in or before June 1992 would be required, no specific arrangements or agreements were made to that end as part of the 1990 phase. In October 1992, the Company completed the second phase (the 1992 phase) of the Refinancing. The concluding actions taken in the 1992 phase, which were taken in conjunction with an overall restructuring of CTI, have allowed the Company to substantially defer or reduce its debt service obligations. ACTIONS TAKEN IN THE 1990 PHASE: A renewal of the $30.0 million accounts receivable revolving credit facility (the "Previous Revolving Credit Facility") with Foothill Capital Corporation until June 3, 1992 and the assignment of a 40% participation interest in the Revolving Credit Facility to Prudential. The issuance to DSC, a major switch vendor, of the warrants being exercised as part of this Offering in exchange for concessions with respect to lease payments for switching equipment. The purchase of $7.2 million of notes of the Company (the "1990 Notes") pursuant to Note and Warrant Purchase Agreements (the "1990 Note Agreements") by Prudential, General Electric, Grumman Hill and Grumman Hill, L.P. (collectively, the "1990 Investors"), and the issuance to the 1990 Investors of Warrants (the "1990 Warrants") to purchase up to 4,708,999 shares of the Common Stock at $3.00 per share. The execution of an Additional Financing Agreement with the 1990 Investors, whereby the Company could seek, and the 1990 Investors had the option of providing, up to $5.0 million of additional financing on substantially the same terms as those contained in the 1990 Note Agreements. The extension until June 4, 1992 of the $20.0 million loan (the "Restructured Promissory Note") from CTI to Allnet, coupled with the forgiveness of certain interest payments and fees thereon and a lower interest rate effective January 1, 1991. The Restructured Promissory Note was subsequently sold by CTI to the Banks. The modification of a significant transmission contract between Allnet and CTGI, then a wholly owned subsidiary of CTI. The issuance to CTI of 716,200 shares of the new Class D Preferred of ALC (which was subsequently converted to 14,324,000 shares of Common Stock) in exchange for concessions described above and the one-time waiver by CTI of certain anti-dilution rights associated with its shares of Class B Preferred and Class C Preferred. The agreement by the holders of approximately 96% of the outstanding Original Debentures (as defined below) to reschedule interest and principal payment requirements and to waive certain defaults. The agreement with three holders of the Class A Preferred, who held approximately 86% of the then outstanding Class A Preferred, providing for, under certain circumstances, the redemption of shares of Class A Preferred below the otherwise applicable mandatory redemption price, and the modification of the mandatory redemption schedule for all Class A Preferred. ACTIONS TAKEN IN THE 1992 PHASE: The extension to June 30, 1993 of the Previous Revolving Credit Facility with the borrowing rates reduced, the termination of Prudential's participation interest in the Revolving Credit Facility, and the sale of a participation interest to Star Bank, N.A. 40 63 Further amendment of lease agreements with DSC, pursuant to which DSC agreed to amortize the $9.9 million balance due June 1, 1992 under existing equipment leases over the subsequent twenty-four months with no change in the current interest rate of 14.0%. The reduction of the exercise price on the 1990 Warrants to $2.00 per share. The due date of approximately $4.6 million (including accrued and unpaid interest through March 31, 1991 added to principal) in principal amount of the 1990 Notes issued to the 1990 Investors other than Prudential was extended to June 30, 1993 and the interest rate on such 1990 Notes was reduced from 15% to 13% per annum, all effective as of August 7, 1992. Prudential was paid in full on its 1990 Note but continues to hold 1990 Warrants. The termination of the Additional Financing Agreement, which had not been utilized. The amendment and restatement of the Loan Agreement which governed the Restructured Promissory Note and the extension of the Restructured Promissory Note to June 30, 1995 with quarterly principal payments commencing on September 15, 1992 and additional annual payments if the Company met certain excess cash tests and a $5.0 million principal prepayment made in August 1992. The payment of $2.0 million for the purchase of an $0.8 million note from a member of the Class A Preferred Group, which note was secured by 53,777 shares of the Class A Preferred, as well as for the purchase of a certain Founders Refund right, which right was used to acquire $1.2 million of prepaid transmission capacity from CTGI. The transfer to the Banks of the 14,324,000 shares of Common Stock, 1,000,000 shares of Class B Preferred, and 1,000,000 shares of Class C Preferred held by CTI in exchange for the release of certain portions of CTI's obligations to each of the Banks. The Class B Preferred and Class C Preferred were convertible into 3,796,000 shares of Common Stock. The completion of an exchange offer (the "Note Exchange Offer") pursuant to which approximately 99% of the Original Debentures, the 11 7/8% Senior Subordinated Debentures of ALC due December 31, 1995 (the "Replacement Debentures") and the PIK Debentures (the Original Debentures, the Replacement Debentures and the PIK Debentures are collectively, the "Debentures" and the holders of the Debentures are collectively referred to as "Debentureholders") were exchanged for 11 7/8% Subordinated Notes due June 30, 1999 (the "1992 Notes") and warrants (the "1992 Warrants") to purchase shares of Common Stock at an exercise price of $5.00 per share of Common Stock. The 1992 Notes had a redemption schedule which provided for the mandatory equal quarterly redemption of 6.25% of principal beginning on September 30, 1995 through June 30, 1999 and, under certain circumstances, were required to be redeemed earlier. The Class A Exchange. See "Certain Relationships and Related Transactions -- Class A Exchange." RELATED ACTIONS SUBSEQUENT TO THE REFINANCING: In October 1992, an equity offering (the "1992 Equity Offering") was completed pursuant to which the Banks, the Class A Preferred Group and Kansas City Southern Industries, Inc. sold an aggregate of 9,863,600 shares of Common Stock at $5.50 per share. ALC did not receive any of the proceeds from the sale of the shares of Common Stock in the 1992 Equity Offering. In October 1992, the $0.8 million note due to the Company by a member of the Class A Preferred Group was paid in full. In December 1992, General Electric, Grumman Hill and Grumman Hill, L.P. were paid in full on their 1990 Notes as amended and replaced in August 1992, but continued to hold the 1990 Warrants. In March 1993, an equity offering (the "1993 Equity Offering") was completed pursuant to which the Banks and Prudential sold an aggregate of 10,350,000 shares of Common Stock at $14.25 per share. As part of the 1993 Equity Offering, the Banks converted all of the shares of Class B Preferred and 41 64 Class C Preferred to shares of Common Stock, and Prudential exercised its 1990 Warrant as to 963,784 shares. ALC did not receive any of the proceeds from the sale of the shares of Common Stock in the 1993 Equity Offering, although it did receive $1.9 million upon Prudential's partial exercise of its 1990 Warrant. In May 1993, Allnet publicly sold $85.0 million of its 1993 Notes. The proceeds of this sale were used to redeem the 1992 Notes and to reduce the amount outstanding under the Previous Revolving Credit Facility. Concurrently with this sale, the Restructured Promissory Note was paid in full. In June 1993, the Company entered into the Revolving Credit Facility to replace the Previous Revolving Credit Facility. SELLING STOCKHOLDERS The following chart sets forth the number of shares of Common Stock held by each of the Selling Stockholders indicated below as of the date of this Prospectus and the number of shares of Common Stock to be offered in the Offering by each of the parties indicated below. See also "Principal Stockholders."
SHARES OF NUMBER OF SHARES COMMON STOCK SHARES OF AND PERCENTAGE OF HELD PRIOR COMMON STOCK OUTSTANDING TO TO BE OFFERED IN COMMON STOCK SELLING STOCKHOLDER THE OFFERING THE OFFERING OWNED AFTER OFFERING - ---------------------------------------------- ------------ ----------------- --------------------- The Prudential Insurance Company of America..................................... 5,535,386 4,905,386 630,000(1) 2.0% Trustees of General Electric Pension Trust.... 4,019,950 2,035,105 1,984,845(1) 6.2% DSC Communications Corporation................ 100,000 100,000 0 0% ------------ ----------------- --------- Total....................................... 9,655,336 7,040,491 2,614,845(1) ------------ ----------------- --------- ------------ ----------------- ---------
- ------------------------- (1) Of these, 900,000 shares will be sold to the extent the over-allotment option is exercised. The shares of Common Stock to be issued to Prudential and General Electric upon the exercise of their warrants and which are being sold hereunder have been included in this Prospectus pursuant to the Registration Rights Agreement among Prudential, General Electric and ALC (and certain other parties) dated June 4, 1990. The shares of Common Stock to be issued to DSC upon this exercise of its warrants and which are being sold hereunder have been included in this Prospectus pursuant to the Registration Rights Agreement between DSC and ALC dated June 1, 1990. 42 65 PRINCIPAL STOCKHOLDERS The following table sets forth information regarding beneficial ownership of the stock of ALC as of August 25, 1993 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 NUMBER OF PERCENTAGE SHARES OF SHARES OF OF COMMON STOCK CLASS A VOTING POWER NAME AND ADDRESS OF (% OF PREFERRED OF ALL BENEFICIAL OWNER CLASS)* (% OF CLASS)* STOCK* - ---------------------------------------------------------------- ------------ ------------- ------------ The Prudential Insurance Company of America.................................................... 5,535,386(1) -- 18.4% Prudential Plaza (18.4%) 751 Broad Street Newark, NJ 07102 Trustees of General Electric Pension Trust...................... 4,019,950(2) -- 12.2% c/o G.E. Investments Corp. (12.2%) 3003 Summer Street Stamford, CT 06904 FMR Corp.(3).................................................... 1,965,700(4) -- 6.8% 82 Devonshire Street (6.8%) Boston, MA 02109 David Gale(5)................................................... -- 62,635(6) ** 167 Dune Road (17.6%) Bridgehampton, N.Y. 11932 Delta Dividend Group, Inc.(5)................................... -- 58,721 ** 167 Dune Road (16.5%) Bridgehampton, N.Y. 11932 Richard D. Irwin................................................ 815,646(7) 5,000 2.7% 15 Ketchum Street (2.7%) (1.4%) Westport, CT 06880 Grumman Hill Investments, L.P................................... 639,155(8) -- 2.1% 15 Ketchum Street (2.2%) Westport, CT 06880 Grumman Hill Associates, Inc.................................... 103,490(**)(9) -- ** 15 Ketchum Street Westport, CT 06880 Saulene M. Richer............................................... 19,366(**) 115,432 ** 300 Walnut, No. 183 (32.4%) Des Moines, IA 50309 John M. Zrno.................................................... 498,018(10) 1,667(**) 1.7% Suite 350 (1.7%) 30300 Telegraph Road Bingham Farms, MI 48025 Marvin C. Moses................................................. 423,059(11) 1,667(**) 1.4% Suite 350 (1.4%) 30300 Telegraph Road Bingham Farms, MI 48025 Richard J. Uhl.................................................. 40,200(**)(12) -- ** One Thousand RIDC Plaza Pittsburgh, PA 15238 Michael E. Faherty.............................................. 40,000(**)(13) -- ** 15301 Dallas Parkway, Suite 600 Dallas, TX 75248 William H. Oberlin.............................................. 428,059(14) 1,666(**) 1.5% Suite 350 (1.5%) 30300 Telegraph Road Bingham Farms, MI 48025 Gregory M. Jones................................................ 942(**) -- ** Suite 350 30300 Telegraph Road Bingham Farms, MI 48025
43 66
APPROXIMATE NUMBER OF NUMBER OF PERCENTAGE SHARES OF SHARES OF OF COMMON STOCK CLASS A VOTING POWER NAME AND ADDRESS OF (% OF PREFERRED OF ALL BENEFICIAL OWNER CLASS)* (% OF CLASS)* STOCK* - ---------------------------------------------------------------- ------------ ------------- ------------ Connie R. Gale.................................................. 65,148(**)(15) -- ** Suite 350 30300 Telegraph Road Bingham Farms, MI 48025 All current executive officers and directors as group (17 persons)...................................................... 2,623,710(16) 10,000 8.3% (8.3%) (2.8%)
- ------------------------- * Percentage calculation based on 29,051,290 shares of Common Stock, and 355,956 shares of Class A Preferred, issued and outstanding on August 25, 1993, 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) Includes 1,012,020 shares of Common Stock which may be acquired pursuant to the exercise of outstanding warrants. (2) Includes 3,799,950 shares of Common Stock which may be acquired pursuant to the exercise of outstanding warrants. (3) Based on information set forth in a Schedule 13G, dated February 14, 1993, filed with the Securities and Exchange Commission. (4) 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. (5) Based on information set forth in Amendment No. 2 to Statement on Schedule 13D, dated February 11, 1993, filed with the Securities and Exchange Commission. The Company has been informed that there is no business or familial relationship between Ms. Connie R. Gale and Mr. David Gale ("Gale" is Ms. Gale's married name), or between Ms. Gale and Mr. Gale's affiliates. (6) Includes 58,721 shares of Class A Preferred held by Delta Dividend Group, Inc., which are deemed to be beneficially owned by Mr. Gale, its sole executive officer, the sole director and the controlling stockholder. (7) Includes 153,163 shares of Common Stock which may be acquired pursuant to the exercise of outstanding stock options held by Grumman Hill, L.P. and 622,483 shares of Common 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. (8) Includes 485,992 shares of Common Stock which may be acquired pursuant to the exercise of outstanding warrants and 153,163 shares of Common Stock which may be acquired pursuant to the exercise of outstanding stock options. (9) These shares of Common Stock may be acquired pursuant to the exercise of outstanding warrants. (10) Includes 495,578 shares of Common Stock which Mr. Zrno has the right to acquire pursuant to the exercise of outstanding stock options, and 800 shares of Common Stock which Mr. Zrno's wife and mother-in-law own jointly (Mr. Zrno disclaims beneficial interest as to these shares). (11) Includes 415,059 shares of Common Stock which Mr. Moses has the right to acquire pursuant to the exercise of outstanding stock options, 3,000 shares of Common Stock which Mr. Moses owns as custodian for his children under UGMA and 1,000 shares of Common Stock which Mr. Moses' daughter owns (Mr. Moses disclaims beneficial interest as to the latter 1,000 shares). (12) Includes 40,000 shares of Common Stock which Mr. Uhl has the right to acquire pursuant to the exercise of outstanding stock options. (13) Shares of Common Stock which Mr. Faherty has the right to acquire pursuant to the exercise of outstanding stock options. (14) Includes 418,059 shares of Common Stock which Mr. Oberlin has the right to acquire pursuant to the exercise of outstanding stock options, and 4,000 shares of Common Stock which Mr. Oberlin's daughters own (Mr. Oberlin disclaims beneficial interest as to the latter 4,000 shares). (15) Includes 61,542 shares of Common Stock which Ms. Gale has the right to acquire pursuant to the exercise of outstanding stock options. (16) Includes 1,924,018 shares of Common 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 Common 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. 44 67 DESCRIPTION OF CAPITAL STOCK GENERAL The authorized capital stock of ALC consists of 200,000,000 shares of Common Stock, par value $0.01, of which 29,051,290 shares are issued and outstanding; 2,500,000 shares of Class A Preferred, $0.01 par value, of which 355,956 shares are issued and outstanding; and 14,783,800 shares of Preferred Stock (the "Preferred Stock"), $0.01 par value, of which no shares are issued and outstanding. After this Offering, 32,198,415 shares of Common Stock will be issued and outstanding. COMMON STOCK. The holders of Common Stock (i) are entitled to vote with one share per vote; (ii) have equal ratable rights to dividends from funds legally available thereof if, as and when declared by the Board of Directors; (iii) are entitled to share ratably in any distribution to holders of Common Stock upon liquidation of ALC; and (iv) do not have preemptive rights (except for certain pre-emptive rights granted by contract to the Banks). Common Stock is not convertible or redeemable. Dividends may not be paid on Common Stock if (i) any dividends are due on, or ALC has any past-due obligation to redeem, Preferred Stock, or Class A Preferred; or (ii) a dividend is not permissible under the terms of the Indenture Agreement governing the 1993 Notes. Since its inception, ALC has not declared or paid dividends on the Common Stock. The Board of Directors is authorized to issue additional shares of the authorized Common Stock without stockholder approval. Accordingly, holders of Common Stock may be subject to potential future dilution of the value of the Common Stock they own or have the right to acquire. CLASS A PREFERRED. The Class A Preferred was entitled to quarterly, cumulative (without interest) dividends of $0.40 per share commencing with the quarter ended September 30, 1987 through the quarter ended December 31, 1991. Thereafter, dividends on the Class A Preferred are calculated according to a formula set forth in the Certificate using an adjusted prime rate of interest based on the prime rate published in the Wall Street Journal on the first business day of a given quarterly dividend period. Under the Delaware General Corporation Law, ALC may pay dividends only out of surplus or net profits for the fiscal year in which the dividends are declared and/or the preceding fiscal year. ALC paid $1.5 million in cash dividends to the Class A Preferred holders in 1988 in connection with the purchase by CTI of the Class B Preferred and Class C Preferred. ALC has declared a cash dividend of $0.32 per share on the Class A Preferred, payable September 30, 1993 to the stockholders of record on September 13, 1993. The Certificate provides that ALC must redeem the shares of Class A Preferred at $20.00 per share plus accrued dividends. If ALC does not make a scheduled redemption, the Class A Preferred holders can elect to convert the amount of Class A Preferred which should have been redeemed (plus accrued and unpaid dividends thereon) to Common Stock. As of June 30, 1993, dividends accrued on the Class A Preferred were $3.1 million. Future redemption obligations relating to the Class A Preferred consist of one scheduled payment of approximately $7.1 million (plus accrued and unpaid dividends on the shares then being redeemed) at December 31, 1996. As of September 17, 1993, the remaining shares of Class A Preferred were held by 1,632 stockholders. Holders of the Class A Preferred are entitled to a number of votes equal to .166 of one vote per share of Class A Preferred. PREFERRED. The Board of Directors is entitled to issue up to 14,783,800 shares of Preferred Stock without stockholder approval. Preferred Stock can be issued from time to time in one or more classes containing one or more series. The Board of Directors has full authority to determine the features of such stock, including the dividend rate, whether such stock will be redeemable (and, if so, the price and terms for redemption), any preferential amount payable to holders in the event of liquidation, whether such stock will be convertible (and, if so, the terms and conditions of such conversion), and whether and to what extent voting rights will attach to such stock. Such Preferred Stock may be issued with extraordinary voting or other rights which could have an anti-takeover effect or could be issued in an attempt to discourage or prevent a takeover bid. Accordingly, holders of Common Stock may be subject to possible future dilution of the value or other adverse effects which might result from the issuance of additional Preferred Stock. 45 68 CLASSIFICATION OF THE BOARD The Board of Directors of ALC consists of seven director positions. The Class A Preferred holders are entitled to elect one member of the Board; the holders of Common Stock are entitled to elect two members of the Board; and all of the stockholders as a class are entitled to elect four members of the Board. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, ALC will have outstanding 32,198,415 shares of Common Stock, without taking into account shares of Common Stock issuable upon exercise of outstanding options and warrants or issuable upon conversion of any preferred stock. All of these outstanding shares are freely tradable without registration or further registration under the Securities Act, except for any shares held by "affiliates" of ALC within the meaning of the Securities Act, which shares will be subject to the resale limitations of Rule 144 promulgated under the Securities Act ("Rule 144"). In addition, if ALC fails to redeem shares of Class A Preferred according to the mandatory redemption schedule, the Class A Preferred holders may elect to convert the shares which should have been redeemed, plus accrued and unpaid dividends thereon, to Common Stock. See "Description of Capital Stock." The Company has filed a "shelf" registration statement (of which this Offering is a part) which will permit the sale from time to time, in addition to the shares being sold in this Offering, of up to 1,370,088 shares of Common Stock, including 630,000 shares owned by Prudential and 270,000 shares which General Electric may acquire upon exercise of 1990 Warrants. Of these, 900,000 shares will be sold in this Offering to the extent the over-allotment option is exercised. The directors and officers and certain stockholders of the Company, including the Selling Stockholders, have agreed not to sell (other than in certain limited circumstances) any shares of Common Stock owned by them within 180 days (or, in the case of the Selling Stockholders with respect to an underwritten public offering as to which a registration statement has become effective, 120 days) after the date of this Prospectus without the written consent of the Underwriters. In general, under Rule 144 as currently in effect, any person (or persons whose shares are aggregated), including persons deemed to be affiliates, whose restricted securities have been fully paid for and held for at least two years from the later of the date of issuance by ALC or acquisition from an affiliate, may sell such securities in brokers' transactions or directly to market makers, provided that the number of shares sold in any three-month period may not exceed the greater of 1.0% of the then outstanding shares of Common Stock (approximately 322,000 shares immediately after the Offering) or the average weekly trading volume of the Common Stock on the American Stock Exchange during the four calendar weeks preceding the sale. Sales under Rule 144 are also subject to certain notice requirements and the availability of certain public information about the Company. After three years have elapsed from the later of the issuance or restricted securities by ALC or their acquisition from an affiliate, such securities may be sold without limitation by persons who are not affiliates under the rule. Sales of substantial amounts of Common Stock in the public market could adversely affect prevailing market prices and impair the Company's ability to raise capital at such times through the sale of its equity securities. See "Risk Factors -- Future Sales of Common Stock." 46 69 UNDERWRITING The U.S. Underwriters named below, have severally agreed, subject to the terms and conditions set forth in the U.S. Underwriting Agreement (the "U.S. Underwriting Agreement") among the Selling Stockholders, the Company and the U.S. Underwriters to purchase from the Selling Stockholders, and the Selling Stockholders have agreed to sell to the U.S. Underwriters, the number of shares of Common Stock set forth opposite their respective names below:
NUMBER OF U.S. UNDERWRITERS SHARES --------- PaineWebber Incorporated...................................... 1,878,497 Goldman, Sachs & Co........................................... 1,878,497 Wheat, First Securities, Inc. ................................ 1,878,497 --------- Total............................................... 5,635,491 --------- ---------
In addition, PaineWebber International (U.K.) Ltd., Goldman Sachs International Limited and Wheat, First Securities, Inc. (the "International Underwriters") have severally agreed, subject to the terms and conditions set forth in the International Underwriting Agreement (the "International Underwriting Agreement") among the Selling Stockholders, the Company and the International Underwriters, to purchase 1,405,000 shares of Common Stock and to offer and sell such shares outside of the United States and Canada concurrently with the offering and sale of shares of Common Stock by the U.S. Underwriters. The U.S. Underwriting Agreement provides that the obligations of the U.S. Underwriters to purchase the shares of Common Stock listed above are subject to certain conditions. The U.S. Underwriting Agreement also provides that the U.S. Underwriters are committed to purchase all of the shares of Common Stock offered hereby, if any are purchased (without consideration of any shares that may be purchased through the Underwriters' over-allotment option). In general, the closing with respect to the sale of the shares of Common Stock pursuant to the U.S. Underwriting Agreement is a condition to the closing with respect to the sale of the shares of Common Stock pursuant to the International Underwriting Agreement and vice versa. The public offering price per share and the total underwriting discount per share are identical under the U.S. Underwriting Agreement and the International Underwriting Agreement. The Company and the Selling Stockholders have been advised by the U.S. Underwriters that the U.S. Underwriters propose to offer the shares of Common Stock to the public at the offering price set forth on the cover page of this Prospectus and to certain securities dealers at such price less a concession not in excess of $.55 per share and that the U.S. Underwriters and such dealers may reallow a concession not in excess of $.10 per share to other dealers, including the U.S. Underwriters. After the shares of Common Stock are released for sale to the public, the public offering price and the concession and discount to dealers may be changed by the U.S. Underwriters. Each U.S. Underwriter has agreed that, as part of the distribution of the shares of Common Stock, (a) it is not purchasing any shares of Common Stock for the account of anyone other than a United States Person and (b) it has not offered or sold, and will not offer or sell, directly or indirectly, any shares of Common Stock or distribute this Prospectus to any person outside the United States or to anyone other than a United States Person. Each International Underwriter has agreed that, as part of the distribution of shares of Common Stock, (a) it is not purchasing any shares of Common Stock for the account of any United States Person or Canadian Person and (b) it has not offered or sold, and will not offer or sell, directly or indirectly, any shares of Common Stock or distribute this Prospectus to any person within the United States or Canada or to any United States Person or Canadian Person. The foregoing limitations do not apply to stabilization transactions or to certain other transactions specified in the Agreement Between described below. As used herein, "United States Person" means any individual who is resident in the United States, or any corporation, pension, profit-sharing or other trust or other entity organized under or governed by the laws of the United States or any political subdivision thereof (other than a foreign branch of any United States Person), and includes any United States branch of a non-United States Person. "Canadian Person" means any individual who is resident in Canada, or any corporation, pension, profit-sharing or other trust or other entity organized under or 47 70 governed by the laws of Canada or any political subdivision thereof (other than a foreign branch of any Canadian Person), and includes any Canadian branch of a non-Canadian Person. The U.S. Underwriters and the International Underwriters have entered into an Agreement between U.S. and International Underwriters (the "Agreement Between") that provides for the coordination of their activities. Pursuant to the Agreement Between, sales may be made between the U.S. Underwriters and the International Underwriters of such number of shares of Common Stock as may be mutually agreed upon. The per share price of any shares so sold shall be the public offering price, less an amount not greater than the per share amount of the concession to dealers set forth above. To the extent there are sales between the U.S. Underwriters and the International Underwriters, the number of shares of Common Stock initially available for sale by the U.S. Underwriters or by the International Underwriters may be more or less than the amount appearing on the cover page of this Prospectus. The Selling Stockholders have granted to the U.S. Underwriters an option, expiring at the close of business on the 45th day subsequent to the date of this Prospectus, to purchase up to an aggregate of 900,000 additional shares of Common Stock at the public offering price set forth on the cover page of this Prospectus, less underwriting discounts and commissions. The U.S. Underwriters may exercise such option only to cover over-allotments, if any, incurred in the sale of the shares. To the extent that the option is exercised, each of the U.S. Underwriters will be obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the percentage it is required to purchase of the total number of shares of Common Stock it was obligated to purchase under the U.S. Underwriting Agreement. ALC and its directors and officers, the Selling Stockholders, Grumman Hill and Grumman Hill L.P. have agreed not to offer, sell or otherwise dispose of any shares of Common Stock except in certain limited circumstances for a period of 180 days (or, in the case of the Selling Stockholders, with respect to an underwritten public offering as to which a registration statement has become effective, 120 days) after the date of this Prospectus without the prior written consent of the U.S. Underwriters. The Company and the Selling Stockholders have agreed to indemnify the U.S. Underwriters and the International Underwriters against certain liabilities, including liabilities under the Act, or to contribute to payments which the U.S. Underwriters and the International Underwriters may be required to make in respect thereof. In connection with the 1992 and 1993 Equity Offerings, PaineWebber Incorporated and Wheat, First Securities, Inc., and in connection with the 1993 Note Offering, the U.S. Underwriters, for their services as underwriters and representatives of the underwriters, received customary underwriters' discounts and commissions. 48 71 LEGAL MATTERS The legality of the securities offered hereby has been passed upon for ALC by Jaffe, Raitt, Heuer & Weiss, Professional Corporation, Detroit, Michigan. Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York, is acting as counsel for the Underwriters in connection with certain legal matters relating to the sale of the shares of Common Stock offered hereby. EXPERTS The consolidated financial statements of ALC Communications Corporation and consolidated subsidiary at December 31, 1992 and 1991, and each of the three years in the period ending December 31, 1992, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young, independent auditors, as set forth in their report thereon appearing elsewhere herein, and in the Registration Statement, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. 49 72 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS as of June 30, 1993 (unaudited) and December 31, 1992...... F-2 CONSOLIDATED STATEMENTS OF INCOME for the three and six months ended June 30, 1993 and 1992 (unaudited)................................................... F-3 CONSOLIDATED STATEMENTS OF CASH FLOWS for the six months ended June 30, 1993 and 1992 (unaudited)................................................... F-4 CONSOLIDATED STATEMENT OF CLASS A PREFERRED STOCK AND STOCKHOLDERS' EQUITY for the six months ended June 30, 1993 (unaudited).............. F-5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the six months ended June 30, 1993 and 1992............................................................... F-6 REPORT OF INDEPENDENT AUDITORS......................................................... F-9 CONSOLIDATED BALANCE SHEETS as of December 31, 1992 and 1991........................... F-10 CONSOLIDATED STATEMENTS OF OPERATIONS for the years ended December 31, 1992, 1991 and 1990..................................................... F-11 CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended December 31, 1992, 1991 and 1990..................................................... F-12 CONSOLIDATED STATEMENTS OF CLASS A PREFERRED STOCK AND STOCKHOLDERS' DEFICIT for the years ended December 31, 1992, 1991 and 1990........... F-13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 1992, 1991 and 1990..................................................... F-14
F-1 73 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY CONSOLIDATED BALANCE SHEETS
DECEMBER JUNE 30, 31, 1993 1992 ----------- ----------- (UNAUDITED) (IN THOUSANDS) ASSETS Current Assets: Cash......................................................................... $ 2,100 $ 112 Accounts receivable, less allowance for doubtful accounts of $3,392,000 and $3,334,000................................................................. 53,319 45,327 Other current assets......................................................... 8,361 3,000 ----------- ----------- Total Current Assets..................................................... $ 63,780 $ 48,439 Fixed Assets: Communication systems........................................................ $ 75,346 $ 74,002 Other equipment and leasehold improvements................................... 30,565 28,371 Construction in progress..................................................... 4,186 3,443 ----------- ----------- $ 110,097 $ 105,816 Less accumulated depreciation and amortization............................... 68,518 63,872 ----------- ----------- Total Fixed Assets....................................................... $ 41,579 $ 41,944 Cost in excess of net assets acquired.......................................... 49,554 50,317 Deferred taxes and other assets................................................ 11,701 2,566 ----------- ----------- Total Assets............................................................. $ 166,614 $ 143,266 ----------- ----------- ----------- ----------- LIABILITIES, CLASS A PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Accounts payable............................................................. $ 1,242 $ 3,508 Accrued liabilities.......................................................... 13,600 11,895 Accrued network costs........................................................ 33,346 28,676 Taxes other than income...................................................... 10,428 9,889 Revolving Credit Facility.................................................... 14,802 Notes payable, capitalized leases and other long-term debt................... 860 11,417 ----------- ----------- Total Current Liabilities................................................ $ 59,476 $ 80,187 Revolving Credit Facility...................................................... 4,871 Notes payable, capitalized leases and other long-term debt..................... 3,455 12,308 Senior Subordinated Notes...................................................... 84,313 Subordinated Notes............................................................. 61,983 Class A Preferred Stock, $0.01 par value; authorized -- 2,500,000 shares; issued and outstanding -- 356,000 shares, aggregate redemption value of $7,119,000 less discount of $319,000 and $364,000 plus accrued but undeclared dividends of $3,125,000 and $2,904,000....................................... 9,925 9,659 Stockholders' Equity (Deficit): Class B Preferred Stock, $0.01 par value; authorized, issued and outstanding -- none and 1,000,000 shares............................................... 10 Class C Preferred Stock, $0.01 par value; authorized, issued and outstanding -- none and 1,000,000 shares............................................... 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 -- 28,939,000 and 23,794,000 shares............................ 289 238 Capital in excess of par value............................................... 114,221 110,146 Paid-in capital -- Warrants.................................................. 15,955 17,022 Accumulated deficit.......................................................... (125,891) (148,297) ----------- ----------- Total Stockholders' Equity (Deficit)..................................... $ 4,574 $ (20,871) ----------- ----------- Total Liabilities, Class A Preferred Stock and Stockholders' Equity (Deficit).................................................................... $ 166,614 $ 143,266 ----------- ----------- ----------- -----------
See notes to consolidated financial statements F-2 74 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED -------------------- -------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 1993 1992 1993 1992 -------- -------- -------- -------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Revenue............................................. $104,233 $ 92,659 $206,077 $184,702 Operating Expenses: Cost of communication services.................... $ 56,824 $ 55,236 $112,291 $111,286 Sales, general and administrative................. 29,575 25,671 58,090 51,255 Depreciation and amortization..................... 2,826 2,830 5,680 5,573 -------- -------- -------- -------- Total Operating Expenses..................... $ 89,225 $ 83,737 $176,061 $168,114 -------- -------- -------- -------- Operating Income............................. $ 15,008 $ 8,922 $ 30,016 $ 16,588 Interest expense (net of interest & other income of $79,000, $57,000, $131,000 and $137,000).......... 2,866 4,214 6,520 8,413 -------- -------- -------- -------- Income Before Income Taxes, Extraordinary Items and Cumulative Effect of Accounting Change............ $ 12,142 $ 4,708 $ 23,496 $ 8,175 Income taxes........................................ 3,750 1,996 7,100 3,522 -------- -------- -------- -------- Income Before Extraordinary Items and Cumulative Effect of Accounting Change....................... $ 8,392 $ 2,712 $ 16,396 $ 4,653 Extraordinary Items: Loss on early retirement of debt (net of income tax benefit of $4,000,000)..................... (7,490) (7,490) Utilization of operating loss carryforward........ 1,722 3,048 Cumulative effect of change in method of accounting for income taxes.................................. 13,500 -------- -------- -------- -------- Net Income................................... $ 902 $ 4,434 $ 22,406 $ 7,701 -------- -------- -------- -------- -------- -------- -------- -------- Earnings per common and common equivalent share: Income before extraordinary items and cumulative effect of accounting change.................... $ 0.23 $ 0.07 $ 0.46 $ 0.09 Extraordinary items: Loss on early retirement of debt............... $ (0.21) $ (0.21) Utilization of operating loss carryforward..... $ 0.08 $ 0.15 Cumulative effect of change in method of accounting for income taxes.................... $ 0.38 -------- -------- -------- -------- Net Income........................................ $ 0.02 $ 0.15 $ 0.63 $ 0.24 -------- -------- -------- -------- -------- -------- -------- -------- Weighted Average Common and Common Equivalent Shares............................................ 35,635 20,634 35,058 20,633 -------- -------- -------- -------- -------- -------- -------- --------
