-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FyVmL6qyliPCto9JwB9yBwuRBX5uwsXUboq3OE6IHcGhus7r/+Xn7VZ2Yya3Ife4 xDHJVn+rD+5gMprANsClzQ== 0000950152-99-005126.txt : 19990607 0000950152-99-005126.hdr.sgml : 19990607 ACCESSION NUMBER: 0000950152-99-005126 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990328 FILED AS OF DATE: 19990604 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERILINK CORP CENTRAL INDEX KEY: 0000924774 STANDARD INDUSTRIAL CLASSIFICATION: WATER, SEWER, PIPELINE, COMM AND POWER LINE CONSTRUCTION [1623] IRS NUMBER: 311409345 STATE OF INCORPORATION: OH FISCAL YEAR END: 0329 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24334 FILM NUMBER: 99640441 BUSINESS ADDRESS: STREET 1: 1900 E DUBLIN GRANVILLE RD CITY: COLUMBUS STATE: OH ZIP: 43229 BUSINESS PHONE: 6148951313 10-K 1 AMERILINK COPORATION FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the fiscal year ended March 28, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from _______________ to ________________ Commission file number 0-24334 AMERILINK CORPORATION --------------------- (Exact name of registrant as specified in its charter) Ohio 31-1409345 ---- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1900 E. Dublin - Granville Road, Columbus, Ohio 43229 - ------------------------------------------------- ----- (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (614) 895-1313 -------------- Securities registered pursuant to Section 12(b) of the Act: None ---- Securities registered pursuant to Section 12(g) of the Act: Common Shares with no par value NASDAQ National Market 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 . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ). Based upon the closing sale price reported on the NASDAQ National Market on May 25, 1999, the aggregate market value of the Common Shares of the Registrant held by non-affiliates (assuming, for this purpose, that only executive officers are affiliates) on that date was $36,753,920 4,427,874 shares of common stock were outstanding on May 25, 1999 -1- 2 AMERILINK CORPORATION FORM 10-K TABLE OF CONTENTS
Item Page - ---- ---- PART I 1 Business----------------------------------------------------------------------------------------- 3 2 Properties--------------------------------------------------------------------------------------- 12 3 Legal Proceedings-------------------------------------------------------------------------------- 12 4 Submission of Matters to a Vote of Security Holders---------------------------------------------- 12 PART II 5 Market for Registrant's Common Equity and Related Stockholder Matters---------------------------- 12 6 Selected Financial Data-------------------------------------------------------------------------- 13 7 Management's Discussion and Analysis of Financial Condition and Results of Operations------------ 14 7A Quantitative and Qualitative Disclosures About Market Risk--------------------------------------- 22 8 Financial Statements and Supplementary Data------------------------------------------------------ 22 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure------------- 38 PART III 10 Directors and Executive Officers of the Registrant----------------------------------------------- 38 11 Executive Compensation--------------------------------------------------------------------------- 40 12 Security Ownership of Certain Beneficial Owners and Management----------------------------------- 43 13 Certain Relationships and Related Transactions--------------------------------------------------- 44 PART IV 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K---------------------------------- 45 Signatures--------------------------------------------------------------------------------------- 47
-2- 3 PART I CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. This Annual Report on Form 10-K contains various forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involves risks and uncertainties. These forward-looking statements, such as statements regarding anticipated future revenues, capital expenditures and other statements regarding matters that are not historical facts, involve predictions. These forward-looking statements are based on the Company's current expectations and are subject to a number of risks and uncertainties that could cause actual results in the future to differ significantly from results expressed or implied in any forward-looking statements included herein. The Company's actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements depending upon a variety of important factors, including a continuation of the degree and timing of customer utilization and rate of renewals of contracts with the Company at historic levels, the Company's relationship with key customers, implementation of the Company's growth strategy, seasonality, changing market conditions and customer purchase authorizations, competitive and regulatory risks associated with the telecommunications industry, new products and technological changes, disruptions to the operations of the Company resulting from Year 2000 issues, and other risks detailed in the Company's periodic report filings with the Securities and Exchange Commission, including, but not limited to, the factors described under the caption "Variability in Quarterly Results and Seasonality" on page 11. ITEM 1. BUSINESS. GENERAL AmeriLink Corporation (referred to herein, together with its subsidiaries, where the context requires, as the "Company") is a nationwide provider to the telecommunications industry of cabling systems for the transmission of video, voice, and data. The Company offers these services on a national basis to providers of telecommunications services, including: major cable television multiple system operators ("MSOs); traditional telephone service providers, including local exchange carriers and long distance carriers (collectively, "Telcos"); competitive local exchange carriers ("CLECs"); Direct Broadcast Satellite ("DBS") providers; system integrators and users of local area network ("LAN") and wide-area network ("WAN") systems; and other businesses providing specific or bundled telecommunications services. The Company, which conducts business under the trade name "NaCom" in addition to AmeriLink, is headquartered in Columbus, Ohio, and provides its services predominately through the use of independent contractors via its national network of field offices. The Company designs, constructs, installs and maintains fiber optic, coaxial and twisted-pair copper cabling systems for the transmission of video, voice, and data. The Company believes there continue to be growing opportunities in both residential and commercial markets to provide its services as telecommunications service providers increase capital expenditures for their infrastructures and implement plans to improve service in response to competition. In order to eliminate the ongoing expense and effort required to manage labor intensive, multi-office service organizations, the cable television industry historically has sought to outsource a large portion of these services on a unit cost basis with independent contractors, such as the Company. Telcos and other telecommunications service providers are also beginning to seek new outsourcing solutions in response to competitive price pressures. Independent contractors, such as the Company, typically have lower cost structures than the telecommunications providers do, primarily as a result of the contractor's lower direct and overhead cost structures. Commercial LAN cabling services are also typically performed by third party vendors who construct, install and maintain LAN systems for businesses on a contract basis. The Company believes that telecommunications providers are seeking comprehensive solutions to their infrastructure needs by utilizing fewer qualified contractors to provide a full range of telecommunications services, and that it will continue to gain significant cabling opportunities in both residential and commercial markets as new technologies, increased services and competition fuel the growing demand for the delivery of video, voice and data into homes and businesses. In addition, the Company believes that it will gain significant cabling opportunities to provide services to DBS providers and distributors given the potential market for video, audio, and data programming services via satellite. -3- 4 PROPOSED MERGER WITH TANDY CORPORATION On May 21, 1999, AmeriLink Corporation and Tandy Corporation ("Tandy") each announced their signing of a definitive merger agreement (the "Merger"). Under terms of the Merger, Tandy will acquire 100% of AmeriLink's common stock at an exchange ratio designed to reflect $15.60 per share of AmeriLink's stock in a tax-free exchange for Tandy stock. If the average closing price of Tandy's common shares falls below a specified amount for a twenty-day trading period ending just before the merger is completed, AmeriLink shareholders will receive $14.50 cash for every AmeriLink common share they own instead of Tandy stock. Following the merger, AmeriLink will continue its operations as a wholly owned subsidiary of Tandy. The Merger has been approved by the Board of Directors of each Company and is subject to usual and customary closing conditions, including regulatory and shareholder approval. It is currently anticipated that the transaction will close in late August 1999. More detailed information relating to the terms and conditions of the Merger will be contained in a Registration Statement on Form S-4 to be filed by Tandy on or around June 8, 1999, which will include a prospectus and a proxy statement for a special shareholders meeting of AmeriLink. If the merger is not consummated for any reason, the Company intends to continue operating independently. RECENT ACQUISITION On February 2, 1999, the Company, through a wholly-owned subsidiary, MCC Acquisition Corp. ("MAC"), acquired Midwest Computer Cable, Inc. ("MCCI"), a commercial cabling installation firm headquartered in Des Moines, Iowa. Pursuant to the Merger Agreement, MCCI was merged with and into MAC and the separate corporate existence of MCCI ceased. Following the Merger, MAC changed its name to "Midwest Computer Cable, Inc." and will continue to conduct business as a wholly-owned subsidiary of the Company. The consideration delivered to the shareholders of MCCI in connection with the acquisition consisted of $4.4 million in cash and 500,000 common shares (without par value) of the Company valued at the time of the merger at $3,565,000. MCCI provides installation and maintenance services for premise cabling systems through six offices located in Iowa, Kansas, Ohio, and Texas. The Company believes that the additional offices, management, and technicians which were gained from the MCCI acquisition will accelerate the growth of its commercial cabling and installation business. PRINCIPAL SERVICES The Company's services include the drops and cable feeds to, and wiring of, residences, multiple dwelling units ("MDUs") and commercial buildings (collectively, "premises wiring services") and the construction and installation of aerial and underground distribution plant ("outside plant construction services"). Premises Wiring Services. Residential premises wiring services include the installation and maintenance of both hardwire and wireless cable systems. Installation services for hardwire cable systems include the installing of cable drops which connect residences to the feeder cable carrying the operator's signal, cabling the exterior and interior of MDUs and single family residences, and installing converter units within the residence. Maintenance services for hardwire cable systems include: (1) the replacement of damaged or obsolete cable, (2) the reconnection and disconnection of subscriber services, (3) day-to-day additions and changes to installed drops, (4) upgrade sales and service changes, and (5) miscellaneous service calls. Wireless cabling services include both installation and maintenance services for Direct Broadcast Satellite ("DBS") systems or wireless multi-channel, multi-point distribution systems ("MMDS"), popularly known as "wireless cable". DBS installation services consist of attaching a satellite dish to the subscriber's property, hooking up the digital set-top converter box, and installing the related cabling, grounding, and connective materials. DBS maintenance services include the replacement of damaged cable, grounding and connective materials, and satellite receiving equipment. MMDS cable system installations consist of attaching a microwave receiving antenna to the subscriber's property and installing the set-top converter and related cabling, grounding, and connective materials. Maintenance services for MMDS are essentially the same as maintenance services for DBS. The Company provides digital satellite services for both residential subscribers (single family and multi-family units) and commercial and other subscribers, such as hotels, motels, bars, businesses, schools, and non-residential buildings which are not easily accessible by hardwire cable systems. Premises wiring services for the commercial market also include the design and data cabling of LAN and WAN systems for commercial businesses, governments, and educational communities. The Company's network cabling design services begin with an on-location site survey to determine the most efficient cable routing path and the location of end-user outlets. The Company may then utilize a computer-assisted design system to finalize a -4- 5 cabling plan that meets network requirements and performance specifications. Once approved by the customer, a blueprint or other working print is generated which is used as a guide for the network installation. Upon completion of a network installation, the Company generally delivers to the customer test documentation and an as-built design layout. In fiscal 1998 the Company also started providing commercial voice and data installation and maintenance services to competitive local exchange carriers (such as Teligent and Winstar) for connections to local-loop networks. These services include both on-location site surveys to determine the most efficient digital microwave antenna location, and the subsequent installation of the antenna on the roof of the commercial building. Outside Plant Construction Services. Outside plant construction projects include the installation of fiber optic cable, coaxial cable and twisted-pair copper wire for aerial and underground portions of cable systems. These services include installation of all necessary electronic components, including signal amplification and conversion devices and the performance of diagnostic engineering tests at all levels of the infrastructure to determine whether new and existing systems are within appropriate manufacturer or Federal Communication Commission ("FCC") specifications. The Company uses heavy machinery, specialized trucks and other construction equipment to perform its outside plant construction services. The Company has implemented a strategy to shift its outside plant construction services from providing services for both retrofit construction projects (systems with active subscribers) and new construction projects (systems without active subscribers) to exclusively providing outside plant construction services for new construction projects. Retrofit construction projects involve more uncertainties than new construction projects because each phase of the retrofit construction project must be planned and executed in a manner which disrupts service to the active subscribers as little as possible. The Company believes that the competitive environment associated with retrofit construction projects, along with uncertainty regarding customer work commitments on these projects, make them less desirable for the Company's current resources than new construction and premises wiring projects. For the fiscal year ended March 28, 1999, outside plant construction services accounted for approximately 8 % of the Company's total revenues. MARKET OVERVIEW The market for telecommunications services is undergoing rapid change due to deregulation and the introduction of new technologies, both of which have resulted in increased competition in the industry. In addition, growing customer demand for enhanced video, voice and data telecommunications services has increased bandwidth requirements and highlighted bandwidth limitations of existing cabling in many markets. There is a convergence of different types of technologies and of the services that have traditionally been provided using these different technologies. This convergence allows for new services to be provided over existing infrastructure, and new infrastructure to be developed that provides combined services, including both content-based and common carrier services. The practical effect of technological and market convergence is that traditionally defined industry segments are less and less distinguishable. The telephone industry and the television industry are entering each others markets both at the technical and the service level: telephone operators can provide broadcast type services and cable TV operators are introducing telephone services. Both types of communication take place over wired and wireless media, in both a one-to-one and one-to-many format. In the end, definitions of services according to the nature of information transmitted (video, voice, and data) are becoming irrelevant. Cable television service traditionally has been provided primarily by cable television system operators that have been awarded franchises from the municipalities they serve. The cable television industry has been subject to varying degrees of both national and local government regulation, most recently The Telecommunications Act of 1996 and the 1992 Cable Reregulation Act, which imposed extensive rate regulation on the cable television industry. The Telecommunications Act of 1996 provides for a termination of existing FCC regulation of cable rates on March 31, 1999. Currently, MSOs are facing competition for video services from DBS providers and, in certain markets, from Telcos and other telecommunications providers. In response to this competition, MSOs have been increasing and expanding their service offerings. To date, a vast majority of video networks have adopted a hybrid fiber coax ("HFC") network architecture for video service delivery. Many telecommunications providers envision the expansion of the role of HFC networks from a video-centric focus to a key platform for the delivery of a variety of broadband services, including high-speed Internet access via cable modems, video on demand, and HDTV. Providers also envision the delivery of cable television signal programming data and phone services on one drop cable. These services generally require increased amounts of cabling and system bandwidth, which in turn require MSOs to upgrade their existing cable plant. The construction, expansion, and upgrade of cable systems require significant capital investment by cable operators. MSO's have been significant borrowers from the credit and capital -5- 6 markets, and, accordingly, capital spending within the domestic cable television industry has been cyclical, depending to a significant degree on the availability of credit and capital. Due to the significant capital investment required to construct, expand, and upgrade these networks and to finance the market opportunities associated with new video, voice, and data services, there has been much consolidation among providers within the telecommunications industry. Companies appear to be following a belief that size and scale is the best strategy for long-term, facilities based telecommunications competition. On March 9, 1999 AT&T Corporation completed its acquisition of Tele-Communications, Inc. ("TCI") the country's second largest MSO, and in May, 1999 announced that they reached a definitive merger agreement to acquire MediaOne Group. AT&T Corporation, the country's largest phone company, will also be the biggest cable company. There have been other numerous consolidations among existing cable MSOs, including Paul Allen's purchase of Charter Communications, Marcus Cable, and his recently announced intent to acquire Falcon Cable TV and Fanch Communications. Other planned mergers within the telecommunications industry include SBC Communications Inc. and Ameritech Corp., Bell Atlantic Corp. and GTE Corp., and US West Inc. and Global Crossing Ltd. With regard to the commercial video, voice, and data cabling market, the rapidly growing need to interconnect new and existing computer resources over local and geographically dispersed areas continues to create an increased demand for networking cabling. In the past decade, the commercial use of PCs has become pervasive. The development of more powerful processors and easier to use software has expanded applications from word processing, accounting and database management to electronic mail and research. As the number of PCs in businesses has grown, the need to share information among users has also grown, giving rise to a large and rapidly expanding networking industry consisting of LANs, which connect PCs to other PCs, file servers and other devices such as printers, and WANs which connect LANs at one site to other sites and connect users working at home or traveling to their LAN, third party information sources or the Internet. Rapid technological advances in computers and software, including the use of more powerful computers and distributed area processing, have created the need for increasingly sophisticated LAN and WAN technologies. Such technologies demand advanced high bandwidth data transmission cable that enables increased volumes of data to be transmitted at faster speeds without diminishing data integrity. This rapid rate of technological change has created demand both for new LANs and for maintenance and upgrades of existing LAN systems which no longer provide the necessary speed or quality of data transmission. There is growing competition in the estimated $51 billion local exchange market, which is currently one of the most profitable segments in the communications industry. Local exchange services have historically been provided by regional monopolies known as incumbent local exchange carriers or "ILECs". ILECS have typically used older, existing copper wire-based networks. These networks, faced with increasing demand from businesses for new services, such as Internet access, have created a "last mile bottleneck" between the customer location and the ILEC network. The potential revenue opportunity in the local exchange market, coupled with changes in the regulatory environment designed to enhance competition, have created opportunities for competitive local exchange carriers, or CLECs. Facilities-based CLECs such as Teligent and Winstar offer customers a variety of individual and bundled services, including local and long distance voice services and high-speed data and Internet service in a growing number of major markets throughout the United States. PRINCIPAL CUSTOMER GROUPS The Company provides cabling services on a national basis to providers of telecommunications services, including: major cable television multiple system operators ("MSOs); traditional telephone service providers, including local exchange carriers and long distance carriers (collectively, "Telcos"); competitive local exchange carriers ("CLECs"); Direct Broadcast Satellite ("DBS") providers; system integrators and users of local area network ("LAN") and wide-area network ("WAN") systems; and other businesses providing specific or bundled telecommunications services. The effect of technological and market convergence is that traditionally defined industry segments are less and less distinguishable. Definitions of services and customers according to the nature of information transmitted (video, voice, and data or "cable company" and "telephone company") are becoming irrelevant. Telcos. Prior to the Telecommunications Act of 1996, Local Exchange Carriers ("LECs") were prohibited from offering video programming directly to subscribers in their telephone service areas (except in limited circumstances in rural areas). The Telecommunications Act provides LECs with options for providing video programming directly to their local exchange area customers. During the fiscal year that ended March 29, 1998 the Company provided premises wiring services for competitive video systems to the following Telcos: GTE, Ameritech, Pacific Bell, U.S. West, and BellSouth. In fiscal 1998, revenues from Telcos for video communication -6- 7 systems increased 151% to approximately $25.9 million from approximately $10.3 million in the previous 1997 fiscal year. SBC Communications ("SBC") acquired Pacific Bell in April 1997 and announced that it was scaling back its investments in video services in its service areas. SBC discontinued its broadband network video trials including a Pacific Bell project in San Jose, California. This project produced approximately $1.1 million of revenues for the Company in its fiscal 1998 first quarter. In late 1997 there was a reassessment by Telcos with regard to their video strategies, primarily of pursuing less costly DBS and MMDS wireless cable systems in lieu of the more costly hybrid fiber-coaxial hardwire systems. In 1998 Bell Atlantic recorded pre-tax charges of $23 million related to wireline and other nonsatellite video initiatives. In conjunction with this charge, Bell Atlantic announced a strategic decision to focus video efforts on satellite service being offered via DirecTV, and they are currently providing video service exclusively in conjunction with arrangements with DirecTV. The biggest impact to the Company regarding Telco competitive video projects has been the decision by GTE (through GTE Media Ventures) to scale back deployment of the hybrid fiber coax (HFC) video networks that it had built in certain test markets, and not to proceed with HFC deployment in previously announced additional markets. In 1996, GTE announced aggressive plans to expand video services to 66 markets with a reach of some seven million homes by 2004. AmeriLink was one of GTE's lead contractors in its initial two test markets in Tampa Bay, Florida and Ventura County, California. In fiscal 1998 revenues from these two projects totaled approximately $14.7 million, and GTE was the Company's largest customer, comprising approximately 17% of total revenues. After completing a review of its operations in these two test markets, GTE decided to scale back its video initiatives. In their 1998 fiscal year, GTE recorded a pretax charge of approximately $161 million related to their video networks, which had generated operating losses of approximately $86 million as of December 31, 1998. Company revenues from GTE from these two projects in fiscal 1999 declined $11.7 million to $3.0 million. The Company no longer performs installation services for GTE in the Tampa Bay area, and revenues from the Ventura County project for the most recent fourth quarter ended March 28, 1999 were only approximately $240,000. Revenues from Telcos for video services, excluding DirecTV re-sale programs, have declined sequentially in the six consecutive quarters that ended December of 1998, from approximately $8.3 million in the quarter ended June 1998 to approximately $2.5 million in the third and fourth quarters of fiscal 1999. The Company currently performs video installation services, excluding DirecTV re-sale programs, for GTE, Ameritech, and BellSouth. During the 1999 fiscal year the Pacific Bell MMDS properties were sold to PrimeOne Tele-TV, for which the Company continues to perform installation services. Revenues from Telcos for the most recent fourth quarter ended March 28, 1999 were approximately $2.5 million, of which $1.2 million related to video projects with Ameritech. The amount of future capital allocated by Telcos to their video programs is largely contingent upon the financial success of these programs, possible new technical developments, and overall strategic decisions by the companies regarding video services, including the current pending mergers. It is unclear what impact that the current pending mergers between SBC Communications Inc. and Ameritech Corp. and Bell Atlantic Corp. and GTE will have on the respective company's video strategies. CLECs. The Company provides premises wiring and outside plant construction services to CLECs that are competing for residential and commercial local-loop business. In fiscal 1999, the Company performed outside plant construction services for MFS Network Technologies and Mcleod, Inc. and residential voice and data installation services for MCI. In late fiscal 1998, the Company also started performing commercial voice and data installation services for Teligent, Inc., and Winstar, nationwide CLECs. Revenues derived from cabling services from Teligent and Winstar for the fiscal year ended March 28, 1999 were approximately $0.9 million and $0.3 million, respectively. MSOs. The Company provides both premises wiring and outside plant construction services to MSOs. Historically, broadband video networks in the United States were almost exclusively provided by cable television operators. Accordingly, the Company had historically derived a large percentage of its revenues from this customer base. Revenues derived for or on behalf of MSOs (excluding PRIMESTAR, the DBS provider owned by certain MSOs) for fiscal 1999 were approximately $27.2 million, or 42% of total Company revenues, versus approximately $26.1 million or 30% the previous fiscal year. Representative customers of the Company include Time Warner Cable (approximately 12% of total Company revenues in fiscal 1999), Tele-Communications, Inc. (approximately 11% of total Company revenues in fiscal 1999), MediaOne Group, and Cox Communications, Inc. AT&T Corporation acquired TCI in March, 1999 and also recently announced that they reached an agreement to acquire MediaOne Group. MSOs have historically contracted for cabling services through their local and regional offices. As a result, the Company markets its services to MSOs in a decentralized manner. The Company seeks to develop contacts and learn of potential opportunities through attendance at trade shows and by membership of its key managers and -7- 8 corporate personnel in the Society of Cable Television Engineers and local cable associations. The Company's regional directors, regional managers and area managers are responsible for developing and maintaining relationships with local and regional cable operators. The Company believes that the development and maintenance of customer relationships as well as the consistent performance of quality services allows it to gain repeat business. The Company believes that more and more MSOs are seeking comprehensive solutions to their infrastructure needs by turning to fewer qualified contractors who have the size and financial capability to meet their cabling needs. This trend should accelerate as industry consolidations increase, and these entities begin to provide bundled services to end-users. The Company believes that this trend will result in additional cabling opportunities due to its national presence and cabling capabilities. System Integrators and End Users of LAN and WAN Systems. The Company provides network cabling services to both systems integrators of network systems and directly to the end users of the network. Systems integrators such as Unisys, IBM, and Lucent Technologies, Inc. submit competitive bids for network systems to third party customers. The Company submits a competitive bid to the systems integrator for the cabling portion of the overall proposal. If the systems integrator is awarded the project, the Company will perform the required cabling services if its bid is accepted and bill the systems integrator directly. In other projects, the end users request bids directly from third party suppliers for network related services. In this case, the Company submits a proposal directly to the end user. The Company provides network cabling services through its larger field offices, which provides customers with a single source for large regional or nationwide network installation projects. The Company employs a combined corporate and regional approach to marketing its network cabling services. In 1992 the Company created a dedicated corporate sales and installation support group to identify and establish relationships with systems integrators that can provide an ongoing source of network cabling business in markets in which the Company has regional offices. The Company augments this national sales effort with network sales engineers who market multi-state sales territories from key regional offices. DBS Providers. DBS companies provide television services via transmission from medium power and higher power communications DBS satellites. Unlike cable television, DBS services do not require ground construction to install, maintain, or upgrade cable distribution plant. These systems require the subscriber to purchase or lease a satellite dish to receive signals and a receiver system to process and descramble signals for television viewing. Digital satellite television has been one of the fastest selling consumer electronics products in U.S. history. As of December 31, 1998 the installed base for digital satellite services ("DSS") consisted of approximately 8.7 million active subscribers nationwide, as compared to approximately 6.2 million, 4.4 million and 2.2 million subscribers at December 31, 1997, 1996 and 1995, respectively. PRIMESTAR, Inc. ("PRIMESTAR"), DirecTV, Inc. ("DirecTV"), and EchoStar Communications Corporation ("EchoStar") are the primary providers of DBS services in the United States. Historically, DirecTV distributed their equipment primarily via nationwide retail outlets and utilized numerous contractors to perform their installation services. Because of this, the Company has been unable to obtain the necessary volume of work-orders from DirecTV needed to operate in an acceptable profitable manner. PRIMESTAR also utilized numerous contractors ("full-service providers" or "FSPs") to install their satellite equipment. PRIMESTAR required that FSPs sign exclusivity agreements with them to perform satellite installation services, which the Company elected not to do. Thus, revenues received from PRIMESTAR related installations, primarily through contracts with the FSPs, decreased to approximately $1.1 million in fiscal 1999 from approximately $4.5 million the previous year. Revenues derived from all DSS providers including PRIMESTAR, EchoStar, and DirecTV for the fiscal year ended March 28, 1999 were approximately $3.4 million, versus approximately $5.2 million in fiscal 1998. On April 28, 1999 DirecTV, a subsidiary of Hughes Corporation and General Motors Corporation, completed its acquisition of PRIMESTAR. At that time, DirecTV indicated that it will operate the PRIMESTAR medium-power business for approximately 24 months, during which time it will transition PRIMESTAR subscribers to DirecTV high-power service. The Company believes that the acquisition of PRIMESTAR by DirecTV, along with other developments within the DSS industry, will provide significant cabling opportunities and increased demand for its services. DBS providers have historically been at a disadvantage in competing with MSOs due to the fact that they cannot generally offer local programming. However, on April 27, 1999 the U.S. House of Representatives passed the "Satellite Copyright Competition and Consumer Protection Act of 1999" which: (1) allows satellite TV companies to continue the delivery of out-of-market broadcast network signals to eligible subscribers, as well as deliver local channels into local markets, (2) reduces the copyright fees satellite TV carriers -8- 9 pay for broadcast signals, and (3) eliminates the 90-day waiting period for former cable subscribers to subscribe to distant network signals via satellite. The U.S. Senate recently approved similar legislation, and any differences between the two bills will have to be reconciled before the legislation can become law. Upon passage of the legislation by the House of Representatives, DirecTV announced plans for delivering local broadcast network channels by satellite to approximately 50 million homes in major metropolitan markets across the United States. DirecTV, with its acquisition of PRIMESTAR, currently provides service to more than 7 million subscribers. The Company believes that DirecTV, along with other providers of DSS services, are seeking larger, national contractors to provide their installation and maintenance needs. The conversion of PRIMESTAR subscribers to DirecTV satellite dishes will require numerous new installations. PRIMESTAR currently has approximately 2.3 million satellite subscribers. Bell Atlantic Corp., SBC Communications Inc., and GTE Corporation have also entered into a multi-year marketing and distribution agreement with DirecTV to sell satellite-television services to their telephone customers, and the Company currently performs satellite installations for Bell Atlantic in California. In order to increase the Company's DSS installation capability, it is in the process of implementing a national installation network and customer call center. This installation network will feature centralized work order processing that will process work orders and disseminate them throughout the United States. The customer call center and support function will handle both customer and end subscriber calls along with work order status and monitoring procedures. The Company is in the process of partnering with other smaller contractors to provide installation coverage in those areas that are currently not practical or cost efficient to service. The installation network will ultimately provide complete service coverage for the continental United States. Other Telecommunications Providers. As a result of the opportunities presented by the passage of The Telecommunications Act of 1996 (the "Act"), the overall growing customer demand for enhanced video, voice and data telecommunications services which have increased bandwidth requirements, and the continued industry trend toward the outsourcing of cabling services, the Company believes it can capture new customers in industries in which it currently competes, and can expand into new industries and customers requiring cabling services. For example, the Act allows public utility companies to provide local and long distance telecommunications facilities to third parties. Many utilities have already announced plans to enter businesses or form joint ventures offering services such as local and long distance telephone services, cable television services and Internet access to their markets. The Company also markets its cabling services to other providers offering individual or bundled video, voice, and data services such as RCN Corp., a competitive carrier offering bundled phone, video, and Internet services in several Northeast cities. For the fiscal year ended March 28, 1999 the Company performed approximately $400,000 of cabling services to RCN Corp., primarily in the Boston area. CONTRACTS Many telecommunication providers require cabling service contractors, such as the Company, to first enter into a master contract which establishes certain requirements to be met before actual work orders are issued. However, master contracts do not bind these companies to use any one cabling service contractor in any given locality or for any given project. Rather, they negotiate with individual cabling service contractors on a project by project basis. Therefore, the Company has no extended commitment from any single provider and bids on individual projects along with its competitors. The Company is typically compensated on these projects on a per unit basis for actual services performed. The Company's commercial network cabling and outside plant construction services are generally nonrecurring in nature and are contracted on a project-by-project basis. Since the Company's services are generally provided on a project-by-project basis, the amount of work being performed at any given time for any particular customer and the general mix of customers for which work is being performed can vary significantly. OPERATIONS Amerilink's projects are managed under the direct supervision of over 40 project managers who generally report to area or regional managers or, in certain cases, directly to one of the Company's four regional directors. The regional directors are all under the supervision of the Company's Senior Vice President - Operations. The Company's marketing and operations functions are decentralized, giving regional directors, regional managers and area managers greater flexibility in their regions to maintain and develop relationships with existing customers and to pursue new opportunities. The Company provides its services predominately through the use of independent contractors via its national network of regional and satellite field offices. Each regional office is headed by a -9- 10 regional manager or area manager whose primary duties consist of new business development and contract oversight. Regional managers and area managers employ the project managers who are responsible for locating and qualifying independent contractor production personnel, maintaining and deploying vehicles and equipment, and supporting the regional managers and area managers in maintaining customer relationships. The smaller satellite offices report to and are supervised by the larger regional offices. Regional offices are "full service" premises wiring providers offering both residential and commercial premises wiring services and in certain markets outside plant construction services. MCCI projects are managed in a similar manner, with the six field offices headed by a branch manager who reports directly to the MCCI Vice President of Operations. MCCI provides its commercial cabling services through the use of hourly paid employee technicians. The Company's operating profitability and capacity to increase revenues is largely dependent upon its ability to locate and attract qualified regional directors, regional managers, area managers, project managers, and production personnel. The Company's corporate headquarters in Columbus, Ohio, provides national marketing support, strategic planning, administrative services and operations support for the Company's field offices. The corporate office develops and maintains customer relationships with national companies and provides support for field offices performing work for these customers in local markets. In addition, the corporate office assists regional directors and area managers in responding to all bid requests by providing engineering support, performing cost analyses to determine pricing, and preparing proposal response documentation. All purchasing and accounting functions are managed at the corporate level. MATERIALS The Company provides both consignment and material turnkey services. In the majority of non-network cabling contracts, the Company's customers supply most or all of the materials required for the project. The majority of the Company's network and construction contracts are turnkey contracts in which the Company provides both the labor and materials necessary for the network installation. The Company purchases cabling materials directly from independent third party suppliers, and does not manufacture any materials for resale to customers. The Company is not dependent upon any one supplier for network cabling materials and has not experienced, nor does it anticipate experiencing, difficulties in obtaining network cabling materials. PERSONNEL As of March 28, 1999, the Company had 501 employees. Fifty-two (52) are employees at the Corporate Office in Columbus, Ohio and 449 are employed in field offices, including 88 employees of Midwest Computer Cable, Inc. The Company believes that its relationship with its employees is good. AmeriLink provides most of its cabling services through the use of independent contractors who are either sole proprietorships or small business entities. Independent contractors are engaged and compensated on a project-by-project basis to perform local work. They generally provide their own vehicles, tools and insurance coverage. Independent contractors are paid in accordance with a schedule of unit rates for the performance of specific services. MCCI utilizes hourly paid employee technicians to perform its commercial cabling services. The Company's success is dependent upon its ability to attract and retain the services of qualified employees and independent contractors. From time to time, state and federal authorities have asserted that these contractors should be deemed to be employees of the Company for purposes of taxation and coverage under wage and hour, workers' compensation and unemployment compensation laws and regulations. None of these asserted claims has had a material adverse effect on the Company's results of operations or financial condition. However, if, in the future, additional assertions by state or Federal authorities are upheld, the Company could incur significant litigation costs and liabilities and, if the Company were required to treat individual installers as employees rather than independent contractors, the Company's operating expenses could increase significantly with potential adverse effects on its results of operations and financial condition. COMPETITION The Company competes both with the in-house service organizations of telecommunication providers and with independent third parties in most of the markets in which it operates. Historically, the cabling service industry has been highly fragmented, and most service providers are small, privately-held companies. The Company believes -10- 11 that while it may be considered a major competitor in many of the markets in which it provides cabling services, there are few barriers to entry into the cabling service business and, as a result, any business that has access to persons who possess technical expertise may become a competitor of the Company. Smaller regional and local competitors may be able to offer lower prices because of lower overhead expenses. Because of the highly competitive bidding environment in recent years for cable service contracts, the price of the cable service contractor's bid has often been the deciding factor in determining whether such contractor was awarded a contract for a cabling project. In response to the current deregulated operating environment, there has been an increase in business combinations among the smaller private firms, which the Company believes will continue. As the demand for cabling services has increased, the Company believes that contracts are increasingly being awarded based on the combination of a contractor's price, its track record for completing projects, its ability to dedicate management and production personnel to the project, and its financial and operational resources to complete the contract. The markets in which the Company provides network cabling services are highly competitive and many of the competitors in those markets include national competitors with greater financial resources than the Company. VARIABILITY IN QUARTERLY RESULTS AND SEASONALITY The Company's quarterly revenues and associated operating results have in the past, and may in the future, vary depending upon a number of factors. The Company has no long-term contractual commitments to provide its services. The contractual commitments which do exist generally can be terminated on 30 days' notice. These contractual commitments do not involve a firm backlog of committed work because the nature of the Company's contracts with MSOs, Telcos, CLECs, DBS providers, and other telecommunication providers produce daily work orders only on a project-by-project basis which must be funded by an approved purchase order. In addition, network cabling services are generally nonrecurring in nature and are contracted on a project-by-project basis. Therefore, the amount of work performed at any given time and the general mix of customers for which work is being performed can vary significantly. Consolidation within the telecommunications industry may also delay or depress capital spending, as companies assess their new business plans and strategies and focus on administrative and operational issues associated with their acquisitions or alliances. The Company's operations historically have also been influenced by the budget cycles of the Company's customers. Many of the Company's MSO customers utilize a calendar year budget cycle, funded with quarterly purchase authorizations, which in certain fiscal years has resulted in a lack of availability of funds in the Company's third fiscal quarter and has delayed work authorizations in the early part of the calendar year (the Company's fourth and first fiscal quarters.) Telecommunications providers are also subject to actual and potential local, state, and federal regulations that influence the availability of work for which the Company may compete. Weather may affect operating results due to the fact that construction cabling services are performed outdoors. Weather can also impact the Company's premises wiring cabling services due to the limited and lost production associated with poor driving conditions, and soft ground which may prevent underground premises installations, the burying of cable drops, and increased restoration costs. Operating results may also be affected by the capital spending patterns of the Company's customers and by the success of various technologies and business strategies employed by them. In fiscal 1998, the Company recorded approximately $25.9 million (or 30.2% of total revenues for the year) in revenues from Telcos that are building or expanding video systems. Of the total $25.9 million of revenues from Telcos, approximately $14.7 million (or 17% of total Company revenues) was generated from work orders issued under contracts with GTE Media Ventures, a part of GTE Corporation. In late 1997 there was a reassessment by Telcos with regard to their video strategies, primarily of pursuing less costly DBS and MMDS wireless cable systems in lieu of the more costly hybrid fiber-coaxial hardwire systems. Revenues from Telcos for video services, excluding DirecTV re-sale programs, have declined sequentially in the six consecutive quarters that ended December of 1998, from approximately $8.3 million in the quarter ended June 1998 to approximately $2.5 million in the third and fourth quarters of fiscal 1999. Company revenues from GTE in fiscal 1999 declined $11.7 million to $3.0 million. The amount of future capital allocated by these companies to their video programs is largely contingent upon the financial success of these programs, possible new technical developments, and overall strategic decisions by the companies regarding video services. The Company's operating profitability and capacity to increase revenues is also largely dependent upon its ability to locate and attract qualified field managers, project managers, and technical production personnel. Other factors that may affect the Company's operating results include the size and timing of significant projects, and the gain or loss of a significant contract or customer. -11- 12 ITEM 2. PROPERTIES. The Company does not own any real property. The Company's corporate headquarters are located in Columbus, Ohio. The Company's regional field offices service the following metropolitan areas: Atlanta, Baltimore, Charleston, West Va., Cedar Rapids, Chicago, Cincinnati, Cleveland, Columbus, Dallas, Davenport, Des Moines, Detroit, Houston, Indianapolis, Kansas City, Los Angeles, Louisville, New Orleans, Omaha, Phoenix, Richmond, San Antonio, San Francisco, Seattle/Tacoma, St. Louis, and Tampa Bay. A typical regional office consists of an office with an attached warehouse for the storage of materials, tools and equipment and an adjacent secure outside storage area. The Company leases its corporate headquarters and all of its regional and satellite offices from unaffiliated lessors. The lease terms, including options exercisable by the Company, range from one month to five years. Subsequent to fiscal 1999, the Company executed a new ten-year non-cancelable lease agreement for a new corporate office facility that is in addition to leases that were in effect as of March 28, 1999. The agreement will require future minimal rental commitments of $230,000 per year effective upon the targeted occupation and commencement date, which is currently estimated to be April 1, 2000. ITEM 3. LEGAL PROCEEDINGS. The Company is involved in various legal proceedings, most of which arise in the ordinary course of business and many of which are covered by insurance. In the opinion of the Company's management, none of the claims relating to such proceedings will have a material adverse effect on the financial condition or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock is traded on the NASDAQ National Market, under the symbol "ALNK". The following table sets forth for the periods indicated the high and low last sales price for the common shares, as reported by the NASDAQ National Market.
Sales Prices ------------ High Low ---- --- FISCAL YEAR 1998 Quarter Ended June 29, 1997 $ 9.500 $ 6.000 Quarter Ended September 28, 1997 $ 33.875 $ 9.406 Quarter Ended December 28, 1997 $ 36.250 $ 21.500 Quarter Ended March 29, 1998 $ 33.563 $ 21.500 FISCAL YEAR 1999 Quarter Ended June 28, 1998 $ 25.000 $ 11.875 Quarter Ended September 27, 1998 $ 16.250 $ 5.875 Quarter Ended December 27, 1998 $ 9.250 $ 7.000 Quarter Ended March 28, 1999 $ 9.250 $ 6.750
The Company has never paid cash dividends, other than S Corporation distributions, on its common stock. The Company currently intends to retain all of its net earnings to finance future growth and therefore does not anticipate paying any cash dividends in the foreseeable future. As of May 25, 1999, there were approximately 3,457 holders of the Company's stock. -12- 13 ITEM 6. SELECTED FINANCIAL DATA. The selected financial data included in the following table should be read in conjunction with the Company's Financial Statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing on pages 14 through 22 of this Annual Report on Form 10-K. On February 2, 1999, the Company acquired Midwest Computer Cable, Inc. The acquisition has been accounted for as a purchase, and the results of operations of MCCI have been included in the consolidated results of the Company from the date of acquisition.
FISCAL YEAR ENDED ----------------------------------------------------------------------- APRIL 2, MARCH 31, MARCH 30, MARCH 29, MARCH 28, 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- (in thousands, except per share data) STATEMENT OF INCOME DATA: Revenues $ 47,541 $ 56,055 $ 63,036 $ 85,646 $ 65,211 Income from operations 2,780 1,170 3,301 7,846 1,636 Income before income taxes (a) 2,487 686 2,691 7,659 2,100 Net income (a) 1,492 457 1,568 4,586 1,223 Earnings per share (a): Basic $ 0.47 $ 0.13 $ 0.45 $ 1.20 $ 0.29 Diluted $ 0.45 $ 0.13 $ 0.44 $ 1.15 $ 0.28 Weighted average shares: Basic 3,156 3,479 3,479 3,806 4,245 Diluted 3,351 3,626 3,589 4,002 4,334 BALANCE SHEET DATA: Total assets $ 17,133 $ 20,554 $ 26,211 $ 38,528 $ 40,350 Total debt 4,009 6,563 9,069 ---- ---- Shareholders' equity 8,754 9,211 10,802 31,321 33,751
- ---------- (a) On a pro forma basis for the fiscal year ended April 2, 1995. NOTE: The Company made S Corporation distributions to its shareholders Larry R. Linhart, E. Len Gibson and Robert L. Powelson of $3.2 million in fiscal 1995, $2.7 million of which was made in conjunction with the Company's initial public offering in August 1994 and $500,000 was paid in April 1994. No dividends have been paid since the Company's initial public offering on August 12, 1994. -13- 14 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. This Annual Report on Form 10-K, including Management's Discussion and Analysis of Financial Condition and Results of Operations, contains various forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involves risks and uncertainties. These forward-looking statements, such as statements regarding anticipated future revenues, capital expenditures and other statements regarding matters that are not historical facts, involve predictions. These forward-looking statements are based on the Company's current expectations and are subject to a number of risks and uncertainties that could cause actual results in the future to differ significantly from results expressed or implied in any forward-looking statements included herein. The Company's actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements depending upon a variety of important factors, including a continuation of the degree and timing of customer utilization and rate of renewals of contracts with the Company at historic levels, the Company's relationship with key customers, implementation of the Company's growth strategy, seasonality, changing market conditions and customer purchase authorizations, competitive and regulatory risks associated with the telecommunications industry, new products and technological changes, disruptions to the operations of the Company resulting from Year 2000 issues, and other risks detailed in the Company's periodic report filings with the Securities and Exchange Commission, including, but not limited to, the factors described under the caption "Variability in Quarterly Results and Seasonality" below. PROPOSED MERGER WITH TANDY CORPORATION On May 21, 1999, AmeriLink Corporation and Tandy Corporation ("Tandy") each announced their signing of a definitive merger agreement (the "Merger"). Under terms of the Merger, Tandy will acquire 100% of AmeriLink's common stock at an exchange ratio designed to reflect $15.60 per share of AmeriLink's stock in a tax-free exchange for Tandy stock. If the average closing price of Tandy's common shares falls below a specified amount for a twenty-day trading period ending just before the merger is completed, AmeriLink shareholders will receive $14.50 cash for every AmeriLink common share they own instead of Tandy stock. Following the merger, AmeriLink will continue its operations as a wholly owned subsidiary of Tandy. The Merger has been approved by the Board of Directors of each Company and is subject to usual and customary closing conditions, including regulatory and shareholder approval. It is currently anticipated that the transaction will close in late August 1999. More detailed information relating to the terms and conditions of the Merger will be contained in a Registration Statement on Form S-4 to be filed by Tandy on or around June 8, 1999, which will include a prospectus and a proxy statement for a special shareholders meeting of AmeriLink. If the merger is not consummated for any reason, the Company intends to continue operating independently. RECENT ACQUISITION On February 2, 1999, the Company, through a wholly-owned subsidiary, MCC Acquisition Corp. ("MAC"), acquired Midwest Computer Cable, Inc. ("MCCI"), a commercial cabling installation firm headquartered in Des Moines, Iowa. Pursuant to the Merger Agreement, MCCI was merged with and into MAC and the separate corporate existence of MCCI ceased. Following the Merger, MAC changed its name to "Midwest Computer Cable, Inc." and will continue to conduct business as a wholly-owned subsidiary of the Company. The consideration delivered to the shareholders of MCCI in connection with the acquisition consisted of $4.4 million in cash and 500,000 common shares (without par value) of the Company valued at the time of the merger at $3,565,000. MCCI provides installation and maintenance services for premise cabling systems through six offices located in Iowa, Kansas, Ohio, and Texas. The Company believes that the additional offices, management, and technicians which were gained from the MCCI acquisition will accelerate the growth of its commercial cabling and installation business. -14- 15 OVERVIEW The Company reported record revenues and earnings for its 1998 fiscal year which ended March 29, 1998. In comparison to the previous fiscal 1997 year, revenues increased 36% to approximately $85.6 million, operating income more than doubled to $7.8 million, and diluted earnings per share increased 161% to $1.15. Revenues and operating results for the most recent fiscal 1999 year, however, decreased substantially from fiscal 1998. Revenues decreased 24% to approximately $65.2 million, and operating income decreased to approximately $1.6 million. Diluted earnings per share for the most recent fiscal year decreased 76% to $0.28. The Company's decreased operating profitability is primarily the result of its reduced revenue levels, which were negatively impacted primarily by a reduction in revenues from telephone companies building or expanding competitive video systems. The following table sets forth for fiscal years 1997, 1998 and 1999, and the dollar change from fiscal 1997 to 1998 and from fiscal 1998 to 1999: (1) approximate Company revenues from premises wiring services (segregated by residential premises wiring services and commercial premises wiring services) and (2) approximate premises wiring residential revenues by principal customer group or service. Fiscal 1999 revenues include approximately $1.9 million of commercial network cabling revenues from MCCI .