See notes to consolidated financial statements F-3 75 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED -------------------- JUNE 30, JUNE 30, 1993 1992 -------- -------- (IN THOUSANDS) Operating Activities: Net income............................................................. $ 22,406 $ 7,701 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization....................................... 6,629 6,195 Loss on sale of assets.............................................. 3 46 Cumulative effect of change in accounting principle................. (13,500) Extraordinary loss on early retirement of debt...................... 7,490 Gain on debenture retirement........................................ (60) Increase in accounts receivable and other current assets............ (7,116) (4,710) Increase (decrease) in current liabilities.......................... 10,828 (5,014) -------- -------- Net Cash Provided by Operating Activities...................... $ 26,740 $ 4,158 Financing Activities: Proceeds from (payments on) Revolving Credit Facility.................. $ (9,931) $ 3,915 Proceeds from long-term debt........................................... 84,310 325 Payments on long-term debt............................................. (20,560) (3,761) Proceeds from issuance of stock........................................ 3,305 30 Retirement of debentures............................................... (74,319) (75) -------- -------- Net Cash Provided by (Used in) Financing Activities............ $(17,195) $ 434 Investing Activities: Expenditures for fixed assets.......................................... $ (4,049) $ (3,828) Change in other non-current assets..................................... (3,512) (849) Proceeds from sale of fixed assets..................................... 4 15 -------- -------- Net Cash Used in Investing Activities.......................... $ (7,557) $ (4,662) -------- -------- Increase (decrease) in Cash During Period...................... $ 1,988 $ (70) Cash at beginning of period.............................................. 112 223 -------- -------- Cash at end of period.................................................... $ 2,100 $ 153 -------- -------- -------- -------- Interest paid............................................................ $ 5,770 $ 3,613 -------- -------- -------- -------- Income taxes paid........................................................ $ 2,188 $ 449 -------- -------- -------- --------
See notes to consolidated financial statements F-4 76 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY CONSOLIDATED STATEMENT OF CLASS A PREFERRED STOCK AND STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 1993 (IN THOUSANDS) (UNAUDITED)
STOCKHOLDERS' EQUITY ------------------------- CLASS C CLASS A CLASS B PREFERRED PREFERRED STOCK PREFERRED STOCK STOCK --------------- --------------- ------- SHARES AMOUNT SHARES AMOUNT SHARES ------ ------ ------ ------ ------- Balance, December 31, 1992....................................................... 356 $9,659 1,000 $ 10 1,000 Accretion of discount on Class A Preferred Stock................................. 45 Accrued undeclared dividends on Class A Preferred Stock.......................... 221 Conversion of Class B Preferred to Common Stock.................................. (1,000) (10) Conversion of Class C Preferred to Common Stock.................................. (1,000) Exercise of options.............................................................. Exercise of Warrants............................................................. Net income for the six months ended June 30, 1993................................ -- ------ ------ -- ------- Balance, June 30, 1993........................................................... 356 $9,925 0 $ 0 0 --- ------ ------ ---- ------- --- ------ ------ ---- ------- PAID-IN-CAPITAL COMMON STOCK -- WARRANTS --------------- ---------------- AMOUNT SHARES AMOUNT SHARES AMOUNT ------ ------ ------ ------ ------- Balance, December 31, 1992....................................................... $ 10 23,794 $238 8,869 $17,022 Accretion of discount on Class A Preferred Stock................................. Accrued undeclared dividends on Class A Preferred Stock.......................... Conversion of Class B Preferred to Common Stock.................................. 1,898 19 Conversion of Class C Preferred to Common Stock.................................. (10) 1,898 19 Exercise of options.............................................................. 370 3 Exercise of Warrants............................................................. 979 10 (979) (1,067) Net income for the six months ended June 30, 1993................................ -- ------ ------ ------ ------- Balance, June 30, 1993........................................................... $ 0 28,939 $289 7,890 $15,955 -- ------ ------ ------ ------- -- ------ ------ ------ ------- CAPITAL IN EXCESS OF ACCUMULATED PAR VALUE DEFICIT TOTAL --------- ----------- -------- Balance, December 31, 1992....................................................... $ 110,146 $(148,297) $(20,871) Accretion of discount on Class A Preferred Stock................................. (45) (45) Accrued undeclared dividends on Class A Preferred Stock.......................... (221) (221) Conversion of Class B Preferred to Common Stock.................................. (9) 0 Conversion of Class C Preferred to Common Stock.................................. (9) 0 Exercise of options.............................................................. 1,297 1,300 Exercise of Warrants............................................................. 3,062 2,005 Net income for the six months ended June 30, 1993................................ 22,406 22,406 --------- ----------- -------- Balance, June 30, 1993........................................................... $ 114,221 $(125,891) $ 4,574 --------- ----------- -------- --------- ----------- --------
See notes to consolidated financial statements F-5 77 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 1993 AND 1992 NOTE A -- MANAGEMENT'S REPRESENTATION The consolidated financial statements included herein have been prepared by ALC management, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Certain prior year amounts have been reclassified to conform to current year presentation. In the opinion of ALC management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature, and the accompanying consolidated financial statements present fairly the financial position as of June 30, 1993 and December 31, 1992, the results of operations and cash flows for the three and six month periods ended June 30, 1993 and 1992. The balance sheet at December 31, 1992 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes included in the Company's Form 10-K for the fiscal year ended December 31, 1992. NOTE B -- 1993 FINANCING ACTIVITIES 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. A group of five banks ("Banks") sold 8,386,216 shares of this ALC Common Stock, of which 3,796,000 were received upon conversion of all the Class B and Class C Preferred Stock. Upon completion of this offering, the Banks held an aggregate of 4,321,784 shares of ALC Common Stock, representing 15.0% of the total voting power of ALC capital stock (10.9% assuming the exercise of certain warrants and options). The Prudential Insurance Company of America ("Prudential") sold the remaining 1,963,784 shares of which 963,784 represented the exercise of certain 1990 Warrants. ALC did not receive any of the proceeds from the sale of these shares in the 1993 equity offering, although it did receive $1.9 million upon Prudential's exercise of certain 1990 Warrants. The Banks have further 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 May 1993, the Company completed an offering of $85.0 million 9.0% Senior Subordinated Notes ("1993 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. In the event of a change of control, the holders have the right to require the Company to purchase all or part of the 1993 Notes. Management used the $84.3 million of proceeds of this offering to repay the outstanding 1992 Notes in the aggregate amount of $72.4 million, and to reduce the amount outstanding under the Revolving Credit Facility. As a result of repaying the 11 7/8% Subordinated Notes an extraordinary loss of $11.4 million was recorded on the early retirement. The loss reflected the difference between the carrying value and the redemption value of the debt as well as the write off of issuance costs. The transaction was recorded with a net tax effect of $4.0 million. Additionally, 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 the Revolving Credit Agreement, the Company is able to minimize interest expense by structuring the borrowings under any of three alternatives. Each alternative has a varying interest rate calculation associated with it. Costs to the Company currently approximate 6% per annum. The agreement includes financial covenants which may allow the Company to further reduce interest expense 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 eligible receivables. As of July 1, 1993, the Company had $33.8 million of availability under the line. F-6 78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE C -- INCOME TAXES Effective January 1, 1993, the Company adopted the Financial Accounting Standards Board Statement 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 financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Prior to the adoption of Statement 109, income tax expense was determined using the deferred method. 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 increased net income by $13.5 million or $0.38 per share as of January 1, 1993. 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 an Internal Revenue Code Section 382 limitation of approximately $10.0 million per annum. As a result of this annual limitation, along with the 15 year carryforward limitation, the maximum cumulative net operating losses ("NOLs") and investment tax credits which can be utilized for federal income tax purposes in 1993 and future years are limited to approximately $130.0 million. For financial reporting purposes, deferred tax assets of $48.0 million representing primarily the future tax benefits related to those carryforwards have been recorded and a valuation allowance of $38.0 million has been recognized to offset these deferred tax assets. The resulting net asset recorded represents three years of NOL benefit. The Company has taken a conservative position that realization of the benefit of the NOLs beyond the three year period is difficult to predict and therefore was not recorded. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of June 30, 1993 are as follows:
(IN THOUSANDS) -------------- Net operating loss carryforwards.............................................. $ 48,000 Allowance for doubtful accounts............................................... 1,234 Depreciation.................................................................. 867 Compensation liabilities...................................................... 683 Capital leases................................................................ 588 Other......................................................................... 128 -------------- Total deferred tax assets..................................................... 51,500 Valuation allowance........................................................... (38,000) -------------- Net deferred tax assets....................................................... $ 13,500 -------------- --------------
The difference between the statutory federal income tax rate of 34.0% and the effective rate for the six months ended June 30, 1993 of 30.2% results primarily from state income taxes, goodwill amortization, and the utilization of NOLs. The difference between the effective rate for the six months ended June 30, 1993 and the year ended December 31, 1992 results primarily from recognizing the NOL tax benefits in accordance with Statement 109. NOTE D -- SUBSEQUENT EVENTS During July 1993, the Company acquired the specialized 800 customer base of Call Home America, Inc. The purchase price was comprised of: (1) approximately $15 million paid in July 1993 and (2) a payment to be made based on 150% of average monthly revenue generated by the customers in April, May and June 1994. Call Home America, Inc. has approximately 50,000 customers, including parents of college students and frequent travelers, who will continue to receive services under the Call Home America (R) name. The current F-7 79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) level of annualized revenue is approximately $20 million. These customers will be offered other telecommunications services by Allnet. In July 1993, the Company declared a quarterly dividend of $0.32 per share on each of the 355,956 outstanding shares of Class A Preferred Stock. The dividend is payable September 30, 1993 to stockholders of record at the close of business September 13, 1993. The dividends were determined according to the Company's Restated Certificate of Incorporation. F-8 80 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 consolidated subsidiary as of December 31, 1992 and 1991, and the related consolidated statements of operations, cash flows, and preferred stock and stockholders' deficit for each of the three years in the period ended December 31, 1992. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of ALC Communications Corporation and consolidated subsidiary at December 31, 1992 and 1991, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1992, in conformity with generally accepted accounting principles. ERNST & YOUNG January 25, 1993 Detroit, Michigan F-9 81 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, 1992 1991 ------------ ------------ (IN THOUSANDS) ASSETS Current Assets: Cash.................................................................. $ 112 $ 223 Accounts receivable, less allowance for doubtful accounts of $3,334,000 and $3,676,000 (Note C)................................................. 45,327 42,979 Other current assets.................................................. 3,000 1,875 ------------ ------------ Total Current Assets........................................... $ 48,439 $ 45,077 Fixed Assets: (Notes A, C & E) Communication systems................................................. $ 74,002 $ 70,384 Other equipment and leasehold improvements............................ 28,371 27,695 Construction in progress.............................................. 3,443 1,349 ------------ ------------ $105,816 $ 99,428 Less accumulated depreciation and amortization........................ 63,872 57,761 ------------ ------------ Total Fixed Assets............................................. $ 41,944 $ 41,667 Cost in excess of net assets acquired less accumulated amortization of $10,673,000 and $9,149,000 (Note A)................................... 50,317 51,841 Other assets............................................................ 2,566 2,261 ------------ ------------ Total Assets................................................... $143,266 $ 140,846 ------------ ------------ ------------ ------------ LIABILITIES, CLASS A PREFERRED STOCK AND STOCKHOLDERS' DEFICIT Current Liabilities: Accounts payable and accrued liabilities.............................. $ 15,403 $ 10,218 Accrued network costs................................................. 28,676 34,716 Taxes other than income............................................... 9,889 10,181 Revolving Credit Facility (Notes B & C)............................... 14,802 9,402 Notes payable, capitalized leases and other long-term debt (Notes B, C, E, & G)................................................ 11,417 42,616 Senior Subordinated Debentures (Notes B & C).......................... 29,640 Class A Preferred Stock (Notes B & D)................................. 1,018 ------------ ------------ Total Current Liabilities...................................... $ 80,187 $ 137,791 Notes payable, capitalized leases and other long-term debt (Notes B, C, E, & G)............................................................... 12,308 3,261 Subordinated Notes (Notes B & C)........................................ 61,983 Senior Subordinated Debentures (Notes B & C)............................ 39,660 Class A Preferred Stock, $0.01 par value; authorized -- 2,500,000 shares; issued and outstanding -- 356,000 and 2,500,000 shares, aggregate redemption value of $7,119,000 and $48,928,000 less discount of $364,000 and $2,994,000 plus accrued but undeclared dividends of $2,904,000 and $16,500,000 (Notes B & D).............................. 9,659 62,434 Stockholders' Deficit: Class B Preferred Stock, $0.01 par value; authorized, issued and outstanding -- 1,000,000 shares (Notes F & G)....................... 10 10 Class C Preferred Stock, $0.01 par value; authorized, issued and outstanding -- 1,000,000 shares (Notes F & G)....................... 10 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 -- 23,794,000 and 17,221,000 shares (Notes B, C & F).............................................................. 238 172 Capital in excess of par value........................................ 110,146 57,718 Paid-in capital -- Warrants (Notes C & E)............................. 17,022 8,913 Accumulated deficit................................................... (148,297) (169,123) ------------ ------------ Total Stockholders' Deficit.................................... $(20,871) $ (102,300) ------------ ------------ Total Liabilities, Class A Preferred Stock and Stockholders' Deficit........................................................... $143,266 $ 140,846 ------------ ------------ ------------ ------------
See notes to consolidated financial statements F-10 82 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, -------------------------------------- 1992 1991 1990 -------- -------- -------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Revenue................................................ $376,064 $346,873 $326,004 Operating Expenses: Cost of communication services, including amounts with related parties of $16,004,000, $18,000,000 and $22,553,000 (Note G).......................... $216,889 $212,716 $209,612 Sales, general and administrative.................... 107,294 97,964 102,838 Depreciation and amortization........................ 11,197 12,343 13,320 Financial restructuring.............................. 2,987 -------- -------- -------- Total Operating Expenses........................ $335,380 $323,023 $328,757 -------- -------- -------- Operating Income (Loss)......................... $ 40,684 $ 23,850 $ (2,753) Interest expense including amounts with related parties of $5,000,000, $4,640,000 and $2,887,000 (net of interest and other income (expense) of ($369,000), $278,000, and $675,000).............................. 17,158 18,128 21,250 Gain on sale of subsidiary............................. 4,360 -------- -------- -------- Income (Loss) before Income Taxes and Extraordinary Item................................................. $ 23,526 $ 5,722 $(19,643) Income taxes (Note H).................................. 9,700 3,005 -------- -------- -------- Income (loss) before Extraordinary Item................ $ 13,826 $ 2,717 $(19,643) Extraordinary item -- utilization of operating loss carryforwards (Note H)............................... 7,000 2,630 -------- -------- -------- Net Income (Loss)............................... $ 20,826 $ 5,347 $(19,643) -------- -------- -------- -------- -------- -------- Income (loss) per common and common equivalent share before extraordinary item (Note F)................... $ 0.43 $ (0.17) $ (2.29) -------- -------- -------- -------- -------- -------- Net income (loss) per common and common equivalent share (Note F)....................................... $ 0.74 $ (0.02) $ (2.29) -------- -------- -------- -------- -------- -------- Weighted average common and common equivalent shares... 22,141 17,216 11,074 -------- -------- -------- -------- -------- --------
See notes to consolidated financial statements F-11 83 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------ 1992 1991 1990 -------- -------- -------- (IN THOUSANDS) Operating Activities Net income (loss)............................................ $ 20,826 $ 5,347 $(19,643) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Gain from sale of subsidiary.............................. (4,360) Non-cash restructuring expense............................ 716 Depreciation expense...................................... 9,372 10,508 11,435 Amortization of intangible assets and bond discount....... 4,415 3,520 4,637 Accrued interest converted to debentures.................. 7,998 4,246 Loss on sale of assets.................................... 722 95 Gain on debenture retirement.............................. (59) (Increase) decrease in accounts receivable and other current assets.......................................... (3,371) 2,558 (4,485) Increase (decrease) in current liabilities................ (1,523) (2,774) 2,172 -------- -------- -------- Net Cash Provided by (Used in) Operating Activities..... $ 30,382 $ 27,252 $ (5,282) Financing Activities Proceeds from (payments on) Revolving Credit Facility (Notes B & C)............................................. $ 5,400 $ (9,896) $ 3,317 Proceeds from long-term debt................................. 1,321 7,707 Payments on long-term debt................................... (22,818) (12,562) (13,142) Proceeds from issuance of stock (Note F)..................... 607 109 738 Contract payment to the Class A Preferred Group (Note D)..... (1,286) Payment of stock issuance costs.............................. (620) Retirement of debentures (Note C)............................ (947) -------- -------- -------- Net Cash Used in Financing Activities..................... $(19,664) $(21,028) $ (1,380) Investing Activities Expenditures for fixed assets................................ $(10,254) $ (6,401) $ (5,108) Transfer lease security deposit to current................... 5,599 Change in other non-current assets........................... (596) (67) 686 Proceeds from sale of fixed assets........................... 21 125 353 Proceeds from sale of subsidiary............................. 5,234 -------- -------- -------- Net Cash Provided by (Used in) Investing Activities....... $(10,829) $ (6,343) $ 6,764 -------- -------- -------- Increase (Decrease) in Cash During Year................... $ (111) $ (119) $ 102 Cash at beginning of year...................................... 223 342 240 -------- -------- -------- Cash at end of year............................................ $ 112 $ 223 $ 342 -------- -------- -------- -------- -------- -------- Interest paid.................................................. $ 15,572 $ 9,945 $ 9,541 -------- -------- -------- -------- -------- -------- Income taxes paid.............................................. $ 1,862 $ 225 $ 0 -------- -------- -------- -------- -------- --------
See notes to consolidated financial statements F-12 84 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY CONSOLIDATED STATEMENTS OF CLASS A PREFERRED STOCK AND STOCKHOLDERS' DEFICIT YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
STOCKHOLDERS' DEFICIT --------------------------------------------------------------------- CLASS A CLASS B CLASS C CLASS D PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK ---------------- --------------- --------------- --------------- --------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------ ------- ------ ------ ------ ------ ------ ------ ------ ------ (IN THOUSANDS) Balance, December 31, 1989.............. 2,500 $52,007 1,000 $ 10 1,000 $ 10 2,747 $ 27 Accretion of discount on Class A Preferred Stock....................... 1,384 Employee stock purchases (Note F)....... 70 1 Accrued undeclared dividends on Class A Preferred Stock (Note D).............. 4,000 Accretion of contract payment to the Class A Preferred Group............... 375 Issuance of Class D Preferred Stock (Note F).............................. 716 $7 Issuance of warrants (Note C)........... Conversion of Class D Preferred Stock to Common Stock (Note F)................. (716) (7) 14,324 143 Net loss for the year ended December 31, 1990.................................. ------ ------- ------ ------ ------ ------ ------ -- ------ ------- Balance, December 31, 1990.............. 2,500 $57,766 1,000 $ 10 1,000 $ 10 0 $0 17,141 $171 Accretion of discount on Class A Preferred Stock....................... 1,043 Employee stock purchases (Note F)....... 71 1 Accrued undeclared dividends on Class A Preferred Stock (Note D).............. 4,000 Accretion of contract payment to the Class A Preferred Group............... 643 Exercise of Stock Options (Note F)...... 9 Net income for the year ended December 31, 1991.............................. ------ ------- ------ ------ ------ ------ ------ -- ------ ------ Balance, December 31, 1991.............. 2,500 $63,452 1,000 $ 10 1,000 $ 10 0 $0 17,221 $172 Accretion of discount on Class A Preferred Stock....................... 860 Accrued undeclared dividends on Class A Preferred Stock (Note D).............. 3,254 Accretion of contract payment to the Class A Preferred Group............... 268 Contract payment to the Class A Preferred Group....................... (1,286) Exercise of Stock Options (Note F)...... 174 2 Issuance of warrants (Notes B & C)...... Repricing of warrants (Notes B & C)..... Conversion of Class A Preferred Stock to Common Stock (Notes B & D)............ (2,144) (56,889) Issuance of Common Stock (Notes B & D)......................... 6,399 64 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 0 $0 23,794 $238 ------ ------- ------ ------ ------ ------ ------ -- ------ ------ ------ ------- ------ ------ ------ ------ ------ -- ------ ------ PAID-IN CAPITAL -- WARRANTS CAPITAL IN ACCUM- ---------------- EXCESS ULATED SHARES AMOUNT PAR VALUE DEFICIT TOTAL ------ ------- ---------- ---------- ---------- Balance, December 31, 1989.............. 660 $ 8,484 $ 68,174 $ (154,827) $ (78,122) Accretion of discount on Class A Preferred Stock....................... (1,384) (1,384) Employee stock purchases (Note F)....... 308 309 Accrued undeclared dividends on Class A Preferred Stock (Note D).............. (4,000) (4,000) Accretion of contract payment to the Class A Preferred Group............... (375) (375) Issuance of Class D Preferred Stock (Note F).............................. 709 716 Issuance of warrants (Note C)........... 4,809 429 429 Conversion of Class D Preferred Stock to Common Stock (Note F)................. (136) 0 Net loss for the year ended December 31, 1990.................................. (19,643) (19,643) ------ ------- ---------- ---------- ---------- Balance, December 31, 1990.............. 5,469 $ 8,913 $ 63,296 $ (174,470) $ (102,070) Accretion of discount on Class A Preferred Stock....................... (1,043) (1,043) Employee stock purchases (Note F)....... 79 80 Accrued undeclared dividends on Class A Preferred Stock (Note D).............. (4,000) (4,000) Accretion of contract payment to the Class A Preferred Group............... (643) (643) Exercise of Stock Options (Note F)...... 29 29 Net income for the year ended December 31, 1991.............................. 5,347 5,347 ------ ------- ---------- ---------- ---------- Balance, December 31, 1991.............. 5,469 $ 8,913 $ 57,718 $ (169,123) $ (102,300) Accretion of discount on Class A Preferred Stock....................... (860) (860) Accrued undeclared dividends on Class A Preferred Stock (Note D).............. (3,254) (3,254) Accretion of contract payment to the Class A Preferred Group............... (268) (268) Contract payment to the Class A Preferred Group....................... Exercise of Stock Options (Note F)...... 605 607 Issuance of warrants (Notes B & C)...... 3,400 3,400 3,400 Repricing of warrants (Notes B & C)..... 4,709 4,709 Conversion of Class A Preferred Stock to Common Stock (Notes B & D)............ 56,825 56,825 Issuance of Common Stock (Notes B & D)......................... 64 Stock Issuance costs.................... (620) (620) Net income for the year ended December 31, 1992.............................. 20,826 20,826 ------ ------- ---------- ---------- ---------- Balance, December 31, 1992.............. 8,869 $17,022 $110,146 $ (148,297) $ (20,871) ------ ------- ---------- ---------- ---------- ------ ------- ---------- ---------- ----------
See notes to consolidated financial statements F-13 85 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Corporate Structure ALC Communications Corporation ("ALC") was incorporated in 1985 in order to accomplish the combination of Allnet Communication Services, Inc. and Lexitel Corporation ("Lexitel"). From August 1988 through August 1992, ALC was a majority owned subsidiary of Communications Transmission, Inc. ("CTI") (see Notes B & G). ALC and Allnet Communication Services Inc. are collectively referred to herein as the "Company" or "Allnet". In February 1988 the Company acquired all of the outstanding common stock of Clark Telecommunications, Inc. of South Bend, Indiana for $2.8 million in cash and notes. This company was operated as a wholly-owned subsidiary of Allnet under the name CTI Telecommunications, Inc. On January 30, 1990, Allnet sold CTI Telecommunications, Inc. in a cash transaction and recorded a gain of $4.4 million. Description of Business Allnet, the operating subsidiary of ALC, is a communications common carrier licensed by the Federal Communications Commission to offer long distance telephone and other communication services to both commercial and residential subscribers. Allnet provides twenty-four hour long distance telephone services terminating worldwide, utilizing a variety of transmission methods, primarily fiber optic facilities and digital microwave. Basis of Consolidation The consolidated financial statements include the accounts of ALC and its wholly-owned subsidiary, Allnet Communication Services, Inc. Significant 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. Amortization expense, including amortization of cost in excess of net assets acquired and cost associated with the issuance of debentures, was $1.8 million, $1.8 million and $1.9 million for the years ended December 31, 1992, 1991 and 1990, 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 Income taxes are presently accounted for in accordance with Accounting Principles Board Opinion No. 11. In February 1992, the Financial Accounting Standards Board issued Statement of Financial F-14 86 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Accounting Standards No. 109 "Accounting for Income Taxes." The Company will adopt this Statement as of January 1, 1993, the required implementation date. Application of the new rules as of January 1, 1993, will result in the recording of a net deferred tax asset of approximately $13.5 million related primarily to the future tax benefits which are expected to be realized upon utilization of a portion of the Company's net operating loss carryforwards ("NOLs"). Any subsequent realization of NOLs will be reflected in the income tax provision in the year realized and not as an extraordinary item. The Company has determined it will not apply the Statement retroactively and thus will not restate prior year financial statements to reflect adoption of the new rules. Reclassifications Certain prior year amounts have been reclassified to conform to 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 provided a revised redemption and maturity schedule that will enable the Company to meet these obligations from expected cash flow from operations. The principal components of the 1992 phase of the Refinancing are outlined in the following paragraphs. - A "Note Exchange Offer" was completed as of August 6, 1992 whereby the Company's Original Debentures, Replacement Debentures, PIK Debentures, and accrued interest on the nonconsenting Debentures totalling $73.3 million were replaced by 11 7/8% Subordinated Notes of Allnet ("1992 Notes"). The Note Exchange Offer was agreed to by 98.8% of the then existing Debentureholders. The revised redemption schedule of the 1992 Notes effectively reschedule the earliest redemption from June 30, 1992 to September 30, 1995. 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. - The Revolving Credit Facility was extended to June 30, 1993 and modifications included a new participant and a reduction in the borrowing rates. - The Restructured Promissory Note was restated and extended to June 30, 1995 and a $5.0 million principal prepayment was made. The amended terms provide for continuation of the 12% interest rate and quarterly principal payments of $1.3 million commencing on September 15, 1992. - The 1990 Note Agreements with a principal balance of approximately $8.0 million were paid down and extended in conjunction with the Refinancing and subsequently paid in full in December 1992. - The 4,708,999 1990 Warrants held by General Electric Pension Trust, Grumman Hill Investments Inc., Grumman Hill L.P. and Prudential were amended to reduce the exercise price from $3.00 to $2.00 per share in consideration for participating in the Refinancing. - Equipment leases with a major switch vendor were renegotiated to be repaid over 24 months with no change in the interest rate of 14%. - The Company paid $2.0 million on June 4, 1992 to CTI and received an $0.8 million note from a major holder of Class A Preferred (which note was subsequently paid in full) and $1.2 million of prepaid transmission capacity from Communications Transmission Group, Inc. ("CTGI"), an affiliate of CTI, to be utilized over a period of 37 months. F-15 87 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - On August 18, 1992, the 14,324,000 shares of Common Stock, 1,000,000 shares of Class B Preferred, and 1,000,000 shares of Class C Preferred held by CTI were transferred to a group of five banks ("Banks") in exchange for the release of certain portions of CTI's obligations to each of the Banks. The Class B Preferred and Class C Preferred are convertible into 3,796,000 shares of Common Stock. - Effective October 16, 1992, the Company commenced a stock offering ("1992 Equity Offering") for 9,863,600 shares of Common Stock at $5.50 per share. A portion of the 1992 Equity Offering relating to 3,464,373 shares was to facilitate the sale of shares for existing major holders including 3,000,000 shares held by the Banks. - The remaining 6,399,227 shares that were part of the 1992 Equity Offering were issued in conjunction with an Exchange Agreement ("Class A Exchange") with the major holders of the Class A Preferred ("Class A Preferred Group"). The members of the Class A Preferred Group agreed to exchange the 2,144,044 Class A Preferred shares they held with an aggregate redemption value of $58.7 million, including all accrued and unpaid dividends, for shares of Common Stock at an effective 40% discount. On January 19, 1993 the Company filed a shelf registration with the Securities and Exchange Commission for 19,500,909 shares held by certain stockholders, or issuable upon exercise of certain outstanding warrants or conversion of outstanding Class B Preferred and Class C Preferred. Several factors, such as market conditions, will determine when and how many of these shares will be sold. Any such offering of shares will provide for a broader public ownership of the Company's Common Stock. None of the proceeds from these stock sales will accrue to the Company other than through exercise of warrants in connection with the shelf registration. NOTE C -- LONG-TERM DEBT AND OTHER FINANCING Long-term debt, including the amount due within one year, consists of:
DECEMBER 31, --------------------- 1992 1991 ------- -------- (IN THOUSANDS) Restructured Promissory Note.......................................... $12,566 $ 20,698 1990 Note Agreements.................................................. 7,961 11 7/8% Senior Subordinated Debentures due 1995 -- face value of $55,000,000 less discount of $4,091,000............................. 50,909 Accrued interest on Debentures........................................ 18,391 11 7/8% Subordinated Notes due 1999 -- face value of $72,380,000 less discount of $10,397,000............................................. 61,983 Capitalized lease obligations (see Note E)............................ 8,851 15,373 Other long-term debt.................................................. 2,308 1,845 ------- -------- $85,708 $115,177 Due within one year................................................... 11,417 72,256 ------- -------- $74,291 $ 42,921 ------- -------- ------- --------