(DOLLARS IN MILLIONS) - --------------------- FISCAL YEAR CHANGE IN DOLLARS 1997 1998 1999 1997 / 1998 1998 / 1999 ---- ---- ---- ----------- ----------- PREMISES WIRING RESIDENTIAL: MSOs $ 22.5 $ 26.1 $ 27.2 $ 3.6 $ 1.1 Telco video 10.3 25.9 11.2 15.6 (14.7) DBS providers 6.8 5.2 3.4 (1.6) (1.8) Other -- 3.7 1.2 3.7 (2.5) -------- ------- ------- -------- --------- TOTAL RESIDENTIAL 39.6 60.9 43.0 21.3 (17.9) COMMERCIAL: 13.8 16.1 16.7 2.3 0.6 -------- ------- ------- -------- --------- TOTAL $ 53.4 $ 77.0 $ 59.7 $ 23.6 $ (17.3) ======== ======== ======== ======== =========
After deliberation for several years, the Telecommunications Act of 1996 ("the Act") was signed into law in February 1996. Key provisions of the Act were designed to enhance competition within the telecommunications industry. These provisions include: (1) allowing Telcos to sell video services, and in certain cases, to buy local cable television companies, (2) deregulating cable companies (such as allowing them to charge what they wish for many channels) once there is effective competition or after three years, (3) permitting RBOCs and other LECs to enter the long distance market once certain conditions are met in the local phone market, and (4) allowing long distance providers to enter the local phone business. During the fiscal year that ended March 29, 1998 the Company provided premises wiring services for competitive video systems to the following Telcos: GTE, Ameritech, Pacific Bell, U.S. West, and BellSouth. In fiscal 1998, revenues from Telcos for video communication systems increased 151% to approximately $25.9 million from approximately $10.3 million in the previous 1997 fiscal year. SBC Communications ("SBC") acquired Pacific Bell in April 1997 and announced that it was scaling back its investments in video services in its service areas. SBC discontinued its broadband network video trials including a Pacific Bell project in San Jose, California. This project produced approximately $1.1 million of revenues for the Company in its fiscal 1998 first quarter. In late 1997 there was a reassessment by Telcos with regard to their video strategies, primarily of pursuing less costly DBS and MMDS wireless cable systems in lieu of the more costly hybrid fiber-coaxial hardwire systems. In 1998 Bell Atlantic recorded pre-tax charges of $23 million related to wireline and other nonsatellite video initiatives. In conjunction with this charge, Bell Atlantic announced a strategic decision to focus video efforts on satellite service being offered via DirecTV, and they are currently providing video service exclusively in conjunction with arrangements with DirecTV. The biggest impact to the Company regarding Telco competitive video projects has been the decision by GTE (through GTE Media Ventures) to scale back deployment of the hybrid fiber coax (HFC) video networks that it had built in certain test markets, and not to proceed with HFC deployment in previously announced additional markets. In 1996, GTE announced aggressive plans to expand video services to 66 markets with a reach of some seven million homes by 2004. AmeriLink was one of GTE's lead contractors in its initial two test markets in Tampa Bay, Florida and Ventura County, California. In fiscal 1998 revenues from these two projects totaled approximately $14.7 million, and GTE was the Company's -15- 16 largest customer, comprising approximately 17% of total revenues. After completing a review of its operations in these two test markets, GTE decided to scale back its video initiatives. In their 1998 fiscal year, GTE recorded a pretax charge of approximately $161 million related to their video networks, which had generated operating losses of approximately $86 million as of December 31, 1998. Company revenues from GTE from these two projects in fiscal 1999 declined $11.7 million to $3.0 million. The Company no longer performs installation services for GTE in the Tampa Bay area, and revenues from the Ventura County project for the most recent fourth quarter ended March 28, 1999 were only approximately $240,000. Revenues from Telcos for video services, excluding DirecTV re-sale programs, have declined sequentially in the six consecutive quarters that ended December of 1998, from approximately $8.3 million in the quarter ended June 1998 to approximately $2.5 million in the third and fourth quarters of fiscal 1999. In response to this decrease in revenues from Telephone companies, the Company has initiated or is initiating strategies designed to rebuild its revenue streams and to improve its operating results, including: (1) focusing marketing activities on positive developments within its core cable television customer base, primarily with Tele-Communications, Inc. ("TCI"), (2) aggressively seeking acquisitions or alliances to augment its existing premises wiring capabilities (3) pursuing cabling opportunities with DirecTV and other DSS providers given the potential market for video, audio, and data programming services via satellite, along with recent favorable regulatory and market developments within the DSS industry, and (4) continuing to diversify its customer base and market its cabling services to new and additional telecommunication providers. The Company has historically provided cabling services to TCI, who comprised approximately 15% of total Company revenues for its 1994 fiscal year. However, the Company focused on broadening its customer base in order to reduce its dependency on cable television companies, due to the highly volatile nature of capital spending within the cable television industry. As a result of project opportunities from Telcos that were building or expanding competitive video systems, the Company deployed its resources on Telco projects due to their perceived short term and long term economic potential. Revenues derived from TCI projects for the 1998 fiscal year comprised only 4% of total Company sales. In June 1998 AT&T Corporation announced its intent to acquire TCI and announced a $4 billion four-year upgrade and maintenance program of TCI's cable networks. The Company aggressively pursued TCI projects and opened new regional offices in Dallas, Baltimore, and the Seattle / Tacoma area, primarily to service new TCI contracts. Revenues from TCI for the 1999 fiscal year increased $3.8 million to approximately $6.9 million, and comprised approximately 11% of total Company revenues. The Company believes that its strong financial resources allow it to supplement internal growth and sales development efforts with acquisitions and strategic alliances. On February 2, 1999, the Company, through a wholly-owned subsidiary, acquired Midwest Computer Cable, Inc., a commercial cabling installation firm that provides installation and maintenance services for premise cabling systems through six offices located in Iowa, Kansas, Ohio, and Texas. The Company believes that the additional offices, management, and technicians which were gained from the acquisition will accelerate the growth of its commercial cabling and installation business. On April 28, 1999 DirecTV, a subsidiary of Hughes Corporation and General Motors Corporation, completed its acquisition of PRIMESTAR. At that time, DirecTV indicated that it will operate the PRIMESTAR medium-power business for approximately 24 months, during which time it will transition PRIMESTAR subscribers to DirecTV high-power service. The Company believes that the acquisition of PRIMESTAR by DirecTV, along with other developments within the DSS industry, will provide significant cabling opportunities and increased demand for its services. DBS providers have historically been at a disadvantage in competing with MSOs due to the fact that they cannot generally offer local programming. However, on April 27, 1999 the U.S. House of Representatives passed the "Satellite Copyright Competition and Consumer Protection Act of 1999" which: (1) allows satellite TV companies to continue the delivery of out-of-market broadcast network signals to eligible subscribers, as well as deliver local channels into local markets, (2) reduces the copyright fees satellite TV carriers pay for broadcast signals, and (3) eliminates the 90-day waiting period for former cable subscribers to subscribe to distant network signals via satellite. The U.S. Senate recently approved similar legislation, and any differences between the two bills will have to be reconciled before the legislation can become law. Upon passage of the legislation by the House of Representatives, DirecTV announced plans for delivering local broadcast network channels by satellite to approximately 50 million homes in major metropolitan markets across the United States. DirecTV, with its acquisition of PRIMESTAR, currently provides service to more than 7 million subscribers. The Company believes that DirecTV, along with other providers of DSS services, are seeking larger, national contractors to provide their installation and maintenance needs. The conversion of PRIMESTAR subscribers to DirecTV satellite dishes will require numerous new installations. PRIMESTAR currently has -16- 17 approximately 2.3 million satellite subscribers. Bell Atlantic Corp., SBC Communications Inc. and GTE Corporation have also entered into a multi-year marketing and distribution agreement with DirecTV to sell satellite-television services to their telephone customers, and the Company currently performs satellite installations for Bell Atlantic in California. In order to increase the Company's DSS installation capability, it is in the process of implementing a national installation network and customer call center. This installation network will feature centralized work order processing that will process work orders and disseminate them throughout the United States. The customer call center and support function will handle both customer and end subscriber calls along with work order status and monitoring procedures. The Company is in the process of partnering with other smaller contractors to provide installation coverage in those areas that are currently not practical or cost efficient to service. The installation network will ultimately provide complete service coverage for the continental United States. Finally, the Company has continued to market its cabling services to new customers and markets beyond the traditional cable television industry. In late fiscal 1998, the Company started performing commercial voice and data installation services for Teligent, Inc., and Winstar, facilities-based nationwide CLECs that offer customers a variety of individual and bundled services, including local and long distance voice services and high-speed data and Internet service in a growing number of major markets throughout the United States. Revenues derived from cabling services from Teligent and Winstar for the fiscal year ended March 28, 1999 were approximately $0.9 million and $0.3 million, respectively. RESULTS OF OPERATIONS Revenue is generated from cabling projects performed via work orders issued under master contracts. Contract costs may vary depending upon the contract volume, the level of productivity, competitive factors in the local market, and other items. Cost of sales includes subcontractor production costs, materials not supplied by the customer, vehicle and machinery expenses, and business insurance related costs. Selling, general and administrative expenses consist primarily of field employee wages and payroll costs. FISCAL 1999 COMPARED TO FISCAL 1998 REVENUES Total revenues for fiscal 1999 were $65,211,040 compared to $85,645,991 for fiscal 1998, a decrease of 24%. Revenues derived from residential and commercial premises wiring activities decreased by 22% to $59.7 million in fiscal 1999, versus approximately $77.0 million in the prior year period. Premises wiring revenues from telephone companies for video communication services decreased to approximately $11.2 million (17% of total Company revenues) in fiscal 1999 from $25.9 million (30% of total Company revenues) in fiscal 1998. Revenues from these services have declined sequentially in the six consecutive quarters that ended December of 1998, from approximately $8.3 million in the quarter ended June 1998 to approximately $2.5 million in the third and fourth quarters of fiscal 1999. Revenues from GTE Media Ventures derived from classic hardwire cable system projects for fiscal 1999 declined to $3.0 million, versus approximately $14.7 million in fiscal 1998. GTE was the Company's largest customer in fiscal 1998 and comprised approximately 17% of total Company revenues. The amount of future capital allocated by Telcos to their video programs is largely contingent upon the financial success of these programs, possible new technical developments, and overall strategic decisions by the companies regarding video services. It is unclear what impact that the current pending mergers between SBC Communications Inc. and Ameritech Corp. and Bell Atlantic Corp. and GTE will have on the respective company's video strategies. Premises wiring revenues for fiscal 1998 also included approximately $2.6 million in revenues from a contract to provide voice and data cabling for U.S. West in Phoenix, AZ. Work under this contract was substantially completed in June 1998 and contributed approximately $0.5 million of revenues in fiscal 1999. Commercial network cabling revenues in fiscal 1999 were negatively impacted by funding delays on a number of large contracts for cabling educational facilities. These projects , which were anticipated to commence in May 1999, were expected to generate approximately $5.0 million of revenues in fiscal 1999. Cabling on some of these projects began in late fiscal 1999 and contributed approximately $0.2 million in revenues. Revenues for fiscal 1999 include approximately $1.9 million of commercial network cabling revenues from Midwest Computer Cable, Inc., a commercial cabling installation firm acquired by the Company on February 2, 1999. Revenues and operations were adversely impacted -17- 18 by weather in the fourth fiscal quarter ended March 28, 1999. In addition, revenues during the fourth quarter of fiscal 1998 were negatively impacted by weather and by delays in customer purchase and work authorizations in several market areas. GROSS PROFIT Gross profit for fiscal 1999 was $25.7 million, or 39.4% of revenues, as compared to $33.0 million, or 38.6% of revenues in 1998. The increase in gross margin is due primarily to a decrease in subcontractor production costs, which decreased as a percent of labor cabling revenues in fiscal 1999 compared to the corresponding period last year. Contract and project subcontractor costs are dependent upon a number of factors, including pricing for the Company's services, the level of productivity, competitive factors in the local market and other items. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses for fiscal 1999 were $24.1 million, or 37.0% of revenues, as compared to $25.2 million, or 29.4%, of revenues for fiscal 1998. The Company's selling, general and administrative cost structure is maintained at levels necessary to adequately support both anticipated near term revenues and projected longer term revenues. These anticipated revenue levels and associated cost structures may vary among the Company's regional field offices and geographic market areas. The Company is reluctant to significantly reduce its cost structure during periods of reduced revenues and spending by its customers and believes a certain expense level is necessary to adequately support longer term revenue growth and quality customer service. The decrease in selling, general and administrative expenses for fiscal 1999 is primarily a result of a decrease in employee wage expense and employee benefits. The increase in selling, general and administrative expenses as a percentage of revenues is a result of a decline in revenues in fiscal 1999, which decreased approximately 24% from fiscal 1998. INTEREST INCOME AND EXPENSE Interest income was $464,174, or 0.7% of revenues, for fiscal 1999 as compared to net interest expense of $187,633, or 0.2% of revenues, for fiscal 1998. In October 1997 the Company used part of the proceeds received from a public stock offering to pay in full its outstanding bank debt of approximately $6.8 million. The balance of the proceeds are being invested in short-term investment grade securities (see "Liquidity and Capital Resources"). PROVISION FOR INCOME TAXES The Company's effective tax rate was 41.8% for fiscal 1999 versus 40.1% for fiscal 1998. This increase is the result of Goodwill amortization and other permanent differences which, combined, represented 4.4% of income before income taxes versus 0.9% in fiscal 1998. FISCAL 1998 COMPARED TO FISCAL 1997 REVENUES Total revenues for fiscal 1998 were $85,645,991 compared to $63,035,814 for fiscal 1997, an increase of 35.9%. Revenues derived from residential and commercial premises wiring activities increased by 44.2% to a record $77.0 million in fiscal 1998, versus approximately $53.4 million in the prior year period. Such revenues accounted for 90.0% of the Company's total revenues for fiscal 1998 versus 84.7% a year earlier, consistent with the Company's announced strategy to focus efforts on premises wiring activities. Premises wiring revenues derived from Telcos building or expanding video systems increased to approximately $25.9 million (30.2% of total Company revenues) in fiscal 1998 compared to approximately $10.3 million (16.4% of total Company revenues) in fiscal 1997. Of the total $25.9 million of revenues from Telcos, approximately $14.7 million, or 17% of total Company revenues, was generated from work orders issued under -18- 19 contracts with GTE Media Ventures, a division of GTE. Revenues from Telcos for video systems declined sequentially in each quarter of fiscal 1998, from approximately $8.3 million in the first quarter to approximately $4.2 million in the fourth quarter, which ended March 29, 1998. Premises wiring sales from cable television multiple system operators in fiscal 1998 increased approximately $3.6 million to $26.1 million, and commercial network revenues increased $2.3 million, or 17%, to approximately $16.1 million. Revenues during the fourth quarter of fiscal 1998 were negatively impacted by weather-related problems and delays in customer purchase and work authorizations in several market areas. In May 1998, the Company elected to terminate a contract in Phoenix, Arizona, with a Telco due to profitability concerns. Individual project work orders related to this contract generated approximately $2.6 million in revenues in fiscal 1998, including approximately $1.3 million in the fourth fiscal quarter ended March 29, 1998. Work under this contract was substantially completed in June 1998. GROSS PROFIT Gross profit for fiscal 1998 was $33.0 million, or 38.6% of revenues, as compared to $21.7 million, or 34.5% of revenues in 1997. The increase in gross margin is due primarily to a decrease in cabling materials expense (included in cost of sales) as a percent of total Company revenues. The majority of the Company's commercial network cabling contracts are turnkey contracts, in which the Company provides both the labor and materials necessary for the network installation. These cabling materials, which are billed at near cost, comprised approximately 9% of total Company revenues in fiscal 1998 versus approximately 14% in fiscal 1997. The percentage decline in cabling materials is primarily due to strong fiscal 1998 labor only revenues derived from Telcos. The increase in gross margin is also a result of subcontractor production costs, which decreased as a percent of labor cabling revenues in fiscal 1998. Contract and project subcontractor costs are dependent upon a number of factors, including pricing for the Company's services, the level of productivity, competitive factors in the local market, and other items. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses for fiscal 1998 were $25.2 million, or 29.4% of revenues, as compared to $18.4 million, or 29.2%, of revenues for fiscal 1997. The Company's selling, general and administrative cost structure is maintained at levels necessary to adequately support both anticipated near term revenues and projected longer-term revenues. These anticipated revenue levels and associated cost structures may vary among the Company's regional field offices and geographic market areas. The dollar increase in selling, general, and administrative expenses for fiscal 1998 is primarily due to increased employee wages and associated costs incurred to support both current period revenues and anticipated future revenues. INTEREST EXPENSE Interest expense was $343,726, or 0.4% of revenues, for fiscal 1998 as compared to $617,004, or 1.0% of revenues, for fiscal 1997. In October 1997 the Company used part of the proceeds received from a public stock offering to pay in full its outstanding bank debt of approximately $6.8 million. The balance of the proceeds are being invested in short-term investment grade securities. Interest income generated from these investments totaled $156,093 for the period ended March 29, 1998 (see "Liquidity and Capital Resources"). LIQUIDITY AND CAPITAL RESOURCES General. Historically, the Company's principal sources of liquidity have come from operating cash flow and credit arrangements. The Company's primary requirements for working capital are to finance accounts receivable, work-in-process and capital expenditures. Pursuant to a typical construction, MDU, or LAN cabling contract, work performed by the Company is generally not billed to a customer until various stages in a project are complete or until the entire project is complete. Because the Company pays its suppliers and subcontractors on a current basis, to the extent that trade payables exceed customer accounts paid at any given time, the Company would draw on its revolving credit note to finance its work-in-process until project work is billed to and paid by the customer. -19- 20 In October 1997, the Company completed a public offering in which it issued 600,000 new shares of common stock. Net proceeds from the offering were $14,175,000 before deducting related expenses of $279,443. The Company paid in full the outstanding balance of its revolving credit note of approximately $6.8 million and is using the balance of the proceeds for general corporate purposes, including working capital, expansion of sales and marketing activities, openings of new field offices and possible acquisitions of businesses, services or technology complimentary to the Company's business. Pending such uses, the proceeds are being invested in short-term investment grade securities. As of March 28, 1999 the Company had approximately $6.0 million in cash and cash equivalents. On September 4, 1998 the Company's Board of Directors authorized the repurchase of up to 400,000 common shares of the Company's stock in the open market or in privately negotiated transactions depending upon market conditions and other factors. The Company used current cash reserves to finance the share repurchase program. A total of 333,570 shares were repurchased as of March 28, 1999 at an aggregate purchase price of approximately $2.5 million. Subsequent to March 28, 1999 through April 13, 1999, the Company repurchased an additional 21,900 shares for an additional $159,000. Due to the proposed merger with Tandy Corporation, the Company does not anticipate repurchasing any additional shares. On February 2, 1999, the Company acquired Midwest Computer Cable, Inc. The consideration delivered to the shareholders of MCCI in connection with the Merger consisted of $4.4 million in cash and 500,000 shares of the Company's no par common stock, of which 249,000 were shares previously held in treasury. Combined accounts receivable and work-in-process at March 28, 1999 totaled $17.4 million compared to $19.6 million at March 29, 1998, a decrease of $2.2 million or 11%. This decrease was primarily due to lower revenue levels recorded in fiscal 1999. Revenues for fiscal 1999 were $65.2 million, a decrease of $20.4 million, or 24%, from the $85.6 million recorded in fiscal 1998. Revenues for the fourth quarter of fiscal 1999 decreased 12% to $17.1 million compared with $19.5 million for the fourth quarter of fiscal 1998. Combined accounts receivable and work-in-process for MCCI was approximately $1.1 million at March 28, 1999. The Company anticipates that it will continue to receive collections of its accounts receivable in the ordinary course of business. However, there is no assurance that the Company will be able to collect all or substantially all of its accounts receivable outstanding at any time, although the Company believes it has adequately provided for potential losses through its allowance for doubtful accounts. The Company's failure to collect substantially all of its accounts