Revolving Credit Facility The Revolving Credit Facility is a $30.0 million facility which expires on June 30, 1993. The agreement allows for inclusion of up to 80% of billed and 45% of unbilled receivables in eligible receivables under the line. Advances and guarantees secured by billed receivables bear interest of 3.0% per annum in excess of the reference rate (6.0% as of December 31, 1992); however, advances secured by unbilled receivables bear F-16 88 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) interest of 3.75% per annum in excess of the reference rate. In addition, a 1/2% per annum charge is made on the unused portion of the line. As of December 31, 1992, the amount of credit available under the line was $30.0 million and was reduced by the Company's borrowings of $14.8 million. The unused portion of the line was $15.2 million. Restructured Promissory Note In the third quarter of 1989, the Company executed a $5.0 million note and a $15.0 million note with CTI for bridge financing, both of which were due on September 25, 1990. Terms of the notes required interest to be accrued at 18%, payable quarterly commencing November 30, 1989. The Company failed to make the interest payments due under those notes on February 26 and May 29, 1990. In June 1990, these notes were restructured into a note in the amount of $20.0 million due on June 4, 1992. The agreement provided that interest payments from December 1, 1989 through December 31, 1990 and certain loan fees due to CTI were forgiven (in the aggregate, approximately $4.2 million). Effective January 1, 1991, the interest rate was lowered to 12% per annum, and interest became payable quarterly beginning on March 31, 1991. The note is secured by a security interest in substantially all of the assets of Allnet (generally, second in priority behind the Company's Revolving Credit Facility). During the third quarter of 1991, the note ("Restructured Promissory Note") was sold to the Banks. In August 1992, the Restructured Promissory Note was restated and extended to June 30, 1995 and a $5.0 million principal payment was made. The amended terms provide for quarterly principal payments of $1.3 million commencing on September 15, 1992. The interest rate remains at 12% per annum. 1990 Note Agreements In June 1990, Allnet issued, pursuant to the 1990 Note Agreements, $7.2 million face amount of notes due June 4, 1992 ("1990 Notes") and warrants ("1990 Warrants"), valued at $0.4 million, to purchase up to 4,708,999 shares of its Common Stock for total cash consideration of $7.2 million. In June 1992, the 1990 Note Agreements were extended to August 15, 1992 and the interest rate was modified from 15% to 13%. In August 1992, the Company made a principal payment of $3.4 million and the term for the remainder of the 1990 Notes was extended to June 30, 1993. In December 1992, the 1990 Notes were paid in full. In August 1992, in consideration for participating in the Refinancing, the exercise price of the 1990 Warrants was modified from $3.00 per share to $2.00 per share. The 1990 Warrants expire on June 4, 2005. The purchase price and number of shares purchasable are subject to adjustment in certain events involving the Company's securities. One of the holders of the 1990 Warrants is entitled to nominate a representative for election to the Board of Directors. 11 7/8% Senior Subordinated Debentures of ALC Various terms and conditions under the Company's 11 7/8% Senior Subordinated Debentures ("Original Debentures") were amended as of June 1, 1990 and agreed upon by approximately 96% of the Debentureholders. The amendment ("Replacement Debentures") included modifications to interest payments to the consenting Debentureholders, including the acceptance of additional Debentures ("PIK Debentures") in lieu of cash as payment for certain interest payments. The amendment also included modification of the mandatory redemption schedule for the Original Debentures, Replacement Debentures and PIK Debentures (collectively the "Debentures") held by the consenting Debentureholders. The Debentures held by the nonconsenting Debentureholders were to be redeemed according to the original schedule. At December 31, 1991, the book value of Debentures held by nonconsenting Debentureholders maturing within one year of $1.4 million, and accrued interest of $0.7 million on the nonconsenting Debentures were recorded as current liabilities. F-17 89 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Original Debentures had been issued with detachable warrants (exercisable until December 1995) to purchase 660,000 Common Shares at a price of $63.75 per share, subject to adjustment in certain events. The cost associated with the issuance of the Debentures, approximately $2.9 million is included in other assets and is being amortized over 10 years. In August 1992, the "Note Exchange Offer" was completed whereby the Company's existing Debentures of $54.9 million face value, PIK Debentures of $18.4 million face value and accrued interest on the nonconsenting Debentures were replaced by 11 7/8% Subordinated Notes of Allnet. The Debentureholders who did not agree to the Note Exchange Offer were paid in September 1992 the full amount of their principal, the related PIK Debentures and accrued interest all totalling approximately $0.9 million. 11 7/8% Subordinated Notes of Allnet On August 6, 1992, Allnet issued the 1992 Notes with a face value of $72.4 million in exchange for the Company's Debentures (including PIK Debentures) and accrued interest thereon. The 1992 Notes bear interest at 11 7/8% per annum payable quarterly. The 1992 Notes have a redemption schedule which provides for the mandatory equal quarterly redemption of 6.25% of principal beginning on September 30, 1995 through June 30, 1999. The 1992 Notes are guaranteed by ALC and are secured by a subordinated security interest in substantially all of the assets of Allnet. The payment of dividends as well as stock repurchases are restricted by terms of the Indenture. Since ALC conducts no other business than as a holding company for Allnet, the guarantee of ALC will not provide the Noteholders with any significant additional security. The Indenture provides for a limitation on indebtedness of Senior Indebtedness not to exceed $50.0 million, excluding capitalized leases, the Revolving Credit Facility, Restructured Promissory Note and the 1992 Notes. Indebtedness is subject to further tests which limit aggregate indebtedness, excluding the Revolving Credit Facility to $106.0 million at December 31, 1992. At December 31, 1992, the Company was limited to additional aggregate indebtedness of $20.3 million. The Indenture also places restrictions on ALC or Allnet from making any dividend, redemption or other payments with respect to its equity securities. The 1992 Notes were issued with 3,400,000 1992 Warrants exercisable at $5.00 per share. The 1992 Warrants expire on June 30, 1997. The difference of $3.4 million between the exercise price of the 1992 Warrants and the fair value of the Company's Common Stock at the time of issuance has been recorded as a discount on the 1992 Notes and credited to paid-in capital -- warrants. This portion of the 1992 Note discount is being amortized over the life of the 1992 Warrants. The reduction in exercise price of the 1990 Warrants of $4.7 million was recorded as a discount on the 1992 Notes and an increase to paid-in capital -- warrants. The 1992 Note discount related to the 1990 Warrants is being amortized over the life of the 1992 Notes. Other Long-Term Debt Other long-term debt includes notes payable of $0.2 million secured by switches, leasehold improvements, office furniture and equipment. The carrying value of the assets securing these notes is $0.2 million and $0.3 million at December 31, 1992 and 1991. The average interest rate for this debt is 7%. The remaining $2.1 million of other long term debt represents deferred liabilities relating to certain operating leases. F-18 90 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Principal Requirements The principal requirements of long-term debt at December 31, 1992 are as follows:
(IN THOUSANDS) Year Ended December 31: 1993.............................................................. $ 11,417 1994.............................................................. 8,593 1995.............................................................. 12,158 1996.............................................................. 18,258 1997.............................................................. 18,309 1998 and thereafter............................................... 27,370 -------------- $ 96,105 Less discount on 1992 Notes....................................... 10,397 -------------- $ 85,708 -------------- --------------
NOTE D -- REDEEMABLE PREFERRED STOCK As of December 31, 1992, the Company has 355,956 shares of Class A Preferred outstanding with a redemption value of $7.1 million. Holders of Class A Preferred are entitled to a number of votes equal to .166 of one vote per share of Class A Preferred. These shares began accruing dividends at the rate of $1.60 per annum in July 1987. As of December 31, 1992 and 1991, there were $2.9 million and $16.5 million in cumulative dividends in arrears, or $8.16 per share and $6.60 per share, respectively on Class A Preferred. Under the General Corporation Law of Delaware, the Company's state of incorporation, the Company does not currently have adequate surplus to enable it to pay any dividends. 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 Class A Exchange with the Class A Preferred Group the Company exchanged 2,144,044 shares of Class A Preferred for 6,399,227 shares of Common Stock at an effective 40% discount. As a result of the 1992 Equity Offering, the Company's mandatory redemption obligation has been reduced to one scheduled payment of approximately $7.1 million (plus accrued and unpaid dividends) at December 31, 1996. In accordance with the Restated Certificate of Incorporation of ALC ("Certificate") affecting Class A Preferred, the amount of the dividend which shall accrue is equivalent to interest, on $20 per share, at a rate calculated as the weighted average of 1% plus prime rate. Certain additional dividends will accrue if the Company fails to pay the "Minimum Dividend" as described in the Certificate. In September 1992, ALC paid an aggregate amount of approximately $1.3 million to certain members of the Class A Preferred Group in connection with a concession agreement with the Class A Preferred Group entered into in June 1990. F-19 91 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE E -- LEASE TRANSACTIONS Future minimum rental payments under capital leases and noncancellable operating leases with initial or remaining terms of one or more years at December 31, 1992 are as follows:
CAPITAL OPERATING LEASES LEASES ------- --------- (IN THOUSANDS) Year Ended December 31: 1993............................................................ $ 7,172 $ 33,417 1994............................................................ 2,613 27,114 1995............................................................ 63 23,902 1996............................................................ 24 20,401 1997............................................................ 15,064 1998 and thereafter............................................. 28,674 ------- --------- Minimum Lease Payments.......................................... $ 9,872 $ 148,572 --------- --------- Less amount representing interest............................... 1,021 ------- Present Value of Future Lease Payments.......................... $ 8,851 ------- -------
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-cancellable operating leases relate primarily to building and office space, office equipment, and intercity transmission facilities. Rental expense was $52.3 million, $56.9 million and $63.0 million for the years ended December 31, 1992, 1991 and 1990, respectively. The amounts included in fixed assets financed by capital leases are:
DECEMBER 31, ------------------ 1992 1991 ------- ------- (IN THOUSANDS) Communications systems.......................................... $19,878 $22,587 Other equipment and leasehold improvements...................... 912 1,088 ------- ------- $20,790 $23,675 Accumulated depreciation........................................ 9,427 8,476 ------- ------- $11,363 $15,199 ------- ------- ------- -------
In June 1990, in connection with the Company's 1990 phase of its Refinancing, the terms of a major capital lease agreement were revised to reduce monthly payments with the difference deferred until the June 1992 termination date. In consideration for the deferral of lease payments, the Company issued warrants to purchase 100,000 Common Shares at a price of $3.00 per share to a major lessor. In June 1992, the lease was renegotiated resulting in a lease extension until May 1994. The interest rate was unchanged. NOTE F -- EARNINGS PER SHARE AND STOCKHOLDERS' DEFICIT Earnings per share Earnings per share are computed using weighted average shares outstanding and Common Stock equivalents. To arrive at income available for Common Stockholders, the Company's net income or loss is adjusted by amounts relating to the accretion of discount on Class A Preferred, the accretion of a contract payment to certain members of the Class A Preferred Group and dividends on Class A Preferred accrued but F-20 92 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) not declared. Anti-dilutive securities include warrants and options and for 1991 and 1990 also include Class B and Class C Preferred Stock. Earnings per share for the third and fourth quarters of 1992 include the impact of the exercise of outstanding stock options and warrants utilizing the Treasury Stock Method. The impact of the 1992 Equity Offering on earnings per share was not material. Common Stock On September 3, 1991, the Company effected a one-for-five reverse stock split of all authorized and outstanding shares of the Company's Common Stock. The number of authorized shares remained at 200,000,000. The par value of a share of stock was unchanged. All share amounts used in the accompanying financial statements and notes thereto have been adjusted to reflect the reverse stock split. Effective October 16, 1992, the Company commenced the 1992 Equity Offering for 9,863,600 shares of Common Stock at $5.50 per share. A portion of the 1992 Equity Offering relating to 3,464,373 shares was to facilitate the sale of shares for existing major stockholders. The remainder of 6,399,227 shares that were part of the 1992 Equity Offering were issued in conjunction with the Class A Exchange. ALC did not receive any proceeds from the sale of the shares. Class B Preferred and Class C Preferred In 1988, CTI purchased, for an aggregate purchase price of $30.0 million, all the shares of the Company's Class B Preferred and Class C Preferred. On August 18, 1992, all of the Class B Preferred and the Class C Preferred were transferred to the Banks. Each share of Class B Preferred or Class C Preferred may be converted, at the option of the holder, into 1.898 shares or a total of 3,796,000 common shares, subject to adjustment, for the outstanding Class B Preferred and Class C Preferred. The holder of each share of Class B Preferred or Class C Preferred is entitled to a preference in liquidation over holders of any other class of capital stock in amounts ranging from $21.00 during the period from July 1, 1992 to June 30, 1993 to $22.50 after June 30, 1993. No dividends shall accrue or be payable on the Class B Preferred or Class C Preferred. Holders of Class B Preferred and Class C Preferred are entitled to a number of votes equal to the number of shares of Common Stock into which their shares are convertible. Conversion of Class D Preferred In June 1990, ALC issued 716,200 shares of Class D Preferred to CTI in exchange for the concessions relating to the Allnet contract with CTGI for transmission capacity, concessions relating to the Restructured Promissory Note, and for a waiver by CTI of certain anti-dilution rights under the Company's Certificate relating to the shares of Class B Preferred and Class C Preferred which would otherwise have resulted from the Refinancing. Effective October 12, 1990, upon the amendment of the Certificate to increase the number of authorized shares of Common Stock to 200,000,000, each share of outstanding Class D Preferred was converted into 20 shares of Common Stock. During 1992, the authorized shares of Class D Preferred were retired by the Company. Employee Stock Purchase Plan In October 1988, the Board adopted and the stockholders approved an Employee Stock Purchase Plan, which became effective January 1, 1989. During 1991 and 1990, 71,171, and 70,362 shares were issued under the plan, respectively. The Plan was terminated as of employee contributions through December 31, 1990 because total shares projected to be issued in the subsequent six month period would have exceeded the shares authorized under the Plan. Final shares were issued in January 1991. F-21 93 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Employee Stock Options In October 1988, the Board adopted and the stockholders approved an increase in the number of shares issuable under the ALC 1986 Option Plan. In September 1990, the Stockholders approved the 1990 Stock Option Plan. The maximum number of shares for which options may be granted under both plans is 4,000,000 (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:
OPTION PRICE NUMBER --------------------------------- OF PER SHARES SHARE TOTAL --------- ---------------- -------------- (IN THOUSANDS) Shares under option December 31, 1989.......... 870,476 $10.00 - $48.75 $ 12,415 Options cancelled.............................. (815,677) $ 5.00 - $21.25 (8,072) Options regranted.............................. 815,677 $ 3.50 2,855 Options granted................................ 2,234,725 $ 3.50 - $ 5.00 8,001 Options terminated............................. (105,848) $ 3.50 - $48.75 (1,744) --------- ---------------- -------------- 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 cancelled.............................. (554,000) $ 3.50 (1,939) Options regranted.............................. 554,000 $ 3.50 1,939 Options terminated............................. (65,119) $ 3.50 - $ 5.88 (271) Options granted................................ 1,055,876 $ 4.38 - $ 5.88 5,604 Options exercised.............................. (173,345) $ 3.50 (607) --------- ---------------- -------------- Shares under option December 31, 1992.......... 3,619,128 $ 3.50 - $ 5.88 $ 14,612 --------- ---------------- -------------- --------- ---------------- -------------- Options exercisable, December 31, 1990......... 622,662 $ 3.50 - $48.75 $ 5,120 --------- ---------------- -------------- --------- ---------------- -------------- 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 --------- ---------------- -------------- --------- ---------------- --------------
NOTE G -- TRANSACTIONS WITH RELATED PARTIES The Company leases transmission capacity, multiplexing and various other technical equipment through both capital and operating leases from CTGI, an affiliate of a major stockholder through August 1992. Amounts paid under the leases were $17.7 million, $19.7 million and $24.4 million for the years ended December 31, 1992, 1991 and 1990, respectively. In June 1992, the Company paid $2.0 million to CTI for the purchase of certain assets including an $0.8 million 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 includes $1.2 million of prepaid transmission capacity from CTGI to be utilized over a 37 month period. During August 1992, CTI conveyed 14,324,000 shares of Common Stock, 1,000,000 shares of Class B Preferred and 1,000,000 shares of Class C Preferred 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, Prudential became a related party through beneficial ownership of options on F-22 94 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 1,975,804 shares of Common Stock. Prudential was also a major participant in the Revolving Credit Facility through August 1992 which entitled it to a share of the interest on the line of credit. The transfer of stock from CTI to the Banks gave NationsBank of Texas, N.A. ("NationsBank") and The First National Bank of Chicago ("First National") related party status through their ownership of Common, Class B Preferred and Class C Preferred. Additionally, each of these banks is a major participant in the Restructured Promissory Note. As of December 31, 1992, NationsBank owned 3,893,866 shares of Common Stock and 343,860 shares of Class B Preferred and 343,860 shares of Class C Preferred and held a portion of the Restructured Promissory Note with principal balance of $4.3 million. As of December 31, 1992, First National owned 2,781,333 shares of Common Stock and 245,614 shares of Class B Preferred and 245,614 shares of Class C Preferred as well as a portion of the Restructured Promissory Note totalling $3.1 million. General Electric Pension Trust ("GEPT") holds warrants entitling them to 2,305,105 shares of Common Stock at $2.00 and 1,494,845 shares of Common Stock at $5.00 per share. Other holdings included 1990 Notes of $3.9 million which were paid in full in December 1992. During 1991, GEPT purchased $31.8 million Debentures which were exchanged and subsequently sold in September 1992. GEPT also purchased 500,000 shares of Common Stock in the 1992 Equity Offering. GEPT may be deemed beneficial owner of an additional 120,000 shares of Common Stock. 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 1990 Notes in the aggregate principal amount of $0.7 million which were paid off during 1992. As of December 31, 1992, these entities held $4.1 million of 1992 Notes, 194,393 of the 1992 Warrants and 428,090 of the 1990 Warrants to purchase shares of the Company's Common Stock. Additionally, during 1988, Grumman Hill Associates, Inc. was granted options to purchase approximately 153,000 of Common Stock. These options were subsequently assigned to Grumman Hill Investments, L.P. The Company has paid consulting and investment banking advisory fees amounting to approximately $0.4 million, $0.1 million and $0.3 million for the years ended December 31, 1992, 1991 and 1990, respectively, to firms whose directors and principals are or were directors of ALC. NOTE H -- TAXES ON INCOME The 1992 and 1991 provisions for income taxes include a charge to operations for income taxes that would have been payable except for the availability of net operating loss carryforwards ("NOLs"). The tax benefits of the loss carryforwards utilized were reported as an extraordinary item in the 1992 and 1991 Consolidated Statements of Operations. These provisions were determined based on the statutory tax rates applied to pre-tax income adjusted for permanent differences related primarily to the amortization of the cost in excess of net assets acquired. Due to the operating loss sustained for the year ended December 31, 1990, no provision for income taxes was necessary. F-23 95 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Income tax expense and the extraordinary item as shown in the Consolidated Statements of Operations are composed of the following:
1992 1991 ---------- ---------- Federal Income tax expense................................ $8,075,000 $2,240,000 Extraordinary item................................ 6,445,000 2,095,000 State Income tax expense................................ 1,625,000 765,000 Extraordinary item................................ 555,000 535,000
Due to the change of ownership which occurred in August 1992 and the resulting limitation on the utilization of NOLs, the Company is now subject to regular tax resulting in federal taxes currently payable of $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. Net operating losses were used to offset 90% of this tax. Federal taxes currently payable were $0.1 million in 1991. The 1992 and 1991 provisions for state and local income taxes reflect the effect of filing separate Company state income tax returns for members of the consolidated group. This amount is reduced, where appropriate, by the state portion of operating loss carryforwards. State income taxes currently payable were $1.1 million in 1992 and $0.2 million in 1991. A reconciliation between the statutory federal and the effective income tax rates follows:
PERCENTAGE OF PRE-TAX INCOME ------------- 1992 1991 ----- ---- Income tax at statutory rate........................................... 34.0% 34.0% Goodwill amortization.................................................. 2.2 9.1 State tax expense (net of federal benefit)............................. 4.6 8.9 Other.................................................................. .4 .5 ----- ---- Income tax provision................................................... 41.2% 52.5% ----- ---- ----- ----
The Company has tax net operating loss, alternative tax net operating loss and investment tax credit ("ITC") carryforwards which expire on December 31 of the following years:
ALTERNATIVE TAX NET TAX NET INVESTMENT OPERATING LOSS OPERATING LOSS TAX CREDIT -------------- -------------- ---------- (IN THOUSANDS) 1998........................................ $ 16,938 $ 16,885 1999........................................ 15,090 15,090 $2,841 2000........................................ 18,290 18,290 774 2001........................................ 18,073 18,073 2002........................................ 18,959 18,959 2003........................................ 26,896 26,875 2004........................................ 19,173 19,150 2005........................................ 14,411 14,445 -------------- -------------- ---------- $147,830 $147,767 $3,615 -------------- -------------- ---------- -------------- -------------- ----------
F-24 96 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The amount of carryforwards which can be utilized annually to offset future taxable income is, however, limited because of the Internal Revenue Code Section 382 "ownership changes" which occurred in 1989 and 1992. Under provisions of Section 382, the utilization of these NOLs is presently limited to approximately $10.0 million per year. This annual limitation, along with the 15 year carryforward limitation, results in a maximum cumulative NOL and ITC carryforward which may be utilized of approximately $130.0 million as of December 31, 1992. NOTE I -- STATEMENTS OF CASH FLOWS The following non-cash investing and financing transactions are not reflected in the Consolidated Statements of Cash Flows but are shown as supplemental information:
YEAR ENDED DECEMBER 31, ---------------------- 1992 1991 1990 ---- ---- ------ (IN THOUSANDS) Capitalized lease obligations incurred in connection with acquisitions of fixed assets............................... $187 $640 $1,518
NOTE J -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
THREE MONTHS ENDED --------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1992 1992 1992 1992 --------- -------- ------------- ------------ (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Revenue...................................... $92,043 $ 92,659 $95,673 $ 95,689 Gross profit................................. $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
THREE MONTHS ENDED --------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1991 1991 1991 1991 --------- -------- ------------- ------------ (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Revenue...................................... $85,914 $ 86,541 $88,168 $ 86,250 Gross profit................................. $32,829 $ 33,283 $34,448 $ 33,597 Income (loss) before extraordinary item...... $ 757 $ 909 $ 1,133 $ (82) Net income................................... $ 1,307 $ 1,534 $ 1,888 $ 618 Loss per common and common equivalent share before extraordinary item............ $ (0.04) $ (0.02) $ (0.01) $ (0.09) Net income (loss) per common and common equivalent share........................... $ (0.01) $ 0.01 $ 0.02 $ (0.05)
F-25 97 ------------------------------------ ------------------------------------ NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE 7,040,491 SHARES CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY [ALLNET LOGO] SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER [LOGO] COMMUNICATIONS TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO CORPORATION WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. COMMON STOCK ------------------ PROSPECTUS - ------------------------------------ ------------------- TABLE OF CONTENTS PAGE ------ Available Information.................. 2 Prospectus Summary..................... 3 Risk Factors........................... 6 Use of Proceeds........................ 8 Price Range of Common Stock............ 8 PAINEWEBBER INCORPORATED Dividend Policy........................ 8 The Company............................ 9 Capitalization......................... 11 GOLDMAN, SACHS & CO. Selected Financial Data................ 12 Management's Discussion and Analysis of Financial Condition and Results of WHEAT FIRST BUTCHER & SINGER Operations........................... 13 Business............................... 22 CAPITAL MARKETS Management............................. 28 Certain Relationships and Related Transactions......................... 35 The Refinancing........................ 40 Selling Stockholders................... 42 Principal Stockholders................. 43 Description of Capital Stock........... 45 Shares Eligible for Future Sale........ 46 Underwriting........................... 47 Legal Matters.......................... 49 Experts................................ 49 SEPTEMBER 20, 1993 Index to Consolidated Financial Statements........................... F-1 - ------------------------------------ --------------------- - ------------------------------------ --------------------- 98 19,500,909 SHARES [ALLNET LOGO] [LOGO] COMMUNICATIONS CORPORATION COMMON STOCK ------------------------ This Prospectus covers the sale by the Selling Stockholders of up to 19,500,909 shares of Common Stock of ALC Communications Corporation, including (i) 11,324,000 shares of Common Stock currently outstanding, (ii) 4,380,909 shares, subject to adjustment, of Common Stock issuable upon exercise of certain outstanding warrants held by General Electric, Prudential and DSC having an exercise price of $2.00 per share for General Electric and Prudential and $3.00 per share for DSC (collectively, the "Participating Warrants") and (iii) 3,796,000 shares, subject to adjustment, of Common Stock issuable upon conversion of outstanding Class B and Class C Preferred. ALC will not receive any of the proceeds from the sale of the shares of Common Stock other than the proceeds upon the exercise of the Participating Warrants. See "Use of Proceeds" and "Selling Stockholders." Certain banks control, in the aggregate, 54.4% of the present voting power of ALC (38.3% assuming exercise of certain warrants and options). After any sale of shares pursuant to this Prospectus, their holdings will depend on how many shares are sold by them. See "Risk Factors -- Control," "Principal Stockholders" and "Selling Stockholders." The Selling Stockholders may sell the shares of Common Stock to or through underwriters or dealers, and also may sell the shares of Common Stock directly to other purchasers or through agents. The distribution of the shares of Common Stock may be effected from time to time in one or more transactions at a fixed price or prices, which may be changed, or at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. If underwriters, dealers or agents are used, a prospectus or prospectus supplement describing that particular sale ("Prospectus Supplement") will be delivered which sets forth the names of the underwriters, dealers and agents involved in the sale of the shares of Common Stock, the amount, if any, to be purchased by the underwriters or agents and the compensation, if any, of such underwriters or agents and any applicable commissions or discounts and the net proceeds to the Selling Stockholders from the sale of the shares of Common Stock. The Common Stock is traded on the American Stock Exchange under the symbol "ALC." The last reported sale price of the Common Stock on February 25, 1993 was $14 per share. See "Price Range of Common Stock." SEE "RISK FACTORS" FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ THE DATE OF THIS PROSPECTUS IS MARCH 18, 1993 99 MAP OF THE ALLNET(R) NETWORK [MAP] DIGITAL SWITCH - ALLNET(R) SALES SITE - --- 100% DIGITAL TRANSMISSION AVAILABLE INFORMATION ALC Communications Corporation is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and, in accordance therewith, files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). These materials can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois, 60661-2511; and 7 World Trade Center, 13th Floor, New York, New York, 10008. Copies of such materials can also be obtained from the Commission's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C., 20549, at prescribed rates. The Common Stock is listed on the American Stock Exchange and reports and other materials also may be inspected at the offices of the American Stock Exchange. ------------------------- 2 100 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. All information set forth herein has been adjusted to reflect a one-for-five reverse stock split of the Common Stock effected in September 1991. Investors should carefully consider the information set forth under the caption "Risk Factors." THE COMPANY ALC Communications Corporation ("ALC") is the holding company of Allnet Communication Services, Inc. and conducts no other business. ALC and Allnet Communication Services, Inc. are collectively referred to herein as "Allnet" or the "Company." 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 a few nationwide carriers of long distance services and in 1992 carried in excess of 600 million calls over its network. The Company transmits long distance telephone calls through its network facilities over transmission lines which are primarily leased from other long haul transmission providers. All of the transmission facilities utilized by the Company are digital, allowing it to offer the highest quality transmission currently available. Each call is routed through at least one of the Company's 16 digital switching centers, which select the most efficient and highest quality transmission alternative among those available to the Company to complete the call. 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 approximately $65 billion, comprise the first tier. Allnet is positioned in the second tier with four other companies with annual revenues of $250-$800 million 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 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. 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. Several of the Company's second tier competitors and all of the third tier 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. The Company currently serves approximately 151,000 commercial customers which account for approximately 89% of the Company's revenue. In order to take advantage of its non-peak hour capacity, the Company also provides long distance services to approximately 112,000 residential customers and is working with a variety of companies, trade associations and special interest groups to increase the size of its residential customer base while minimizing the cost of such residential customer acquisition. Competition in the industry is based on pricing, customer service, network quality and value-added services. The prices and promotions offered for the Company's services are designed to be competitive with other long distance telephone carriers. The Company markets its products and services through approximately 451 field sales representatives who provide face-to-face contact with current and potential customers. Allnet has made steady improvements in its financial performance since the beginning of 1990. After five years of losses, Allnet has generated eight consecutive quarters of profit as of December 31, 1992. This performance is a result of increases in traffic volume ("billable minutes") and an improvement in controlling network costs and sales, general and administrative expense. The increase in billable minutes is a result of several factors, including an increase in both the size and productivity of the field sales organization, expanded product offerings, and a reduction in customer attrition. 3 101 REFINANCING, CLASS A EXCHANGE AND 1992 EQUITY OFFERING In August 1992, Allnet completed a two phase refinancing begun in 1990, consisting of a 1990 phase and a 1992 phase (together, the "Refinancing"). As a result of the Refinancing it rescheduled substantially all of its funded debt. See "The Refinancing." Prior to August 18, 1992, Communications Transmission, Inc. ("CTI") owned 14,324,000 shares of Common Stock and all of the outstanding shares of the Class B Senior Convertible Preferred Stock ("Class B Preferred") and the Class C Senior Convertible Preferred Stock ("Class C Preferred") of ALC, all of which had been pledged to secure loans CTI owed to five banks (the "Banks," as defined in "Selling Stockholders"). As part of a restructuring of CTI, which was accomplished in conjunction with the 1992 phase of the Refinancing, CTI transferred all of these shares pro rata to the Banks. Subsequent to that transfer, in October 1992, the Banks in the aggregate sold 3,000,000 shares of Common Stock in the 1992 Equity Offering (as defined in "The Refinancing"). As of February 15, 1993, the Company was indebted to the Banks in the principal amount of $10.2 million. See "Certain Relationships and Related Transactions -- Banks and CTI Stock Ownership in the Company." In addition, pursuant to an agreement between ALC and certain holders of Class A Preferred Stock (the "Class A Preferred Group"), the Class A Preferred Group exchanged $58.7 million aggregate redemption value (including accrued dividends) of ALC Class A Preferred Stock (the "Class A Preferred") for 6,399,227 shares of Common Stock (the "Class A Exchange"). The shares of Common Stock received by the Class A Preferred Group were sold to the public in the 1992 Equity Offering. As a result of the Class A Exchange, the Company's aggregate dividend and redemption obligations relating to the shares of Class A Preferred were significantly reduced, and the stockholders' deficit was improved by over $56 million. In June 1990, The Prudential Insurance Company of America ("Prudential") and the Trustees of General Electric Pension Trust ("General Electric") were issued 1990 Warrants to purchase 1,975,804 and 2,305,105 shares of Common Stock, respectively, pursuant to the 1990 Note Agreements (as defined in "The Refinancing"). In addition, Prudential has the right to acquire, and may offer in this Offering, all shares held by the Banks pursuant to the Stock Option and Residual Option (as defined in "Certain Relationships and Related Transactions - -- Banks and CTI Stock Ownership in the Company"). Such shares have been included in this Prospectus pursuant to the Registration Rights Agreement among Prudential and General Electric and ALC (and certain other parties) dated June 4, 1990. In June 1990, in exchange for certain lease concessions DSC Communications Corporation ("DSC"), a major switch vendor, received from ALC Participating Warrants to purchase 100,000 shares of Common Stock. Such shares have been included in this Prospectus pursuant to the Registration Rights Agreement between DSC and ALC dated June 1, 1990. THE OFFERING Common Stock offered by the Selling Stockholders:(1) SHARES Banks................................................. 15,120,000(2) General Electric...................................... 2,305,105(3) Prudential............................................ 1,975,804(3)(4) DSC .................................................. 100,000(3) Total............................................... 19,500,909 Common Stock to be outstanding after the Offering(5).... 32,095,689 Use of Proceeds......................................... ALC will not receive any of the proceeds from the sale of the shares of Common Stock. The proceeds it receives upon exercise of the Participating Warrants will be used for general corporate purposes. American Stock Exchange Symbol.......................... ALC
- ------------------------- (1) Selling Stockholders are defined in "Selling Stockholders." (2) The Banks currently hold 11,324,000 shares of Common Stock. An additional 3,796,000 shares, subject to adjustments, will be received by the Banks from ALC upon the conversion of 1,000,000 shares of Class B Preferred and 1,000,000 shares of Class C Preferred currently held by the Banks (which amounts represent all of the outstanding shares of Class B Preferred and Class C Preferred). (3) These shares will be received pursuant to the exercise of outstanding warrants. (4) In addition, Prudential has the right to acquire, and may offer in this Offering, all shares held by the Banks pursuant to the Stock Option and Residual Option (as defined in "Certain Relationships and Related Transactions -- Banks and CTI Stock Ownership in the Company"). (5) Does not include 7,982,116 shares of Common Stock which may be acquired pursuant to the exercise of other outstanding warrants and options. See "Principal Stockholders." 4 102 SUMMARY FINANCIAL INFORMATION