receivable and work-in-process would have an adverse impact on its working capital and could adversely affect its results of operations. Capital requirements are dependent upon a number of factors, including the Company's revenues, level of operations, and the type of contracts and work that the Company performs. Due to the fact that the Company generally has no extended commitments from its customers, it is difficult to forecast longer-term revenues and associated capital expenditure and operating cash requirements. Management believes that current cash reserves, cash flow from operations, and possible credit from its commercial bank should provide sufficient capital to meet the reasonably foreseeable business needs of the Company. Current Credit Arrangements. On March 9, 1999, the Company received a commitment from a commercial bank for a two-year $10.0 million unsecured revolving credit note. The formal loan agreement was executed on April 5, 1999 and provides for borrowing under the note at a rate of prime minus 1.25%. The revolving credit note matures on April 6, 2001 and includes a commitment fee, after the first request for an advance, of 1/8% on any unused portion of the note. The new loan agreement contains certain restrictive covenants, which, among others, require the Company to maintain certain financial ratios. There were no borrowings under the agreement as of March 28, 1999. Cash Flow From Operating Activities. For fiscal 1999, net cash provided by operating activities was $5.8 million. This was due primarily to the Company's depreciation and amortization, which totaled $3.1 million, and a reduction in combined accounts receivable and work-in-process, which totaled $3.3 million. The reduction in combined accounts receivable and work-in-process is due primarily to lower revenue levels in fiscal 1999. Cash Used In Investing Activities. Net cash used in investing activities for fiscal 1999 totaled $6.2 million, primarily as a result of the $4.6 million of cash utilized in the acquisition of MCCI (net of acquired cash), and the purchase of property and equipment which totaled $2.6 million. -20- 21 VARIABILITY IN QUARTERLY RESULTS AND SEASONALITY The Company's quarterly revenues and associated operating results have in the past, and may in the future, vary depending upon a number of factors. The Company has no long-term contractual commitments to provide its services. The contractual commitments which do exist generally can be terminated on 30 days' notice. These contractual commitments do not involve a firm backlog of committed work because the nature of the Company's contracts with MSOs, Telcos, CLECs, DBS providers, and other telecommunication providers produce daily work orders only on a project-by-project basis which must be funded by an approved purchase order. In addition, network cabling services are generally nonrecurring in nature and are contracted on a project-by-project basis. Therefore, the amount of work performed at any given time and the general mix of customers for which work is being performed can vary significantly. Consolidation within the telecommunications industry may also delay or depress capital spending, as companies assess their new business plans and strategies and focus on administrative and operational issues associated with their acquisitions or alliances. The Company's operations historically have also been influenced by the budget cycles of the Company's customers. Many of the Company's MSO customers utilize a calendar year budget cycle, funded with quarterly purchase authorizations, which in certain fiscal years has resulted in a lack of availability of funds in the Company's third fiscal quarter and has delayed work authorizations in the early part of the calendar year (the Company's fourth and first fiscal quarters.) Telecommunications providers are also subject to actual and potential local, state, and federal regulations that influence the availability of work for which the Company may compete. Weather may affect operating results due to the fact that construction cabling services are performed outdoors. Weather can also impact the Company's premises wiring cabling services due to the limited and lost production associated with poor driving conditions, and soft ground which may prevent underground premises installations, the burying of cable drops, and increased restoration costs. Operating results may also be affected by the capital spending patterns of the Company's customers and by the success of various technologies and business strategies employed by them. In fiscal 1998, the Company recorded approximately $25.9 million (or 30.2% of total revenues for the year) in revenues from Telcos that are building or expanding video systems. Of the total $25.9 million of revenues from Telcos, approximately $14.7 million (or 17% of total Company revenues) was generated from work orders issued under contracts with GTE Media Ventures, a part of GTE Corporation. In late 1997 there was a reassessment by Telcos with regard to their video strategies, primarily of pursuing less costly DBS and MMDS wireless cable systems in lieu of the more costly hybrid fiber-coaxial hardwire systems. Revenues from Telcos for video services, excluding DirecTV re-sale programs, have declined sequentially in the six consecutive quarters that ended December of 1998, from approximately $8.3 million in the quarter ended June 1998 to approximately $2.5 million in the third and fourth quarters of fiscal 1999. Company revenues from GTE in fiscal 1999 declined $11.6 million to $3.0 million. The amount of future capital allocated by these companies to their video programs is largely contingent upon the financial success of these programs, possible new technical developments, and overall strategic decisions by the companies regarding video services. The Company's operating profitability and capacity to increase revenues is also largely dependent upon its ability to locate and attract qualified field managers, project managers, and technical production personnel. Other factors that may affect the Company's operating results include the size and timing of significant projects, and the gain or loss of a significant contract or customer. INFLATION Historically, inflation has not been a significant factor to the Company as labor is the primary cost of operations and its contracts are typically short-term in nature. On an ongoing basis, the Company attempts to minimize any effects of inflation on its operating results by controlling operating costs and, whenever possible, seeking to insure that selling prices reflect increases in costs due to inflation. -21- 22 ENVIRONMENTAL MATTERS The Company anticipates that its compliance with various laws and regulations relating to the protection of the environment will not have a material effect on its capital expenditures, future earnings or competitive position. YEAR 2000 The Year 2000 problem arises from the fact that due to early limitations on memory and disk storage many computer programs indicate the year by only two digits, rather than four. This limitation can cause programs that perform arithmetic operations, comparisons, or sorting of data fields to yield incorrect results when working outside the year range of 1900-1999. This could cause computer hardware or software to fail or to create erroneous results unless corrective measures are taken. Incomplete or untimely resolution of the Year 2000 issue could have a material adverse impact on the Company's business, operations or financial condition in the future. The Company has undertaken a Year 2000 project which includes an assessment of computer equipment, software, network infrastructure, and telephone equipment. The project addresses inventory and assessment, impact analysis, implementation, and testing. The Company is utilizing primarily internal resources to complete and test the Year 2000 project. External costs associated with the project through May 1999 were approximately $40,000, and the Company estimates that it will incur additional external costs of approximately $70,000, including the replacement of identified non-compliant computer hardware, to complete the project. The Company is currently in the late stages of implementation and testing and believes that all critical parts of the project will be complete by September 1999, prior to any anticipated impact on the Company's operating systems. The Company is also in the process of surveying its bank, critical suppliers, and significant third parties to determine the extent to which related interfaces with the Company's systems are vulnerable if these third parties fail to remediate their Year 2000 issues. The Company will be formulating a contingency plan to address the possible effects , if any, of any significant third parties experiencing Year 2000 problems. Assuming that project plans can be implemented as planned, the Company believes future costs relating to the Year 2000 issue will not have a material adverse impact on the Company's business, operations, or financial condition. However, there is no assurance that the Company's year 2000 compliance efforts will prevent all consequences, and there may be undetermined future costs due to business disruption that may be caused by customers, suppliers, or unforeseen circumstances. ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's exposure to market risk through derivative financial instruments and other financial instruments, such as investments in short-term marketable securities and long-term debt, is not material. The existing credit facility of the Company has a variable interest rate and could be adversely affected by an increase in interest rates. There were no borrowings under this facility as of March 28, 1999. ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Registrant's consolidated financial statements and related notes and independent auditors' reports follow on the subsequent pages of this report. -22- 23 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders AmeriLink Corporation We have audited the accompanying consolidated balance sheets of AmeriLink Corporation as of March 29, 1998 and March 28, 1999, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended March 28, 1999. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of AmeriLink Corporation at March 29, 1998 and March 28, 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 28, 1999, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Columbus, Ohio May 11, 1999, except for Note 12, as to which the date is May 21, 1999 -23- 24 AMERILINK CORPORATION CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
March 29, March 28, 1998 1999 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 8,723,230 $ 5,958,882 Accounts receivable-trade, net of allowance for doubtful accounts of $234,000 in 1998 and $237,000 in 1999 13,884,731 12,084,381 Work-in-process 5,690,546 5,322,616 Materials and supply inventories 1,655,809 2,100,419 Other receivables 229,702 225,372 Deferred income taxes 458,584 361,400 Other 114,895 519,978 ------------ ------------ Total current assets 30,757,497 26,573,048 Property and equipment - net 7,585,118 6,366,853 Goodwill - net -- 7,168,168 Deferred income taxes -- 128,184 Deposits and other assets 185,291 114,474 ------------ ------------ Total assets $ 38,527,906 $ 40,350,727 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 2,658,091 $ 2,565,298 Liability to subcontractors 1,886,173 1,610,121 Accrued compensation and related expenses 1,845,507 1,643,872 Accrued insurance 509,965 397,713 Other 307,579 383,223 ------------ ------------ Total current liabilities 7,207,315 6,600,227 Shareholders' equity: Preferred stock, without par; 1,000,000 shares authorized; none issued or outstanding -- -- Common stock, without par; 10,000,000 shares authorized; 4,255,930 and 4,534,344 shares issued and outstanding in 1998 and 1999 24,017,256 25,872,715 Common stock held in treasury, at cost; 84,570 shares at March 28, 1999 -- (648,877) Retained earnings 7,303,335 8,526,662 ------------ ------------ Total shareholders' equity 31,320,591 33,750,500 ------------ ------------ Total liabilities and shareholders' equity $ 38,527,906 $ 40,350,727 ============ ============
- -------------------------------------------------------------------------------- See notes to consolidated financial statements -24- 25 AMERILINK CORPORATION CONSOLIDATED STATEMENTS OF INCOME For the Fifty-Two Weeks Ended - --------------------------------------------------------------------------------
March 30, March 29, March 28, 1997 1998 1999 ---- ---- ---- Revenues $ 63,035,814 $ 85,645,991 $ 65,211,040 Cost of sales 41,297,467 52,615,969 39,511,832 ------------ ------------ ------------ Gross profit 21,738,347 33,030,022 25,699,208 Selling, general and administrative expenses 18,436,896 25,183,821 24,063,055 ------------ ------------ ------------ Income from operations 3,301,451 7,846,201 1,636,153 Interest income (expense) (617,004) (187,633) 464,174 Other income 7,047 -- -- ------------ ------------ ------------ Income before income taxes 2,691,494 7,658,568 2,100,327 Provision for income taxes 1,123,000 3,073,000 877,000 ------------ ------------ ------------ Net income $ 1,568,494 $ 4,585,568 $ 1,223,327 ============ ============ ============ Earnings per share: Basic $ 0.45 $ 1.20 $ 0.29 ============ ============ ============ Diluted $ 0.44 $ 1.15 $ 0.28 ============ ============ ============ Weighted average shares: Basic 3,479,025 3,805,866 4,244,790 Diluted 3,589,131 4,002,089 4,334,465
- -------------------------------------------------------------------------------- See notes to consolidated financial statements -25- 26 AMERILINK CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY - --------------------------------------------------------------------------------
Common Stock Common Stock Held in Treasury Shares Amount Shares Amount ------ ------ ------ ------ Balance at March 31, 1996 3,478,580 $ 8,061,395 Net Income -- -- Issuance of restricted stock 3,000 23,250 --------- ------------ -------- ------------ Balance at March 30, 1997 3,481,580 8,084,645 -- -- Net income -- -- Proceeds from exercise of stock options 174,350 813,275 Tax benefit from exercise of stock options -- 1,223,779 Net proceeds from sale of common stock, less issuance expenses of $279,443 600,000 13,895,557 --------- ------------ -------- ------------ Balance at March 29, 1998 4,255,930 24,017,256 -- -- Net income -- -- Proceeds from exercise of stock options 25,000 158,750 -- -- Repurchases of common stock -- -- (333,570) $ (2,528,400) MCCI Acquisition 251,000 1,685,477 249,000 1,879,523 Issuance of restricted stock, net of deferred compensation expense 2,414 -- -- -- Amortization of deferred compensation expense -- 11,232 -- -- --------- ------------ -------- ------------ Balance at March 28, 1999 4,534,344 $ 25,872,715 (84,570) $ (648,877) ========= ============ ======== ============
Retained Earnings Total -------- ----- Balance at March 31, 1996 $ 1,149,273 $ 9,210,668 Net Income 1,568,494 1,568,494 Issuance of restricted stock -- 23,250 ------------ ------------ Balance at March 30, 1997 2,717,767 10,802,412 Net income 4,585,568 4,585,568 Proceeds from exercise of stock options -- 813,275 Tax benefit from exercise of stock options -- 1,223,779 Net proceeds from sale of common stock, less issuance expenses of $279,443 -- 13,895,557 ------------ ------------ Balance at March 29, 1998 7,303,335 31,320,591 Net income 1,223,327 1,223,327 Proceeds from exercise of stock options -- 158,750 Repurchases of common stock -- (2,528,400) MCCI Acquisition -- 3,565,000 Issuance of restricted stock, net of deferred compensation expense -- -- Amortization of deferred compensation expense -- 11,232 ------------ ------------ Balance at March 28, 1999 $ 8,526,662 $ 33,750,500 ============ ============
- -------------------------------------------------------------------------------- See notes to consolidated financial statements -26- 27 AMERILINK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the Fifty-Two Weeks Ended
March 30, March 29, March 28, 1997 1998 1999 ---- ---- ---- OPERATING ACTIVITIES Net income $ 1,568,494 $ 4,585,568 $ 1,223,327 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,242,312 2,967,518 3,105,767 Net loss (gain) on disposal of fixed assets (14,950) (4,400) 8,515 Gain on investments (6,199) -- -- Deferred income taxes (145,000) (304,281) (31,000) Changes in operating assets and liabilities net of effect of acquisition: Accounts receivable and work-in-process (6,051,531) (1,721,686) 3,334,630 Materials and supply inventories 200,244 (145,969) (20,354) Other receivables (86,558) 78,515 4,330 Other assets 357,138 38,230 (309,831) Trade accounts payable 516,554 339,416 (555,320) Liability to subcontractors 877,568 (74,581) (276,052) Accrued compensation and related expenses 356,737 409,835 (517,077) Accrued insurance (168,615) 141,708 (112,252) Other liabilities 95,199 51,428 (70,930) ------------ ------------ ------------ Net cash provided by (used in) operating activities (258,607) 6,361,301 5,783,753 INVESTING ACTIVITIES Purchase of property and equipment (2,752,254) (4,917,240) (2,593,451) Proceeds from sale of property and equipment 629,525 297,066 936,630 Cash paid for acquisition net of acquired cash -- -- (4,592,446) Deposits and other assets (82,912) (1,713) 70,816 ------------ ------------ ------------ Net cash used in investing activities (2,205,641) (4,621,887) (6,178,451) FINANCING ACTIVITIES Principal payments on long-term debt (20,400,000) (25,794,190) -- Proceeds from borrowings on long-term debt 22,905,963 16,725,000 -- Common stock repurchased -- -- (2,528,400) Proceeds from issuance of common stock -- 13,895,557 -- Proceeds from exercise of stock options -- 813,275 158,750 Tax benefit from exercise of options -- 1,223,779 -- ------------ ------------ ------------ Net cash provided by (used in) financing activities 2,505,963 6,863,421 (2,369,650) ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents 41,715 8,602,835 (2,764,348) Cash and cash equivalents at beginning of year 78,680 120,395 8,723,230 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 120,395 $ 8,723,230 $ 5,958,882 ============ ============ ============ Supplemental cash flow disclosures: Interest paid $ 619,192 $ 347,484 $ -- Income taxes paid $ 762,048 $ 2,304,584 $ 1,056,089
- -------------------------------------------------------------------------------- See notes to consolidated financial statements -27- 28 AMERILINK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Fifty-two weeks ended March 30, 1997, March 29, 1998 and March 28, 1999 - -------------------------------------------------------------------------------- 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS: AmeriLink Corporation (the "Company") designs, constructs, installs and maintains fiber optic, coaxial and twisted-pair copper cabling systems for the transmission of video, voice and data. The Company's cabling services include the drops and cable feeds to, and wiring of, residences, multiple dwelling units and commercial buildings and the construction of aerial and underground distribution plant. The Company offers these services on a national basis to providers of telecommunications services, including: major cable television multiple system operators; traditional telephone service providers, including local exchange carriers and long distance carriers; competitive local exchange carriers; Direct Broadcast Satellite ("DBS") providers; system integrators and users of local area network ("LAN") and wide-area network ("WAN") systems; and other businesses providing specific or bundled telecommunications services. The Company's services are provided predominately through the use of independent contractors via its national network of regional and satellite field offices. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. FISCAL YEAR: Fiscal years are designated in the financial statements and notes thereto by the year in which the fiscal year ends. Accordingly, results for the fiscal years 1997, 1998 and 1999 represent the 52 weeks ended March 30, 1997, March 29, 1998, and March 28, 1999, respectively. REVENUES AND COST RECOGNITION: The Company recognizes revenues from its fixed and unit price contracts in process on the percentage of completion method of accounting. Anticipated losses on these contracts are recorded when identified. Contract costs include all direct labor, material, subcontract and other direct project costs related to contract performance. Work-in-process typically represents amounts earned under the Company's contracts but not billed due to timing or not billable to clients according to contract terms, which usually consider passage of time, achievement of certain milestones or completion of the project. MAJOR CUSTOMERS: Customers comprising 10% or greater of the Company's fiscal year net sales are summarized as follows: 1997 1998 1999 ---- ---- ---- Time Warner Cable 19% 16% 12% Tele-Communications, Inc. (TCI) 9% 4% 11% GTE Media Ventures 8% 17% 5% CONCENTRATIONS OF CREDIT RISK: Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of uncollateralized trade receivables and unbilled work-in-process. The Company performs ongoing credit evaluations of its customers' financial conditions but does not require collateral to support customer receivables. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. The following is a summary of activity in the allowance for doubtful accounts for the fiscal years ended 1997, 1998 and 1999.
1997 1998 1999 ---- ---- ---- Beginning balance $ 95,000 $ 171,000 $ 234,000 Provision for bad debts 349,000 229,600 76,000 Allowance acquired in acquisition -- -- 40,000 Account write-offs, net (273,000) (166,600) (113,000) --------- --------- --------- Ending Balance $ 171,000 $ 234,000 $ 237,000 ========= ========= =========
- -------------------------------------------------------------------------------- -28- 29 AMERILINK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Fifty-two weeks ended March 30, 1997, March 29, 1998 and March 28, 1999 - -------------------------------------------------------------------------------- 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) MATERIALS AND SUPPLY INVENTORIES: Materials and supply inventories are comprised primarily of cabling materials and are stated at cost. Cost is determined using the first-in, first-out (FIFO) method. PROPERTY AND EQUIPMENT: Property and equipment is recorded at cost. Depreciation and amortization for financial reporting purposes is computed using the straight-line method over the estimated useful lives of the assets. Generally, the useful lives for all major classes of assets are two to seven years. Recovery of capital costs for income tax reporting purposes is primarily provided by the use of accelerated methods over the statutory recovery periods. The costs of assets sold or retired and the related accumulated depreciation are removed from the accounts in the year of disposal, and any gain or loss is included in net income. Maintenance and repairs are charged to expense as incurred. GOODWILL: Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is being amortized ratably over a 25 year period. The carrying value of goodwill will be reviewed periodically by the Company, and impairments, if any, will be recognized when expected future operating cash flows derived from goodwill are less than its carrying value. Goodwill related amortization expense charged to operations for fiscal 1999 was $69,856. CASH AND CASH EQUIVALENTS: For purposes of the statements of cash flows, the Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents consist of money market fund investments and short-term commercial paper, substantially all of which were held with two financial institutions. INCOME TAXES: Income taxes are calculated in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". Deferred tax assets and liabilities are recognized based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to be realized. FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair values of all financial instruments approximate carrying values because of the short maturities of those instruments. - -------------------------------------------------------------------------------- -29- 30 AMERILINK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Fifty-two weeks ended March 30, 1997, March 29, 1998 and March 28, 1999 - -------------------------------------------------------------------------------- 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) COMMON STOCK AND EARNINGS PER SHARE: The Company follows SFAS No. 128, "Earnings per Share," which requires the presentation of basic and diluted earnings per share ("EPS"). Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS includes the dilution of common stock equivalents consisting of shares subject to stock options.
1997 1998 1999 ---- ---- ---- Basic: ------ Net income $1,568,494 $4,585,568 $1,223,327 Weighted average common shares outstanding 3,479,025 3,805,866 4,244,790 ---------- ---------- ---------- Basic EPS $ 0.45 $ 1.20 $ 0.29 ========== ========== ========== Diluted: -------- Net income $1,568,494 $4,585,568 $1,223,327 Weighted average common shares outstanding 3,479,025 3,805,866 4,244,790 Dilutive stock options 110,106 196,223 89,675 ---------- ---------- ---------- Total shares and dilutive potential shares 3,589,131 4,002,089 4,334,465 ---------- ---------- ---------- Diluted EPS $ 0.44 $ 1.15 $ 0.28 ========== ========== ==========
Some options were outstanding during fiscal years 1997, 1998 and 1999 but were not included in the computation of diluted earnings per share because the average market price of the Company's common stock during the period was greater than the exercise price of the options and, therefore, were anti-dilutive. Note 7 provides additional information on the Company's stock options. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes those estimates and assumptions utilized in preparing the financial statements are reasonable. Actual results could differ from those estimates. Estimates used in the Company's consolidated financial statements include, but are not limited to, revenue recognition of work-in-process, the allowance for doubtful accounts, self-insured claims liabilities, the valuation of deferred tax assets, depreciation and amortization and the estimated lives of assets. BUSINESS SEGMENTS: In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 changes the way public companies report segment information in annual financial statements and also requires those companies to report selected segment information in interim financial reports to stockholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Management believes the Company's operations comprise only one segment and as such, adoption of SFAS No. 131 does not impact the disclosures made in the Company's financial statements. - -------------------------------------------------------------------------------- -30- 31 AMERILINK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Fifty-two weeks ended March 30, 1997, March 29, 1998 and March 28, 1999 - -------------------------------------------------------------------------------- 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following as of March 29, 1998 and March 28, 1999:
1998 1999 ---- ---- Leasehold improvements $ 224,331 $ 238,633 Transportation equipment 7,105,535 6,968,000 Machinery and equipment 5,380,994 5,594,254 Computer equipment and related software 1,621,867 2,055,927 Furniture and fixtures 974,463 854,813 ------------- ------------- Total 15,307,190 15,711,627 Less accumulated depreciation (7,722,072) (9,344,774) ------------- -------------- Net property and equipment $ 7,585,118 $ 6,366,853 ============= =============
3. EMPLOYEE BENEFIT PLANS The Company has a Profit Sharing and 401(k) Plan covering substantially all of its employees. Profit sharing contributions are at the discretion of the Board of Directors, although limited to the maximum amount permitted under the Internal Revenue Code. The Company did not make a profit sharing contribution for fiscal years 1997, 1998, and 1999. The Company's 401(k) Plan allows eligible employees to contribute a portion of their compensation to the Plan. The employer may make an additional contribution subject to the terms of the Plan. The contribution expense for the Company to the 401(k) Plan for fiscal years 1997, 1998 and 1999 was $66,109, $160,557, and $65,274, respectively. 4. EXISTING CREDIT FACILITY On March 9, 1999 the Company received a commitment from a commercial bank for a $10.0 million unsecured revolving credit note. The formal loan agreement was executed on April 5, 1999 and provides for borrowings under the note at a rate of prime minus 1.25%. The revolving credit note matures on April 6, 2001 and includes a commitment fee, after the first request for an advance, of 1/8% on any unused portion of the note. The new loan agreement contains certain restrictive covenants which, among others, require the Company to maintain certain financial ratios. There were no borrowings under the agreement as of March 28, 1999. - -------------------------------------------------------------------------------- -31- 32 AMERILINK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Fifty-two weeks ended March 30, 1997, March 29, 1998 and March 28, 1999 - -------------------------------------------------------------------------------- 5. INCOME TAXES The provision for income taxes consists of the following for the fiscal years ended 1997, 1998 and 1999:
1997 1998 1999 ---- ---- ---- Current: Federal $ 1,013,000 $ 2,728,000 $ 771,000 State and local 255,000 649,000 137,000 ----------- ----------- ----------- 1,268,000 3,377,000 908,000 Deferred: Federal (123,000) (259,000) (27,000) State and local (22,000) (45,000) (4,000) ----------- ----------- ----------- (145,000) (304,000) (31,000) ----------- ----------- ----------- Total provision for income taxes $ 1,123,000 $ 3,073,000 $ 877,000 =========== =========== ===========
Deferred tax assets recorded in the consolidated balance sheets at fiscal years ended 1998 and 1999, consist of the following:
1998 1999 ---- ---- Deferred tax assets: Depreciation $ -- $128,184 Accrued compensation 169,073 80,749 Accrued insurance 88,128 126,646 Allowance for doubtful accounts 93,600 78,800 Other 107,783 75,205 -------- -------- Total deferred tax assets $458,584 $489,584 ======== ========
A reconciliation of the federal corporate income tax rate and the effective tax rate on income taxes is summarized below for the fiscal years ended 1997, 1998 and 1999:
1997 1998 1999 ---- ---- ---- Statutory income tax rate 34.0% 34.0% 34.0% State and local taxes, net of Federal benefit 5.2% 5.2% 3.4% Goodwill amortization -- -- 1.4% Other permanent differences 2.5% 0.9% 3.0% ---- ---- ---- Effective income tax rate 41.7% 40.1% 41.8% ==== ==== ====
- -------------------------------------------------------------------------------- -32- 33 AMERILINK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Fifty-two weeks ended March 30, 1997, March 29, 1998 and March 28, 1999 - -------------------------------------------------------------------------------- 6. OPERATING LEASES The Company is committed under non-cancelable operating leases for offices and warehouse space which will require future minimum rental commitments of $1,058,968, $270,707, $87,960, $20,760, and $19,030 in fiscal years 2000 through 2004, respectively. The Company also operates under lease agreements which do not exceed one year in term. Rental expense under all operating leases amounted to $923,752, $1,222,171 and $1,255,549 for the fiscal years 1997,1998 and 1999, respectively. Subsequent to fiscal 1999, the Company executed a new ten-year non-cancelable lease agreement that is in addition to leases that were in effect as of March 28, 1999. The agreement will require future minimal rental commitments of $230,000 per year effective upon the targeted occupation and commencement date, which is currently estimated to be April 1, 2000. 7. STOCK OPTIONS AND STOCK INCENTIVE PLAN Prior to the Company's initial public offering in August 1994, key officers were granted options to purchase outstanding shares of common stock from the majority shareholders of the Company, and in connection with the offering agreed to restated option agreements. The Chief Executive Officer was granted options to purchase 135,000 shares at $4.00 per share, all of which were exercised during fiscal 1998, and 225,000 shares at $6.35 per share. Of the 225,000 shares, 25,000 were exercised during fiscal 1998 and 25,000 were exercised during fiscal 1999. The remaining 175,000 options are currently exercisable and shall remain in effect until the later of termination of employment or, in the event employment is terminated by death, one year after death. The Company's Senior Vice President of Operations was granted options to purchase 81,000 shares at $4.69 per share. These options shall remain effective until the earlier of May 1, 2004, or the termination of employment (if employment is terminated by death, then one year after death). Options to purchase 40,500 of the shares became exercisable on April 1, 1997, and the remaining options will become exercisable, on a cumulative basis, at the rate of 10% per year commencing on April 1, 1998. None of the options have been exercised as of March 28, 1999. Effective August 1994, and amended in August 1998, the Company adopted a stock incentive plan (the "Plan") for key employees and directors of the Company. The Plan is administered by the Compensation Committee of the Board of Directors, and provides for grants of stock options, stock appreciation rights, restricted stock awards and phantom stock. The maximum aggregate number of common shares which may be granted under the Plan is 950,000 shares, and the maximum number of shares that may be awarded during any calendar year may not exceed 10% of the total number of issued and outstanding common shares of the Company. Any awards that lapse or are canceled are available for re-grant under the terms of the Plan. At March 28, 1999, there were 350,933 shares available for grant. Stock option grants may be in the form of incentive stock options or non-qualified options. Key employee options awarded under the plan vest either 20% or 25% annually from the date of the grant. Non-employee Director option awards granted after August 4, 1998 vest on the first anniversary of the date of the grant, and those granted before August 4, 1998 vest 25% annually from the date of grant. Stock options awarded under the plan are at exercise prices that equal or exceed the fair market value at the date of the grant, and any shares not exercised lapse on the earliest of ten years from the grant date or 90 days after termination with the Company. In February 1997, a grant of 3,000 shares of restricted stock was issued to non-employee Directors of the Company. In May 1998, the Company awarded 2,414 shares of restricted stock to the Senior Vice President of Operations. One-third of the restricted shares becomes exercisable on each anniversary of the date of the award. - -------------------------------------------------------------------------------- -33- 34 AMERILINK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Fifty-two weeks ended March 30, 1997, March 29, 1998 and March 28, 1999 - -------------------------------------------------------------------------------- 7. STOCK OPTIONS AND STOCK INCENTIVE PLAN (CONTINUED) The following table summarizes all stock option transactions under the Stock Incentive Plan for the fiscal years ended March 30, 1997, March 29, 1998, and March 28, 1999.
1997 1998 1999 ---------------------- ---------------------- ----------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------- ----- ------- ----- ------- ----- Outstanding - beginning of year 142,450 $ 8.70 177,490 $ 8.50 220,736 $ 10.80 Granted 48,425 $ 7.75 57,596 $ 17.19 368,251 $ 10.02 Forfeited (13,385) $ 7.95 -- (9,684) $ 15.04 Exercised -- (14,350) $ 7.98 -- ------- ------- ------- Outstanding - end of year 177,490 $ 8.50 220,736 $ 10.80 579,303 $ 10.23 ======= ======= ======= Exercisable at end of year 49,125 $ 8.81 71,410 $ 8.84 120,190 $ 9.43 ======= ======= =======
The following table summarizes information about stock options outstanding at March 28, 1999:
Options Outstanding Options Exercisable ----------------------------------------- --------------------- Weighted Weighted Weighted Average Average Average Remaining Exercise Exercise Range of Exercise Prices Options Contractual Life Price Options Price - ------------------------ ------- ---------------- ----- ------- ----- $7.75 - $8.25 194,216 7.7 $ 8.05 71,636 $ 7.95 $10.00 - $14.06 343,101 8.3 $ 10.38 40,000 $ 10.00 $19.13 41,986 8.4 $ 19.13 8,554 $ 19.13 ------- ------- 579,303 8.1 $ 10.23 120,190 $ 9.43 ======= =======
The Company follows the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation", but has elected to continue to measure compensation expense in accordance with Accounting Principles Board Opinion No. 25, ("APB 25") "Accounting for Stock Issued to Employees". Under APB 25, no compensation expense for stock options has been recognized because the exercise prices equal or exceed the market price of the underlying stock on the date of grant. - -------------------------------------------------------------------------------- -34- 35 AMERILINK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Fifty-two weeks ended March 30, 1997, March 29, 1998 and March 28, 1999 - -------------------------------------------------------------------------------- 7. STOCK OPTIONS AND STOCK INCENTIVE PLAN (CONTINUED) The fair value of the options granted in fiscal years 1997, 1998 and 1999 has been estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:
1997 1998 1999 ---- ---- ---- Expected stock volatility 40.0% 70.0% 60.0% Risk-free interest rate 6.5% 6.2% 5.3% Expected lives 5 years 5 years 4 to 5 years Dividend yield 0.0% 0.0% 0.0%
The weighted average estimated fair value of stock options granted during fiscal 1997, 1998 and 1999 was $3.53, $10.85 and $5.51 per share, respectively. Had compensation cost for the Company's stock option and stock incentive plans been determined based on the fair value at the grant dates of awards under those plans, consistent with the method of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the proforma amounts indicated below:
1997 1998 1999 ---- ---- ---- Net income: As reported $ 1,568,494 $ 4,585,568 $ 1,223,327 Proforma 1,544,000 4,502,000 958,572 Basic EPS As reported $ 0.45 $ 1.20 $ 0.29 Proforma 0.44 1.18 0.23 Diluted EPS As reported $ 0.44 $ 1.15 $ 0.28 Proforma 0.44 1.13 0.23
The Black-Scholes option valuation model was developed for estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Because option valuation models require the use of subjective assumptions and changes in these assumptions can materially impact the fair value of the options and the Company's options do not have the characteristics of traded options, the option valuation models do not necessarily provide a reliable measure of the fair value of its options. 8. STOCK OFFERING On October 23, 1997, the Company issued 600,000 new shares of its common stock. The proceeds from the offering were $14,175,000 before deducting related expenses totaling $279,443. The Company used part of the proceeds to pay in full the outstanding balance of its unsecured revolving credit note with its commercial bank. - -------------------------------------------------------------------------------- -35- 36 AMERILINK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Fifty-two weeks ended March 30, 1997, March 29, 1998 and March 28, 1999 - -------------------------------------------------------------------------------- 9. ACQUISITION On February 2, 1999, the Company, through a wholly-owned subsidiary, MCC Acquisition Corp. ("MAC"), acquired Midwest Computer Cable, Inc. ("MCCI"), a commercial cabling installation firm headquartered in Des Moines, Iowa. Pursuant to the Merger Agreement, MCCI was merged with and into MAC and the separate corporate existence of MCCI ceased. Following the Merger, MAC changed its name to "Midwest Computer Cable, Inc." and will continue to conduct business as a wholly-owned subsidiary of the Company. The consideration delivered to the shareholders of MCCI in connection with the acquisition consisted of $4.4 million in cash and 500,000 common shares (without par value) of the Company valued at $3,565,000. The acquisition has been accounted for as a purchase, and the results of operations of MCCI have been included in the consolidated results of the Company from the date of acquisition. The excess of the total cost over the fair value of the net assets acquired is being amortized under the straight-line method over twenty-five years. The purchase price allocation is subject to final adjustments which management believes will not be material. The following unaudited pro forma data summarize the results of operations for the fifty-two weeks ended March 29, 1998 and March 28, 1999 as if the acquisition took place as of the beginning of the periods presented. The unaudited pro forma data gives effect to actual operating results prior to the acquisition and reflects pro forma adjustments for amortization of goodwill on a straight-line basis over 25 years, and interest charges on the $4,734,452 of cash utilized in the acquisition. In December 1998 the shareholders of MCCI declared special one-time bonuses to three key employees in the aggregate amount of $1,369,575 payable by issuing a total of 17,823.53 shares of MCCI common stock. This bonus is not representative of the bonuses expected to be paid to those key employees subsequent to the acquisition, and therefore, the unaudited pro forma consolidated statement of income for the fifty-two weeks ended March 28, 1999 has been adjusted as if these special bonuses had not been made. Effective July 1, 1998 MCCI elected under Subchapter S of the Internal Revenue Code to have the shareholders recognize their proportionate share of MCCI's taxable income on their personal income tax returns in lieu of paying corporate income tax. Pro forma net income includes a provision for income taxes reflecting adjustments to provide for income taxes as if MCCI were included in AmeriLink's federal and state income tax returns, including the associated amortization of goodwill resulting from the acquisition which is not deductible for income tax purposes. PRO FORMA DATA (UNAUDITED) 1998 1999 ----------- ---- ---- Revenues $92,622,068 $72,652,772 Net income $ 4,526,841 $ 1,587,358 =========== =========== Earnings per share: Basic $ 1.05 $ 0.34 =========== =========== Diluted $ 1.01 $ 0.33 =========== =========== Weighted average shares: Basic 4,305,866 4,669,447 Diluted 4,502,089 4,759,122 These unaudited pro forma results do not purport to be indicative of the results that would have actually been obtained if MCCI had been acquired as of the beginning of the earliest period presented. - -------------------------------------------------------------------------------- -36- 37 AMERILINK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Fifty-two weeks ended March 30, 1997, March 29, 1998 and March 28, 1999 - -------------------------------------------------------------------------------- 10. STOCK REPURCHASE PROGRAM On September 4, 1998 the Company's Board of Directors authorized the repurchase of up to 400,000 common shares of the Company's stock in the open market or in privately negotiated transactions depending upon market conditions and other factors. The Company intends to use current cash reserves to finance the share repurchase program. Repurchased common shares will be held in the Company's treasury and used for employee benefit plans, potential acquisitions and other general corporate purposes. A total of 333,750 shares have been repurchased, 249,000 of which were re-issued in connection with the MCCI acquisition (see note 9). As of March 28,1999 there were 84,570 shares held in Treasury. 11. QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the unaudited quarterly results from operations for the 52 weeks ended March 29, 1998, and March 28, 1999 (in thousands, except per share amounts).
First Second Third Fourth Quarter Quarter Quarter Quarter --------- --------- --------- ---------- Revenues: Fiscal 1998 $21,651 $21,717 $22,736 $19,542 Fiscal 1999 16,649 15,759 15,669 17,134 Gross profit: Fiscal 1998 8,302 8,338 8,791 7,599 Fiscal 1999 6,482 6,041 6,252 6,924 Income before income taxes: Fiscal 1998 2,001 2,001 2,322 1,335 Fiscal 1999 717 570 536 277 Net income: Fiscal 1998 1,181 1,212 1,389 804 Fiscal 1999 444 339 321 119 Basic EPS: Fiscal 1998 $ 0.34 $ 0.35 $ 0.35 $ 0.19 Fiscal 1999 $ 0.10 $ 0.08 $ 0.08 $ 0.03 Diluted EPS: Fiscal 1998 $ 0.33 $ 0.31 $ 0.32 $ 0.18 Fiscal 1999 $ 0.10 $ 0.08 $ 0.08 $ 0.03
12. SUBSEQUENT EVENT - PLANNED TRANSACTION On May 21, 1999, AmeriLink Corporation and Tandy Corporation ("Tandy") each announced their signing of a definitive merger agreement (the "Merger"). Under terms of the Merger, Tandy will acquire 100% of AmeriLink's common stock at an exchange ratio designed to reflect $15.60 per share of AmeriLink's stock in a tax-free exchange for Tandy stock. If the average closing price of Tandy's common shares falls below a specified amount for a twenty-day trading period ending just before the merger is completed, AmeriLink shareholders will receive $14.50 cash for every AmeriLink common share they own instead of Tandy stock. Following the merger, AmeriLink will continue its operations as a wholly owned subsidiary of Tandy. The Merger has been approved by the Board of Directors of each Company and is subject to usual and customary closing conditions, including regulatory and shareholder approval. It is currently anticipated that the transaction will close in late August 1999. - -------------------------------------------------------------------------------- -37- 38 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The following table sets forth the names and ages of the directors and executive officers of the Company as well as offices held by such persons. A summary of the background and experience of each of these individuals is set forth after the table. The Board of Directors is divided into two classes of three members each. The members of the two classes are elected to serve for staggered terms of two years. There are no family relationships among the directors or executive officers of the Company.
Director or Executive Name Age Officer Since Position ---- --- ------------- -------- Larry R. Linhart 53 1984 Chairman of the Board of Directors, President and Chief Executive Officer Joseph L. Govern 41 1986 Senior Vice President - Operations Robert B. Horn 50 1997 Vice President - Human Resources James W. Brittan 40 1994 Treasurer and Vice President - Finance Robert L. Powelson 57 1981 Director Robert D. Setzer 51 1998 Director William H. Largent 43 1994 Director Richard W. Rubenstein 55 1997 Director George R. Manser 68 1994 Director
Larry R. Linhart is the Chairman of the Board of Directors, President and Chief Executive Officer of the Company. Mr. Linhart has been the President, Treasurer and Chief Executive Officer of AmeriLink Corp. ("The Operating Company") since 1986 and a Director of the Operating Company since 1984. From 1984 to 1986, Mr. Linhart served as Executive Vice President and General Counsel of the Operating Company. Mr. Linhart was previously a partner in the Columbus law firm of Murphey, Young and Smith (currently, Squire, Sanders & Dempsey), which he joined in 1971. Joseph L. Govern is the Senior Vice President - Operations of the Corporation. Mr. Govern has been Senior Vice President - Operations of the Operating Company since 1992. From 1991 to 1992, Mr. Govern served as the Operating Company's Vice President of Finance and Director of Operations. From 1986 to 1991, Mr. Govern was the Vice President of Finance and Administration for the Operating Company. He is a Certified Public Accountant and from 1980 through 1985 was employed by Coopers & Lybrand. Robert B. Horn is the Vice President - Human Resources of the Corporation. Mr. Horn was hired as Vice President Human Resources in February, 1997. From 1993 to 1997, Mr. Horn was the Vice President of Human Resources of Damon's International, Inc., a 110 unit casual dining restaurant chain. From 1985 to 1993, Mr. Horn owned and operated five restaurants, co-owned and operated an international meeting planning firm and served as a -38- 39 management development consultant to various small companies and trade associations. From 1974 to 1985, Mr. Horn was employed by RAX Restaurants, Inc. and served as Executive Vice President - Operations. James W. Brittan is the Treasurer and Vice President - Finance of the Corporation. Mr. Brittan has been Treasurer and Vice President - Finance of the Operating Company since May, 1994. Mr. Brittan served as the Operating Company's Controller from 1986 to May, 1994. From 1984 to 1986, Mr. Brittan was employed by The Limited, Inc., a national fashion retailer, as Senior Accountant. Mr. Brittan is a Certified Public Accountant and from 1981 through 1984 was employed by Coopers & Lybrand. Robert L. Powelson was a co-founder of the Operating Company with E. Len Gibson. From 1987 to 1994, Mr. Powelson served as a consultant for the Operating Company. Robert D. Setzer is currently the Chairman of the Board of Directors, President and Chief Executive Officer of Capital-Plus, Inc. From 1989 to 1991 Mr. Setzer was President and a Director of Liebert Corporation. William H. Largent is the Senior Vice President - Operations and Chief Financial Officer of Applied Innovation, Inc. Previously Mr. Largent was the Chief Financial Officer and a Director of Metatec, Corporation from 1993 to 1997, and was President of Liebert Capital Management Corporation from 1990 to 1993. Richard W. Rubenstein is a Partner of Squire, Sanders & Dempsey, L.L.P. From 1992 until 1994 Mr. Rubenstein was a Partner of Schwartz, Kelm, Warren & Rubenstein. George R. Manser is currently Chairman of the Board of Directors of UniGlobe Travel (Capital Cities) Inc., a travel agency franchiser; Director of Corporate Finance of UniGlobe Travel USA since 1997; Advisory Director to J.C. Bradford & Co. since 1994; Director of Cardinal Health, Inc., a wholesale pharmaceutical distributor; Director of State Auto Financial Corporation, an insurance holding company; Director of Hallmark Financial Services, Inc., a nonstandard, Texas-only, auto insurer; Director of Checkfree Corporation, a business facilitating electronic commerce and prior to 1994, Chairman of North American National Corporation. -39- 40 ITEM 11. EXECUTIVE COMPENSATION. The following table sets forth all cash compensation paid or accrued by the Company for services rendered to the Company and its subsidiaries in all capacities during the fiscal years ended March 30, 1997, March 29, 1998 and March 28, 1999 for the chief executive officer of the Company and other executive officers (together, the "Named Executives"), whose total salary and bonus for the fiscal year ended March 29, 1998 exceeded $100,000. SUMMARY COMPENSATION TABLE
Long Term Compensation Annual Compensation Awards --------------------------------------------- ---------------------------- Other Restricted Stock Name and Fiscal Annual Stock Award Options Principal Position Year Salary ($) Bonus ($) Comp.(1) ($) Granted (#) ------------------ ---- --------- -------- ------- ----------- ---------- Larry R. Linhart, 1999 $ 377,145 $ 14,154 $ 2,400 $ -0- 200,000 President and Chief 1998 372,673 115,229 4,750 -0- -0- Executive Officer 1997 361,818 105,089 1,365 -0- -0- Joseph L. Govern, 1999 $ 138,000 $ 5,000 $ 1,400 $ -0- 5,208 Senior Vice President - 1998 115,000 86,250 2,980 40,435(2) -0- Operations 1997 105,000 37,991 1,718 -0- -0- James W. Brittan, 1999 $ 80,000 $ 5,000 $ 1,400 $ -0- 4,167 Vice President - 1998 80,000 60,692 2,886 -0- 5,000 Finance, Treasurer 1997 73,500 15,193 1,428 -0- 5,000 Robert B. Horn, 1999 $ 75,000 $ 5,000 $ 530 $ -0- 10,000 Vice President - 1998 75,000 37,500 -0- -0- 2,500 Human Resources 1997 (3)
- ---------- (1) Represents the Named Executive's share of the Operating Company's contribution under the Operating Company's 401(k). (2) Represents 2,414 restricted shares granted to Mr. Govern on May 15, 1998, as part of his fiscal 1998 bonus. The shares are subject to annual vesting of 805 shares on May 15, 1999, 805 shares on May 15, 2000, and 804 shares on May 15, 2001, contingent upon Mr. Govern's continued employment through the years then ended. (3) Mr. Horn joined the Company in February 1997 and earned cash compensation of $11,500 during fiscal year 1997. -40- 41 STOCK OPTION GRANTS IN FISCAL 1999 The following table sets forth information regarding stock option grants to the Named Executives during the 1999 fiscal year. All options were awarded at exercise prices that equal or exceed the market price of the Corporation's stock on the date of grant.