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1988 1989 1990 1991 1992 -------- -------- -------- -------- -------- (IN THOUSANDS EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Revenue......................................... $394,115 $333,765 $326,004 $346,873 $376,064 Operating income (loss)......................... (7,765) (1,351) (2,753) 23,850 40,684 Interest expense................................ 22,178 21,338 21,250 18,128 17,158 Income (loss) before income taxes and extraordinary item............................ (29,943) (22,689) (19,643) 5,722 23,526 Income (loss) before extraordinary item......... (29,943) (22,689) (19,643) 2,717 13,826 Net income (loss)............................... (29,943) (21,324) (19,643) 5,347 20,826 Net income (loss) available for Common Stockholders(1)............................... (35,951) (27,156) (25,402) (339) 16,444 Income (loss) per common and common equivalent share before extraordinary item............... $ (13.21) $ (10.43) $ (2.29) $ (0.17) $ 0.43 Net income (loss) per common and common equivalent share.............................. $ (13.21) $ (9.93) $ (2.29) $ (0.02) $ 0.74 Weighted average common and common equivalent shares outstanding............................ 2,723 2,735 11,074 17,216 22,141
DECEMBER 31, 1992 ------------------ (IN THOUSANDS) BALANCE SHEET DATA: Total assets....................................................................... $ 143,266 Total debt(2)...................................................................... 100,510 Class A Preferred.................................................................. 9,659 Stockholders' deficit.............................................................. (20,871)
- ------------------------- (1) To arrive at net income (loss) available for Common Stockholders, the Company's net income (loss) is adjusted by amounts relating to the accretion of discount on Class A Preferred, the accretion of a contract payment to certain members of the Class A Preferred Group and dividends on Class A Preferred accrued but not declared. (2) Excludes trade debt. 5 103 RISK FACTORS Investors should carefully consider the following risk factors, in addition to the other information contained in this Prospectus, before purchasing the Common Stock offered hereby. FINANCIAL CONSIDERATIONS From its formation in 1985 through the year ended December 31, 1990, the Company incurred substantial cumulative financial losses. For the years ended December 31, 1991 and 1992, Allnet had net income of $5.3 million and $20.8 million, respectively. The total accumulated deficit at December 31, 1992 was $148.3 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Allnet has substantial debt. At December 31, 1992, the Company's total funded debt aggregated $100.5 million, excluding $9.7 million in payment obligations relating to the Class A Preferred. In the past, the Company's highly leveraged structure has affected its ability to obtain additional financing and the terms and conditions on which financing could be obtained. The Company recently completed the Refinancing, as described under the caption "The Refinancing." Allnet historically has had negative working capital. The Company's working capital position at December 31, 1992 was negative $31.7 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Allnet has significant tax net operating loss carryforwards ("NOLs"). The amount that can be utilized to offset future income is limited under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), because the Company had ownership changes in 1989 and 1992. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Income Taxes." COMPETITION The long distance telecommunications industry is highly competitive. Competition is based upon pricing, customer service, network quality and value-added services. AT&T is a dominant competitor in the long distance segment of the telecommunications services market. In addition to AT&T, Allnet competes with other national and regional long distance carriers. The Company believes that there are more than 300 companies in the long distance telecommunications market. The first tier companies and some of the second tier companies have substantially greater market share and financial resources than the Company. The ability of Allnet to compete effectively with other carriers depends upon its continued ability to maintain high quality services at prices that generally are comparable to those charged by its competitors. Various regulatory factors can also have an impact on the Company's ability to compete. REGULATION Allnet is regulated at the federal level by the Federal Communications Commission ("FCC") and at the state level by various state public utility commissions. Allnet is required to file tariffs for its services. The current trend at both the federal and state level is toward less regulation for Allnet 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. Regulation can also affect the costs of business for Allnet and its long distance competitors. In order to provide their services, long distance carriers such as Allnet must purchase "access services" from local exchange carriers to originate and terminate calls. Presently, pricing of those "access services" is on an equal rate per minute ("equal per unit") basis for "local transport." On September 17, 1992, the FCC announced it would (1) maintain the existing "equal per unit" pricing rules until late 1993, (2) implement an interim rate structure and pricing plan during the subsequent two years, and (3) commence further rulemaking for consideration of a permanent rate structure beginning no earlier than late 1995. See "Business -- Regulation." 6 104 CUSTOMER TURNOVER A high level of customer attrition is inherent in the long distance industry. Attrition (defined as the average of the last three months' revenue from customers that have terminated or dropped to zero usage as a percentage of total revenue) averaged 1.8% per month for the year ended December 31, 1992, 2.0% per month for the year ended December 31, 1991 and 2.2% per month for the year ended December 31, 1990. To retain its commercial and residential customer base, the Company implements programs and enhancements such as value-added services, agent and association sales to residential users, improved customer service and competitive price adjustments. AVAILABILITY OF TRANSMISSION CIRCUITS The future profitability of the Company is based upon its ability to transmit long distance telephone calls over transmission facilities leased from others on a cost-effective basis. The Company owns only a minor portion of its transmission facilities, and its long distance telephone business historically has been dependent upon lease arrangements with facilities-based carriers for the transmission of calls. While the Company believes that it now has ample access to transmission facilities at attractive rates and expects to continue to have such access in the foreseeable future, this ongoing availability cannot be assured. See "Business -- Transmission Facilities" and "Certain Relationships and Related Transactions -- CTI Transactions." CONTROL The Board of Directors of ALC consists of seven directors. Because of their respective ownership of Common Stock, Class B Preferred and Class C Preferred, the Banks in the aggregate currently control 54.4% of the voting power of ALC (38.3% assuming exercise of certain warrants and options). The Banks currently have the power collectively to elect six out of seven directors, to prevent any change of control or other extraordinary transaction with respect to ALC (except if the options referred to below are exercised) and otherwise to control the vote on all matters which are submitted for stockholder vote. See "Description of Capital Stock." The Banks have advised the Company that the Banks have no pre-existing understanding or agreement to exercise their voting rights as a group. The extent to which the Banks collectively will continue to hold a controlling interest will depend on the extent to which they convert shares of the Class B Preferred and Class C Preferred as well as the number of shares actually sold in this Offering or otherwise. Five of the director positions are filled. The directorship which may be filled by the Class A Preferred holders and one directorship which may be filled by the Class B Preferred holders are currently vacant. See "Management -- Executive Officers and Directors." In August 1992, the Company, the Banks and Prudential entered into various agreements which provide, among other things that (a) Prudential may exercise before July 31, 1993 certain options to acquire all of the Common Stock, Class B Preferred and Class C Preferred owned by the Banks, (b) certain other parties may share with Prudential in the exercise of the foregoing options and the proceeds realized upon sale of any shares acquired pursuant thereto, and (c) Prudential and the Banks will sell or otherwise transfer prior to June 1, 1993 or July 31, 1993, respectively, the Common Stock, Class B Preferred and Class C Preferred owned by them only under certain circumstances. In addition to restrictions imposed pursuant to the lock-up agreements referred to in "Risk Factors -- Future Sales of Common Stock" and "Shares Eligible for Future Sale," the Banks' ability to sell shares of Common Stock in this Offering depends, in large part, on whether and to what extent Prudential waives or does not exercise its rights under the agreements among the Company, the Banks and Prudential. On February 12, 1993, the Banks gave Prudential notice of their intention to sell shares of Common Stock in this Offering. Prudential's right to exercise the Residual Option (as defined in "Certain Relationships and Related Transactions - -- Banks and CTI Stock Ownership in the Company") will be suspended after March 15, 1993. However, this suspension will lapse if the Banks do not sell any shares of Common Stock by April 15, 1993. If the Banks sell any shares of Common Stock before April 15, 1993, the Residual Option will no longer be of any practical effect. If Prudential exercises the Stock Option and the Residual Option prior to any sales of shares by the Banks in this Offering or otherwise, it would have the power to elect up to six out of seven directors and otherwise to control the vote on all matters which are submitted for stockholder vote. Prudential may offer in this Offering any shares acquired from the Banks upon exercise of its 7 105 options. See "Certain Relationships and Related Transactions -- Banks and CTI Stock Ownership in the Company." FUTURE SALES OF COMMON STOCK ALC is not able to estimate the amount, timing or nature of future sales of Common Stock held by the Selling Stockholders pursuant to this Offering, or sales by other holders of significant amounts of Common Stock, because such sales and option exercise decisions depend on market conditions, individual circumstances of the holders and other conditions. Any sales of substantial amounts of Common Stock in the open market may significantly reduce the market price of the outstanding shares of Common Stock. Certain of the Company's stockholders or holders of convertible securities have the right to require the Company to register restricted securities held by them. The Company agreed to file the registration statement of which this Prospectus is a part within 90 days after the consummation of the 1992 Equity Offering in order to permit the Banks to sell from time to time, subject to certain lock-up restrictions discussed below, any or all of the shares (15,120,000 shares, subject to adjustment) of Common Stock they own or may acquire upon conversion of the Class B Preferred and Class C Preferred. See "Certain Relationships and Related Transactions -- Banks and CTI Stock Ownership in the Company" and "The Refinancing." The registration statement of which this Prospectus is a part also relates to up to 4,380,909 shares of Common Stock which General Electric, Prudential and DSC may acquire upon exercise of the Participating Warrants. As part of the 1992 Equity Offering, ALC and its directors and officers, the Selling Stockholders, and certain other major stockholders of the Company, except under certain limited circumstances, agreed not to dispose of any shares of Common Stock during a period of 180 days (in the case of the Banks with respect to an underwritten public offering as to which a registration statement has become effective, 120 days) after October 16, 1992, the date of the prospectus relating to the 1992 Equity Offering, without the prior written consent of the underwriters in the 1992 Equity Offering. See "Shares Eligible for Future Sale." Any underwriter who participates in a sale of stock pursuant to this Prospectus may require additional agreements not to dispose of shares of Common Stock. Any such agreements will be described in a Prospectus Supplement. 8 106 USE OF PROCEEDS ALC will not receive any of the proceeds from the sale of the Common Stock. Proceeds to ALC from exercise of the Participating Warrants will be added to working capital and used for general corporate purposes. Assuming the exercise of all of the Participating Warrants, ALC would receive $8.9 million upon such exercise. PRICE RANGE OF COMMON STOCK The Common Stock has been traded on the American Stock Exchange ("AMEX") since September 4, 1991 and is listed under the symbol ALC. From July 15, 1990 until September 4, 1991, the Common Stock was traded over-the-counter and listed on the Over-the-Counter Bulletin Board under the symbol ALCC. The table below sets forth: (1) the best approximation of the high and low bid prices of the Common Stock on the over-the-counter market for the first eight months in 1991; and (2) the ranges of high and low closing sales prices of the Common Stock as reported on the AMEX composite tape for the last four months of 1991 and calendar year 1992. The over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
1991 1992 -------------- -------------- HIGH LOW HIGH LOW ----- ----- ----- ----- 1st quarter....................................... $3.15 $1.05 $7.00 $4.25 2nd quarter....................................... 4.50 2.85 6.00 4.25 3rd quarter....................................... 5.00 3.10 6.38 5.00 4th quarter....................................... 5.00 3.75 14.13 5.13
As of February 15, 1993, there were 2,350 holders of record of the Common Stock. The high and low closing sales prices per share of the Common Stock for the period from January 1, 1993 to February 25, 1993, as reported by AMEX, were $14.63 and $12.50, respectively. The last reported sale price of the Common Stock on February 25, 1993 was $14.00 per share. DIVIDEND POLICY ALC has never declared or paid any cash dividends on the Common Stock. ALC has paid certain dividends on the Class A Preferred. See "Description of Capital Stock." Except as otherwise required under the terms of the Class A Preferred, ALC currently intends to retain its earnings to service debt and finance future growth and does not anticipate paying any cash dividends on the Common Stock in the foreseeable future. In addition, the documents governing certain indebtedness of the Company preclude the payment of cash dividends. 9 107 THE COMPANY ALC is the holding company for Allnet Communication Services, Inc. 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 1992 carried in excess of 600 million calls over its network. The Company's predecessor, Combined Network, Inc., was founded in Chicago, Illinois in 1980. Its name was changed in November 1983 to Allnet Communication Services, Inc. In 1985, Allnet Communication Services, Inc. merged with Lexitel Corporation, a smaller regional long distance company, and became the wholly owned subsidiary of ALC. Following the merger, difficulties experienced in integrating the two companies resulted in revenue declines and net losses. In addition to internal problems, the industry as a whole was going through rapid changes, including severe price competition from the three major carriers, AT&T, MCI and Sprint. In 1988, CTI purchased preferred stock of ALC for a total equity investment of $30.0 million, thereby acquiring a controlling interest in ALC, and in 1989 loaned $20.0 million to the Company. CTI's revenue was dependent to a significant degree upon Allnet as a customer of CTI's transmission services. Communications Transmission Group, Inc. ("CTGI"), then a wholly owned subsidiary of CTI, was (and remains) a provider of a significant portion of the Company's transmission network. In late 1988, the Company's present management team was installed by CTI with the goal of restoring the Company to profitability. The management team was led by former senior executives of Cable and Wireless North America, Inc. ("C&W"), a subsidiary of Cable & Wireless plc, the Great Britain based telecommunications group, who had built C&W's presence in the long distance industry in the United States. The management team implemented a number of changes commencing in 1989, including the following: (i) redirection of sales and marketing efforts to focus on face-to-face sales to small-and medium-sized commercial customers; (ii) enhancement of existing product offerings and introduction of new products with a focus on value-added services; (iii) increase in training for the sales force and customer service personnel; (iv) implementation of a comprehensive quality program; (v) consolidation and upgrade of the transmission network and switching equipment to become 100% digital, resulting in improved quality and reduced costs; and (vi) renegotiation of transmission contracts which further reduced costs. In June 1990, the Company began the Refinancing which was undertaken in order to allow the operating changes to take effect without the added burden of significant near term debt retirement schedules. The basic components of the 1990 phase of the Refinancing are outlined under the caption "The Refinancing." In connection with the 1990 phase of the Refinancing, CTI acquired 14,324,000 shares of Common Stock in addition to its earlier equity interest. In late 1991, CTI sold the $20.0 million loan due from the Company, to the Banks, CTI's lenders. In August 1992, CTI conveyed all of its equity interest in ALC to the Banks in exchange for the release of certain of its obligations to the respective Banks pro rata, in proportion to these obligations. As a result, the Banks, in the aggregate, currently have the voting power to elect six of seven directors of ALC and otherwise to control the vote on all matters which are submitted for stockholder vote. See "Risk Factors -- Control" and "Certain Relationships and Related Transactions -- Banks and CTI Stock Ownership in the Company." In June and August 1992, the Company concluded the Refinancing and rescheduled substantially all of its funded debt to reduce its debt service requirements over the next several years. The basic components of the 1992 phase of the Refinancing are outlined under the caption "The Refinancing." Allnet has made steady improvements in its financial performance since June 30, 1990. After five years of losses, Allnet has generated eight consecutive quarters of profit as of December 31, 1992. This performance is a result of increases in the amount of billable minutes and an improvement in controlling network costs and sales, general and administrative expense. The increase in billable minutes is a result of several factors, including an increase in both the size and productivity of the field sales organization, expanded product offerings, and a reduction in customer attrition. 10 108 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, AT&T, MCI and Sprint, which generate an aggregate of approximately 88% of the nation's long distance revenue of approximately $65 billion and which comprise the first tier. Allnet is positioned in the second tier with four other companies with annual revenues of $250-$800 million 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 and its second tier competitors target 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 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. 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. Several of the Company's second tier competitors and all of the third tier 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. The Company currently serves approximately 151,000 commercial customers which account for approximately 89% of the Company's revenue. In order to take advantage of non-peak capacity, the Company also provides long distance services to approximately 112,000 residential customers and is working with a variety of companies, trade associations and special interest groups to increase the size of its residential customer base while minimizing the cost of such residential customer acquisition. The prices and promotions offered for the Company's services are designed to be competitive with other long distance telephone carriers. The Company markets its products and services through face-to-face contact with an emphasis on pricing, customer service, network quality and value-added services. The successful implementation of this strategy over the past several years has resulted in increased sales, increased operating profit margins, reduced customer attrition and more efficient use of the Company's network. The Company's principal executive offices are located at 30300 Telegraph Road, Suite 350, Bingham Farms, Michigan 48025. The Company has sales offices and operations facilities throughout the United States. The Company's telephone number is (313) 647-4060. 11 109 CAPITALIZATION The following table sets forth the consolidated capitalization of ALC as of December 31, 1992.
DECEMBER 31, 1992 --------------- (IN THOUSANDS) Short Term Obligations: Revolving Credit Facility................................................... $ 14,802 Notes payable, capitalized leases and other long term debt.................. 11,417 --------------- Total Short Term Obligations........................................... $ 26,219 --------------- --------------- Long Term Debt: Notes payable, capitalized leases and other long term debt.................. $ 12,308 Subordinated Notes.......................................................... 61,983 --------------- Total Long Term Debt................................................... 74,291 --------------- Class A Preferred............................................................. 9,659 Stockholders' Deficit: Class B Preferred........................................................... 10 Class C Preferred........................................................... 10 Common Stock................................................................ 238 Capital in excess of par value.............................................. 110,146 Paid-in capital warrants.................................................... 17,022 Accumulated deficit......................................................... (148,297) --------------- Total Stockholders' Deficit............................................ (20,871) --------------- Total Capitalization.............................................. $ 63,079 --------------- ---------------
12 110 SELECTED FINANCIAL DATA The selected financial data presented below for, and as of the end of, each of the years in the five year period ended December 31, 1992, are derived from the consolidated financial statements of ALC. Consolidated financial statements for ALC for the three fiscal years ended December 31, 1992, are included elsewhere in this Prospectus. The selected financial data should be read in conjunction with the financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus.
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1988 1989 1990 1991 1992 -------- -------- -------- -------- -------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) INCOME STATEMENT DATA: Revenue............................................ $394,115 $333,765 $326,004 $346,873 $376,064 Operating expenses: Cost of communication services................... 263,149 215,555 209,612 212,716 216,889 Sales, general and administrative................ 119,954 103,647 102,838 97,964 107,294 Depreciation and amortization.................... 18,777 15,914 13,320 12,343 11,197 Financial restructuring.......................... 2,987 -------- -------- -------- -------- -------- Total operating expenses..................... 401,880 335,116 328,757 323,023 335,380 -------- -------- -------- -------- -------- Operating income (loss)...................... (7,765) (1,351) (2,753) 23,850 40,684 Interest expense................................... 22,178 21,338 21,250 18,128 17,158 Gain on sale of subsidiary......................... 4,360 -------- -------- -------- -------- -------- Income (loss) before income taxes and extraordinary item............................................. (29,943) (22,689) (19,643) 5,722 23,526 Income taxes....................................... 3,005 9,700 -------- -------- -------- -------- -------- Income (loss) before extraordinary item............ (29,943) (22,689) (19,643) 2,717 13,826 Extraordinary item(1).............................. 1,365 2,630 7,000 -------- -------- -------- -------- -------- Net income (loss)............................ $(29,943) $(21,324) $(19,643) $ 5,347 $ 20,826 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) available for Common Stockholders(2).................................. $(35,951) $(27,156) $(25,402) $ (339) $ 16,444 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) per common and common equivalent share before extraordinary item....... $ (13.21) $ (10.43) $ (2.29) $ (0.17) $ 0.43 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) per common and common equivalent share.......................... $ (13.21) $ (9.93) $ (2.29) $ (0.02) $ 0.74 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Weighted average common and common equivalent shares........................................... 2,723 2,735 11,074 17,216 22,141 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- BALANCE SHEET DATA (AT END OF PERIOD): Total assets....................................... $167,887 $161,015 $149,375 $140,846 $143,266 Total debt......................................... 101,998 126,323 135,884 124,579 100,510 Class A Preferred.................................. 46,175 52,007 57,391 62,434 9,659 Stockholders' deficit.............................. (51,201) (78,122) (102,070) (102,300) (20,871)
- ------------------------- (1) Extraordinary item for the year ended December 31, 1989 pertains to gain on early extinguishment of debt and for the years ended December 31, 1991 and 1992, to utilization of net operating loss carryforwards. (2) To arrive at net income (loss) available for Common Stockholders, the Company's net income (loss) is adjusted by amounts relating to the accretion of discount on Class A Preferred, the accretion of a contract payment to certain members of the Class A Preferred Group and dividends on Class A Preferred accrued but not declared. 13 111 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW ALC was formed in 1985 in connection with the merger of Allnet Communication Services, Inc. and Lexitel Corporation, and the surviving entity became a wholly-owned subsidiary of ALC. The Company incurred significant losses for the years ended December 31, 1986 through December 31, 1990. As the result of these losses, the Company experienced cash flow shortages which required external cash to fund operations. During this period, CTI made an equity investment of $30.0 million (in 1988), acquiring a controlling interest in the Company, and loaned the Company $20.0 million (in 1989). Subsequent to its equity investment, CTI put in place a new management team, which implemented a number of changes commencing in 1989, including the following: (i) redirection of sales and marketing efforts to focus on face-to-face sales to small-and medium-sized commercial customers; (ii) enhancement of existing product offerings and introduction of new products with a focus on value-added services; (iii) increase in training for the sales force and customer service personnel; (iv) implementation of a comprehensive quality program; (v) consolidation and upgrade of the transmission network and switching equipment to become 100% digital, resulting in improved quality and reduced costs; and (vi) renegotiation of transmission contracts which further reduced costs. In June 1990, the Company began the Refinancing which allowed for the continued operation of the Company while providing the interim resources necessary for financial stability. The 1990 phase of the Refinancing included the components set forth in the following paragraph, which provided for additional sources of capital and reduction or deferral of debt payments. The Note and Warrant Purchase Agreements ("1990 Note Agreements") provided $7.2 million and included warrants to purchase up to 4,708,999 shares of Common Stock of ALC at $3.00 per share ("1990 Warrants"). Interest and principal payments were rescheduled for approximately 96% of the Company's outstanding 11 7/8% Senior Subordinated Debentures ("Original Debentures"). The $30.0 million Revolving Credit Facility was renewed until June 1992. The Restructured Promissory Note of $20.0 million was extended until June 1992 with a reduction in interest rates. A significant transmission contract between the Company and CTGI, an affiliate of CTI, was modified to significantly reduce service costs payable by ALC to CTGI. In consideration for concessions, ALC issued 716,200 shares of Class D Preferred to CTI which was subsequently converted to 14,324,000 shares of Common Stock. Finally, a major equipment lease was modified to reduce monthly payments. As a result of the 1990 phase of the Refinancing, the Company had significant principal and interest payments scheduled in 1992. At the conclusion of the 1990 phase of the Refinancing, management believed that cash flow from operations would be inadequate to meet the debt service requirements as scheduled. 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. The 1992 phase of the Refinancing provided a revised redemption and maturity schedule that the Company believes can be met from expected cash flow from operations. The principal components of the 1992 phase of the Refinancing are outlined below: - A "Note Exchange Offer" was completed as of August 6, 1992 whereby the Company's Original Debentures, Replacement Debentures, PIK Debentures, and accrued interest on the nonconsenting Debentures totalling $73.2 million were replaced by 11 7/8% Subordinated Notes of Allnet Communication Services, Inc. ("1992 Notes"). The Note Exchange Offer was agreed to by 98.8% of the current Debentureholders. The revised redemption schedule of the 1992 Notes effectively rescheduled the earliest redemption from June 30, 1992 to September 30, 1995. 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. 14 112 - The Revolving Credit Facility was extended to June 30, 1993 and modifications included a new participant and a reduction in the borrowing rates. - The Restructured Promissory Note was restated and extended to June 30, 1995 and a $5.0 million principal prepayment was made. The amended terms provide for continuation of the 12% interest rate and quarterly principal payments of $1.3 million commencing on September 15, 1992. - The 1990 Note Agreements with a principal balance of approximately $8.0 million were paid down and extended in conjunction with the Refinancing and subsequently paid in full in December 1992. - In consideration for participating in the Refinancing the 4,708,999 1990 Warrants held by General Electric Pension Trust, Grumman Hill Investments Inc., Grumman Hill L.P. and Prudential Insurance Company of America were amended to reduce the exercise price from $3.00 to $2.00 per share. - Equipment leases with a major switch vendor were renegotiated to be repaid over 24 months until May 1, 1994 with no change in the interest rate of 14%. - The Company paid $2.0 million on June 4, 1992 to CTI and received an $0.8 million note from a major holder of Class A Preferred (which note was subsequently paid in full) and $1.2 million of prepaid transmission capacity from CTGI to be utilized over a period of 37 months. - On August 18, 1992, the 14,324,000 shares of Common Stock, 1,000,000 shares of Class B Preferred, and 1,000,000 shares of Class C Preferred held by CTI were transferred to a group of five banks ("Banks") in exchange for the release of certain portions of CTI's obligations to each of the Banks. The Class B Preferred and Class C Preferred are convertible into 3,796,000 shares of Common Stock. - Effective October 16, 1992, the Company completed a stock offering ("1992 Equity Offering") for 9,863,600 shares of Common Stock at $5.50 per share. A portion of the 1992 Equity Offering relating to 3,464,373 shares was to facilitate the sale of shares for existing major holders including 3,000,000 shares held by the Banks. - The remaining 6,399,227 shares that were part of the 1992 Equity Offering were issued in conjunction with an Exchange Agreement ("Class A Exchange") with the major holders of the Class A Preferred ("Class A Preferred Group"). The members of the Class A Preferred Group agreed to exchange the 2,144,044 Class A Preferred shares held by them with an aggregate redemption value of $58.7 million, including all accrued and unpaid dividends, for shares of Common Stock at an effective 40% discount. During 1992, the Company achieved both the successful completion of the Refinancing and a significant financial turnaround. After five consecutive years of losses and declining revenues, the Company has achieved eight consecutive quarters of income through the quarter ended December 31, 1992. The 1992 results of operations reflect an increase in both billable minutes and revenue and a significant reduction in operating expenses as a percent of revenue. RESULTS OF OPERATIONS Years ended December 31, 1992, 1991 and 1990 The Company had net income of $20.8 million on revenue of $376.1 million for the year ended December 31, 1992. This compares to net income of $5.3 million on revenue of $346.9 million and net loss of $19.6 million on revenue of $326.0 million for the years ended December 31, 1991 and 1990, respectively. Operating results for 1990 included a gain of $4.4 million from the sale of CTI Telecommunications, Inc. and included restructuring costs of $3.0 million. 15 113 Operating results improved from an operating loss of $2.8 million for the year ended December 31, 1990 to operating income of $23.9 million in 1991 and $40.7 million in 1992. This improvement is the result of increased revenue, improved gross margin and for 1991, reduced sales, general and administrative expenses. Revenue Revenue increased 8.4% to $376.1 million from 1991 to 1992 resulting from a 9.6% increase in billable minutes offset somewhat by a slight decrease in the revenue per minute. 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 the highest level in 1992 since the year ended December 31, 1988. The increase in billable minutes results from traffic generated by new customers, increased minutes per customer and a decrease in billable minutes lost through attrition of existing customers. Revenue increased from $326.0 million in 1990 to $346.9 million in 1991. The 6.4% increase in revenue represents a 7.1% increase in billable minutes. The increase in billable minutes was a result of several factors, including the increase in the size of the field sales organization which resulted in increased new sales, the increased minutes per customer which resulted from expanded product offerings, and the decrease in billable minutes lost through the attrition of existing customers. During 1992, the Company introduced several strategic services to upgrade existing products. The Company enhanced Allnet Voice Mail by adding additional features including message notification, and introduced Allnet Broadcast FAX(R), which allows the customer to send a fax document to multiple locations simultaneously. Allnet also introduced a new streamlined dialing method known as "00 Platform" to reach a long distance operator, customer service, or Allnet special features. Customers with multi-locations now have a new "800" enhancement available which connects "800" calls automatically to the customer's location closest to the originating call. The Company's field sales representatives have increased from 363 at the beginning of 1990 to 451 as of December 1992. Management has been successful in adding field sales representatives in order to increase revenue while still maintaining control over sales and marketing expenses. The revenue generated from customers' first full month of service in 1992 was 7.5% higher than in 1991 and 13.8% higher than in 1990. The increased revenue from new sales along with revenue from existing customers outpaced revenue lost from customer attrition. Attrition (defined as the average of the last three months revenue from customers that have terminated or dropped to zero usage as a percentage of total revenue) has improved from 2.2% in 1990 to 2.0% in 1991 to 1.8% in 1992. The provision for uncollectible revenue, which is deducted from gross revenue to arrive at reported revenue, was 3.0% for the year ended 1992 and 3.4% for the years ended December 31, 1991 and 1990. 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. Cost of Communication Services The Company's primary cost is for communication services, which represents the costs of originating and terminating calls via local exchange carriers (primarily Bell Operating Companies). Also included in communication services are the costs of obtaining usage sensitive and fixed price transmission capacity from carriers on a short term basis and the cost of owning and leasing bulk transmission capacity. The cost of communication services increased slightly from $209.6 and $212.7 to $216.9 for the years 1990, 1991, and 1992, respectively. The increase in cost of communication services is due to the 9.6% and 7.1% increase in billable minutes in 1992 and 1991. These increases were offset by cost reductions for transmission capacity experienced in 1991 and even further reductions during 1992. The cost of communication services decreased, however, as a percent of revenue from 64% for 1990, 61% for 1991, to 58% for 1992, the lowest rate in the Company's history. 16 114 The Company has successfully negotiated the reduction of rates under contracts with various transmission carriers including CTGI. In addition, the Company has continued to reconfigure its network to provide better long-term economics. 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 driven down 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 $102.8 million, $98.0 million and $107.3 million for the years 1990, 1991 and 1992, respectively. Sales, general and administrative expense for 1992 increased $9.3 million or 9.5% compared to 1991. This increase resulted in sales, general and administrative expense increasing from 28.2% to 28.5% of revenue. 