Potential Realizable Value Number % of Total at Assumed Annual Rates of Securities Options Granted of Stock Price Appreciation Underlying to Employees Exercise for Option Term Options in Fiscal Price Expiration --------------- Name Granted (#) Year ($/Share) Date 5% ($) 10% ($) ---- ----------- ---- --------- ---- ------ ------- Larry R. Linhart 50,000 13.6% $ 11.000 August 3, 151,955 335,781 2003 150,000 40.7% $ 10.000 August 3, 943,342 2,390,614 2008 Joseph L. Govern 5,208 (1) 1.4% $ 14.063 August 20, 16,508 35,701 2002 James W. Brittan 4,167 (1) 1.1% $ 14.063 August 20, 13,208 28,565 2002 Robert B. Horn 10,000 2.7% $ 10.000 August 3, 62,889 159,374 2008
- ---------- (1) Shares became fully exercisable on May 26, 1999. AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE The following table sets forth certain information concerning stock options exercised during fiscal year 1999 and the value of unexercised stock options held as of March 28,1999, by the Named Executives.
Value of Unexercised Shares Unexercised Options In-The-Money Options Acquired at Fiscal Year End (#) at Fiscal Year End ($)(1) Name and on Value ---------------------- ------------------------- Principal Position Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable ------------------ ------------ ------------ ----------- ------------- ----------- ------------- Larry R. Linhart 25,000 $ -0- 215,000 210,000 $135,625 $ -0- Joseph L. Govern -0- -0- 48,600 37,608 118,341 78,894 James W. Brittan -0- -0- 10,500 15,667 -0- -0- Robert B. Horn -0- -0- 3,500 16,500 -0- -0-
- ---------- (1) Amount shown represents the difference between the fair market value of the Common Shares underlying the options based on the closing price of the Common Shares of $7.125 on March 26, 1999, the last trading day prior to the end of fiscal 1999, and the exercise price of the options. -41- 42 EMPLOYMENT AGREEMENTS Larry R. Linhart. Larry R. Linhart has entered into an employment agreement with the Corporation pursuant to which he has agreed to serve as Chairman of the Board of Directors, President and Chief Executive Officer of the Corporation. In August 1998 the Company amended the existing employment agreement and extended Mr. Linhart's employment through March 31, 2008. Mr. Linhart receives a base annual salary, subject to annual cost of living adjustments, which for fiscal 1999 was $377,145. Mr. Linhart also receives incentive compensation based upon the operating results of the Company which may be payable in a combination of cash, deferred compensation, and restricted stock. Mr. Linhart received cash incentive compensation for fiscal 1999 in the amount of $14,154. In the event Mr. Linhart's employment is terminated for cause, the Corporation will pay Mr. Linhart the compensation (including a pro rata share of any incentive compensation) and benefits due under his employment agreement through the date of such termination. In the event Mr. Linhart's employment is terminated by the Corporation other than for cause, disability or death, or if Mr. Linhart voluntarily terminates his employment with the Corporation for good reason, all restricted stock held will be deemed fully vested, and all incentive bonus compensation remaining unpaid shall be payable in cash. Pursuant to the August 1998 amendment to Mr. Linhart's employment agreement, the Corporation granted to Mr. Linhart the right to purchase 200,000 Common Shares subject to the terms and conditions of the Corporation's 1994 Stock Incentive Plan. Mr. Linhart was granted 50,000 Incentive Stock Options at a price equal to 110% of the fair market value on the day of the grant ($11.00 per share) and 150,000 non-qualified Options equal to the fair market value at the time of grant. The Incentive Stock Options expire five years from the date of grant and the non-qualified Options expire ten years from the date of grant. All options vest and become exercisable ratably over the four successive years following the grant date. Joseph L. Govern. The Operating Company and Joseph L. Govern are parties to an employment agreement pursuant to which Mr. Govern is serving as Senior Vice President - Operations of the Operating Company. The employment agreement renews every two years and may be terminated by the Operating Company for cause or in the event of Mr. Govern's disability. In the event the Corporation terminates Mr. Govern's employment other than for cause (as defined in the agreement), the Corporation will be obligated to pay Mr. Govern his base salary over the remaining term of his employment. Mr. Govern's employment agreement contains certain non-competition and non-solicitation provisions, which prohibit him from competing with the Operating Company during his employment and for a period of three years after termination of his employment. Mr. Govern's salary for fiscal 1999 was $138,000. With respect to fiscal 1999, Mr. Govern was eligible to receive a bonus, payable in cash and restricted stock, based upon the operating profitability of the Company. Mr. Govern received cash incentive compensation for fiscal 1999 in the amount of $5,000. COMPENSATION OF DIRECTORS In connection with the consummation of the Corporation's initial public offering of its Common Shares in fiscal 1995, the Corporation, pursuant to its 1994 Stock Incentive Plan, granted to each non-employee Director an option to purchase 1,875 Common Shares at $8.00 per share. Under the original provisions of The Corporation's 1994 Stock Incentive Plan, the Corporation granted to each non-employee Director on the date of each year's annual meeting of shareholders an option to purchase that number of Common Shares equal to the lesser of (i) 2,500, and (ii) the quotient derived from dividing $15,000 by the fair market value of one Common Share on the date the option is granted. Each option vests or will vest over a four-year period and has or will have an exercise price equal to the market price at the time of grant. In accordance with the amendments to the 1994 Stock Incentive Plan, the Corporation granted to each non-employee Director on August 3, 1998 options to purchase 2,000 Common Shares. In addition, on February 4, 1997, the Corporation granted 1,500 Common Shares each to William H. Largent and George R. Manser (or a total of 3,000 Common Shares), as awards of restricted stock, subject to the condition that such restricted stock awards shall each become exercisable as to 500 Common Shares on each of the next three anniversaries of the grant date, except that if the grantee shall cease to be a Director at any time, any unvested portion of such restricted stock awards shall be subject to forfeiture, and subject to certain other terms and conditions contained in certain Restricted Stock Award Agreements between the Corporation and each such grantee. Non-employee Directors also receive reimbursement for travel expenses incurred in connection with attending meetings. Directors who are employees do not receive any separate compensation for their services as Directors. The -42- 43 Corporation has agreed to provide health insurance benefits to Messrs. Powelson and Gibson on the same terms as provided to all other participants in the Corporation's health care plan. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Mr. Linhart is Chairman of the Board of Directors, President and Chief Executive Officer of the Corporation and Mr. Powelson is Secretary of the Corporation. Mr. Manser is not an officer or employee of the Corporation. Mr. Linhart has and intends to continue to abstain from participating in any actions of the Compensation Committee affecting his compensation. Mr. Powelson is not compensated for his services as Secretary of the Corporation. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth information regarding the beneficial ownership of Common Shares as of May 25, 1999, by each person known by the Corporation to own beneficially more than five percent of the Corporation's outstanding Common Shares, by each Nominee and Continuing Director, by each executive officer named in the Summary Compensation table contained in "Executive Compensation," and by all Directors and executive officers as a group. As of May 25, 1999, there were 4,427,874 Common Shares issued and outstanding (net of 106,470 Common shares held in treasury) and an aggregate of 382,377 Common Shares subject to options exercisable within 60 days thereafter. Except as otherwise noted, each person named in the table has sole voting and investment power with respect to all shares shown as beneficially owned by him.
Percent of Shares Name of Shares Beneficially Beneficially Beneficial Owner Owned at May 18, 1999 Owned ---------------- --------------------- ----- Larry R. Linhart 638,808 (1) 13.8% Robert L. Powelson 760,631 (2) 17.2% E. Len Gibson 616,871 (3) 13.9% Joseph L. Govern 64,322 (4) 1.4% James W. Brittan 14,667 (5) * Robert B. Horn 12,500 (6) * William H. Largent 7,945 (2) * Richard W. Rubenstein, Esq. 396 (7) * Robert D. Setzer -0- * George R. Manser 14,065 (2) * All Directors and Executive 2,130,205 (1)(2)(3) 46.3% Officers as a group (10 Persons) (4)(5)(6)(7)
- ---------- * Represents less than 1%. (1) Share amount shown includes the following exercisable options to purchase 215,000 Common Shares: (i) exercisable options to purchase 175,000 Common Shares pursuant to the 1991 Options and (ii) exercisable options to purchase 40,000 Common Shares, representing 80% of the 50,000 Common Shares subject to the options -43- 44 granted in fiscal 1995 to Mr. Linhart pursuant to his employment agreement. See "Executive Compensation -- Aggregated Option Exercises and Fiscal Year-End Option Value Table" and "Executive Compensation -- Employment Agreements." (2) Share amount shown includes exercisable options to purchase 4,445 Common Shares, representing the exercisable portion of the 8,469 Common Shares subject to options granted to each non-employee Director of the Corporation. See "Compensation of Directors." (3) Share amount shown includes exercisable options to purchase 5,685 Common Shares. In conjunction with Mr. Gibson's decision not to stand for re-election, the Board elected to vest 100% of Mr. Gibson's options granted through 1996 in consideration of his past services to the Company, and to forfeit the 784 shares granted in August 1997. (4) Share amount shown amount shown includes (1) 2,414 shares of restricted stock, granted as part of Mr. Govern's fiscal year 1998 bonus (2) exercisable options to purchase 56,700 Common Shares, representing 70% of the 81,000 Common Shares subject to the options granted in fiscal 1995, and (3) exercisable options to purchase 5,208 Common Shares granted in fiscal 1999. See "Executive Compensation - Aggregated Option Exercises and Fiscal Year-End Option Value Table" and "Executive Compensation - Employment Agreements". (5) Share amount shown includes exercisable options to purchase 10,500 Common Shares, representing the exercisable portion of the 26,167 Common Shares subject to options granted to Mr. Brittan. See "Executive Compensation -- Aggregated Option Exercises and Fiscal Year-End Option Value Table". (6) Share amount shown includes (1) 2,000 shares owned by family members and (2) exercisable options to purchase 3,500 Common Shares, representing the exercisable portion of the 20,000 Common Shares subject to options granted to Mr. Horn. See "Executive Compensation -- Aggregated Option Exercises and Fiscal Year-End Option Value Table". (7) Share amount shown includes exercisable options to purchase 196 Common Shares, representing the exercisable portion of 2,784 Common Shares subject to options. See "Compensation of Directors." ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Not Applicable -44- 45 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) (1) FINANCIAL STATEMENTS. The following consolidated financial statements and notes of the Company, together with the report thereon of Ernst & Young LLP, appear in this Form 10-K: Report of Independent Auditors Consolidated Balance Sheets as of March 29, 1998, and March 28, 1999 Consolidated Statements of Income for the 52 weeks ended March 30, 1997, March 29, 1998, and March 28, 1999 Consolidated Statements of Changes in Shareholders' Equity for the 52 weeks ended March 30, 1997, March 29, 1998, and March 28, 1999 Consolidated Statements of Cash Flows for the 52 weeks ended March 30, 1997, March 29, 1998, and March 28, 1999 Notes to Consolidated Financial Statements (a) (2) FINANCIAL STATEMENT SCHEDULES. All schedules have been omitted because they are either not applicable, not required, or the required information is provided in the financial statements or notes thereto. (a) (3) SEE INDEX TO EXHIBITS ON PAGE 46 (b) REPORTS ON FORM 8-K. On April 13, 1999 the Company filed a current report on Form 8-K reporting under Item 2, Acquisition or Disposition of Assets, that on February 2, 1999, the Company, through a wholly-owned subsidiary, acquired Midwest Computer Cable, Inc. ,a commercial cabling installation firm headquartered in Des Moines, Iowa. -45- 46 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION ----------- ----------- 2.1 Agreement and Plan of Merger, dated February 2, 1999, among Larry Kendall, Dayton Kendall, Linda Kendall, Midwest Computer Cable, Inc., AmeriLink Corporation and MCC Acquisition Corp., a wholly-owned subsidiary of AmeriLink Corporation, incorporated by reference herein to Exhibit 2 to the Company's December 27, 1998 quarterly report Form 10-Q dated February 2, 1999 which was filed on February 9, 1999. 3.1 Amended Articles of Incorporation.* 3.2 Code of Regulations.* 4.1 Specimen Certificate for Common Shares.* 4.2 Bank Loan Agreement and Promissory Note dated April 5, 1999 between AmeriLink Corporation and KeyBank National Association ** 10.1 Form of 1994 Stock Incentive Plan (incorporated by reference herein to the registrant's registration statement on form S-1 file no. 33-79832 and to Exhibit A to the registrant's 1998 Proxy Statement dated July 6, 1998 which was filed on July 7, 1998). 10.2 Executive Employment Agreement between Larry R. Linhart and Registrant including amendments ** 10.3 Employment Agreement between Joseph L. Govern and Operating Company, dated October 1, 1991.* 10.4 Form of Joseph L. Govern Stock Option Agreement.* 10.5 Form of Shareholders' Agreement among the Principal Shareholders and Registrant.* 10.9 Stock Purchase and Close Corporation Agreement as amended among the Principal Shareholders and the Operating Company (without exhibits).* 10.10 Restricted Stock Award Agreement between AmeriLink Corporation and William H. Largent and George Manser (Incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended March 30, 1997). 10.12 Employment Agreement of Larry Kendall, dated February 2, 1999 incorporated by reference herein to Exhibit 10 to the Company's December 27, 1998 quarterly report Form 10-Q dated February 2, 1999 which was filed on February 9, 1999 11.1 Incorporated by reference to Page 30 of the 1999 Financial Statements beginning on page 22 herein. 21.1 Subsidiaries of the registrant.** 23.1 Consent of Ernst & Young LLP.** 27.1 Financial Data Schedule. ** * Incorporated by reference from the registrant's registration statement on form S-1, file no. 33-79832. ** Filed herewith. -46- 47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Date: June 1, 1999 AMERILINK CORPORATION /s/ Larry R. Linhart --------------------- By Larry R. Linhart, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Larry R. Linhart Chairman of the Board, President and June 1, 1999 - --------------------------- and Chief Executive Officer (Principal Larry R. Linhart Executive Officer) /s/ James W. Brittan Treasurer and Vice President Finance June 1, 1999 - --------------------------- (Principal Financial and Accounting James W. Brittan Officer) /s/ Robert Powelson Secretary and Director June 1, 1999 - --------------------------- Robert Powelson /s/ William H. Largent Director June 1, 1999 - --------------------------- William H. Largent /s/ Richard W. Rubenstein Director June 1, 1999 - --------------------------- Richard W. Rubenstein
-47- EX-4.2 2 EXHIBIT 4.2 1 EXHIBIT 4.2 LOAN AGREEMENT This agreement is made effective April 5, 1999, between Amerilink Corporation, an Ohio corporation ("Borrower"), and KeyBank National Association, a national banking association ("Lender"). Background Information A. Borrower has applied to Lender for a $10,000,000 revolving line of credit (the "Revolving Loan"). B. Lender has approved Borrower's application for the Revolving Loan by the commitment letter dated March 9, 1999 (the "Loan Commitment"), and Lender is willing to make the Revolving Loan to Borrower but only on the terms and subject to the conditions set forth in the Loan Commitment, this agreement, and the Loan Documents (defined in Section 2, below). Statement of Agreement Borrower and Lender acknowledge the accuracy of the foregoing Background Information and hereby agree as follows: Section 1. Loan; Use of Loan Proceeds. On the terms and subject to the conditions set forth in this agreement, the Loan Commitment, and the Loan Documents (as defined below), Lender shall lend to Borrower on a revolving basis, in one or more loans, advances of funds, or other extensions of credit (each an "Advance") from time to time during the period beginning on the date of this agreement and ending on April 6, 2001 (the "Availability Period"), an amount up to, but not in excess of, $10,000,000.00 (the "Maximum Amount"); provided that the Bank shall not be obligated to make any Advance hereunder if immediately after giving effect to the requested Advance, the aggregate unpaid principal amount of all Advances outstanding would exceed the Maximum Amount. The aggregate unpaid principal amount of all Advances and interest thereon outstanding on April 6, 2001 (the "Termination Date"), shall be due and payable on the Termination Date. After the Termination Date, the Borrower shall not be entitled to receive and the Lender shall not be obligated to make or otherwise fund any Advance. Borrower shall use the proceeds of the Revolving Loan to finance working capital and other general corporate purposes. Section 2. Evidence of Indebtedness and Security for the Revolving Loan. The Revolving Loan shall be evidenced by a Revolving Variable Rate Cognovit Promissory Note (the "Revolving Note"), a copy of which is attached to this agreement as Exhibit A and incorporated into this agreement by reference. The Note and Loan Agreement shall be referred to collectively as the "Loan Documents." Section 3. Rate of Interest; Terms of Payments; Late Charges; Prepayment Charges; and Default. The rate of interest, terms of payment, late charges, prepayment charges, and default rates for the Revolving Loan shall be those set forth in the Revolving Note and this agreement. Section 4. Term of Loans. The principal balance of the Revolving Note and accrued interest thereon shall be due and payable in accordance with the Revolving Note, and the entire unpaid principal balance of the Revolving Note and all accrued and unpaid interest thereon shall be due and payable on or before the "Maturity Date" as set forth in the Revolving Note. Section 5. Commitment Fee. Borrower shall pay a fee of $2,500 at the end of each six-month period that lapses prior to the first request for an Advance. In addition, after the first Advance, Borrower shall pay a commitment fee on the unused portion of the Loan which shall be billed to Borrower quarterly in arrears at a rate of 1/8% per annum. The foregoing fees are hereinafter collectively referred to as the "Commitment Fee". Section 6. Costs and Expenses. In addition to the payment of the Commitment Fee, Borrower shall pay or reimburse Lender, as applicable, for all of Lender's out-of-pocket costs and expenses relating to, or incidental with, the Revolving Note, -48- 2 including without limitation costs and expenses relating to administration of the Revolving Note and Lender's attorneys' fees (including costs and expenses) whether incurred before or after the Closing (collectively, "Lender's Costs"). Section 7. Depository Requirements. No later than October 1, 1999, Borrower shall move its primary depository/cash management relationship to Lender. Cash management fees associated with the Depository Requirements shall be negotiated subsequent to the Closing of the Revolving Note. Section 8. Representations, Warranties, and Affirmative Covenants. Borrower represents, warrants, and covenants, as applicable, that all of the following statements are true and correct as of the date of this agreement and shall continue to be true and correct until such time as the Revolving Note is paid in full and all of Borrower's obligations under this agreement and the Loan Documents are satisfied in full: (a) Borrower is a corporation duly organized, validly existing, and in good standing under the laws of the State of Ohio and is qualified to do business and is in good standing in all jurisdictions in which it is required to be so qualified and has the corporate power and authority to own its properties and assets and to transact the business in which it is engaged. (b) There has been no material adverse change in Borrower's financial statements and other documents and materials submitted to Lender with Borrower's application for the Revolving Loan since the period covered by such statements, documents and materials. (c) Borrower has not employed or engaged any broker, finder, or agent who may claim a commission or fee relating to the Revolving Loan, and Borrower shall indemnify and hold Lender harmless from any such claim, demand, or litigation resulting therefrom. (d) Borrower has full power and authority to execute and deliver this agreement and the Loan Documents and to perform and observe its obligations under this agreement and the Loan Documents; and this agreement and the Loan Documents have been duly and validly executed and delivered by Borrower and are the legal, valid, and binding obligations of Borrower enforceable in accordance with their respective terms. (e) Neither the execution or delivery of this agreement or the Loan Documents, nor the consummation of any of the transactions contemplated by this agreement or the Loan Documents, nor compliance with the terms and provisions of this agreement or the Loan Documents, will contravene or conflict with: (i) any provision of law, statute, or regulation to which Borrower or any of its properties is subject; (ii) any judgment, license, order, or permit applicable to Borrower or any of its properties; (iii) any indenture, mortgage, or other agreement or instrument to which Borrower is a party or by which Borrower or any of its properties is subject or bound; or (iv) Borrower's articles of incorporation, code of regulations, qualifications to do business in any state, or any actions or proceedings of Borrower. No consent, approval, authorization, or order of any court or governmental authority or third party is required in connection with the execution, delivery, and performance by Borrower of this agreement or the Loan Documents. Borrower shall promptly provide Lender with certified copies of the documents used to effectuate any amendments to its articles of incorporation, code of regulations, or other organizational documents, as the case may be. (f) To the best of Borrower's knowledge after reasonable investigation, Borrower is not in default under any agreement, indenture, mortgage, deed of trust, security agreement, lease, franchise, or other obligation to which it is a party or by which it or any of its property is bound which would have a material adverse affect on the business, prospects, profits, properties or financial condition of Borrower. To the best of Borrower's knowledge after reasonable investigation, Borrower is not in violation of any law, ordinance, governmental rule, or regulation to which it is subject, which violation might materially adversely affect the business, prospects, profits, properties, or financial condition of Borrower. To the best of Borrower's knowledge after reasonable investigation, no event has occurred and is continuing which constitutes an Event of Default (as defined in Section 11, below) or would, with the lapse of time or giving of notice or both, constitute such a default. -49- 3 (g) Borrower shall comply with all applicable laws, rules, regulations, and all orders of any governmental authority, a breach of which could materially and adversely affect its business or credit. (h) To the best of Borrower's knowledge after reasonable investigation, there are no claims, suits, or causes of action (whether legal, equitable, or administrative) pending or threatened against Borrower which will or may have a material adverse affect on the properties, business, prospects, profits, or financial condition of Borrower or the ability of Borrower to consummate or perform the transactions contemplated by this agreement or the Loan Documents. (i) Borrower is not in default or delinquent in the payment of any type of tax or assessment with any governmental entity which will or may have a material adverse affect on the properties, business, prospects, profits, or financial condition of Borrower or the ability of Borrower to consummate or perform the transactions contemplated by this agreement or the Loan Documents. (j) Borrower is not a party to any contract or agreement which is not referred to herein, contemplated hereby, or previously disclosed in writing to Lender, which materially adversely affects Borrower. There is no fact that Borrower has not disclosed in writing to Lender which could materially or adversely affect the properties, business, prospects, or conditions (financial or other) of Borrower. Borrower shall comply in all material respects with all material agreements, indentures, mortgages or documents binding on it or affecting its properties or business. (k) Borrower shall use the proceeds of the Revolving Loan solely for those uses permitted under Section 1. (l) Borrower shall furnish to Lender, promptly upon becoming aware of the existence of any condition or event constituting an Event of Default or which, with the giving of notice or lapse of time or both, would constitute an Event of Default under this agreement or any Loan Document, a written notice specifying the nature and period of existence thereof and what action Borrower is taking or proposes to take with respect thereto. (m) Upon becoming aware thereof, Borrower shall promptly notify Lender in writing of (i) any material adverse change in its financial condition or business, (ii) any default under any material agreement, contract or other instrument to which Borrower is a party or by which any of its properties are bound, or any acceleration of the maturity of any indebtedness owing by Borrower, and (iii) any material adverse claim against or affecting Borrower. (n) Borrower shall maintain proper books of account and records containing entries of all of the transactions entered into by Borrower in accordance with generally accepted accounting principles. (o) Borrower shall preserve and maintain its corporate existence and all of its rights, privileges and franchises necessary or desirable in the normal conduct of its business, and conduct its business in an orderly and efficient manner consistent with good business practices and in accordance with all valid regulations and orders of any governmental authority. (p) All of the properties and operations of Borrower of a character usually insured by persons or entities of established reputation engaged in the same or similar business similarly situated are adequately insured, by financially sound and reputable insurers, against loss or damage of the kinds and in the amounts customarily insured against by such persons or entities; and Borrower carries, with one or more such insurers, in customary amounts, such other insurance, including public and product liability insurance, as is usually carried by persons or entities of established reputation engaged in the same or a similar business similarly situated. Borrower shall maintain workers' compensation insurance, liability insurance, casualty insurance and other insurance on its present and future properties, assets and business against such casualties, risks and contingencies, and in such types and amounts, as are prudent and customary in the industry and as Lender may from time to time reasonably request. (q) Borrower shall pay when due all taxes, assessments, and other governmental charges imposed upon it or its assets, franchises, business, income, or profits before any penalty or interest accrues thereon, and all claims which would or may have a material adverse affect on Borrower (including without limitation claims for labor, services, materials, and -50- 4 supplies) for sums which by law might be a lien or charge upon any of its assets; provided that (unless any material item or property would be lost, forfeited, or materially damaged as a result thereof) no such charge or claim need be paid if it is being diligently contested in good faith by Borrower, if Lender is notified in advance of such contest, and if Lender receives adequate reserve or other appropriate security acceptable to Lender to protect the Lender against any loss therefrom. (r) Borrower shall deliver, or cause to be delivered, to Lender: (i) year-end financial statements prepared in accordance with generally accepted accounting principles for Borrower, audited by a firm of independent accountants, not later than 120 days after the expiration of each fiscal year of Borrower; (ii) not later than 45 days after the end of each fiscal quarter, quarterly balance sheets and income statements prepared in a form satisfactory to Lender certified as being true, accurate, and complete by the Chief Financial Officers of the Borrower; and (iii) all other information or documentation (financial or otherwise), including without limitation, financial statements, tax returns, income statements, balance sheets, accounts receivable and accounts payable agings relating to Borrower upon request of Lender from time to time. (s) All representations and warranties made by Borrower herein shall survive the delivery of the Revolving Note and the making of the Revolving Loan, and any investigation at any time made by or on behalf of Lender shall not diminish Lender's rights to rely thereon. All statements contained in any certificate or other instrument delivered by or on behalf of Borrower by one of its officers under or pursuant to this agreement or the other Loan Documents or in connection with the transactions contemplated hereby or thereby shall constitute representations and warranties made by Borrower hereunder. (t) Borrower shall furnish such other information and documentation as the Lender may reasonably request. Section 9. Negative Covenants. In addition to the affirmative covenants set forth in Section 8, until such time as the Revolving Note is paid in full and all of Borrower's obligations under this agreement and the Loan Documents are satisfied in full, Borrower shall not (unless Lender consents in writing): (a) Incur, create, assume, have outstanding, guaranty or otherwise be or become directly or indirectly liable in respect of any Indebtedness except Permitted Indebtedness. For purposes of this Section 9(a), "Indebtedness" shall mean (i) all obligations of Borrower for borrowed money (including without limitation all notes payable and drafts accepted representing extensions of credit, all obligations evidenced by bonds, debentures, notes or other similar instruments and all obligations upon which interest charges are customarily paid); (ii) all obligations under conditional sale or other title retention agreements and all obligations issued or assumed as full or partial payment for property, whether or not any such obligations represent obligations for borrowed money; (iii) all indebtedness secured by any Additional Encumbrances (as defined in Section 9(b), below) existing on property owned or acquired by Borrower subject to any such Lien, whether or not the obligations secured thereby shall have been assumed; (iv) all indebtedness guaranteed (other than by endorsement of negotiable instruments for collection in the ordinary course of business), directly or indirectly, in any manner, by Borrower, or in effect guaranteed, directly or indirectly, by Borrower through an agreement contingent or otherwise: (A) to purchase securities or indebtedness, (B) to purchase, sell or lease (as lessee or lessor) property or to purchase or sell services primarily for the purpose of enabling the debtor to make payment of the indebtedness or to assure the owner of the indebtedness against loss, (C) to supply funds to or in any other manner invest in the debtor, or (D) to repay amounts drawn down by beneficiaries of letters of credit, whether or not issued directly or indirectly for the account of Borrower; (v) all indebtedness for which Borrower has agreed, contingently or otherwise, to advance or supply funds; and (vi) indebtedness of any joint venture, partnership or other person or entity for which Borrower is liable. Obligations under leases shall be treated as Indebtedness only to the extent shown as such on Borrower's balance sheet prepared in accordance with generally accepted accounting principles. Indebtedness shall not include the long-term portion of deferred federal income taxes. For purposes of this Section 9(a), "Permitted Indebtedness" shall mean Indebtedness to finance specific capital expenditures not to exceed in the aggregate during the Availability Period the amount of $4,000,000.00. -51- 5 (b) Create or suffer to exist any Additional Encumbrances upon any of its property or assets now owned or hereafter acquired, except Permitted Encumbrances. For purposes of this Section 9(b), "Additional Encumbrances" shall mean any lien, mortgage, security interest, tax lien, pledge, encumbrance or conditional sale or title retention arrangement, or any other interest in property designed to secure the repayment of indebtedness, whether arising by agreement or under any statute or law or otherwise. For purposes of this Section 9(b), "Permitted Encumbrances" shall mean: (i) purchase money security interests and liens securing Permitted Indebtedness of the type described in the above definition of Permitted Indebtedness; (ii) pledges or deposits made to secure payment of workers' compensation, or to participate in any fund in connection with workers' compensation, unemployment insurance, pensions, or other social security programs; (iii) landlords' liens for rent not yet due and payable; (iv) liens securing the payment of taxes due and payable or claims of mechanics, materialmen, warehousemen, carriers, and operators; and (v) liens for taxes not yet due and payable; provided that liens of the types described in items (ii) through (iv) of this definition shall be "Permitted Encumbrances" only so long as: (A) the validity or amount of such claims is being contested in good faith by appropriate and lawful proceedings, and (B) levy and execution on such Liens have been stayed and continue to be stayed.. (c) With the exception of loans and advances to non-consolidated Affiliates and Related Parties which may not exceed $1,000,000 in the aggregate during the Availability Period, make or have outstanding any loans, advances of funds, or other extensions of credit to any person or entity. For purposes of this agreement the terms "Affiliates" and "Related Parties" shall mean: (i) any non-consolidated corporation, proprietorship, firm, partnership, limited liability company, limited liability partnership, trust, association or other entity which, directly or indirectly, is owned or controlled, is under common ownership or control with, or is owned or controlled by, Borrower; or (ii) any person who is a director, officer, employee, member, manager or partner of Borrower or is, directly or indirectly, the beneficial owner of 10 percent or more of any class of equity securities of the Borrower. (d) Directly or indirectly declare or pay any dividend, distribution or other payment on any shares of any class of Borrower's stock, or make any other distribution to the holders of its securities. (e) Except in the ordinary course of business and not to exceed $5,000,000 in any one fiscal year during the Availability Period, transfer, sell, assign, convey, lease, or otherwise dispose of any of Borrower's properties, rights, assets, or business. (f) Amend its articles of incorporation, code of regulations, or other organizational documents without the prior written consent of Lender, which consent shall not be unreasonably withheld or delayed. (g) Dissolve or liquidate, or merge or consolidate with or into any other person or entity. (h) Without the written consent of Lender which shall not be unreasonably withheld, directly or indirectly, repurchase, redeem or retire more than 25% of its outstanding shares of stock or other securities. (i) Change its fiscal year or method of accounting. (j) Enter into any asset purchase agreement or acquisition agreement(s) that would cause the Borrower's balance sheet leverage (defined as Total Liabilities divided by Tangible Net Worth (defined as Borrower's total assets excluding intangible assets (i.e. goodwill, trademarks, patents, copyrights, organizational expenses and similar intangible items, but including leaseholds and leasehold improvements) less Borrower's Total Liabilities) (the "Balance Sheet Leverage") to exceed a ratio of 1.25:1.00 on a post-acquisition/pro-forma basis. (k) Have capital expenditures exceeding the aggregate of $5,000,000 (the "Capital Expenditures Limitation") in any one fiscal year; however if Borrower's Balance Sheet Leverage is less than or equal to a ratio of 1.25:1.00 on a post- -52- 6 acquisition/pro-forma basis and Tangible Net Worth is greater than or equal to $20,000,000, the Capital Expenditures Limitation shall be increased to $10,000,000. Section 10. Closing Deliveries; Existence and Authority. At or prior to the Closing, Borrower shall have delivered or caused to be delivered to Lender, unless specifically waived by Lender in writing, the following items, each of which shall be in form and content satisfactory to Lender: (a) Fully-executed originals of this agreement and all of the Loan Documents. (b) All items, instruments, documents, certificates listed on the attached Exhibit A and all other matters and documents required to be furnished by Borrower at or prior to the Closing under this agreement, the Loan Commitment, any of the Loan Documents or otherwise required by Lender. (c) Payment of all of Lender's Costs. (d) Certified Articles of Incorporation and Certificate of Good Standing for Borrower from the Ohio Secretary of State. (e) Copy of Borrower's articles of incorporation, and all amendments thereto, as filed with the Ohio Secretary of State, certified by Borrower's secretary as being true, accurate, and complete. (f) Copy of Borrower's code of regulations certified by the Borrower's secretary as being true, accurate, and complete. (g) Resolutions of Borrower approving the execution, delivery and performance of this agreement, the Revolving Note, and all other Loan Documents and the transactions contemplated herein and therein, each duly adopted by the Board of Directors of Borrower, and accompanied by a certificate of the secretary or assistant secretary of Borrower stating that such resolutions are true and correct, have not been altered or repealed, do not violate or conflict with Borrower's articles of incorporation, code of regulation, other organizational documents, or actions by the shareholders of Borrower, and are in full force and effect. (h) A certificate of the secretary of Borrower, which shall certify the names of the officers of Borrower authorized to sign each of the Loan Documents, together with the true signatures of such officers. Lender may conclusively rely on such certificate until it shall receive a further certificate of the secretary or assistant secretary of Borrower canceling or amending the prior certificate and submitting the signatures of the officers named in such further certificate. (i) Any other documents, items, instruments, insurance policies, certificates, and all other matters that Lender reasonably requests. Section 11. Events of Default. The occurrence of any of the following events shall be an Event of Default under this agreement and all of the Loan Documents: (a) The determination by Lender, acting on written advice of its legal counsel which shall be furnished to Borrower, that any representation or warranty made by Borrower in this agreement (including without limitation those representations and warranties set forth in Section 8) or any of the Loan Documents is materially false or misleading in any material respect when made. (b) The failure by Borrower to pay the full amount of any installment of interest or principal and interest when due under the Revolving Note. (c) The failure by Borrower to perform or observe any covenant, condition, or obligation contained in this agreement or any of the Loan Documents (excluding those monetary obligations covered under (b), above, and excluding the -53- 7 representations and warranties covered under (a), above) which failure continues uncured for 20 days after delivery by Lender to Borrower of notice of such failure. (d) The filing of a voluntary or involuntary petition in bankruptcy or insolvency or for reorganization, arrangement, adjustment, liquidation, dissolution or composition or for the appointment of a receiver, guardian, or trustee by or against Borrower. (e) The making of an assignment for the benefit of creditors by Borrower or Borrower's failure generally to pay its debts as they become due. (f) The dissolution, merger, reorganization, or other change in the corporate structure of Borrower, without the prior written consent of Lender. (g) The entry of a final judgment or lien in excess of $250,000 against Borrower which final judgment or lien is not satisfied, discharged or bonded-off within 10 days after the date of entry of such judgment or lien, or, with respect to any collection action relating to such judgment or lien, in the event such collection action is not stayed so as to prevent the issuance of a certificate of judgment against Borrower within 10 days after the date of entry of such judgment or lien. (h) The concealment or removal by Borrower of any part of its property with intent to hinder, delay, or defraud its creditors or any of them, or the making or suffering of a transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance, or similar law, or the making by Borrower of any transfer of its property to or for the benefit of a creditor at a time when other creditors similarly situated have not been paid, or any other action by Borrower which results in Borrower permitting any creditor to obtain a lien upon any of its property through legal proceedings which is not vacated within 10 days from the date thereof. Upon the occurrence of any of the above-described events, Lender may declare the Revolving Note due and payable upon demand without presentment, protest, notice, or demand of any kind. Borrower shall not have the opportunity to cure any default if such failure is incapable of being cured, in Lender's reasonable discretion, or if the failure is described under any of (a), (b), (d), (e), (f) and (g). Section 12. Procedure for Borrowing under Revolving Loan. Provided all conditions described in this Section 12 are satisfied, Borrower may borrow under the Revolving Loan on any Business Day (meaning a day other than a Saturday, Sunday or other day on which commercial banks in Columbus, Ohio, are authorized or required by law to close) provided that the Borrower gives the Lender telephonic or written notice (each, a "Notice of Borrowing") which must be received by the Lender prior to 1:00 p.m., Columbus, Ohio, time, on the requested Borrowing Date (as defined below) for each Revolving Loan disbursement, specifying (i) the requested Borrowing Date of such borrowing, which shall be a Business Day and (ii) the aggregate amount of such requested borrowing. Each borrowing pursuant to the Revolving Loan shall be in an aggregate principal amount equal to or greater than $10,000. Upon receipt of each such Notice of Borrowing from the Borrower, the Lender shall deposit such requested borrowing for the benefit of the Borrower on the requested Borrowing Date, subject to the satisfaction of the terms and conditions of this agreement, by crediting the loan account on the books of the Lender in the amount of such requested borrowing. Lender is hereby authorized, and may at its option, but shall have no obligation to, record the date and amount of each borrowing made in connection with the Revolving Loan, and the date and the amount of each payment or prepayment of principal thereof, on its separate written or electronic records maintained in the ordinary course of its business, and any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded; however, the failure of the Lender to make such recordations shall not effect the obligations of the Borrower to repay outstanding principal, interest or any other amounts due hereunder or under the Revolving Note in accordance with the terms hereof and thereof. The obligation of Lender to continue making disbursements pursuant to the Revolving Note until the Maturity Date as set forth in the Revolving Note and this agreement is subject to the following conditions: -54- 8 (a) The determination by Lender, acting on written advice of its legal counsel which shall be furnished to Borrower, that the representations, warranties and covenants made by Borrower in this agreement or any other Loan Document, and any representations, warranties and covenants made by Borrower which are contained in any certificate, document or financial or other statement furnished at any time under or in connection herewith or therewith, are true and correct in all material respects as of the date the Lender makes a disbursement to Borrower pursuant to the Revolving Note (the "Borrowing Date"). (b) No Event of Default shall have occurred and be continuing on the Borrowing Date. (c) There shall have been no material adverse change in the financial condition (which shall be defined as the Balance Sheet Leverage exceeding a ratio of 1.25 to 1.00) or no material adverse change in the business of either Borrower and its Affiliates from the date of the most recent quarterly financials furnished to Lender prior to the Borrowing Date. (d) All resolutions, certificates, corporate and other proceedings and all other documents and legal matters in connection with the transactions contemplated by this agreement and the Loan Documents shall have been provided prior to the Borrowing Date in form and substance reasonably satisfactory to Lender. Each time Lender makes an Advance to Borrower under the Revolving Note pursuant to a request by Borrower, it shall constitute a representation, warranty and covenant by Borrower that, as of the Borrowing Date, the conditions contained in paragraphs (a), (b), (c) and (d) of this Section 12 have been fully satisfied. Section 13. Assignment. No rights under this agreement nor in or to the proceeds of the Revolving Loan may be assigned by Borrower without the prior written consent of Lender. Section 14. Non-Waiver. No failure by either party to insist upon strict compliance with any term of this agreement or to exercise any option, enforce any right, or seek any remedy upon any default of the other party shall affect, or constitute a waiver of, the first party's right to insist upon that strict compliance, exercise that option, enforce that right, or seek that remedy with respect to that default or any prior, contemporaneous, or subsequent default. No custom or practice of the parties at variance with any provision of this agreement shall affect, or constitute a waiver of, either party's right to demand strict compliance with the provisions of this agreement. Section 15. Notices. All notices and other communications under this agreement to be made to either Lender or Borrower shall be in writing and shall be deemed given when delivered personally, telecopied (which is confirmed electronically), or mailed by certified mail (return receipt requested) or sent by Federal Express, UPS, or other nationally recognized overnight delivery service for overnight delivery to that party at the address for that party (or at such other address for such party as such party shall have specified in notice to the other party): (a) If to Lender: KeyBank National Association 88 East Broad Street Columbus, Ohio 43215 Attention: Roger D. Campbell, Sr. Vice President Telecopy No. (614)_______________________________ With a copy to: Baker & Hostetler LLP 65 East State Street, Suite 2100 Columbus, Ohio 43215 Attention: Michael D. Bridges, Esq. -55- 9 Telecopy No. (614) 462-2616 (b) If to Borrower: Amerilink Corporation 1900 E. Dublin-Granville Road Columbus, Ohio 43229 Attention: James Brittan, Vice President - Finance Telecopy No. (614) Section 16. Governing Law. All questions concerning the validity or meaning of this agreement or relating to the rights and obligations of the parties with respect to performance under this agreement shall be construed and resolved under the laws of Ohio. Section 17. Venue. The parties to this agreement hereby designate the Court of Common Pleas of Franklin County, Ohio, as a court of proper jurisdiction and exclusive venue for any actions or proceedings relating to this agreement; hereby irrevocably consent to such designation, jurisdiction, and venue; and hereby waive any objections or defenses relating to jurisdiction or venue with respect to any action or proceeding initiated in the Court of Common Pleas of Franklin County, Ohio. Section 18. Severability. It is the intention of the parties to comply fully with all laws and public policies, and this agreement shall be construed consistently with such laws and public policies to the extent possible. If and to the extent that any court of competent jurisdiction is unable to so construe any provision of this agreement and holds that provision to be invalid, that invalidity shall not affect the remaining provisions of this agreement, which shall remain in full force and effect. Section 19. Time is of the Essence. Time is of the essence relating to this agreement and with respect to all other obligations to be performed under this agreement, but delay in the exercise by Lender of its rights hereunder shall not be deemed a waiver of such right by Lender. Section 20. Captions. The captions at the beginning of the Sections and several subSections of this agreement are not part of the context of this agreement, but are only labels to assist in locating those Sections and subSections, and shall be ignored in construing this agreement. Section 21. Jury Trial Waiver. Borrower and Lender, after consulting or having the opportunity to consult with legal counsel, knowingly, voluntarily and intentionally waives any right it may have to a trial by jury in any action or proceeding based upon or arising out of this agreement or any of the Loan Documents or any course of conduct, dealings, statements, whether oral or written, or actions of either party. Borrower and Lender shall not seek to consolidate, by counterclaim or otherwise, any action in which a jury trial has been waived with any other action in which a jury trial cannot be or has not been waived. Section 22. No Third Party Benefit. This agreement is intended for the exclusive benefit of the parties and their respective heirs, successors and assigns. Nothing contained in this agreement shall be construed as creating any rights or benefits in or to any third party. Section 23. Complete Agreement. This document, along with the Loan Documents, contains the entire agreement among the parties and supersedes any prior discussions, negotiations, representations, or agreements among them respecting the subject matter. No additions or other changes to this agreement shall be made or be binding unless made in writing and signed by each party to this agreement. -56- 10 AMERILINK CORPORATION KEYBANK NATIONAL ASSOCIATION By:_______________________________ By:_________________________________ (Name) (Title) (Name) (Title) VARIABLE RATE COGNOVIT PROMISSORY NOTE $10,000,000.00 