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 have continued to decrease as a percent of net revenue. Sales, general and administrative expense for 1991 declined $4.9 million or 4.7% compared to 1990. This decrease resulted in sales, general and administrative expense declining from 31.5% to 28.2% of revenue. This reduction includes the impact of a slight increase of 4.4% in total corporate head count. Despite a 13% increase in the average number of field sales representatives for 1991 over 1990, sales expense remained relatively constant from 1990 to 1991. The overall decrease in general and administrative expenses reflects management's continuing focus on cost containment. Procedures implemented to improve efficiencies and contain expenses included improved budgeting techniques; regular, periodic review of actual expenses against budgeted levels; incentive programs tied directly to achievement of budget objectives; and enhanced review of general programs and benefit costs. The decrease in depreciation and amortization from $13.3 million in 1990 to $12.3 million in 1991 and further to $11.2 million in 1992 is primarily the result of 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 have been partially offset by depreciation on newly capitalized assets during the three-year period. Interest Expense Interest expense decreased from $18.1 million in 1991 to $17.2 million in 1992. This resulted from a lower prime rate impacting the interest expense on the Revolving Credit Facility as well as a decrease in interest related to debt principal payments made in connection with the Refinancing. These improvements were partially offset by increased expense on the Debentures and the Restructured Promissory Note. Interest expense decreased from $21.3 million in 1990 to $18.1 million in 1991. This decrease was primarily due to reduced interest on the Revolving Credit Facility resulting from lower average balances and the expiration of capital leases. Cash flow was impacted by interest payments beginning in 1991 on the 1990 Notes and the Restructured Promissory Note, which had been previously deferred. Interest on the Debentures continued to be converted into PIK Debentures through December 1991. PIK Debentures were exchanged for 1992 Notes in the Note Exchange Offer or paid off in September 1992. Interest payments on the 1992 Notes began in July 1992 and are paid quarterly. 17 115 INCOME TAXES Income taxes are presently accounted for in accordance with Accounting Principles Board Opinion No. 11. In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("Statement"). The Company will adopt the Statement as of January 1, 1993, the required implementation date. Application of the new rules as of January 1, 1993, will result in the recording of a net deferred tax asset of approximately $13.5 million 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"). The Statement requires that the tax benefit of NOLs be recorded as an asset to the extent that management assesses that the utilization of such NOLs is "more likely than not." Management believes that recording of the deferred tax assets representing three years of NOL benefit is conservative given the existing limitation of such benefit to $10.0 million per year by Code Section 382 and the likelihood of exceeding the necessary pre-tax income levels to realize the benefit given the Company's current operating results. The Company has further taken a conservative position that realization of the benefit of the NOLs beyond the three-year period is difficult to predict and therefore is not recorded. The Company intends to evaluate the propriety of the deferred tax asset on an ongoing basis. The Company has determined it will not apply the Statement retroactively and thus will not restate prior year financial statements to reflect adoption of the new rules. The tax provisions for the year ended December 31, 1992 and 1991 include 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 years ended 1992 and 1991. In 1992 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 tax. Due to the operating loss sustained for the year ended December 31, 1990, no provision for income taxes was necessary. 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 382 Limitation equals the product of the "long term tax-exempt rate" and the value of a corporation immediately before the ownership change, subject to adjustment for certain built-in gains of the corporation. To the extent the 382 Limitation exceeds the Federal taxable income of the corporation for a given year, the 382 Limitation for the subsequent year is increased by such excess. An ownership change will occur if the percentage of stock of the corporation owned by one or more "five-percent shareholders" (taking into account certain aggregation and segregation rules) increases by more than fifty percentage points during any "testing period." A testing period is normally the preceding three-year period, but if an ownership change has previously occurred, a shorter testing period beginning on the date following an ownership change is used. Generally, options or warrants to acquire stock will be treated as stock which has been acquired by the option holder or right holder if the effect of such treatment is to cause an ownership change to have occurred. Such treatment of options and warrants may be made at the date of grant of such options or warrants, or upon the occurrence of other events ("testing dates"). Generally, options that are in existence at the time of an ownership change are no longer counted for purposes of determining future ownership changes so long as they continue to be held by the same person who owned the option at the time of the previous ownership change. As of December 31, 1992, the Company has approximately $147.8 million of NOLs, $147.8 million of alternative NOLs and $3.6 million of investment tax credit carryforwards which expire beginning December 31, 1998 through 2005. The transfer of 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 $10.0 million per annum. As a result of this annual limitation, along with the 15 year carryforward limitation, 18 116 the maximum cumulative NOLs and ITCs which can be utilized for federal income tax purposes in 1993 and future years are limited to approximately $130.0 million, assuming no future ownership change or built-in gain recognition. The Company is also subject to numerous state income tax laws. Many states limit the utilization of NOLs after an ownership change. Investors are cautioned that 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. If this Offering in combination with previous transactions were to result in another ownership change under Code Section 382, the impact is not expected to be material due to the long-term tax-exempt rate and value of the Company at this time. Furthermore, the 382 Limitation 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. SEASONALITY The Company's long distance revenue is subject to 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, which is primarily commercial, has declined slightly during the fourth quarter due to the November and December holiday periods. However, in 1992 this trend was more than offset by strong traffic growth, which was up 12.3% from the fourth quarter of 1991. LIQUIDITY AND CAPITAL RESOURCES For the years ended December 31, 1992 and 1991, the Company's operations were profitable and generated positive cash flow from operations of $30.4 million and $27.3 million, respectively. The positive cash flow reflects ten consecutive quarters of increased revenue from prior comparable quarters and of operating profits as of December 31, 1992. ALC had operating losses and negative cash flow from its commencement of operations in 1985 through the year ended December 31, 1990 (except for the year ended December 31, 1986). Such operating losses were historically financed through various debt arrangements, including the Revolving Credit Facility. 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. The Revolving Credit Facility is a $30.0 million revolving facility which expires June 30, 1993, and which the Company expects to replace by that date. Advances can be made based on the level of receivables. As of December 31, 1992, the Company had borrowings of $14.8 million and additional borrowing availability of $15.2 million. The borrowings under the line has increased by $5.4 million from December 31, 1991 as funds borrowed have been used to retire more expensive debt such as the 1990 Notes. The Company had negative working capital of $31.7 million at December 31, 1992 compared to negative $92.7 million at December 31, 1991. The increase in working capital is substantially the result of the reclassification of the Debentures to long-term liabilities, the reclassification to long-term and the reduced balance of the Restructured Promissory Note, and the payoff of the 1990 Note Agreements. Of the $31.7 million negative working capital position at December 31, 1992, $11.4 million reflected the current portion of long term obligations and $14.8 million reflected borrowings under the Revolving Credit Facility which is anticipated to be renegotiated, extended or replaced before June 1993. Management believes that an ongoing negative working capital position will not have a material adverse impact on the Company. Because the Company has chosen to lease rather than own its transmission facilities, the Company's requirements for capital expenditures are modest. Capital expenditures totaled $10.3 million in 1992. Capital expenditures during the year ended December 31, 1992 included projects for enhanced efficiency and technical advancement in the network, information systems and customer service. The future investment 19 117 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 1993 is expected to be approximately $15.0 million. During 1992, the Company completed the Refinancing which included the rescheduling of substantially all debt resulting in significantly reduced or deferred debt service obligations. The Refinancing resulted in a revised redemption and maturity schedule that deferred a significant amount of the previous scheduled current liabilities over a period through June 30, 1999. The most significant impact of the Refinancing on the long-term liquidity position of the Company resulted from the Note Exchange Offer which deferred the earliest redemption requirement from $29.6 million during 1992 to a quarterly redemption of $4.5 million beginning September 30, 1995. The other major portion of the Refinancing that affected long-term liquidity was the Class A Exchange which reduced the redemption requirements from $19.6 million in 1993 and $9.8 million in each of 1994, 1995, and 1996 to a single redemption requirement of $7.1 million at December 31, 1996. While no assurances can be given, management believes that the Company's operations, along with continued availability of the Revolving Credit Facility (or similar arrangements), will provide adequate sources of liquidity to meet the Company's anticipated short and long term liquidity needs. 20 118 BUSINESS ALC is the holding company for Allnet Communication Services, Inc. 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 1992 carried in excess of 600 million calls over its network. INDUSTRY AND COMPETITION Since 1984, when AT&T was forced to divest its 22 local telephone companies, (the "AT&T Divestiture Decree") the long distance business has undergone a transformation. AT&T is a dominant long distance competitor in the telecommunications services market, with the major alternative long distance telephone carriers being MCI and Sprint. 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: AT&T, MCI and Sprint. AT&T, MCI and Sprint, which generate an aggregate of approximately 88% of the nation's long distance revenue of approximately $65 billion, comprise the first tier. Allnet is positioned in the second tier with four other companies with annual revenues of $250-$800 million 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. The Company believes it is, in one important aspect, in an advantageous position vis-a-vis the first tier carriers because it 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. Allnet 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. 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. Several of the Company's second tier competitors and all of the third tier 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. Despite significant recessionary pressure throughout the United States, long distance telecommunications traffic grew at an annual rate of approximately 6.5% in 1992 over 1991. Although the industry as a whole grew more slowly than in prior periods, growth remained positive. The Company's performance has outpaced industry trends with an increase in traffic of 9.6% and revenue of 8.4% during 1992. Traffic grew by 7.1% and revenue grew by 6.4% during 1991. In the long distance telecommunications industry, a certain level of customer attrition is inherent. Attrition averaged 1.8% per month for the year ended December 31, 1992, 2.0% per month for the year ended December 31, 1991 and 2.2% per month for the year ended December 31, 1990. To retain its commercial and residential customer base, Allnet continues to implement programs and enhancements such as value-added services, agent and association sales to residential users, improved customer service and competitive price adjustments. PRODUCTS AND SERVICES Allnet 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 second tier and third tier competitors due to the level of value-added services Allnet offers, the flexibility of product pricing to maintain competitiveness and the broader geographic reach of 21 119 Allnet. In addition, because of the Company's size, the concentration of its commercial accounts and its aggressive management team, Allnet has been able to rapidly develop and implement new products. The variety of products offered are categorized by Allnet 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 75 regions which Allnet 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 domestic pricing and two time-of-day period rates, along with aggressive international pricing options. The Allnet 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. Due to the high losses experienced by the industry with "700" and "900" numbers which require that charges be paid by the caller, the Company does not provide these services to its customers. Value-added Services. When customers subscribe to value-added services on the Company's network, their calls follow different routes and 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 Allnet 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 calendar year 1992 Allnet 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 22 120 up at a later date; PC software, which allows the customer to manage his facsimile lists and documents from a PC; and special international pricing to accommodate short duration facsimile traffic. Reporting. Allnet 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 at Allnet, the customer is offered the opportunity to custom design the format of its reports. For example, Allnet 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. The Company also launched its proprietary personal computer reporting service, Allnet Invoice ManagerSM ("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. In preparation for FCC mandated portability in May 1993 (which will allow customers to select a different long distance carrier without changing their 800 number) the Company has greatly expanded its 800 product offerings. These new offerings include area code blocking and routing; time of day routing; Home ConnectionSM 800, fractional 800 service which allows residential customers to acquire 800 service utilizing a 4 digit security Personal Identification Number ("PIN"); Multi-PointSM 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 telephone; and TargetlineSM 800, which routes calls to the closest location and provides custom prompts based upon a customer specific database. In the third quarter of 1992, eight months prior to FCC mandated portability, Allnet offered AT&T customers the opportunity to become portable and use Allnet products, services and rating without changing their 800 number. The Company believes that Allnet is the only nationwide carrier to provide this service. This functionality combined with the Allnet single bill for all services, customized reporting, routing functionality and combined volume discounts has met with significant customer response. MARKETING Approximately 60% of the Company's employees are engaged in sales, marketing or customer services. Allnet 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 49 offices in the United States. The Company employs 953 sales, marketing and customer service individuals, of which 451 are field sales representatives. 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, Allnet 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. 23 121 Allnet 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. Allnet recently opened a second customer service center in Columbus, Ohio to process calls from customers with significant usage levels who have been enrolled in the Company's "select service" programs. Second, corporate account specialists provide proactive telephonic support to mid-sized commercial accounts. Third, communications specialists provide personal service to larger commercial accounts. Allnet services more than 263,000 customers located in almost every state in the country. Of these customers, approximately 151,000 are commercial accounts, with the remainder being residential accounts. During the past two years, Allnet has become more geographically diversified, adding new markets as necessary. Allnet is currently focusing on an agent and association program to increase customer acquisition in specific target markets and small remote markets. Allnet continues to explore ways to increase traffic on its network during non-peak hours, including marketing strategies to tap specific residential target markets such as association with popular consumer items or cultural events and organizations. TRANSMISSION FACILITIES The ability of Allnet to operate profitably is largely dependent on utilizing transmission circuits at cost effective rates. Allnet has generally avoided the large capital requirements of building its own network by entering into low cost fixed price contracts for bulk transmission capacity. Allnet transmits its nationwide long distance services through state-of-the-art transmission equipment. Allnet has sufficient switching capacity, local access circuits and long distance circuits to permit subscribers to obtain access to its switching centers and its long distance circuits on a basis which the Company believes exceeds industry standards regarding clarity, busy signals or delays. The Company has end-to-end control of each long distance call through surveillance equipment located at each switching center and major points of presence. The Allnet network utilizes fiber optic and digital microwave transmission circuits to complete long distance calls. With the exception of twelve digital microwave links located in California for which Allnet holds the FCC licenses, such facilities are leased on a fixed price basis under both short and long term contracts. 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 area or areas 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 area. 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, 1992, the Company had 16 network switching centers which originate traffic in 190 Local Access Transport Areas ("LATAs"). International service is provided through participation in the International Carrier Group ("ICG") with three other second tier 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. 24 122 REGULATION Generally, the current trend is toward lessened regulation for both Allnet and its competitors. As a nondominant Interexchange Carrier ("IXC"), Allnet 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 has 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 decision. The Company believes that the potential impact of the Court of Appeals decision on Allnet will be 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 Company believes that it has operated and continues to operate in compliance with all applicable tariffing and related requirements of the Communications Act of 1934, as amended. Additionally, in a recent decision by the FCC 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, as it does not believe that it is engaged in the sort of activity intended to be regulated under TOCSIA. Finally, by virtue of its ownership of interstate microwave facilities located in California (as described in "Transmission Facilities"), 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 inter-LATA (local access transport areas) long distance 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. If the BOCs ultimately are permitted to provide inter-LATA long distance telecommunications services, existing IXCs, including Allnet, would likely face substantial additional competition from local BOC monopolies. Currently, Allnet and the IXCs with which it competes other than AT&T are subject to less regulation and have greater pricing flexibility than AT&T. However, the general trend of the FCC is to treat AT&T interexchange domestic business services as competitive and lessen FCC review of the rates AT&T charges for many of its business services. As regulatory changes in the nature of more streamlined regulation are adopted, however, AT&T may more aggressively offer and price its services, which, in turn, could affect the Company's rates and its costs of doing business. 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 its inconsistent 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 has extended its effect until it concludes the rulemaking proceeding in which it is considering whether to retain or modify the "equal per unit" local transport pricing structure. On September 17, 1992, the FCC voted in a public meeting to maintain the existing "equal per unit" pricing rules until late 1993. A two year transition plan would then begin. In a press release issued on the date of the FCC's vote, the FCC stated that it was taking a cautious approach by adopting an interim rate structure and pricing plan that has minimal effects on medium and small long-distance carriers. Local telephone companies estimate that the interim plan would increase the switched access costs of small long-distance carriers by less than 1.8%. This translates into a less than 1% increase in total operating costs of these carriers. Based on the text of the FCC Decision itself, both of which provide generic descriptions of how access rates should be assessed, Allnet does not anticipate these decisions will have a material impact during the next three years; however, with respect to 1994 and 1995, further information, including the actual access rates that will be applied, would have to be made available to more accurately assess any impact. The local exchange carriers are not expected to file these rates until the second 25 123 half of 1993. As an aid in reducing IXC costs, the FCC has ordered that charges for reconfiguring a carrier's access services 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 also voted to seek comment on expanding competition for monopoly local access. This could ultimately provide Allnet with alternatives to purchasing all of its local access from the monopoly local exchange carriers. On February 5, 1993, the FCC issued a public notice stating that it had ruled that carriers, such as Allnet, were entitled to damages for overcharges paid to a number of local exchange carriers during the 1985-1986 and 1987-1988 period. The exact amounts of the awards for Allnet are not known at this time but could be significant. In addition Allnet has pending claims for overcharges during the 1989-1990 period. At this time, Allnet is not aware of any pending rulings on these additional claims. The intrastate long distance telecommunications operations of Allnet are also subject to various state laws and regulations, including certification requirements. Generally, Allnet 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, Allnet can provide originating services to customers in 46 states and the District of Columbia. Those services may terminate in any state in the United States, and may also terminate to countries abroad. Of the states in which Allnet provides originating service, only 29 have public utility commissions that actively assert regulatory oversight over the services currently offered by Allnet. Like the FCC, many of these regulating jurisdictions are relaxing the regulatory restrictions currently imposed on telecommunication carriers for intrastate service. In addition, some of these states restrict the offering of intra-LATA long distance services by Allnet and other IXCs. However, the general trend is toward opening up these markets to Allnet 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 places Allnet and other IXCs at a disadvantage as compared to LEC intra-LATA toll service which generally requires no access code. There can be no assurance that the regulatory authorities in one or more states or the FCC will not take action having an adverse effect on the business or financial condition of Allnet. EMPLOYEES As of December 31, 1992, Allnet had 1,568 employees, none of whom were subject to any collective bargaining agreements. PROPERTIES On December 31, 1992, Allnet had under lease approximately 113,000 square feet of office space in Bingham Farms, Michigan for executive and administrative functions, approximately 43,000 square feet in Southfield, Michigan for customer service, collections, and data processing. Allnet also leases approximately 311,000 square feet in the aggregate for sales and administrative offices, network switching centers and unmanned operations 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 Allnet are suitable, well maintained and equipped for the purposes for which they are used. 26 124 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The Board of Directors of ALC consists of seven positions: one elected by the holders of Class A Preferred; two by the holders of Class B Preferred; one by the holders of Class C Preferred; two by the holders of Common Stock (in each case, voting as a separate class); and one elected by all stockholders voting together as one class. Five of those positions are presently filled. If all of the shares of Class B Preferred and/or Class C Preferred are converted into Common Stock, ALC intends to take appropriate action whereby all provisions relating to such class of stock in the Restated Certificate of Incorporation of ALC (the "Certificate") would be eliminated. If this occurs, the positions to be filled by vote of the holders of that class would then be filled by vote of all stockholders voting together as one class. The directorship to be filled by the Class A Preferred holders and one directorship to be filled by the Class B Preferred holders remain vacant. The following table sets forth the executive officers and directors of the Company as of December 31, 1992. Executives are elected annually and serve at the pleasure of the Board.
NAME AGE POSITION - ------------------------------------- --- ------------------------------------------------ Richard D. Irwin..................... 57 Chairman of the Board of Directors John M. Zrno......................... 54 President, Chief Executive Officer and Director Marvin C. Moses...................... 48 Executive Vice President, Chief Financial Officer, Assistant Secretary and Director William H. Oberlin................... 48 Chief Operating Officer, Executive Vice President -- Sales and Marketing Gregory M. Jones..................... 42 Senior Vice President Dennis R. Banks...................... 49 Vice President -- Field Operations Stephen G. Canton.................... 36 Vice President -- Sales S. Danielle Conroyd.................. 45 Vice President -- Human Resources Steven A. Fernald.................... 45 Vice President -- Engineering Connie R. Gale....................... 46 Vice President, General Counsel and Secretary Charles I. Gragg, III................ 34 Vice President -- Marketing Marilyn M. Lesnau.................... 39 Controller (Chief Accounting Officer) Thomas A. Marino..................... 50 Vice President -- Administrative and Technical Services David C. Patterson................... 47 Vice President -- Management Information Systems David J. Thomas...................... 42 Vice President, Treasurer Richard J. Uhl....................... 52 Director Michael E. Faherty................... 57 Director
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 Mountain Medical Equipment, 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 27 125 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 and has held the position of Executive Vice President -- Sales and Marketing 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 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 including director of marketing for MCI Midwest in Chicago, senior manager of telemarketing, and senior manager of customer service. DENNIS R. BANKS has held the position of Vice President -- Field Operations since January 1992 and formerly served as director of Eastern region operations since November 1982. Mr. Banks commenced his employment with the Company July 1982 as manager of transmission and switch engineering. From June 1978 through June 1982 Mr. Banks was a manager of the Network Management Center for ITT. From 1973 through May 1978 Mr. Banks held various positions with MCI, the most recent of which was field operations manager, Northeast Ohio. STEPHEN G. CANTON has held the position of Vice President -- Sales since May 1991 and formerly served as Regional Vice President -- East at the Washington D.C. sales office since November 1989 and as regional sales director since December 1988. Mr. Canton was a sales executive with Cable & Wireless North America, Inc. from 1983 through 1986 and 1987 through 1988 as well as with Bell Atlantic during the interim period between 1986 and 1987. S. DANIELLE CONROYD has held the position of Vice President -- Human Resources since April 1989. From October 1987 to April 1989 Ms. Conroyd was a Senior Vice President, Human Resources for Mercy Hospitals of Detroit. From March 1980 to September 1987 Ms. Conroyd was Vice President, Human Resources for Mount Carmel Hospital in Detroit. STEVEN A. FERNALD has held the position of Vice President -- Engineering since May 1991 and formerly served as director of the Network Control Center since January 1989 and manager of the Network Control Center since June 1986. Mr. Fernald was a manager at Sprint from June 1975 to June 1986. 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 in 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. CHARLES I. GRAGG, III has held the position of Vice President -- Marketing since September 1992 and formerly served as director of marketing since September 1991. Mr. Gragg was previously Vice President, Marketing for Phase II Corporation, a telecommunications consulting firm specializing in overseas cellular and paging systems, where he served in a number of positions since November 1986. From November 1985 to November 1986, Mr. Gragg was Vice President Marketing and a director of Kensington Communications, a 28 126 microcomputer accessories and software firm. Mr. Gragg has also held senior management positions with Computer Sciences Corporation's Infonet division and Western Union. MARILYN M. LESNAU has held the position of Controller since March 1988, commencing her employment with the Company in September 1986 as director, corporate accounting. From 1984 to March 1986 Ms. Lesnau served as director of sales and director of finance for Dayton Hudson Corporation. Ms. Lesnau's previous experience included seven years with Ernst & Young, a certified public accounting firm. THOMAS A. MARINO has held the position of Vice President -- Administrative and Technical Services since April 1992 and formerly served as director of network administration since January 1987, commencing his employment in June 1986 as director of programs and projects. From February 1974 to June 1986, Mr. Marino held various operations and management positions with Sprint, the most recent of which was Eastern area director -- network operations. From January 1964 to January 1974, Mr. Marino held various positions with Western Union Telegraph Company, the most recent of which was technical services supervisor. DAVID C. PATTERSON has held the position of Vice President -- Management Information Systems since January 1991. Mr. Patterson had previously served as a director of data processing since the commencement of his employment with the Company in August 1989. From February 1972 through August 1989, Mr. Patterson was a data processing manager for Electronic Data Systems, a subsidiary of General Motors Corporation. DAVID J. THOMAS has held the position of Vice President since January 1991 and has held the position of Treasurer since October 1989. Mr. Thomas served in a variety of managerial capacities in the areas of network cost management, revenue protection and credit and collections since the commencement of his employment with the Company in January 1983. Mr. Thomas previously was employed by Ford Motor Company as assistant to the Controller and by Abbott Laboratories in several analytical capacities. 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 and which invests in operating companies on a selective basis, generally taking a controlling equity position. Since November 1990 he has also been the Chief Executive Officer and a member of the Board of Directors of Hurrah Stores, Inc. ("Hurrah"). Hurrah is a subsidiary of CHI, which through a wholly-owned subsidiary operates approximately 125 junior women's clothing stores, principally in the midwest. Mr. Uhl has also been President of Steiner Financial Corporation, another subsidiary of CHI, since December 1987. 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 currently serves as the President and Chief Executive Officer of Shared Financial Systems, Inc., having held those positions since January 1992. Shared Financial Systems, Inc. is a worldwide provider of software and consulting services to data processing market segments that utilize on-line transaction processing. 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. The Board of Directors held twelve regularly scheduled and special meetings in the aggregate during the fiscal year from January 1, 1992 through December 31, 1992. 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 29 127 meeting of the Board of Directors coincident with the annual meeting of shareholders. 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 1992 fiscal year were, prior to July 24, 1992, Ralph J. Swett, Richard D. Irwin and Richard J. Uhl; prior to August 17, 1992, Ralph J. Swett, Richard D. Irwin, Richard J. Uhl and Michael E. Faherty; and, subsequent to August 17, 1992, Richard D. Irwin, Richard J. Uhl and Michael E. Faherty. During 1992, the Audit Committee met four times. Ralph J. Swett resigned from the Board of Directors and its committees effective August 17, 1992. 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 1992, prior to July 24, 1992, were Ralph J. Swett, Richard D. Irwin and Richard J. Uhl; prior to August 17, 1992, Ralph J. Swett, Richard D. Irwin, Richard J. Uhl and Michael E. Faherty, and, subsequent to August 17, 1992, Richard D. Irwin, Richard J. Uhl and Michael E. Faherty. During 1992, the Compensation Committee met five times. The Board of Directors does not have a standing committee responsible for nominating individuals to become directors. OFFICER AND DIRECTOR COMPENSATION Director Compensation From 1988 through 1991, the Company's practice was that directors who are not employees of ALC would receive remuneration of up to $12,000 per year for their services as Board members (one-half of the fee is dependent upon per meeting attendance at the four regularly scheduled Board meetings). For 1992, and to be continued for 1993, Richard J. Uhl and Michael E. Faherty 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. Ralph J. Swett and Richard D. Irwin waived their right to fees throughout their respective 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. The option vests 25% on each of January 1, 1992, June 1, 1992, January 1, 1993 and June 1, 1993 and 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. The option vests 25% on June 23, 1992, 50% on January 1, 1993 and 25% on June 1, 1993 and expires on the earlier of 60 days subsequent to Mr. Faherty's death, resignation or removal as a director and June 23, 1998. In addition, Grumman Hill, of which Richard D. Irwin is President, entered into an Advisory Agreement with Stock Option (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 will receive an annual fee of $100,000 and was initially granted a stock option to purchase at a price of $11.25 per share 153,163 shares of Common Stock. In conjunction with the 1990 phase of the Refinancing, this 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. The Company does not anticipate 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. Grumman Hill received an 30 128 additional advisory fee of $150,000 due to its efforts in the 1990 phase of the Refinancing, which then was reinvested in the Company as part of the 1990 phase of the Refinancing. The Company paid Grumman Hill an advisory fee of $250,000 in connection with its efforts in the 1992 phase of the Refinancing. Executive Compensation SUMMARY COMPENSATION TABLE The following table summarizes the total compensation paid to the Chief Executive Officer and the four most highly compensated executive officers at the end of calendar year 1992 for each of the past three fiscal years during which the named executive acted as an executive officer.
LONG TERM ANNUAL COMPENSATION COMPENSATION -------------------------------------------- ----------------------- AWARDS OTHER ------- ANNUAL OPTION/ ALL OTHER COMPENSATION SARS COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) (#)(2) ($)(3) - -------------------------------- ---- -------- -------- ------------ ------- ------------ John M. Zrno.................... 1992 $307,755 $175,000 284,983 $500 President, Chief Executive 1991 292,025 105,000 -- Officer, Director 1990 282,994 68,000 637,231 Marvin C. Moses................. 1992 $234,998 $135,000 217,398 $500 Executive Vice President, 1991 223,256 81,000 -- Chief Financial Officer, 1990 214,837 51,000 524,838 Assistant Secretary, Director William H. Oberlin.............. 1992 $234,893 $135,000 217,398 $500 Chief Operating Officer, 1991 223,172 81,000 -- Executive Vice President-Sales 1990 215,288 38,000 524,838 and Marketing Gregory M. Jones................ 1992 $135,090 $ 49,708 $ 860(4) 55,092 $500 Senior Vice President 1991 128,260 25,425 -- 1990 118,250 19,965 71,102 Connie R. Gale.................. 1992 $130,250 $ 48,280 47,385 $500 Vice President, General 1991 122,000 28,750 10,000 Counsel and Secretary
- ------------------------- (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 1992 in the amount of $500 for each officer listed. (4) Represents gross up for income taxes relating to a perquisite. 31 129 Stock Option Awards During Last Fiscal Year The following table sets forth information about stock option awards granted to the Chief Executive Officer and the four most highly compensated executive officers during 1992.
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED - ------------------------------------------------------------------------------------- ANNUAL RATES OF % OF TOTAL STOCK PRICE OPTIONS/SARS APPRECIATION FOR GRANTED TO EXERCISE OR OPTION TERM* OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION -------------------- NAME GRANTED(#)(1) FISCAL YEAR ($/SH) DATE(6) 5%($) 10%($) - -------------------------- ------------ ------------ ----------- ---------- -------- -------- John M. Zrno.............. 137,214(2)(3) 8.60% $3.50 6/6/2000 $302,557 $763,596 52,657(4) 3.30% $4.50 5/14/2002 $149,283 $376,761 95,112(5) 5.96% $5.88 7/24/2002 $352,333 $889,221 Marvin C. Moses........... 114,236(2)(3) 7.16% $3.50 6/6/2000 $251,890 $635,723 36,762(4) 2.31% $4.50 5/14/2002 $104,220 $263,032 66,400(5) 4.16% $5.88 7/24/2002 $245,972 $620,787 William H. Oberlin........ 114,236(2)(3) 7.16% $3.50 6/6/2000 $251,890 $635,723 36,762(4) 2.31% $4.50 5/14/2002 $104,220 $263,032 66,400(5) 4.16% $5.88 7/24/2002 $245,972 $620,787 Gregory M. Jones.......... 15,102(2)(3) 0.95% $3.50 6/6/2000 $ 33,300 $ 84,043 15,000(4) 0.94% $4.50 5/14/2002 $ 42,525 $107,325 24,990(5) 1.57% $5.88 7/24/2002 $ 92,573 $233,637 Connie R. Gale............ 9,390(2)(3) 0.59% $3.50 6/6/2000 $ 20,705 $ 52,255 13,500(4) 0.85% $4.50 5/14/2002 $ 38,273 $ 96,593 24,495(5) 1.54% $5.88 7/24/2002 $ 90,739 $229,009
- ------------------------- * 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 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) The options become exercisable over a three year period, 50% on June 6, 1992, 25% on each of June 6, 1993 and June 6, 1994. (3) Amendment of options granted in 1990 at the same exercise price, but which were formerly exercisable only upon the occurrence of certain events as provided in the option agreement. (4) 25% of the options become exercisable each year over a four year period with vesting beginning on May 14, 1993. (5) 25% of the options become exercisable each year over a four year period with vesting beginning on July 24, 1993. (6) Unless earlier terminated due to such events as termination of employment or death. OPTION EXERCISES AND FISCAL YEAR END OPTION VALUES Neither the Chief Executive Officer nor any of the four most highly compensated executive officers exercised any options during 1992. The following table shows the number of exercisable and unexercisable 32 130 options held at the end of 1992 by the named executive officers, and the aggregate value of in-the-money, unexercised options held by each named officer.
VALUE OF UNEXERCISED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS/SARS OPTIONS/SARS AT FY END(#) AT FY END ($)(1) ------------------------------ ------------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- John M. Zrno..................... 450,041 334,959 $4,725,431 $ 3,238,041 Marvin C. Moses.................. 359,694 268,306 3,776,787 2,622,419 William H. Oberlin............... 359,694 268,306 3,776,787 2,622,419 Gregory M. Jones................. 63,551 47,541 667,286 424,704 Connie R. Gale................... 49,695 42,690 512,798 376,447
- ------------------------- (1) Values are calculated by determining the difference between the fair market value of the Common Stock at December 31, 1992 and the exercise price of the options. 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 have initial four year terms, amended in 1991 to extend for an additional two years. One of the provisions of each employment agreement is 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. Effective February 1, 1990, 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 from six-to-twelve months should an officer be terminated from employment prior to January 31, 1991. These agreements were renewed in February 1991 and again in August 1992. As amended, the agreements cover termination from employment prior to December 31, 1993. Mr. Jones and Ms. Gale have entered into such agreements. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION 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 will receive an annual fee of $100,000 and was initially granted a stock option to purchase 153,163 shares of Common Stock at a price of $11.25 per share. In conjunction with the 1990 phase of the Refinancing, this 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 not 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. Grumman Hill and Grumman Hill, L.P. participated in the cash financing as part of the 1990 phase of the Refinancing. These entities held 1990 Notes in the aggregate original principal amount of $650,000 and were issued 1990 Warrants to purchase up to 428,090 shares in the aggregate of the Common Stock. 33 131 Grumman Hill received an additional advisory fee of $150,000 due to its efforts in the 1990 phase of the Refinancing, which then was reinvested in the Company (and was included in the aggregate principal amount of the $650,000 of 1990 Notes) as part of the 1990 phase of the Refinancing. The Company paid Grumman Hill an advisory fee of $250,000 in connection with its efforts in the 1992 phase of the Refinancing. The Grumman Hill and Grumman Hill, L.P. 1990 Notes were amended and replaced in August 1992. Such amended and restated 1990 Notes, in the principal amounts of $167,516 and $558,386, respectively, were paid in full as of December 1992. Prior to the Note Exchange Offer, 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 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 additional 1992 Warrants (as defined in "The Refinancing"). 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. On January 28, 1993, Grumman Hill L.P. sold $1.0 million in principal amount of 1992 Notes. Therefore, Mr. Irwin and Grumman Hill L.P. and affiliates own $3.1 million in principal amount of 1992 Notes. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS BANKS AND CTI STOCK OWNERSHIP IN THE COMPANY On June 20, 1988, ALC entered into a Securities Purchase Agreement with CTI, pursuant to which CTI purchased 1,000,000 shares of Class B Preferred and 1,000,000 shares of Class C Preferred for an aggregate of $30.0 million. Each share of Class B Preferred and Class C Preferred is convertible into shares of Common Stock as described below. In addition, the holders of Class B Preferred and Class C Preferred have the right to elect two and one directors of ALC, respectively, thereby controlling election of three of the seven Board members. CTI's purchases of the Class B Preferred and the Class C Preferred were financed by advances under its credit arrangements with the Banks and Prudential. In 1989, CTI loaned $20.0 million to the Company. In conjunction with the 1990 phase of the Refinancing, ALC issued 716,200 shares of newly created Class D Preferred Stock (the "Class D Preferred") to CTI in exchange for certain financing and lease concessions and for a waiver by CTI of certain anti-dilution rights under the Certificate relating to the shares of Class B Preferred and Class C Preferred. All outstanding shares of the Class D Preferred were subsequently converted into 14,324,000 shares of Common Stock. In August 1992, CTI conveyed the Common Stock, Class B Preferred and Class C Preferred owned by it to each of the Banks pro-rata in exchange for the release of certain portions of CTI's obligations to each of the Banks. Thus, the Banks, in the aggregate, acquired all of the Class B Preferred and Class C Preferred of ALC, as well as 14,324,000 shares of Common Stock. In October 1992, the Banks sold, in the aggregate, 3,000,000 shares of Common Stock in the 1992 Equity Offering. Each share of Class B Preferred and Class C Preferred is convertible at the option of the holder into 1.898 shares of Common Stock. As owners of 1,000,000 shares of Class B Preferred, 1,000,000 shares of Class C Preferred and 11,324,000 shares of Common Stock, the Banks are entitled to an aggregate of 15,120,000 votes, which represents 54.4% of the total voting power of ALC capital stock (or 38.3% assuming the exercise of certain warrants and options). Each of the Banks has advised the Company that the Banks presently have no agreements, arrangements or understandings with respect to voting the shares of ALC stock they own. The Banks have disclaimed participation as a "group" for purposes of Section 13(d) of the Securities Exchange Act of 1934. Each Bank may, however, be deemed to share the power to dispose of the shares of ALC stock with the other Banks, since various agreements obligate them to act together with respect to the disposition of their interests to unaffiliated third parties. 34 132 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 has the ability to acquire all of the shares of Class B Preferred, Class C Preferred and Common Stock owned by the Banks. The Options may be transferred by Prudential to its affiliates or a third party transferee. However, a third party transferee of the Residual Option may not exercise the Residual Option prior to June 1, 1993. Each of the Options is exercisable in full only, and will expire if not exercised on or before July 31, 1993. The Stock Option covers 1,000,000 shares of Common Stock owned by the Banks. The exercise price is $4.375 per share. The Stock Option prohibits the Banks from selling the shares of Common Stock covered by the Stock Option. These shares are included in this Offering, but can and will be sold hereunder only if Prudential consents. This consent, if received, will be described in the Prospectus Supplement. The Residual Option covers 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 is an amount calculated by a formula that equals the amount of the debt of CTI released by the Banks on August 18, 1992, as adjusted upward to reflect costs incurred by the Banks in connection with the Banks' ownership of the securities of ALC or otherwise arising as a result of the original loan to CTI and to adjust for proceeds of dispositions which are shared with Prudential (as described below), and downward to reflect proceeds realized after such date by the Banks from the securities of ALC owned by them or otherwise received as a result of components of the original loan to CTI, including net proceeds received by the Banks from this Offering. The exercise price for the Residual Option as of August 18, 1992 was $135.6 million, which, if all shares of Class B Preferred and Class C Preferred were converted to shares of Common Stock, would have been approximately $8.02 per share. After giving effect to the 1992 Equity Offering and various fees and expenses incurred by the Banks since August 1992, the exercise price as of December 31, 1992 was approximately $120.5 million, or approximately $8.54 per share of Common Stock. On February 12, 1993, the Banks gave Prudential notice of their intention to sell shares of Common Stock in this Offering. Prudential's right to exercise the Residual Option will be suspended after March 15, 1993. However, this suspension will lapse if the Banks do not sell any shares of Common Stock by April 15, 1993. If the Banks sell any shares of Common Stock before April 15, 1993, the Residual Option will no longer be of any practical effect. If Prudential exercises either of the Options, it may sell the shares acquired upon such exercise in this Offering. Prudential has agreed with a group of CTGI's equipment lessors to allow them to share in up to half of the shares of ALC stock acquired by Prudential pursuant to the Residual Option under certain circumstances. Further, the Banks have agreed under certain circumstances to transfer to Prudential 10% of the shares subject to the Residual Option upon disposition of any shares of ALC stock owned by them. In addition, after each Bank has 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 has agreed to pay Prudential any additional proceeds received by it from the disposition of any shares of the ALC stock owned by it as a result of the August 1992 transactions and to give Prudential any remaining shares of such ALC stock. The Banks paid Prudential 10% of their net proceeds from the 1992 Equity Offering. In August 1992, Prudential entered into an agreement with ALC whereby Prudential agreed that neither it nor its affiliates would sell shares of ALC stock acquired pursuant to the Residual Option prior to the earlier to occur of (i) June 1, 1993, or (ii) the Company experiencing a significant decrease in results of operations from previous levels, or in the event of a bankruptcy proceeding, except (a) in a public offering, (b) pursuant to Rule 144 promulgated by the Commission pursuant to the Securities Act of 1933, as amended (the "Securities Act"), (c) pursuant to its agreement with CTGI's equipment lessors, (d) to certain types of institutional buyers, so long as no one institutional buyer (and its affiliates) purchases more than 10% of the shares subject to the Residual Option and so long as the institutional buyers do not act in concert, or (e) to any affiliates of Prudential, provided that such affiliates agree to the foregoing sales restrictions. In addition, the Banks have agreed with ALC that the Banks will not sell any shares of ALC stock owned by them prior to July 31, 1993 except (a) for the 3,000,000 shares of Common Stock sold in the 1992 Equity Offering, 35 133 (b) pursuant to exercise of the Options, (c) in a public offering or (d) if the Company experiences a significant decrease in results of operations from previous levels or in the event of a bankruptcy proceeding. ALC has agreed with the Banks that it will 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 hold less than 8,000,000 shares of Common Stock or Common Stock equivalents. ALC has agreed with Prudential that it will 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. ALC has agreed with Prudential and the Banks that any proceeds of Common Stock sales prior to the dates indicated, in the two prior sentences, respectively, will not be used by ALC to acquire any business except one which is related to the business conducted by Allnet. Pursuant to a Registration Rights Agreement dated June 4, 1990, the Banks, Prudential, General Electric and Grumman Hill (and their transferees of securities covered by such agreement) each have the right to require ALC to register the 1990 Warrants, shares of Common Stock issuable upon exercise of the 1990 Warrants, shares of Common Stock issuable upon conversion of the Class B Preferred and Class C Preferred, and the 11,324,000 shares of Common Stock now held by the Banks, in each case held by such party, to permit a public sale of such shares under the Securities Act of 1933 and applicable state securities laws. The parties may demand, in the aggregate, six such registrations, and may join in an unlimited number of ALC initiated registrations. Pursuant to an Assignment of Rights Agreement dated August 6, 1992 among the Banks and ALC (the "Assignment of Rights"), ALC agreed to register the 1992 Equity Offering and to prepare and file the registration statement of which this Prospectus is a part and applicable state securities laws within 90 days after the consummation of the 1992 Equity Offering, to permit a public sale by the Banks from time to time of the shares of Common Stock held by the Banks after the 1992 Equity Offering or issuable to them upon conversion of the Class B Preferred and Class C Preferred, subject to certain lock-up restrictions discussed in "Risk Factors -- Future Sales of Common Stock" and "Shares Eligible For Future Sale." Also in the Assignment of Rights, ALC has given the Banks the right to participate on a preemptive basis in certain future private issuances of Common Stock by ALC. Pursuant to the Registration Rights Agreement, both Prudential and General Electric have included in the registration statement of which this Prospectus is a part shares of Common Stock which may be sold by them upon exercise of their 1990 Warrants. CTI TRANSACTIONS Allnet leases a significant portion of its digital service transmission capacity from CTGI pursuant to a Digital Service Agreement dated February 10, 1989. The Digital Service Agreement provided for a minimum monthly payment of $1.5 million through November, 1992 and $1.2 million through the ten year term of the Digital Service Agreement. As part of the 1990 phase of the Refinancing, Allnet and CTGI entered into an Amendment which amended the digital phase of the Service Agreement to (a) provide for a credit to reduce the service cost payable by Allnet to CTGI by $500,000 per month for the period from May 1, 1990 to December 31, 1990 and by $700,000 per month thereafter; (b) if necessary, commencing in June 1991, adjust the credit further to reflect the market rate at the time of such adjustment, provided that the credit shall not be less than $700,000 per month; (c) give Allnet the right to relocate its circuits out of available inventory on the CTGI owned system; and (d) terminate the Digital Service Agreement on June 1, 1999. A further favorable market rate adjustment of $114,000 has been applied to the monthly credit, effective June 1991 through May 1993. On August 10, 1989, ALC executed a note with CTI for financing of $5.0 million. On September 29, 1989 ALC renewed the existing note and executed a second note for an additional $15.0 million. The notes were to expire the earlier of September 25, 1990 or the date on which ALC secured additional financing or consummated a private debt placement. As part of the 1990 phase of the Refinancing, the notes were restructured into the Restructured Promissory Note (as defined in "The Refinancing"), a single promissory note from Allnet in the amount of $20.0 million. During the third quarter of 1991, the Restructured Promissory Note owed to CTI was sold to the Banks. In June and August 1992, Allnet and the Banks extended the due date on the Restructured Promissory Note, and certain defaults and covenants were waived to permit Allnet and ALC to make the Note Exchange Offer. See "The Refinancing." In June 1992, Allnet bought certain assets from CTI for $2.0 million, which CTI then paid to the Banks to be applied against debt owed by CTI to the Banks. In this purchase, Allnet purchased from CTI the 36 134 "Founder's Refund" for $1.2 million and a promissory note with a balance of approximately $0.8 million in principal and interest payable from Melvyn Goodman, secured by 53,777 shares of Class A Preferred. The "Founder's Refund" is the right set forth in that certain lease agreement between MSM Associates (as successor to Mutual Signal Corporation by assignment), and Allnet (as successor to Lexitel Corporation by merger), dated December 5, 1985, that provides that Allnet shall receive an annual payment based upon the net cash flow and revenue from the fiber optic system of MSM Associates, subject, however to MSM Associates having sufficient cash or cash equivalents on hand at April 30 of the following year, the date when such annual payment is due. Allnet in turn assigned the Founder's Refund to CTGI for $1.2 million in prepaid transmission services. The promissory note and related interest payable was paid in full upon closing of the 1992 Equity Offering. In December 1985, a predecessor to Allnet entered into a fiber optic lease agreement with Mutual Signal Corporation for an initial term of twelve years for capacity over a fiber optic system linking major metropolitan centers in Michigan. In 1989, CTI acquired all of the outstanding stock of Mutual Signal Corporation and subsequently had the fiber optic lease agreement assigned to MSM Associates of which Mutual Signal Corporation is a 50.0% owner and general partner. In 1991 and 1992, Allnet paid approximately $3.7 million and $2.3 million, respectively, for services under that lease. As part of the 1992 phase of the Refinancing, MSM Associates and Allnet entered into an amendment to the lease to provide Allnet certain credits reducing the service cost payable by Allnet thereunder and to provide MSM Associates with a 120-day option to further amend the lease to (a) give Allnet the right to request reconfiguration of its circuits thereunder; (b) provide that Allnet will be paid commissions and act as consultant under certain circumstances; and (c) provide an option to extend the lease. This option to amend was exercised by MSM Associates effective November 1992. Also as part of a 1992 restructuring of CTI, CTI transferred its interest in Mutual Signal Corporation to TIFD VII, Inc., a wholly owned indirect subsidiary of General Electric Capital Corporation. 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 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 the Note Exchange Offer, through subsequent purchases, General Electric held $23.8 million in principal amount of the outstanding Original and Replacement Debentures (as defined in "The Refinancing") (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 additional 1992 Warrants (as defined in "The Refinancing"), which, when added to the 1990 Warrants, give General Electric the right to purchase up to a total of 3,799,950 shares of Common Stock. General Electric subsequently purchased 500,000 shares of Common Stock in the 1992 Equity Offering. 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 have subsequently been sold by General Electric). 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 the Common Stock pursuant to warrants for same. Pursuant to the 1990 Note Agreement between ALC and General Electric, as amended in August 1992, General Electric also has 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. 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. General Electric continues to have the right to nominate one person for election to the ALC Board of Directors based on the terms of the 1990 Note Agreement, as amended in August 1992, due to its equity ownership. 37 135 FINANCIAL SERVICES Richard D. Irwin has been a director of CTI since June 1986 and is President of Grumman Hill. See "Compensation Committee Interlocks and Insider Participation." CLASS A EXCHANGE In an Exchange Agreement dated September 8, 1992 (the "Class A Exchange Agreement"), the members of the Class A Preferred Group agreed to exchange all or any portion of the shares of Class A Preferred held by them (2,144,044 shares) (with accrued and unpaid dividends thereon) for shares of Common Stock, according to a formula based on the $5.50 offering price for the shares of Common Stock being sold in the 1992 Equity Offering and the then present redemption value for the Class A Preferred being exchanged at a 40% discount. Pursuant to the Class A Exchange Agreement, ALC was allowed to choose the amount of shares of Class A Preferred to be exchanged by the Class A Preferred Group, which were exchanged for shares of Common Stock. As part of the 1992 Equity Offering, ALC exchanged 2,144,044 shares of Class A Preferred for the 6,399,227 shares of Common Stock the Class A Preferred Group sold in the 1992 Equity Offering. 38 136 THE REFINANCING In 1990, the Company began an overall refinancing of substantially all of its funded debt. The 1990 phase provided for a two year period (until June 1992) during which the Company could attempt to improve operations without the near term demands on cash flow associated with most elements of its funded debt. As a result of the 1990 phase, approximately $78 million of debt was due to be paid between June and December 1992. Although it was the Company's expectation that a subsequent renegotiation of these obligations in or before June 1992 would be required, no specific arrangements or agreements were made to that end as part of the 1990 phase. In October 1992, the Company completed the second phase (the 1992 phase) of the Refinancing. The concluding actions taken in the 1992 phase, which were taken in conjunction with an overall restructuring of CTI, have allowed the Company to substantially defer or reduce its debt service obligations. ACTIONS TAKEN IN THE 1990 PHASE: A renewal of the $30.0 million accounts receivable Revolving Credit Facility (the "Revolving Credit Facility") with Foothill Capital Corporation until June 3, 1992 and the assignment of a 40% participation interest in the Revolving Credit Facility to Prudential. The issuance to DSC, a major switch vendor, of its Participating Warrants in exchange for concessions with respect to lease payments for switching equipment. The purchase of $7.2 million of notes of the Company (the "1990 Notes") pursuant to Note and Warrant Purchase Agreements (the "1990 Note Agreements") by Prudential, General Electric, Grumman Hill and Grumman Hill, L.P. (collectively, the "1990 Investors"), and the issuance to the 1990 Investors of Warrants (the "1990 Warrants") to purchase up to 4,708,999 shares of the Common Stock at $3.00 per share. The execution of an Additional Financing Agreement with the 1990 Investors, whereby the Company could seek, and the 1990 Investors had the option of providing, up to $5.0 million of additional financing on substantially the same terms as those contained in the 1990 Note Agreements. The extension until June 4, 1992 of the $20.0 million loan (the "Restructured Promissory Note") from CTI to Allnet, coupled with the forgiveness of certain interest payments and fees thereon and a lower interest rate effective January 1, 1991. The Restructured Promissory Note was subsequently sold by CTI to the Banks. The modification of a significant transmission contract between Allnet and CTGI, then a wholly owned subsidiary of CTI. The issuance to CTI of 716,200 shares of the new Class D Preferred of ALC (which was subsequently converted to 14,324,000 shares of Common Stock) in exchange for concessions described above and the one-time waiver by CTI of certain anti-dilution rights associated with its shares of Class B Preferred and Class C Preferred. The agreement by the holders of approximately 96% of the outstanding Original Debentures (as defined below) to reschedule interest and principal payment requirements and to waive certain defaults. The agreement with three holders of the Class A Preferred, who held approximately 86% of the then outstanding Class A Preferred, providing for, under certain circumstances, the redemption of shares of Class A Preferred below the otherwise applicable mandatory redemption price, and the modification of the mandatory redemption schedule for all Class A Preferred. ACTIONS TAKEN IN THE 1992 PHASE: The extension to June 30, 1993 of the Revolving Credit Facility with the borrowing rates reduced, the termination of Prudential's participation interest in the Revolving Credit Facility, and the sale of a participation interest to Star Bank, N.A. 39 137 Further amendment of lease agreements with a major switch vendor, pursuant to which the vendor agreed to amortize the $9.9 million balance due June 1, 1992 under existing equipment leases over the subsequent twenty-four months with no change in the current interest rate of 14.0%. The reduction of the exercise price on the 1990 Warrants to $2.00 per share. The due date of approximately $4.6 million (including accrued and unpaid interest through March 31, 1991 added to principal) in principal amount of the 1990 Notes issued to the 1990 Investors other than Prudential was extended to June 30, 1993 and the interest rate on such 1990 Notes was reduced from 15% to 13% per annum, all effective as of August 7, 1992. Prudential was paid in full on its 1990 Note but continues to hold the 1990 Warrants. The termination of the Additional Financing Agreement, which had not been utilized. The amendment and restatement of the Loan Agreement which governs the Restructured Promissory Note and the extension of the Restructured Promissory Note to June 30, 1995 with quarterly principal payments commencing on September 15, 1992 and additional annual payments if the Company meets certain excess cash tests and a $5.0 million principal prepayment made in August 1992. The payment of $2.0 million for the purchase of an $0.8 million note from a member of the Class A Preferred Group, which note was secured by 53,777 shares of the Class A Preferred, as well as for the purchase of a certain Founders Refund right, which right was used to acquire $1.2 million of prepaid transmission capacity from CTGI. The transfer to the Banks of the 14,324,000 shares of Common Stock, 1,000,000 shares of Class B Preferred, and 1,000,000 shares of Class C Preferred held by CTI in exchange for the release of certain portions of CTI's obligations to each of the Banks. The Class B Preferred and Class C Preferred are convertible into 3,796,000 shares of Common Stock. The completion of an exchange offer (the "Note Exchange Offer") pursuant to which approximately 99% of the Original Debentures, the 11 7/8% Senior Subordinated Debentures of ALC due December 31, 1995 (the "Replacement Debentures") and the PIK Debentures (the Original Debentures, the Replacement Debentures and the PIK Debentures are collectively, the "Debentures" and the holders of the Debentures are collectively referred to as "Debentureholders") were exchanged for 11 7/8% Subordinated Notes due June 30, 1999 (the "1992 Notes") and warrants (the "1992 Warrants") to purchase shares of Common Stock at an exercise price of $5.00 per share of Common Stock. The 1992 Notes have a redemption schedule which provides for the mandatory equal quarterly redemption of 6.25% of principal beginning on September 30, 1995 through June 30, 1999 and, under certain circumstances, must be redeemed earlier. The Class A Exchange. See "Certain Relationships and Related Transactions -- Class A Exchange." ACTIONS IN FURTHERANCE OF THE REFINANCING: In October 1992, an equity offer (the "1992 Equity Offering") was completed pursuant to which the Banks, the Class A Preferred Group and Kansas City Southern Industries, Inc. sold an aggregate of 9,863,600 shares of Common Stock at $5.50 per share. ALC did not receive any of the proceeds from the sale of the shares of Common Stock in the 1992 Equity Offering. In October 1992, the $0.8 million note due to the Company by a member of the Class A Preferred Group was paid in full. In December 1992, General Electric, Grumman Hill and Grumman Hill, L.P. were paid in full on their 1990 Notes as amended and replaced in August 1992, but continue to hold the 1990 Warrants. 40 138 SELLING STOCKHOLDERS The Selling Stockholders consist of 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"), General Electric, Prudential and DSC. The following chart sets forth the number of shares of Common Stock, Class B Preferred and Class C Preferred held by each of the Selling Stockholders indicated below as of the date of this Prospectus and the approximate maximum number of shares of Common Stock to be offered in the Offering by each of the parties indicated below. See also "Principal Stockholders."
SHARES OF SHARES OF COMMON STOCK COMMON STOCK TO BE OFFERED IN PERCENTAGE OF HELD PRIOR SHARES OF SHARES OF THE OFFERING OUTSTANDING TO CLASS B CLASS C (SUBJECT TO COMMON STOCK SELLING STOCKHOLDER THE OFFERING PREFERRED(1) PREFERRED(2) ADJUSTMENT)(1)(2) OWNED AFTER OFFERING - --------------------------- ------------ ------------ ------------ ------------------- --------------------- NationsBank of Texas, N.A...................... 3,893,866 343,860 343,860 5,199,159 0% The First National Bank of Chicago.................. 2,781,333 245,614 245,614 3,713,684 0 CoreStates Bank, N.A....... 1,827,735 161,403 161,403 2,440,421 0 National Westminster Bank USA...................... 1,589,333 140,351 140,351 2,122,105 0 First Union National Bank of North Carolina........ 1,231,733 108,772 108,772 1,644,631 0 Trustees of General Electric Pension Trust... 4,419,950 -- -- 2,305,105 6.6(3) The Prudential Insurance Company of America....... 1,975,804(4) -- -- 1,975,804(4) 0 DSC Communications Corporation.............. 100,000 -- -- 100,000 0 ------------ ------------ ------------ ------------------- --- Total.................... 17,819,754 1,000,000 1,000,000 19,500,909 6.6% ------------ ------------ ------------ ------------------- --- ------------ ------------ ------------ ------------------- ---
(1) Each Share of Class B Preferred is convertible into 1.898 shares of Common Stock, subject to adjustment under certain circumstances. (2) Each share of Class C Preferred is convertible into 1.898 shares of Common Stock, subject to adjustment under certain circumstances. (3) Includes 1,494,845 shares of Common Stock to be issued upon the exercise of 1992 Warrants. See "Certain Relationships and Related Transactions -- Transactions with General Electric and Prudential." (4) Represents shares which Prudential has the right to acquire by exercise of 1990 Warrants. In addition, Prudential has the right to acquire, and may offer in this Offering, up to all shares held by the Banks pursuant to the Stock Option and Residual Option. In addition to holding a majority of the Common Stock in the aggregate and all of the Class B Preferred and Class C Preferred, the Banks hold the Restructured Promissory Note. See "The Refinancing." The holding by each Bank of Common Stock, Class B Preferred and Class C Preferred is not to be construed as a recommendation by any Bank of the investment quality of the Common Stock and does not imply that any Bank will assist in meeting any future financial requirements of the Company. The shares of Common Stock being sold by the Banks have been included in this Prospectus pursuant to certain registration rights assigned to the Banks as part of the CTI restructuring in August 1992. See "Certain Relationships and Related Transactions -- Banks and CTI Stock Ownership in the Company." The shares of Common Stock to be issued to Prudential and General Electric upon the exercise of the Participating Warrants and which are to be registered hereunder have been included in this Prospectus pursuant to the Registration Rights Agreement among Prudential, General and ALC (and certain other parties) dated June 4, 1990. The shares of Common Stock to be issued to DSC upon the exercise of the Participating Warrants and which are to be registered hereunder have been included in this Prospectus pursuant to the Registration Rights Agreement between DSC and ALC dated June 1, 1990. 41 139 PRINCIPAL STOCKHOLDERS The following table sets forth information regarding beneficial ownership of the stock of ALC as of February 15, 1993 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 NUMBER OF NUMBER OF NUMBER OF PERCENTAGE SHARES OF SHARES OF SHARES OF SHARES OF OF COMMON STOCK CLASS A CLASS B CLASS C VOTING POWER NAME AND ADDRESS OF (% OF PREFERRED PREFERRED PREFERRED OF ALL BENEFICIAL OWNER CLASS)* (% OF CLASS)* (% OF CLASS)* (% OF CLASS)* STOCK* - ------------------------------------------ ------------ ------------- ------------- ------------- ------------ Trustees of General Electric Pension Trust................................... 4,419,950(1) -- -- -- 14.0% c/o G.E. Investments Corp. (15.9%) 3003 Summer Street Stamford, CT 06904 The Prudential Insurance Company of America.............................. 13,299,804(2)(3) -- 1,000,000(3) 1,000,000(3) 57.5% Prudential Plaza (51.4%) (100%) (100%) 751 Broad Street Newark, NJ 07102 NationsBank of Texas, N.A.(4)............. 3,893,866(4) -- 343,860(4) 343,860(4) 18.7% 1201 Main St., 12th Floor (16.3%) (34.4%) (34.4%) Dallas, TX 75202 The First National Bank of Chicago(4)..... 2,781,333(4) -- 245,614(4) 245,614(4) 13.4% One First National Plaza (11.6%) (24.6%) (24.6%) Suite 0321, 19th Floor Chicago, IL 60670 National Westminster Bank USA(4).......... 1,589,333(4) -- 140,351(4) 140,351(4) 7.6% 175 Water Street, 27th Floor (6.6%) (14.0%) (14.0%) New York, NY 10038 CoreStates Bank, N.A.(4).................. 1,827,735(4) -- 161,403(4) 161,403(4) 8.8% 1500 Market Street (7.6%) (16.1%) (16.1%) Center Square West, 15th Floor Philadelphia, PA 19102 First Union National Bank of North Carolina(4)....................... 1,231,733(4) -- 108,772(4) 108,772(4) 5.9% 301 South College Street (5.1%) (10.9%) (10.9%) Charlotte, NC 28288 Richard D. Irwin.......................... 815,646(5) 5,000 -- -- 2.9% 15 Ketchum Street (3.3%) (1.4%) Westport, CT 06880 Grumman Hill Investments, L.P............. 639,155(6) -- -- -- 2.2% 15 Ketchum Street (2.6%) Westport, CT 06880 Grumman Hill Associates, Inc.............. 103,490( *)(7) -- -- -- ** 15 Ketchum Street Westport, CT 06880 Saulene M. Richer......................... 30,166(**) 115,432 ** 300 Walnut, No. 183 (32.4%) Des Moines, IA 50309 David Gale(8)............................. -- 35,386(9) -- -- ** 167 Dune Road (9.9%) Bridgehampton, N.Y. 11932 Delta Dividend Group, Inc.(8)............. -- 31,472 -- -- ** 167 Dune Road (8.8%) Bridgehampton, N.Y. 11932 FMR Corp.(10)............................. 1,965,700( )(12) -- -- -- 7.1% 82 Devonshire Street (8.2%) Boston, MA 02109 Edward C. Johnson 3d(10).................. 1,965,700( )(12) -- -- -- 7.1% 82 Devonshire Street (8.2%) Boston, MA 02109
42 140
APPROXIMATE NUMBER OF NUMBER OF NUMBER OF NUMBER OF PERCENTAGE SHARES OF SHARES OF SHARES OF SHARES OF OF COMMON STOCK CLASS A CLASS B CLASS C VOTING POWER NAME AND ADDRESS OF (% OF PREFERRED PREFERRED PREFERRED OF ALL BENEFICIAL OWNER CLASS)* (% OF CLASS)* (% OF CLASS)* (% OF CLASS)* STOCK* - ------------------------------------------ ------------ ------------- ------------- ------------- ------------ Fidelity Management & Research Company(10)............................. 1,727,200(13) -- -- -- 6.2% 82 Devonshire Street (7.2%) Boston, MA 02109 John M. Zrno.............................. 402,246(14) 1,667(**) -- -- 1.4% Suite 350 (1.7%) 30300 Telegraph Road Bingham Farms, MI 48025 Marvin C. Moses........................... 386,700(15) 1,667(**) -- -- 1.4% Suite 350 (1.6%) 30300 Telegraph Road Bingham Farms, MI 48025 Richard J. Uhl............................ 30,200( )(16) -- -- -- ** One Thousand RIDC Plaza Pittsburgh, PA 15238 Michael E. Faherty........................ 30,000( )(17) -- -- -- ** 15301 Dallas Parkway, Suite 600 Dallas, TX 75248 William H. Oberlin........................ 392,700(18) 1,666(**) -- -- 1.4% Suite 350 (1.6%) 30300 Telegraph Road Bingham Farms, MI 48025 Gregory M. Jones.......................... 44,493( )(19) -- -- -- ** Suite 350 30300 Telegraph Road Bingham Farms, MI 48025 Connie R. Gale............................ 53,302( )(20) -- -- -- ** Suite 350 30300 Telegraph Road Bingham Farms, MI 48025 All current executive officers and directors as group (17 persons)......... 2,450,342(21) 10,000 -- -- 8.1% (9.3%) (2.8%)
- ------------------------- * Percentage calculation based on 23,918,780 shares of Common Stock, 355,956 shares of Class A Preferred, 1,000,000 shares of Class B Preferred, and 1,000,000 shares of Class C Preferred, issued and outstanding on February 15, 1993, 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) Includes 3,799,950 shares of Common Stock which may be acquired pursuant to the exercise of outstanding warrants. (2) Includes 1,975,804 shares of Common Stock which may be acquired pursuant to the exercise of outstanding warrants. (3) The holdings of Prudential include all shares held by the Banks which may be acquired pursuant to the exercise of outstanding stock options, as follows: (a) 1,000,000 shares of Common Stock pursuant to the Stock Option; and (b) 10,324,000 shares of Common Stock, 1,000,000 shares of Class B Preferred and 1,000,000 shares of Class C Preferred pursuant to the Residual Option. (4) Shares received on August 18, 1992 pursuant to a conveyance from CTI. (5) Includes 153,163 shares of Common Stock which may be acquired pursuant to the exercise of outstanding stock options held by Grumman Hill, L.P. and 622,483 shares of Common 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 Common Stock which may be acquired pursuant to the exercise of outstanding warrants and 153,163 shares of Common Stock which may be acquired pursuant to the exercise of outstanding stock options. (7) These shares of Common Stock may be acquired pursuant to the exercise of outstanding warrants. (8) Based on information set forth in Amendment No. 2 to Statement on Schedule 13D, dated February 11, 1993, filed with the Securities and Exchange Commission. (9) Includes 31,472 shares of Class A Preferred held by Delta Dividend Group, Inc., which are deemed to be beneficially owned by Mr. Gale, its sole executive officer, the sole director and the controlling stockholder. (10) Based on information set forth in a Schedule 13G, dated February 14, 1993, filed with the Securities and Exchange Commission. 43 141 (11) Includes all shares held by Fidelity Management & Research Company and by Fidelity Management Trust Company, which are wholly-owned subsidiaries of FMR Corp. Mr. Johnson is the Chairman of the Board and a member of a controlling group with respect to FMR Corp. (12) Fidelity Management Trust Company beneficially owns 238,500 shares as a result of its serving as investment manager of several institutional accounts. (13) Shares held by Fidelity Management & Research Company are beneficially owned as a result of its acting as investment adviser to several investment companies registered under Section 8 of the Investment Company Act of 1940. (14) Includes 399,806 shares of Common Stock which Mr. Zrno has the right to acquire pursuant to the exercise of outstanding stock options, and 800 shares of Common Stock which Mr. Zrno's wife and mother-in-law own jointly (Mr. Zrno disclaims beneficial interest as to these shares). (15) Includes 377,700 shares of Common Stock which Mr. Moses has the right to acquire pursuant to the exercise of outstanding stock options, 3,000 shares of Common Stock which Mr. Moses owns as custodian for his children under UGMA and 1,000 shares of Common Stock which Mr. Moses' daughter owns (Mr. Moses disclaims beneficial interest as to the latter 1,000 shares). (16) Includes 30,000 shares of Common Stock which Mr. Uhl has the right to acquire pursuant to the exercise of outstanding stock options. (17) Shares of Common Stock which Mr. Faherty has the right to acquire pursuant to the exercise of outstanding stock options. (18) Includes 377,700 shares of Common Stock which Mr. Oberlin has the right to acquire pursuant to the exercise of outstanding stock options, 2,000 shares of Common Stock which Mr. Oberlin owns as custodian for his daughter under UGMA and 2,000 shares of Common Stock which Mr. Oberlin's daughter owns (Mr. Oberlin disclaims beneficial interest as to the latter 2,000 shares). (19) Includes 43,551 shares of Common Stock which Mr. Jones has the right to acquire pursuant to the exercise of outstanding stock options. (20) Includes 49,695 shares of Common Stock which Ms. Gale has the right to acquire pursuant to the exercise of outstanding stock options. (21) Includes 1,744,647 shares of Common 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 Common 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. 44 142 DESCRIPTION OF CAPITAL STOCK GENERAL The authorized capital stock of ALC consists of 200,000,000 shares of Common Stock, par value $0.01, of which 23,918,780 shares are issued and outstanding; 2,500,000 shares of Class A Preferred, $0.01 par value, of which 355,956 shares are issued and outstanding; 1,000,000 shares of Class B Preferred, $0.01 par value, of which 1,000,000 shares are issued and outstanding; 1,000,000 shares of Class C Preferred, $0.01 par value, of which 1,000,000 shares are issued and outstanding; and 14,783,800 shares of Preferred Stock (the "Preferred Stock"), $0.01 par value, of which no shares are issued and outstanding. COMMON STOCK. The holders of Common Stock (i) are entitled to vote with one share per vote; (ii) have equal ratable rights to dividends from funds legally available thereof if, as and when declared by the Board of Directors; (iii) are entitled to share ratably in any distribution to holders of Common Stock upon liquidation of ALC; and (iv) do not have preemptive rights (except for certain pre-emptive rights granted by contract to the Banks). Common Stock is not convertible or redeemable. Dividends may not be paid on Common Stock if (i) any dividends are due on, or ALC has any past-due obligation to redeem, Preferred Stock, Class A Preferred, Class B Preferred or Class C Preferred; or (ii) a dividend is not permissible under the terms of the Indenture Agreement governing the 1992 Notes. ALC is also restricted from paying dividends by other agreements entered into in connection with the Refinancing. Since its inception, ALC has not declared or paid dividends on the Common Stock. The Board of Directors is authorized to issue additional shares of the authorized Common Stock without stockholder approval. Accordingly, holders of Common Stock may be subject to potential future dilution of the value of the Common Stock they own or have the right to acquire. Pursuant to the terms of the Certificate, ALC will exchange 3,796,000 shares of Common Stock, subject to adjustment, for the Class B Preferred and Class C Preferred owned by the Banks, and ALC is registering 2,305,105 shares of Common Stock to be issued upon the exercise of 1990 Warrants owned by General Electric, 1,975,804 shares of Common Stock to be issued upon the exercise of 1990 Warrants owned by Prudential and 100,000 shares of Common Stock to be issued upon the exercise of Participating Warrants owned by DSC. See "Selling Stockholders." CLASS A PREFERRED. The Class A Preferred was entitled to quarterly, cumulative (without interest) dividends of $0.40 per share commencing with the quarter ended September 30, 1987 through the quarter ended December 31, 1991. Thereafter, dividends on the Class A Preferred are calculated according to a formula set forth in the Certificate using an adjusted prime rate of interest based on the prime rate published in the Wall Street Journal on the first business day of a given quarterly dividend period. Under the Delaware General Corporation Law, ALC may pay dividends only out of surplus or net profits for the fiscal year in which the dividends are declared and/or the preceding fiscal year. ALC paid $1.5 million in cash dividends to the Class A Preferred holders in 1988 in connection with the purchase by CTI of the Class B Preferred and Class C Preferred. The Certificate provides that ALC must redeem the shares of Class A Preferred at $20.00 per share plus accrued dividends. If ALC does not make a scheduled redemption, the Class A Preferred holders can elect to convert the amount of Class A Preferred which should have been redeemed (plus accrued and unpaid dividends thereon) to Common Stock. As of December 31, 1992, dividends accrued on the Class A Preferred were $2.9 million. Future redemption obligations relating to the Class A Preferred consist of one scheduled payment of approximately $7.1 million (plus accrued and unpaid dividends on the shares then being redeemed) at December 31, 1996. As of February 15, 1993, the remaining shares of Class A Preferred were held by 1,787 stockholders. Holders of the Class A Preferred are entitled to a number of votes equal to .166 of one vote per share of Class A Preferred. CLASS B PREFERRED. Each share of Class B Preferred is convertible at any time at the option of the holder into 1.898 shares of Common Stock. The conversion of all or any part of the Class B Preferred could dilute the value of the Common Stock. The holders of the Class B Preferred are entitled to a preference in liquidation over holders of any other class of capital stock in amounts ranging from $19.50 during the period from July 1, 1991 to June 30, 1992 to $22.50 after June 30, 1993. No dividends are payable on the Class B Preferred. Holders of Class B Preferred are entitled to a number of votes equal to the number of shares of Common Stock into which their shares are convertible. Pursuant to the Certificate, ALC will exchange 1,898,000 shares 45 143 of Common Stock, subject to adjustment under certain circumstances, for the Class B Preferred owned by the Banks if requested to do so by the Banks; the Banks hold all of the outstanding Class B Preferred. See "Selling Stockholders." CLASS C PREFERRED. Each share of Class C Preferred is convertible at any time at the option of the holder into 1.898 shares of Common Stock. The conversion of all or any part of the Class C Preferred could dilute the value of the Common Stock. The holders of the Class C Preferred are entitled to a preference in liquidation over holders of any other class of capital stock in amounts ranging from $19.50 during the period from July 1, 1991 to June 30, 1992 to $22.50 after June 30, 1993. No dividends are payable on the Class C Preferred. Holders of Class C Preferred are entitled to a number of votes equal to the number of shares of Common Stock into which their shares are convertible. Pursuant to the Certificate, ALC will exchange 1,898,000 shares of Common Stock, subject to adjustment under certain circumstances, for the Class C Preferred owned by the Banks if requested to do so by the Banks; the Banks hold all of the outstanding Class C Preferred. See "Selling Stockholders." PREFERRED. The Board of Directors is entitled to issue up to 14,783,800 shares of Preferred Stock without stockholder approval. Preferred Stock can be issued from time to time in one or more classes containing one or more series. The Board of Directors has full authority to determine the features of such stock, including the dividend rate, whether such stock will be redeemable (and, if so, the price and terms for redemption), any preferential amount payable to holders in the event of liquidation, whether such stock will be convertible (and, if so, the terms and conditions of such conversion), and whether and to what extent voting rights will attach to such stock. Such Preferred Stock may be issued with extraordinary voting or other rights which could have an anti-takeover effect or could be issued in an attempt to discourage or prevent a takeover bid. Accordingly, holders of Common Stock may be subject to possible future dilution of the value or other adverse effects which might result from the issuance of additional Preferred Stock. CLASSIFICATION OF THE BOARD The Board of Directors of ALC consists of seven director positions. The Class A Preferred holders are entitled to elect one member of the Board; the Class B Preferred holders are entitled to elect two members of the Board; the Class C Preferred holders are entitled to elect one member of the Board; the Common Stock holders are entitled to elect two members of the Board; and all of the stockholders as a class are entitled to elect one member of the Board. If all of the shares of Class B Preferred and/or Class C Preferred are exchanged for Common Stock for sale in this Offering, ALC intends to take appropriate action whereby all provisions in the Certificate relating to such class of stock will be eliminated. If this occurs, the directorships to be filled by vote of the holders of each such class would then be filled by vote of all stockholders voting as one class. Until that happens, if the Banks were to act in concert, the Banks would have the power to elect six directors to the Board. Further, Prudential has the right to acquire all shares of ALC stock owned by the Banks, and thus to acquire control of ALC. See "Risk Factors -- Control." Since the Certificate gives the holders of preferred stock the collective power to elect a majority of the Board, such holders could collectively prevent any change of control or other extraordinary corporate transaction (such as by way of a merger, reorganization, tender offer, sale or transfer of substantially all the assets, or liquidation) with respect to ALC. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, ALC will have outstanding 32,095,689 shares of Common Stock, without taking into account shares of Common Stock issuable upon exercise of outstanding options and warrants or issuable upon conversion of any preferred stock. All of these outstanding shares are freely tradable without registration or further registration under the Securities Act, except for any shares held by "affiliates" of ALC within the meaning of the Securities Act, which shares will be subject to the resale limitations of Rule 144 promulgated under the Securities Act ("Rule 144"). In addition, if ALC fails to redeem shares of Class A Preferred according to the mandatory redemption schedule, the Class A Preferred holders may elect to convert the shares which should have been redeemed, plus accrued and unpaid dividends thereon, to Common Stock. See "Description of Capital Stock." 46 144 ALC and its directors and officers, the Selling Stockholders in the 1992 Equity Offering (other than Michael P. Richer), General Electric, Grumman Hill and Grumman Hill L.P. have agreed not to offer, sell or otherwise dispose of any shares of Common Stock except in certain limited circumstances for a period of 180 days (or, in the case of the Banks, with respect to an underwritten public offering as to which a registration statement has become effective, 120 days) after October 16, 1992, the date of the prospectus relating to the 1992 Equity Offering without the prior written consent of Paine Webber Incorporated and Wheat, First Securities, Inc., acting as representatives of the underwriters who participated in the 1992 Equity Offering. Any underwriter who participates in a sale pursuant to this Prospectus may require additional agreements not to dispose of shares of Common Stock. Any such agreements will be described in a Prospectus Supplement. In general, under Rule 144 as currently in effect, any person (or persons whose shares are aggregated), including persons deemed to be affiliates, whose restricted securities have been fully paid for and held for at least two years from the later of the date of issuance by ALC or acquisition from an affiliate, may sell such securities in brokers' transactions or directly to market makers, provided that the number of shares sold in any three-month period may not exceed the greater of 1.0% of the then outstanding shares of Common Stock (approximately 320,957 shares immediately after the Offering) or the average weekly trading volume of the Common Stock on the American Stock Exchange during the four calendar weeks preceding the sale. Sales under Rule 144 are also subject to certain notice requirements and the availability of certain public information about the Company. After three years have elapsed from the later of the issuance or restricted securities by ALC or their acquisition from an affiliate, such securities may be sold without limitation by persons who are not affiliates under the rule. Sales of substantial amounts of Common Stock in the public market could adversely affect prevailing market prices and impair the Company's ability to raise capital at such times through the sale of its equity securities. See "Risk Factors -- Future Sales of Common Stock." PLAN OF DISTRIBUTION The Selling Stockholders may sell shares of Common Stock to or through underwriters or dealers, and also may sell shares of Common Stock directly to other purchasers or through agents. Each Prospectus Supplement will describe the method of distribution of the shares of Common Stock. The distribution of the shares of Common Stock may be effected from time to time in one or more transactions at a fixed price or prices, which may be changed, or at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. In connection with the sale of shares of Common Stock, underwriters may receive compensation from the Selling Stockholders or from purchasers of shares of Common Stock for whom they may act as agents in the form of discounts, concessions or commissions. Underwriters may sell shares of Common Stock to or through dealers, and such dealers may receive compensation in the form of discounts, concessions or commissions from the underwriters and/or commissions from the purchasers for whom they may act as agents. Underwriters, dealers and agents that participate in the distribution of shares of Common Stock may be deemed to be underwriters, and any discounts or commissions received by them from the Selling Stockholders and any profit on the resale of shares of Common Stock by them may be deemed to be underwriting discounts and commissions, under the Securities Act. Any such underwriter or agent will be identified, and any such compensation received from the Selling Stockholders will be described, in the Prospectus Supplement. Underwriters and agents who participate in the distribution of shares of Common Stock may be entitled under agreements which may be entered into by the Company to indemnification by the Company against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS The legality of the securities offered hereby has been passed upon for ALC by Jaffe, Raitt, Heuer & Weiss, Professional Corporation, Detroit, Michigan. 47 145 EXPERTS The consolidated financial statements of ALC Communications Corporation and consolidated subsidiary at December 31, 1992 and 1991, and each of the three years in the period ending December 31, 1992, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young, independent auditors, as set forth in their report thereon appearing elsewhere herein, and in the Registration Statement, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. 48 146 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS REPORT OF INDEPENDENT AUDITORS......................................................... F-2 CONSOLIDATED BALANCE SHEETS as of December 31, 1992 and 1991........................... F-3 CONSOLIDATED STATEMENTS OF OPERATIONS for the years ended December 31, 1992, 1991 and 1990..................................................... F-4 CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended December 31, 1992, 1991 and 1990..................................................... F-5 CONSOLIDATED STATEMENTS OF CLASS A PREFERRED STOCK AND STOCKHOLDERS' DEFICIT for the years ended December 31, 1992, 1991 and 1990........... F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 1992, 1991 and 1990..................................................... F-7
F-1 147 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 consolidated subsidiary as of December 31, 1992 and 1991, and the related consolidated statements of operations, cash flows, and preferred stock and stockholders' deficit for each of the three years in the period ended December 31, 1992. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of ALC Communications Corporation and consolidated subsidiary at December 31, 1992 and 1991, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1992, in conformity with generally accepted accounting principles. ERNST & YOUNG January 25, 1993 F-2 148 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, 1992 1991 ------------ ------------ (IN THOUSANDS) ASSETS Current Assets: Cash.................................................................. $ 112 $ 223 Accounts receivable, less allowance for doubtful accounts of $3,334,000 and $3,676,000 (Note C)................................................. 45,327 42,979 Other current assets.................................................. 3,000 1,875 ------------ ------------ Total Current Assets........................................... $ 48,439 $ 45,077 Fixed Assets: (Notes A, C & E) Communication systems................................................. $ 74,002 $ 70,384 Other equipment and leasehold improvements............................ 28,371 27,695 Construction in progress.............................................. 3,443 1,349 ------------ ------------ $105,816 $ 99,428 Less accumulated depreciation and amortization........................ 63,872 57,761 ------------ ------------ Total Fixed Assets............................................. $ 41,944 $ 41,667 Cost in excess of net assets acquired less accumulated amortization of $10,673,000 and $9,149,000 (Note A)................................... 50,317 51,841 Other assets............................................................ 2,566 2,261 ------------ ------------ Total Assets................................................... $143,266 $ 140,846 ------------ ------------ ------------ ------------ LIABILITIES, CLASS A PREFERRED STOCK AND STOCKHOLDERS' DEFICIT Current Liabilities: Accounts payable and accrued liabilities.............................. $ 15,403 $ 10,218 Accrued network costs................................................. 28,676 34,716 Taxes other than income............................................... 9,889 10,181 Revolving Credit Facility (Notes B & C)............................... 14,802 9,402 Notes payable, capitalized leases and other long-term debt (Notes B, C, E, & G)................................................ 11,417 42,616 Senior Subordinated Debentures (Notes B & C).......................... 29,640 Class A Preferred Stock (Notes B & D)................................. 1,018 ------------ ------------ Total Current Liabilities...................................... $ 80,187 $ 137,791 Notes payable, capitalized leases and other long-term debt (Notes B, C, E, & G)............................................................... 12,308 3,261 Subordinated Notes (Notes B & C)........................................ 61,983 Senior Subordinated Debentures (Notes B & C)............................ 39,660 Class A Preferred Stock, $0.01 par value; authorized -- 2,500,000 shares; issued and outstanding -- 356,000 and 2,500,000 shares, aggregate redemption value of $7,119,000 and $48,928,000 less discount of $364,000 and $2,994,000 plus accrued but undeclared dividends of $2,904,000 and $16,500,000 (Notes B & D).............................. 9,659 62,434 Stockholders' Deficit: Class B Preferred Stock, $0.01 par value; authorized, issued and outstanding -- 1,000,000 shares (Notes F & G)....................... 10 10 Class C Preferred Stock, $0.01 par value; authorized, issued and outstanding -- 1,000,000 shares (Notes F & G)....................... 10 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 -- 23,794,000 and 17,221,000 shares (Notes B, C & F).............................................................. 238 172 Capital in excess of par value........................................ 110,146 57,718 Paid-in capital -- Warrants (Notes C & E)............................. 17,022 8,913 Accumulated deficit................................................... (148,297) (169,123) ------------ ------------ Total Stockholders' Deficit.................................... $(20,871) $ (102,300) ------------ ------------ Total Liabilities, Class A Preferred Stock and Stockholders' Deficit........................................................... $143,266 $ 140,846 ------------ ------------ ------------ ------------
See notes to consolidated financial statements F-3 149 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, -------------------------------------- 1992 1991 1990 -------- -------- -------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Revenue................................................ $376,064 $346,873 $326,004 Operating Expenses: Cost of communication services, including amounts with related parties of $16,004,000, $18,000,000 and $22,553,000 (Note G).............................. $216,889 $212,716 $209,612 Sales, general and administrative.................... 107,294 97,964 102,838 Depreciation and amortization........................ 11,197 12,343 13,320 Financial restructuring.............................. 2,987 -------- -------- -------- Total Operating Expenses........................ $335,380 $323,023 $328,757 -------- -------- -------- Operating Income (Loss)......................... $ 40,684 $ 23,850 $ (2,753) Interest expense including amounts with related parties of $5,000,000, $4,640,000 and $2,887,000 (net of interest and other income (expense) of ($369,000), $278,000, and $675,000).............................. 17,158 18,128 21,250 Gain on sale of subsidiary............................. 4,360 -------- -------- -------- Income (Loss) before Income Taxes and Extraordinary Item................................................. $ 23,526 $ 5,722 $(19,643) Income taxes (Note H).................................. 9,700 3,005 -------- -------- -------- Income (loss) before Extraordinary Item................ $ 13,826 $ 2,717 $(19,643) Extraordinary item -- utilization of operating loss carryforwards (Note H)............................... 7,000 2,630 -------- -------- -------- Net Income (Loss)............................... $ 20,826 $ 5,347 $(19,643) -------- -------- -------- -------- -------- -------- Income (loss) per common and common equivalent share before extraordinary item (Note F)................... $ 0.43 $ (0.17) $ (2.29) -------- -------- -------- -------- -------- -------- Net income (loss) per common and common equivalent share (Note F)....................................... $ 0.74 $ (0.02) $ (2.29) -------- -------- -------- -------- -------- -------- Weighted average common and common equivalent shares... 22,141 17,216 11,074 -------- -------- -------- -------- -------- --------
See notes to consolidated financial statements F-4 150 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------ 1992 1991 1990 -------- -------- -------- (IN THOUSANDS) Operating Activities Net income (loss)............................................ $ 20,826 $ 5,347 $(19,643) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Gain from sale of subsidiary.............................. (4,360) Non-cash restructuring expense............................ 716 Depreciation expense...................................... 9,372 10,508 11,435 Amortization of intangible assets and bond discount....... 4,415 3,520 4,637 Accrued interest converted to debentures.................. 7,998 4,246 Loss on sale of assets.................................... 722 95 Gain on debenture retirement.............................. (59) (Increase) decrease in accounts receivable and other current assets.......................................... (3,371) 2,558 (4,485) Increase (decrease) in current liabilities................ (1,523) (2,774) 2,172 -------- -------- -------- Net Cash Provided by (Used in) Operating Activities..... $ 30,382 $ 27,252 $ (5,282) Financing Activities Proceeds from (payments on) Revolving Credit Facility (Notes B & C)............................................. $ 5,400 $ (9,896) $ 3,317 Proceeds from long-term debt................................. 1,321 7,707 Payments on long-term debt................................... (22,818) (12,562) (13,142) Proceeds from issuance of stock (Note F)..................... 607 109 738 Contract payment to the Class A Preferred Group (Note D)..... (1,286) Payment of stock issuance costs.............................. (620) Retirement of debentures (Note C)............................ (947) -------- -------- -------- Net Cash Used in Financing Activities..................... $(19,664) $(21,028) $ (1,380) Investing Activities Expenditures for fixed assets................................ $(10,254) $ (6,401) $ (5,108) Transfer lease security deposit to current................... 5,599 Change in other non-current assets........................... (596) (67) 686 Proceeds from sale of fixed assets........................... 21 125 353 Proceeds from sale of subsidiary............................. 5,234 -------- -------- -------- Net Cash Provided by (Used in) Investing Activities....... $(10,829) $ (6,343) $ 6,764 -------- -------- -------- Increase (Decrease) in Cash During Year................... $ (111) $ (119) $ 102 Cash at beginning of year...................................... 223 342 240 -------- -------- -------- Cash at end of year............................................ $ 112 $ 223 $ 342 -------- -------- -------- -------- -------- -------- Interest paid.................................................. $ 15,572 $ 9,945 $ 9,541 -------- -------- -------- -------- -------- -------- Income taxes paid.............................................. $ 1,862 $ 225 $ 0 -------- -------- -------- -------- -------- --------
See notes to consolidated financial statements F-5 151 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY CONSOLIDATED STATEMENTS OF CLASS A PREFERRED STOCK AND STOCKHOLDERS' DEFICIT YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
STOCKHOLDERS' DEFICIT ------------------------------------------------------------ CLASS A CLASS B CLASS C CLASS D COMMON PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK STOCK ---------------- --------------- --------------- --------------- ------ SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES ------ ------- ------ ------ ------ ------ ------ ------ ------ (IN THOUSANDS) Balance, December 31, 1989..................... 2,500 $52,007 1,000 $ 10 1,000 $ 10 2,747 Accretion of discount on Class A Preferred Stock........................................ 1,384 Employee stock purchases (Note F).............. 70 Accrued undeclared dividends on Class A Preferred Stock (Note D)..................... 4,000 Accretion of contract payment to the Class A Preferred Group.............................. 375 Issuance of Class D Preferred Stock (Note F)... 716 $7 Issuance of warrants (Note C).................. Conversion of Class D Preferred Stock to Common Stock (Note F)............................... (716) (7) 14,324 Net loss for the year ended December 31, 1990......................................... ------ ------- ------ ------ ------ ------ ------ -- ------ Balance, December 31, 1990..................... 2,500 $57,766 1,000 $ 10 1,000 $ 10 0 $0 17,141 Accretion of discount on Class A Preferred Stock........................................ 1,043 Employee stock purchases (Note F).............. 71 Accrued undeclared dividends on Class A Preferred Stock (Note D)..................... 4,000 Accretion of contract payment to the Class A Preferred Group.............................. 643 Exercise of Stock Options (Note F)............. 9 Net income for the year ended December 31, 1991......................................... ------ ------- ------ ------ ------ ------ ------ -- ------ Balance, December 31, 1991..................... 2,500 $63,452 1,000 $ 10 1,000 $ 10 0 $0 17,221 Accretion of discount on Class A Preferred Stock........................................ 860 Accrued undeclared dividends on Class A Preferred Stock (Note D)..................... 3,254 Accretion of contract payment to the Class A Preferred Group.............................. 268 Contract payment to the Class A Preferred Group........................................ (1,286) Exercise of Stock Options (Note F)............. 174 Issuance of warrants (Notes B & C)............. Repricing of warrants (Notes B & C)............ Conversion of Class A Preferred Stock to Common Stock (Notes B & D).......................... (2,144) (56,889) Issuance of Common Stock (Notes B & D)................................ 6,399 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 0 $0 23,794 ------ ------- ------ ------ ------ ------ ------ -- ------ ------ ------- ------ ------ ------ ------ ------ -- ------ PAID-IN CAPITAL -- WARRANTS CAPITAL IN ACCUM- ---------------- EXCESS ULATED AMOUNT SHARES AMOUNT PAR VALUE DEFICIT TOTAL ------ ------ ------- ---------- ---------- ---------- Balance, December 31, 1989..................... $ 27 660 $ 8,484 $ 68,174 $ (154,827) $ (78,122) Accretion of discount on Class A Preferred Stock........................................ (1,384) (1,384) Employee stock purchases (Note F).............. 1 308 309 Accrued undeclared dividends on Class A Preferred Stock (Note D)..................... (4,000) (4,000) Accretion of contract payment to the Class A Preferred Group.............................. (375) (375) Issuance of Class D Preferred Stock (Note F)... 709 716 Issuance of warrants (Note C).................. 4,809 429 429 Conversion of Class D Preferred Stock to Common Stock (Note F)............................... 143 (136) 0 Net loss for the year ended December 31, 1990......................................... (19,643) (19,643) ------ ------ ------- ---------- ---------- ---------- Balance, December 31, 1990..................... $171 5,469 $ 8,913 $ 63,296 $ (174,470) $ (102,070) Accretion of discount on Class A Preferred Stock........................................ (1,043) (1,043) Employee stock purchases (Note F).............. 1 79 80 Accrued undeclared dividends on Class A Preferred Stock (Note D)..................... (4,000) (4,000) Accretion of contract payment to the Class A Preferred Group.............................. (643) (643) Exercise of Stock Options (Note F)............. 29 29 Net income for the year ended December 31, 1991......................................... 5,347 5,347 ------ ------ ------- ---------- ---------- ---------- Balance, December 31, 1991..................... $172 5,469 $ 8,913 $ 57,718 $ (169,123) $ (102,300) Accretion of discount on Class A Preferred Stock........................................ (860) (860) Accrued undeclared dividends on Class A Preferred Stock (Note D)..................... (3,254) (3,254) Accretion of contract payment to the Class A Preferred Group.............................. (268) (268) Contract payment to the Class A Preferred Group........................................ Exercise of Stock Options (Note F)............. 2 605 607 Issuance of warrants (Notes B & C)............. 3,400 3,400 3,400 Repricing of warrants (Notes B & C)............ 4,709 4,709 Conversion of Class A Preferred Stock to Common Stock (Notes B & D).......................... 56,825 56,825 Issuance of Common Stock (Notes B & D)................................ 64 64 Stock Issuance costs........................... (620) (620) Net income for the year ended December 31, 1992......................................... 20,826 20,826 ------ ------ ------- ---------- ---------- ---------- Balance, December 31, 1992..................... $238 8,869 $17,022 $110,146 $ (148,297) $ (20,871) ------ ------ ------- ---------- ---------- ---------- ------ ------ ------- ---------- ---------- ----------
See notes to consolidated financial statements F-6 152 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Corporate Structure ALC Communications Corporation ("ALC") was incorporated in 1985 in order to accomplish the combination of Allnet Communication Services, Inc. and Lexitel Corporation ("Lexitel"). From August 1988 through August 1992, ALC was a majority owned subsidiary of Communications Transmission, Inc. ("CTI") (see Notes B & G). ALC and Allnet Communication Services Inc. are collectively referred to herein as the "Company" or "Allnet". In February 1988 the Company acquired all of the outstanding common stock of Clark Telecommunications, Inc. of South Bend, Indiana for $2.8 million in cash and notes. This company was operated as a wholly-owned subsidiary of Allnet under the name CTI Telecommunications, Inc. On January 30, 1990, Allnet sold CTI Telecommunications, Inc. in a cash transaction and recorded a gain of $4.4 million. Description of Business Allnet, the operating subsidiary of ALC, is a communications common carrier licensed by the Federal Communications Commission to offer long distance telephone and other communication services to both commercial and residential subscribers. Allnet provides twenty-four hour long distance telephone services terminating worldwide, utilizing a variety of transmission methods, primarily fiber optic facilities and digital microwave. Basis of Consolidation The consolidated financial statements include the accounts of ALC and its wholly-owned subsidiary, Allnet Communication Services, Inc. Significant 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. Amortization expense, including amortization of cost in excess of net assets acquired and cost associated with the issuance of debentures, was $1.8 million, $1.8 million and $1.9 million for the years ended December 31, 1992, 1991 and 1990, 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 Income taxes are presently accounted for in accordance with Accounting Principles Board Opinion No. 11. In February 1992, the Financial Accounting Standards Board issued Statement of Financial F-7 153 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Accounting Standards No. 109 "Accounting for Income Taxes." The Company will adopt this Statement as of January 1, 1993, the required implementation date. Application of the new rules as of January 1, 1993, will result in the recording of a net deferred tax asset of approximately $13.5 million related primarily to the future tax benefits which are expected to be realized upon utilization of a portion of the Company's net operating loss carryforwards ("NOLs"). Any subsequent realization of NOLs will be reflected in the income tax provision in the year realized and not as an extraordinary item. The Company has determined it will not apply the Statement retroactively and thus will not restate prior year financial statements to reflect adoption of the new rules. Reclassifications Certain prior year amounts have been reclassified to conform to 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 provided a revised redemption and maturity schedule that will enable the Company to meet these obligations from expected cash flow from operations. The principal components of the 1992 phase of the Refinancing are outlined in the following paragraphs. - A "Note Exchange Offer" was completed as of August 6, 1992 whereby the Company's Original Debentures, Replacement Debentures, PIK Debentures, and accrued interest on the nonconsenting Debentures totalling $73.3 million were replaced by 11 7/8% Subordinated Notes of Allnet ("1992 Notes"). The Note Exchange Offer was agreed to by 98.8% of the then existing Debentureholders. The revised redemption schedule of the 1992 Notes effectively reschedule the earliest redemption from June 30, 1992 to September 30, 1995. 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. - The Revolving Credit Facility was extended to June 30, 1993 and modifications included a new participant and a reduction in the borrowing rates. - The Restructured Promissory Note was restated and extended to June 30, 1995 and a $5.0 million principal prepayment was made. The amended terms provide for continuation of the 12% interest rate and quarterly principal payments of $1.3 million commencing on September 15, 1992. - The 1990 Note Agreements with a principal balance of approximately $8.0 million were paid down and extended in conjunction with the Refinancing and subsequently paid in full in December 1992. - The 4,708,999 1990 Warrants held by General Electric Pension Trust, Grumman Hill Investments Inc., Grumman Hill L.P. and Prudential Insurance Company of America were amended to reduce the exercise price from $3.00 to $2.00 per share in consideration for participating in the Refinancing. - Equipment leases with a major switch vendor were renegotiated to be repaid over 24 months with no change in the interest rate of 14%. - The Company paid $2.0 million on June 4, 1992 to CTI and received an $0.8 million note from a major holder of Class A Preferred (which note was subsequently paid in full) and $1.2 million of prepaid transmission capacity from Communications Transmission Group, Inc. ("CTGI"), an affiliate of CTI, to be utilized over a period of 37 months. F-8 154 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - On August 18, 1992, the 14,324,000 shares of Common Stock, 1,000,000 shares of Class B Preferred, and 1,000,000 shares of Class C Preferred held by CTI were transferred to a group of five banks ("Banks") in exchange for the release of certain portions of CTI's obligations to each of the Banks. The Class B Preferred and Class C Preferred are convertible into 3,796,000 shares of Common Stock. - Effective October 16, 1992, the Company commenced a stock offering ("1992 Equity Offering") for 9,863,600 shares of Common Stock at $5.50 per share. A portion of the 1992 Equity Offering relating to 3,464,373 shares was to facilitate the sale of shares for existing major holders including 3,000,000 shares held by the Banks. - The remaining 6,399,227 shares that were part of the 1992 Equity Offering were issued in conjunction with an Exchange Agreement ("Class A Exchange") with the major holders of the Class A Preferred ("Class A Preferred Group"). The members of the Class A Preferred Group agreed to exchange the 2,144,044 Class A Preferred shares they held with an aggregate redemption value of $58.7 million, including all accrued and unpaid dividends, for shares of Common Stock at an effective 40% discount. On January 19, 1993 the Company filed a shelf registration with the Securities and Exchange Commission for 19,500,909 shares held by certain stockholders, or issuable upon exercise of certain outstanding warrants or conversion of outstanding Class B Preferred and Class C Preferred. Several factors, such as market conditions, will determine when and how many of these shares will be sold. Any such offering of shares will provide for a broader public ownership of the Company's Common Stock. None of the proceeds from these stock sales will accrue to the Company other than through exercise of warrants in connection with the shelf registration. NOTE C -- LONG-TERM DEBT AND OTHER FINANCING Long-term debt, including the amount due within one year, consists of:
DECEMBER 31, --------------------- 1992 1991 ------- -------- (IN THOUSANDS) Restructured Promissory Note.......................................... $12,566 $ 20,698 1990 Note Agreements.................................................. 7,961 11 7/8% Senior Subordinated Debentures due 1995 -- face value of $55,000,000 less discount of $4,091,000............................. 50,909 Accrued interest on Debentures........................................ 18,391 11 7/8% Subordinated Notes due 1999 -- face value of $72,380,000 less discount of $10,397,000............................................. 61,983 Capitalized lease obligations (see Note E)............................ 8,851 15,373 Other long-term debt.................................................. 2,308 1,845 ------- -------- $85,708 $115,177 Due within one year................................................... 11,417 72,256 ------- -------- $74,291 $ 42,921 ------- -------- ------- --------
Revolving Credit Facility The Revolving Credit Facility is a $30.0 million facility which expires on June 30, 1993. The agreement allows for inclusion of up to 80% of billed and 45% of unbilled receivables in eligible receivables under the line. Advances and guarantees secured by billed receivables bear interest of 3.0% per annum in excess of the reference rate (6.0% as of December 31, 1992); however, advances secured by unbilled receivables bear F-9 155 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) interest of 3.75% per annum in excess of the reference rate. In addition, a 1/2% per annum charge is made on the unused portion of the line. As of December 31, 1992, the amount of credit available under the line was $30.0 million and was reduced by the Company's borrowings of $14.8 million. The unused portion of the line was $15.2 million. Restructured Promissory Note In the third quarter of 1989, the Company executed a $5.0 million note and a $15.0 million note with CTI for bridge financing, both of which were due on September 25, 1990. Terms of the notes required interest to be accrued at 18%, payable quarterly commencing November 30, 1989. The Company failed to make the interest payments due under those notes on February 26 and May 29, 1990. In June 1990, these notes were restructured into a note in the amount of $20.0 million due on June 4, 1992. The agreement provided that interest payments from December 1, 1989 through December 31, 1990 and certain loan fees due to CTI were forgiven (in the aggregate, approximately $4.2 million). Effective January 1, 1991, the interest rate was lowered to 12% per annum, and interest became payable quarterly beginning on March 31, 1991. The note is secured by a security interest in substantially all of the assets of Allnet (generally, second in priority behind the Company's Revolving Credit Facility). During the third quarter of 1991, the note ("Restructured Promissory Note") was sold to the Banks. In August 1992, the Restructured Promissory Note was restated and extended to June 30, 1995 and a $5.0 million principal payment was made. The amended terms provide for quarterly principal payments of $1.3 million commencing on September 15, 1992. The interest rate remains at 12% per annum. 1990 Note Agreements In June 1990, Allnet issued, pursuant to the 1990 Note Agreements, $7.2 million face amount of notes due June 4, 1992 ("1990 Notes") and warrants ("1990 Warrants"), valued at $0.4 million, to purchase up to 4,708,999 shares of its Common Stock for total cash consideration of $7.2 million. In June 1992, the 1990 Note Agreements were extended to August 15, 1992 and the interest rate was modified from 15% to 13%. In August 1992, the Company made a principal payment of $3.4 million and the term for the remainder of the 1990 Notes was extended to June 30, 1993. In December 1992, the 1990 Notes were paid in full. In August 1992, in consideration for participating in the Refinancing, the exercise price of the 1990 Warrants was modified from $3.00 per share to $2.00 per share. The 1990 Warrants expire on June 4, 2005. The purchase price and number of shares purchasable are subject to adjustment in certain events involving the Company's securities. One of the holders of the 1990 Warrants is entitled to nominate a representative for election to the Board of Directors. 11 7/8% Senior Subordinated Debentures of ALC Various terms and conditions under the Company's 11 7/8% Senior Subordinated Debentures ("Original Debentures") were amended as of June 1, 1990 and agreed upon by approximately 96% of the Debentureholders. The amendment ("Replacement Debentures") included modifications to interest payments to the consenting Debentureholders, including the acceptance of additional Debentures ("PIK Debentures") in lieu of cash as payment for certain interest payments. The amendment also included modification of the mandatory redemption schedule for the Original Debentures, Replacement Debentures and PIK Debentures (collectively the "Debentures") held by the consenting Debentureholders. The Debentures held by the nonconsenting Debentureholders were to be redeemed according to the original schedule. At December 31, 1991, the book value of Debentures held by nonconsenting Debentureholders maturing within one year of $1.4 million, and accrued interest of $0.7 million on the nonconsenting Debentures were recorded as current liabilities. F-10 156 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Original Debentures had been issued with detachable warrants (exercisable until December 1995) to purchase 660,000 Common Shares at a price of $63.75 per share, subject to adjustment in certain events. The cost associated with the issuance of the Debentures, approximately $2.9 million is included in other assets and is being amortized over 10 years. In August 1992, the "Note Exchange Offer" was completed whereby the Company's existing Debentures of $54.9 million face value, PIK Debentures of $18.4 million face value and accrued interest on the nonconsenting Debentures were replaced by 11 7/8% Subordinated Notes of Allnet. The Debentureholders who did not agree to the Note Exchange Offer were paid in September 1992 the full amount of their principal, the related PIK Debentures and accrued interest all totalling approximately $0.9 million. 11 7/8% Subordinated Notes of Allnet On August 6, 1992, Allnet issued the 1992 Notes with a face value of $72.4 million in exchange for the Company's Debentures (including PIK Debentures) and accrued interest thereon. The 1992 Notes bear interest at 11 7/8% per annum payable quarterly. The 1992 Notes have a redemption schedule which provides for the mandatory equal quarterly redemption of 6.25% of principal beginning on September 30, 1995 through June 30, 1999. The 1992 Notes are guaranteed by ALC and are secured by a subordinated security interest in substantially all of the assets of Allnet. The payment of dividends as well as stock repurchases are restricted by terms of the Indenture. Since ALC conducts no other business than as a holding company for Allnet, the guarantee of ALC will not provide the Noteholders with any significant additional security. The Indenture provides for a limitation on indebtedness of Senior Indebtedness not to exceed $50.0 million, excluding capitalized leases, the Revolving Credit Facility, Restructured Promissory Note and the 1992 Notes. Indebtedness is subject to further tests which limit aggregate indebtedness, excluding the Revolving Credit Facility to $106.0 million at December 31, 1992. At December 31, 1992, the Company was limited to additional aggregate indebtedness of $20.3 million. The Indenture also places restrictions on ALC or Allnet from making any dividend, redemption or other payments with respect to its equity securities. The 1992 Notes were issued with 3,400,000 1992 Warrants exercisable at $5.00 per share. The 1992 Warrants expire on June 30, 1997. The difference of $3.4 million between the exercise price of the 1992 Warrants and the fair value of the Company's Common Stock at the time of issuance has been recorded as a discount on the 1992 Notes and credited to paid-in capital -- warrants. This portion of the 1992 Note discount is being amortized over the life of the 1992 Warrants. The reduction in exercise price of the 1990 Warrants of $4.7 million was recorded as a discount on the 1992 Notes and an increase to paid-in capital -- warrants. The 1992 Note discount related to the 1990 Warrants is being amortized over the life of the 1992 Notes. Other Long-Term Debt Other long-term debt includes notes payable of $0.2 million secured by switches, leasehold improvements, office furniture and equipment. The carrying value of the assets securing these notes is $0.2 million and $0.3 million at December 31, 1992 and 1991. The average interest rate for this debt is 7%. The remaining $2.1 million of other long term debt represents deferred liabilities relating to certain operating leases. F-11 157 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Principal Requirements The principal requirements of long-term debt at December 31, 1992 are as follows:
(IN THOUSANDS) Year Ended December 31: 1993.............................................................. $ 11,417 1994.............................................................. 8,593 1995.............................................................. 12,158 1996.............................................................. 18,258 1997.............................................................. 18,309 1998 and thereafter............................................... 27,370 -------------- $ 96,105 Less discount on 1992 Notes....................................... 10,397 -------------- $ 85,708 -------------- --------------
NOTE D -- REDEEMABLE PREFERRED STOCK As of December 31, 1992, the Company has 355,956 shares of Class A Preferred outstanding with a redemption value of $7.1 million. Holders of Class A Preferred are entitled to a number of votes equal to .166 of one vote per share of Class A Preferred. These shares began accruing dividends at the rate of $1.60 per annum in July 1987. As of December 31, 1992 and 1991, there were $2.9 million and $16.5 million in cumulative dividends in arrears, or $8.16 per share and $6.60 per share, respectively on Class A Preferred. Under the General Corporation Law of Delaware, the Company's state of incorporation, the Company does not currently have adequate surplus to enable it to pay any dividends. 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 Class A Exchange with the Class A Preferred Group the Company exchanged 2,144,044 shares of Class A Preferred for 6,399,227 shares of Common Stock at an effective 40% discount. As a result of the 1992 Equity Offering, the Company's mandatory redemption obligation has been reduced to one scheduled payment of approximately $7.1 million (plus accrued and unpaid dividends) at December 31, 1996. In accordance with the Restated Certificate of Incorporation of ALC ("Certificate") affecting Class A Preferred, the amount of the dividend which shall accrue is equivalent to interest, on $20 per share, at a rate calculated as the weighted average of 1% plus prime rate. Certain additional dividends will accrue if the Company fails to pay the "Minimum Dividend" as described in the Certificate. In September 1992, ALC paid an aggregate amount of approximately $1.3 million to certain members of the Class A Preferred Group in connection with a concession agreement with the Class A Preferred Group entered into in June 1990. F-12 158 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE E -- LEASE TRANSACTIONS Future minimum rental payments under capital leases and noncancellable operating leases with initial or remaining terms of one or more years at December 31, 1992 are as follows:
CAPITAL OPERATING LEASES LEASES ------- --------- (IN THOUSANDS) Year Ended December 31: 1993............................................................ $ 7,172 $ 33,417 1994............................................................ 2,613 27,114 1995............................................................ 63 23,902 1996............................................................ 24 20,401 1997............................................................ 15,064 1998 and thereafter............................................. 28,674 ------- --------- Minimum Lease Payments.......................................... $ 9,872 $ 148,572 --------- --------- Less amount representing interest............................... 1,021 ------- Present Value of Future Lease Payments.......................... $ 8,851 ------- -------
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-cancellable operating leases relate primarily to building and office space, office equipment, and intercity transmission facilities. Rental expense was $52.3 million, $56.9 million and $63.0 million for the years ended December 31, 1992, 1991 and 1990, respectively. The amounts included in fixed assets financed by capital leases are:
DECEMBER 31, ------------------ 1992 1991 ------- ------- (IN THOUSANDS) Communications systems.......................................... $19,878 $22,587 Other equipment and leasehold improvements...................... 912 1,088 ------- ------- $20,790 $23,675 Accumulated depreciation........................................ 9,427 8,476 ------- ------- $11,363 $15,199 ------- ------- ------- -------
In June 1990, in connection with the Company's 1990 phase of its Refinancing, the terms of a major capital lease agreement were revised to reduce monthly payments with the difference deferred until the June 1992 termination date. In consideration for the deferral of lease payments, the Company issued warrants to purchase 100,000 Common Shares at a price of $3.00 per share to a major lessor. In June 1992, the lease was renegotiated resulting in a lease extension until May 1994. The interest rate was unchanged. NOTE F -- EARNINGS PER SHARE AND STOCKHOLDERS' DEFICIT Earnings per share Earnings per share are computed using weighted average shares outstanding and Common Stock equivalents. To arrive at income available for Common Stockholders, the Company's net income or loss is adjusted by amounts relating to the accretion of discount on Class A Preferred, the accretion of a contract payment to certain members of the Class A Preferred Group and dividends on Class A Preferred accrued but F-13 159 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) not declared. Anti-dilutive securities include warrants and options and for 1991 and 1990 also include Class B and Class C Preferred Stock. Earnings per share for the third and fourth quarters of 1992 include the impact of the exercise of outstanding stock options and warrants utilizing the Treasury Stock Method. The impact of the 1992 Equity Offering on earnings per share was not material. Common Stock On September 3, 1991, the Company effected a one-for-five reverse stock split of all authorized and outstanding shares of the Company's Common Stock. The number of authorized shares remained at 200,000,000. The par value of a share of stock was unchanged. All share amounts used in the accompanying financial statements and notes thereto have been adjusted to reflect the reverse stock split. Effective October 16, 1992, the Company commenced the 1992 Equity Offering for 9,863,600 shares of Common Stock at $5.50 per share. A portion of the 1992 Equity Offering relating to 3,464,373 shares was to facilitate the sale of shares for existing major stockholders. The remainder of 6,399,227 shares that were part of the 1992 Equity Offering were issued in conjunction with the Class A Exchange. ALC did not receive any proceeds from the sale of the shares. Class B Preferred and Class C Preferred In 1988, CTI purchased, for an aggregate purchase price of $30.0 million, all the shares of the Company's Class B Preferred and Class C Preferred. On August 18, 1992, all of the Class B Preferred and the Class C Preferred were transferred to the Banks. Each share of Class B Preferred or Class C Preferred may be converted, at the option of the holder, into 1.898 shares or a total of 3,796,000 common shares, subject to adjustment, for the outstanding Class B Preferred and Class C Preferred. The holder of each share of Class B Preferred or Class C Preferred is entitled to a preference in liquidation over holders of any other class of capital stock in amounts ranging from $21.00 during the period from July 1, 1992 to June 30, 1993 to $22.50 after June 30, 1993. No dividends shall accrue or be payable on the Class B Preferred or Class C Preferred. Holders of Class B Preferred and Class C Preferred are entitled to a number of votes equal to the number of shares of Common Stock into which their shares are convertible. Conversion of Class D Preferred In June 1990, ALC issued 716,200 shares of Class D Preferred to CTI in exchange for the concessions relating to the Allnet contract with CTGI for transmission capacity, concessions relating to the Restructured Promissory Note, and for a waiver by CTI of certain anti-dilution rights under the Company's Certificate relating to the shares of Class B Preferred and Class C Preferred which would otherwise have resulted from the Refinancing. Effective October 12, 1990, upon the amendment of the Certificate to increase the number of authorized shares of Common Stock to 200,000,000, each share of outstanding Class D Preferred was converted into 20 shares of Common Stock. During 1992, the authorized shares of Class D Preferred were retired by the Company. Employee Stock Purchase Plan In October 1988, the Board adopted and the stockholders approved an Employee Stock Purchase Plan, which became effective January 1, 1989. During 1991 and 1990, 71,171, and 70,362 shares were issued under the plan, respectively. The Plan was terminated as of employee contributions through December 31, 1990 because total shares projected to be issued in the subsequent six month period would have exceeded the shares authorized under the Plan. Final shares were issued in January 1991. F-14 160 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Employee Stock Options In October 1988, the Board adopted and the stockholders approved an increase in the number of shares issuable under the ALC 1986 Option Plan. In September 1990, the Stockholders approved the 1990 Stock Option Plan. The maximum number of shares for which options may be granted under both plans is 4,000,000 (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:
OPTION PRICE NUMBER --------------------------------- OF PER SHARES SHARE TOTAL --------- ---------------- -------------- (IN THOUSANDS) Shares under option December 31, 1989.......... 870,476 $10.00 - $48.75 $ 12,415 Options cancelled.............................. (815,677) $ 5.00 - $21.25 (8,072) Options regranted.............................. 815,677 $ 3.50 2,855 Options granted................................ 2,234,725 $ 3.50 - $ 5.00 8,001 Options terminated............................. (105,848) $ 3.50 - $48.75 (1,744) --------- ---------------- -------------- 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 cancelled.............................. (554,000) $ 3.50 (1,939) Options regranted.............................. 554,000 $ 3.50 1,939 Options terminated............................. (65,119) $ 3.50 - $ 5.88 (271) Options granted................................ 1,055,876 $ 4.38 - $ 5.88 5,604 Options exercised.............................. (173,345) $ 3.50 (607) --------- ---------------- -------------- Shares under option December 31, 1992.......... 3,619,128 $ 3.50 - $ 5.88 $ 14,612 --------- ---------------- -------------- --------- ---------------- -------------- Options exercisable, December 31, 1990......... 622,662 $ 3.50 - $48.75 $ 5,120 --------- ---------------- -------------- --------- ---------------- -------------- 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 --------- ---------------- -------------- --------- ---------------- --------------
NOTE G -- TRANSACTIONS WITH RELATED PARTIES The Company leases transmission capacity, multiplexing and various other technical equipment through both capital and operating leases from CTGI, an affiliate of a major stockholder through August 1992. Amounts paid under the leases were $17.7 million, $19.7 million and $24.4 million for the years ended December 31, 1992, 1991 and 1990, respectively. In June 1992, the Company paid $2.0 million to CTI for the purchase of certain assets including an $0.8 million 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 includes $1.2 million of prepaid transmission capacity from CTGI to be utilized over a 37 month period. During August 1992, CTI conveyed 14,324,000 shares of Common Stock, 1,000,000 shares of Class B Preferred and 1,000,000 shares of Class C Preferred 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, Prudential Insurance Company of America ("Prudential") became a related F-15 161 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 1,975,804 shares of Common Stock. Prudential was also a major participant in the Revolving Credit Facility through August 1992 which entitled them to a share of the interest on the line of credit. The transfer of stock from CTI to the Banks gave NationsBank of Texas, N.A. ("NationsBank") and The First National Bank of Chicago ("First National") related party status through their ownership of Common, Class B Preferred and Class C Preferred. Additionally, each of these banks is a major participant in the Restructured Promissory Note. As of December 31, 1992, NationsBank owned 3,893,866 shares of Common Stock and 343,860 shares of Class B Preferred and 343,860 shares of Class C Preferred and held a portion of the Restructured Promissory Note with principal balance of $4.3 million. As of December 31, 1992, First National owned 2,781,333 shares of Common Stock and 245,614 shares of Class B Preferred and 245,614 shares of Class C Preferred as well as a portion of the Restructured Promissory Note totalling $3.1 million. General Electric Pension Trust ("GEPT") holds warrants entitling them to 2,305,105 shares of Common Stock at $2.00 and 1,494,845 shares of Common Stock at $5.00 per share. Other holdings included 1990 Notes of $3.9 million which were paid in full in December 1992. During 1991, GEPT purchased $31.8 million Debentures which were exchanged and subsequently sold in September 1992. GEPT also purchased 500,000 shares of Common Stock in the 1992 Equity Offering. GEPT may be deemed beneficial owner of an additional 120,000 shares of Common Stock. 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 1990 Notes in the aggregate principal amount of $0.7 million which were paid off during 1992. As of December 31, 1992, these entities held $4.1 million of 1992 Notes, 194,393 of the 1992 Warrants and 428,090 of the 1990 Warrants to purchase shares of the Company's Common Stock. Additionally, during 1988, Grumman Hill Associates, Inc. was granted options to purchase approximately 153,000 of Common Stock. These options were subsequently assigned to Grumman Hill Investments, L.P. The Company has paid consulting and investment banking advisory fees amounting to approximately $0.4 million, $0.1 million and $0.3 million for the years ended December 31, 1992, 1991 and 1990, respectively, to firms whose directors and principals are or were directors of ALC. NOTE H -- TAXES ON INCOME The 1992 and 1991 provisions for income taxes include a charge to operations for income taxes that would have been payable except for the availability of net operating loss carryforwards ("NOLs"). The tax benefits of the loss carryforwards utilized were reported as an extraordinary item in the 1992 and 1991 Consolidated Statements of Operations. These provisions were determined based on the statutory tax rates applied to pre-tax income adjusted for permanent differences related primarily to the amortization of the cost in excess of net assets acquired. Due to the operating loss sustained for the year ended December 31, 1990, no provision for income taxes was necessary. F-16 162 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Income tax expense and the extraordinary item as shown in the Consolidated Statements of Operations are composed of the following:
1992 1991 ---------- ---------- Federal Income tax expense................................ $8,075,000 $2,240,000 Extraordinary item................................ 6,445,000 2,095,000 State Income tax expense................................ 1,625,000 765,000 Extraordinary item................................ 555,000 535,000
Due to the change of ownership which occurred in August 1992 and the resulting limitation on the utilization of NOLs, the Company is now subject to regular tax resulting in federal taxes currently payable of $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. Net operating losses were used to offset 90% of this tax. Federal taxes currently payable were $0.1 million in 1991. The 1992 and 1991 provisions for state and local income taxes reflect the effect of filing separate Company state income tax returns for members of the consolidated group. This amount is reduced, where appropriate, by the state portion of operating loss carryforwards. State income taxes currently payable were $1.1 million in 1992 and $0.2 million in 1991. A reconciliation between the statutory federal and the effective income tax rates follows:
PERCENTAGE OF PRE-TAX INCOME ------------- 1992 1991 ----- ---- Income tax at statutory rate........................................... 34.0% 34.0% Goodwill amortization.................................................. 2.2 9.1 State tax expense (net of federal benefit)............................. 4.6 8.9 Other.................................................................. .4 .5 ----- ---- Income tax provision................................................... 41.2% 52.5% ----- ---- ----- ----
The Company has tax net operating loss, alternative tax net operating loss and investment tax credit ("ITC") carryforwards which expire on December 31 of the following years:
ALTERNATIVE TAX NET TAX NET INVESTMENT OPERATING LOSS OPERATING LOSS TAX CREDIT -------------- -------------- ---------- (IN THOUSANDS) 1998........................................ $ 16,938 $ 16,885 1999........................................ 15,090 15,090 $2,841 2000........................................ 18,290 18,290 774 2001........................................ 18,073 18,073 2002........................................ 18,959 18,959 2003........................................ 26,896 26,875 2004........................................ 19,173 19,150 2005........................................ 14,411 14,445 -------------- -------------- ---------- $147,830 $147,767 $3,615 -------------- -------------- ---------- -------------- -------------- ----------
F-17 163 ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The amount of carryforwards which can be utilized annually to offset future taxable income is, however, limited because of the Internal Revenue Code Section 382 "ownership changes" which occurred in 1989 and 1992. Under provisions of Section 382, the utilization of these NOLs is presently limited to approximately $10.0 million per year. This annual limitation, along with the 15 year carryforward limitation, results in a maximum cumulative NOL and ITC carryforward which may be utilized of approximately $130.0 million as of December 31, 1992. NOTE I -- STATEMENTS OF CASH FLOWS The following non-cash investing and financing transactions are not reflected in the Consolidated Statements of Cash Flows but are shown as supplemental information:
YEAR ENDED DECEMBER 31, ---------------------- 1992 1991 1990 ---- ---- ------ (IN THOUSANDS) Capitalized lease obligations incurred in connection with acquisitions of fixed assets............................... $187 $640 $1,518
NOTE J -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
THREE MONTHS ENDED --------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1992 1992 1992 1992 --------- -------- ------------- ------------ (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Revenue...................................... $92,043 $ 92,659 $95,673 $ 95,689 Gross profit................................. $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
THREE MONTHS ENDED --------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1991 1991 1991 1991 --------- -------- ------------- ------------ (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Revenue...................................... $85,914 $ 86,541 $88,168 $ 86,250 Gross profit................................. $32,829 $ 33,283 $34,448 $ 33,597 Income (loss) before extraordinary item...... $ 757 $ 909 $ 1,133 $ (82) Net income................................... $ 1,307 $ 1,534 $ 1,888 $ 618 Loss per common and common equivalent share before extraordinary item............ $ (0.04) $ (0.02) $ (0.01) $ (0.09) Net income (loss) per common and common equivalent share........................... $ (0.01) $ 0.01 $ 0.02 $ (0.05)
F-18 164 - ------------------------------------ ------------------------------------ - ------------------------------------ ------------------------------------ NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE 19,500,909 SHARES CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY [ALLNET LOGO] SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER [LOGO] COMMUNICATIONS TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO CORPORATION WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. COMMON STOCK -------------- PROSPECTUS TABLE OF CONTENTS --------------- PAGE ---- Available Information.................. 2 Prospectus Summary..................... 3 Risk Factors........................... 6 Use of Proceeds........................ 9 Price Range of Common Stock............ 9 Dividend Policy........................ 9 The Company............................ 10 Capitalization......................... 12 Selected Financial Data................ 13 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 14 Business............................... 21 Management............................. 27 Certain Relationships and Related Transactions......................... 34 The Refinancing........................ 39 Selling Stockholders................... 41 Principal Stockholders................. 42 Description of Capital Stock........... 45 Shares Eligible for Future Sale........ 46 Plan of Distribution................... 47 MARCH 18, 1993 Legal Matters.......................... 47 Experts................................ 48 Index to Consolidated Financial Statements........................... F-1
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