April 5, 1999 For value received, the undersigned, Amerilink Corporation, an Ohio corporation, with offices at 1900 E. Dublin-Granville Road, Ohio 43229 (hereinafter referred to as "Maker"), promises to pay to the order of KeyBank National Association, a national banking association (hereinafter referred to as "Payee," which term shall include any holder hereof), at its principal place of business at 88 East Broad Street, Columbus, Ohio 43215, or at such other place as Payee may designate, the principal sum of Ten Million Dollars ($10,000,000), or so much thereof as may be advanced by Payee to Maker from time to time, together with all charges herein provided and interest on the unrepaid advances of said principal sum from the date of disbursement by Payee, payable in cash at the rates and in the manner hereinafter set forth. ARTICLE I DEFINITIONS 1.1 The following terms wherever used in this Note shall have the following meanings: "Advance" shall mean any loan, advance of funds, or extension of credit under the Loan Agreement. "Default Rate of Interest" shall mean the Prime Rate of Interest as may be charged by Lender. "Loan Agreement" shall mean that certain Loan Agreement dated April 5, 1999 pursuant to which the principal amount of this Note is to be disbursed, by which Payee agrees to loan funds to Maker pursuant to the terms and conditions stated therein. "Loan Documents" shall collectively mean this Note, Loan Agreement and any other instrument, affidavit, certificate or document heretofore, now or hereafter given by Maker in connection with the closing of the loan evidenced by this Note. "Maturity Date" shall mean April 6, 2001. "Note" shall mean this Variable Rate Cognovit Promissory Note. "Prime Rate" shall mean the interest rate established and announced from time to time by Maker as its prime rate, based upon its consideration of economic, money market, business and competitive factors, and it is not necessarily the most -57- 11 favorable rate of Maker. Each change in said Prime Rate shall, without notice, automatically and immediately change the rate of interest due hereon. "Variable Rate" shall mean the rate equal to the Prime Rate minus 125 basis points (bps). ARTICLE II PAYMENTS OF PRINCIPAL AND INTEREST 2.1 From and after the date of this Note, interest on the unrepaid advances of the principal sum from date of disbursement by Payee at the Variable Rate shall be due and payable monthly on the first day of each month after the initial advance and continuing on the first day of each month thereafter through the Maturity Date. 2.2 All interest payable in accordance with this Note shall be calculated on the basis of the actual number of calendar days elapsed but computed on a daily basis as if each year consisted of 360 days. 2.3 All principal and all accrued and unpaid interest shall be due and payable in full on the Maturity Date. 2.4 In the event that any applicable law, treaty, rule or regulation now or hereafter in effect, or any interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof, or compliance by Payee with any request or directive of any such authority (whether or not having the force of law) (each of the foregoing being referred to as a "Regulatory Requirement"), shall (a) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by Payee, or (b) impose any other condition, requirement or charge with respect to this Note or the Loan Documents (including, without limitation, any capital adequacy requirement, any requirement which affects the manner in which Payee allocates capital resources to its commitments or any similar requirement), and the result of any of the foregoing change in external conditions is to increase the actual cost to Payee of making or maintaining the loan evidenced by this Note (the "Loan") or any Advance hereunder, to reduce the actual amount of any sum receivable by Payee thereon, or to reduce the actual rate of return on the capital of Payee from the actual cost, sum receivable or rate of return applicable on the date of this Note, then Maker shall pay to Payee, from time to time, upon request of Payee, additional amounts sufficient to compensate Payee for such increased cost, reduced sum receivable or reduced rate of return (collectively, "Reduced Earnings") to the extent Payee is not compensated therefor in the computation of the interest rates applicable to the Loan. A detailed statement as to the amount of such increased cost, reduced sum receivable or reduced rate of return, prepared in good faith and submitted by Payee to Maker, shall be conclusive and binding for all purposes, absent manifest error in determination. Payee shall promptly notify Maker of any event occurring after the date of this Note that entitles Payee to additional compensation pursuant to this Section. This provision is for the benefit of Payee and is not intended to increase the yield to Payee above the rates of interest provided for in this Note. ARTICLE III LATE CHARGES 3.1 If any of said payments of principal or interest or any combination thereof are not paid in full within five days after such payment is due, then in addition to the amount of said payment Lender shall have the right to assess, and Maker promises to pay, a late charge in respect of each said payment in the amount of 5% which Maker agrees is a fair and reasonable charge for costs incurred by Payee in processing such late payment and shall not be deemed a penalty. ARTICLE IV PREPAYMENT -58- 12 4.1 This Note evidences a loan in the form of a revolving line of credit, and Maker may, subject to the applicable provisions under this Note and the Loan Agreement, borrow, repay, and re-borrow sums an unlimited number of times. 4.2 The privilege is hereby reserved by Maker to prepay this Note in whole or in part at any time and from time to time without premium or penalty, provided that Payee shall receive written notice of Maker's intention to so prepay not less than three days prior to such prepayment and further provided that a payment of all accrued and unpaid interest applicable to the portion of the principal amount to be prepaid, to the date of such prepayment, is included with such prepayment. ARTICLE V DEFAULT 5.1 The term "Event of Default" shall mean the occurrence of any one or more of the following: (a) A failure by Maker to make any payment of principal or interest or any combination thereof under this Note within twenty (20) days when due. (b) The material incorrectness of any representation or warranty made by Maker to Payee in any of the Loan Documents or any financial statement or other document delivered to Payee in connection with the Loan. (c) The inability of Maker to satisfy any one or more of the conditions specified in the Loan Agreement as precedent to the obligation of Payee to make a loan disbursement after an application for a loan disbursement has been submitted by Maker to Payee. (d) The failure of Maker to observe, perform or comply with any of the other terms, covenants or conditions of Maker set forth in the Loan Documents and to cure such failure within the time period, if any, specified therein. 5.2 Upon the occurrence of any Event of Default, the entire unpaid balance of principal and interest evidenced by this Note, together with all sums of money advanced by Payee in accordance with the terms of the Loan Agreement, and all sums due and owing for any late charge or charges hereunder (the foregoing being hereinafter collectively referred to as the "Indebtedness") shall thereupon bear interest at the Default Rate of Interest, and at the option of Payee, all the Indebtedness together with interest at the Default Rate of Interest shall immediately become due and payable ("Acceleration") without demand made therefor and without notice to any person, notice of the exercise of said option being hereby expressly waived, and Payee shall have all remedies of a secured party under law and equity to enforce the payment of all of the Indebtedness, time being of the essence of this Note. The Default Rate of Interest shall be charged to Maker upon the occurrence of any Event of Default notwithstanding any invoices or billing statements sent by Payee to Maker indicating an interest rate to the contrary. In addition, any waiver of Payee's right to charge the Default Rate of Interest or to accelerate the Indebtedness must be made in writing and cannot be waived by oral representation or the submission to Maker of monthly billing statements. ARTICLE VI MISCELLANEOUS 6.1 The failure of Payee to exercise any option herein provided upon the occurrence of any Event of Default shall not constitute a waiver of the right to exercise such option in the event of any continuing or subsequent Event of Default. Maker hereby agrees that the maturity of all or any part of the Loan may be postponed or extended and that any covenants and conditions contained in this Note or in any of the other Loan Documents may be waived or modified without prejudice to the liability of Maker on said Note or Loan Documents. -59- 13 6.2 Maker hereby authorizes Payee, in its sole discretion, upon the occurrence of an Event of Default, to apply all or any portion of the balance of any account, other than the Borrower's account for payroll, taxes and employee contribution which shall be maintained in separate accounts by Payee, maintained by Maker with Payee to the payment or reduction, in whole or in part, of any and all principal and interest then due, whether by acceleration or otherwise, to Payee under this Note. Upon the occurrence of any Event of Default, Payee shall have the right to setoff against all obligations of Maker to Payee hereunder, whether matured or unmatured, all amounts owing to Maker by Payee, whether or not then due and payable, and all other funds or property of Maker on deposit with or otherwise held in the custody of Payee or any of its affiliates, all without notice to or demand on Maker, such notice and demand being hereby waived. 6.3 Presentment for payment, notice of dishonor, protest, notice of protest and diligence in bringing suit against any party hereto are hereby waived by Maker. 6.4 Maker hereby waives all relief from any and all appraisement or exemption laws now in force or hereafter enacted. 6.5 The obligations evidenced or created by this Note, as well as all waivers of rights by Maker contained herein, shall effectively bind and be the obligations and waivers of any and all others who may at any time become liable for the payment of all or any part of this Note, including without limitation all indorsers and guarantors. 6.6 Nothing herein contained, nor in any of the other Loan Documents or other documents relating hereto, shall be construed or so operate as to require Maker, or any person liable for the payment of the Loan, to pay interest in an amount or at a rate greater than the highest rate permissible under applicable law. Should any interest or other charges paid by Maker, or any parties liable for the payment of the Loan, result in the computation or earning of interest in excess of the highest rate permissible under applicable law, then any and all such excess shall be and the same is hereby waived by Payee, and all such excess shall be automatically credited against and in reduction of the principal balance, and any portion of said excess which exceeds the principal balance shall be paid by Payee to Maker and any parties liable for the payment of the loan made pursuant to this Note, it being the intent of the parties hereto that under no circumstances shall Maker or any parties liable for the payment of the loan hereunder be required to pay interest in excess of the highest rate permissible under applicable law. All interest paid or agreed to be paid to Payee shall, to the extent permitted under applicable law, be amortized, prorated, allocated and spread throughout the full period until payment in full of this Note, including the period of any renewal or extension thereof, so that interest thereon for such full period shall not exceed the maximum amount permitted by applicable law. Notwithstanding anything to the contrary herein contained, in the event that the Variable Rate should ever exceed the highest rate permissible under applicable law, thereby causing the interest accruing on the Indebtedness to be limited to such highest rate permissible under applicable law, then any subsequent reduction in the Prime Rate shall not reduce the rate of interest charged hereunder below the highest rate permissible under applicable law until the total amount of interest accrued on the Indebtedness equals the amount of interest which would have accrued on such indebtedness if the Variable Rate had been in effect at all times in the period during which the rate charged thereon was limited to the highest rate permissible under applicable law. 6.7 If any provision (or any part of any provision) contained in this Note shall for any reason be held or deemed to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision (or remaining part of the affected provision) of this Note, and this Note shall be construed as if such invalid, illegal or unenforceable provision (or part thereof) had never been contained herein and the remaining provisions of this Note shall remain in full force and effect. 6.8 Maker hereby authorizes any attorney-at-law to appear in any court of record in the State of Ohio or in any other state or territory of the United States at any time after this Note becomes due, whether by acceleration or otherwise, to waive the issuing and service of process, and to confess judgment against Maker in favor of Payee for the amount due together with interest, expenses, the costs of suit and reasonable counsel fees, and thereupon to release and waive all errors, rights of appeal and stays of execution. Such authority shall not be exhausted by one exercise, but judgment may be confessed -60- 14 from time to time as any sums and/or costs, expenses or reasonable counsel fees shall be due, by filing an original or a photostatic copy of this Note. Maker waives any right to move any court for an order having any attorney or firm representing Payee removed or disqualified as counsel for Payee as a result of such attorney or firm confessing judgment against Maker in accordance with this Section 6.10. Maker hereby expressly waives any conflicts of interest that may now or hereafter exist as a result of any attorney representing Payee confessing judgment against Maker and expressly consents to any attorney representing Payee or to any other attorney to confess judgment against Maker in accordance with this Section 6.8. Maker hereby further consents and agrees that Payee may pay any attorney confessing judgment and that any fees so paid may be included in the amount of such judgment. 6.9 Maker hereby agrees to pay to Payee all costs of collecting and securing, and of attempting to collect and to secure this Note, including without limitation reasonable attorneys' fees, appraisers' fees, court costs, and notice charges, whether such attempt be made by suit, in bankruptcy, or otherwise, and said costs and any other sums due Payee by virtue of this Note may be included in any judgment or decree rendered. This Note is delivered in the State of Ohio and is to be governed by and construed in accordance with the laws of the State of Ohio. In addition to any other appropriate jurisdiction determined by Payee, Maker hereby consents to and, by execution of this Note, submits to the personal jurisdiction of the Court of Common Pleas of Franklin County, Ohio and the United States District Court sitting in Columbus, Ohio for the purposes of any judicial proceedings which are instituted for the enforcement of this Note. Maker agrees that venue is proper in said jurisdiction. WARNING -- BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE. AMERILINK CORPORATION By____________________________________________ Print Name____________________________________ Its___________________________________________ -61- EX-10.2 3 EXHIBIT 10.2 1 EXHIBIT 10.2 AMERILINK CORPORATION Executive Employment Agreement This Executive Employment Agreement ("Agreement") is made in Columbus, Ohio effective as of ______________, 1994, by and between AMERILINK CORPORATION, an Ohio corporation (the "Company"), and LARRY R. LINHART, an individual residing in Columbus, Ohio (the "Executive"), who hereby agree as hereinafter provided. Section 1. Definitions. As used herein, the following terms shall have the meanings set forth below. "Aggregate Operating Income" shall have the meaning set forth in Section 5(b). "Agreement" shall have the meaning set forth in the introductory paragraph hereof. "Base Compensation" shall have the meaning set forth in Section 5(a). "Board of Directors" means the incumbent directors of the Company as of the point in time reference thereto is made in this Agreement. "Cause" shall have the meaning set forth in Section 11(b). "COLA Adjustment" means a cost of living adjustment, which shall correspond to the percent rise in prices for the preceding year as measured by the Consumer Price Index for all Urban Consumers (CPI-UC), All City Average, All Items (base year 1982-1984 = 100) published by the United States Department of Labor, Bureau of Labor Statistics (the "Index"). The COLA Adjustment shall be determined by multiplying the amount or figure to be adjusted by a fraction, the numerator of which is the Index published for the month in which occurs the date of adjustment and the denominator of which is the Index published for the same month of the preceding year. "Company" shall have the meaning set forth in the introductory paragraph of this Agreement, and shall include Subsidiaries where appropriate. "Competitive Business" shall have the meaning set forth in Section 10(a). "Confidential Information" shall have the meaning set forth in Section 10(c). "Covered Options" shall have the meaning set forth in Section 7. "Disability" of the Executive means that, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from his duties on a full-time basis for six consecutive months, or for an aggregate of nine months in any consecutive 12-month period, and a physician selected by the Executive is of the opinion that (a) he is suffering from "total disability" as defined in the Company's disability insurance program or policy and (b) he will qualify for Social Security Disability Payments and (c) within 30 days after written notice thereof is given by the Company to the Executive (which notice may be given at any time after the end of such six or 12-month periods) the Executive shall not have returned to the performance of his duties on a full-time basis. (If the Executive is prevented from performing his duties because of Disability, upon request by the Company the Executive shall submit to an examination by a physician selected by the Company, at the Company's expense, and the Executive shall also authorize his personal physician to disclose to the selected physician all of the Executive's medical records.) -62- 2 "Employment Commencement Date" means the date on which the IPO is consummated. "Employment Period" means that period commencing on the Employment Commencement Date and ending on the Employment Termination Date. "Employment Termination Date" means the date the Employment Period terminates as provided in Section 11. "Executive" shall have the meaning set forth in the introductory paragraph of this Agreement. "Fiscal Year" means the fiscal year of the Company. "Incentive Bonus Compensation" shall have the meaning set forth in Section 5(b). "Insured Stock Options Value" shall have the meaning set forth in Section 7. "IPO" means the initial public offering of common shares of the Company. "Net Income" shall mean the net income of the Company for any Fiscal Year as reflected in its annual financial statements prepared in accordance with generally accepted accounting principles and audited by Ernst & Young or such other accounting firm of national reputation as may be selected by the Company from time to time. "Notice of Termination" shall have the meaning set forth in Section 11(a)(1). "Qualifying Excess Income" shall have the meaning set forth in Section 5(b). "Required Life Insurance Coverage Amount" shall have the meaning set forth in Section 7. "Restricted Period" shall have the meaning set forth in Section 10(a). "Scheduled Employment Termination Date" means the later of (a) the day immediately preceding the fifth anniversary of the Employment Commencement Date or (b) such date as is specified by either the Company or the Executive in a Notice of Termination delivered for the purpose of fixing the Scheduled Employment Termination Date, provided the date so specified shall be at least three (3) years after the date such Notice of Termination is so delivered. "Shareholders" shall have the meaning provided in the Shareholders Agreement dated as of the date hereof among the Company, Larry R. Linhart, E. Len Gibson and Robert L. Powelson. "Subsidiaries" means wholly owned subsidiaries of the Company. Section 2. Employment and Term. The Company hereby employs the Executive, and the Executive hereby accepts such employment by the Company, for the purposes and upon the terms and conditions contained in this Agreement. The term of such employment shall be for the Employment Period. Section 3. Employment Capacity and Duties. The Executive shall be employed throughout the Employment Period as the Chairman of the Board of Directors, President and Chief Executive Officer of the Company. The Executive shall have the duties and responsibilities incumbent with the positions of Chairman of the Board of Directors, President and Chief Executive Officer of the Company. Accordingly, and not by way of limitation, as Chairman of the Board of Directors, President and Chief Executive Officer of the Company, the Executive shall preside over all meetings of the shareholders of the Company and of the Board of Directors, superintend and manage the business of the Company and coordinate and supervise the work of its other officers and employ, direct, fix the compensation of, discipline and discharge its personnel, employ agents, professional advisors and consultants and perform all functions of a general manager of the -63- 3 Company's business. The Company agrees that it will not, without the Executive's written consent, relocate its principal executive offices to a location outside Columbus, Ohio or require the Executive to be based anywhere other than the Company's principal executive offices, except for required travel on the Company's business to an extent substantially consistent with present travel obligations. Section 4. Executive Performance Covenants. The Executive accepts the employment described in Section 3 and agrees to devote his full working time and efforts (except for absences due to illness and appropriate vacations) to the business and affairs of the Company and the performance of the aforesaid duties and responsibilities. However, nothing in this Agreement shall preclude the Executive from devoting a reasonable amount of his time and efforts to civic, community, charitable, professional and trade association affairs and matters. Section 5. Compensation. The Company shall pay to the Executive, for his services hereunder, the compensation hereinafter provided in this Section 5. Such compensation shall be paid to the Executive at the times and in the manner as provided below. (a) Base Compensation. The Executive shall be paid "Base Compensation" for each Fiscal Year at an annual rate of $342,500 in 26 bi-weekly equal installments. The Base Compensation (i) may be increased (but may not be decreased) at any time or from time to time by action of the Board of Directors or any committee thereof, and (ii) shall be increased by the COLA Adjustment annually as of the beginning of each Fiscal Year, commencing with the Fiscal Year beginning in 1995. The Base Compensation shall be pro-rated for any Fiscal Year hereunder which is less than a full Fiscal Year. (b) Incentive Bonus Compensation. The Executive shall be paid "Incentive Bonus Compensation" for each Fiscal Year in an amount equal to 5% of the Qualifying Excess Income (as hereinafter defined), if any, for such Fiscal Year. The first $50,000 of any Incentive Bonus Compensation otherwise earned (the "Current Portion") for any Fiscal Year shall be payable to the Executive by the Company within 10 days after the issuance of the Company's audited financial statements for the Fiscal Year involved. The amount of any Incentive Bonus Compensation in excess of $50,000 for any Fiscal Year (the "Deferred Portion") shall be deferred and (except as provided in Section 11) shall be payable to the Executive only (i) if and when the Aggregate Operating Income (as hereinafter defined) of the Company is at least $2,118,000 (adjusted by the COLA Adjustment annually as of the beginning of each Fiscal Year commencing with the Fiscal Year which begins in 1995) in the succeeding Fiscal Year, or (ii) if, prior to the end of the third succeeding Fiscal Year, the Executive's employment by the Company is terminated for any reason other than termination by the Company under Section 11(b) or termination by the Executive other than under Section 11(e)(1)(A). As used herein, "Qualifying Excess Income" for any Fiscal Year shall mean the amount, if any, by which the Aggregate Operating Income for the Fiscal Year, up to a maximum Aggregate Operating Income amount of $3,706,500, exceeds $1,588,500 (with both numbers being adjusted annually by the COLA Adjustment as of the beginning of each Fiscal Year commencing with the Fiscal Year which begins in 1995). The "Aggregate Operating Income" for any Fiscal Year shall be equal to the Net Income of the Company for the Fiscal Year, calculated before taking into account (i) deductions for any item of compensation, fees or bonuses paid or payable by the Company or any of the Subsidiaries to any of the Shareholders, whether as officer, director, consultant, agent, contractor or otherwise, (ii) deductions for non-cash compensation expense associated with the exercise of stock options or the granting of other rights or interests in securities of the Company, so-called phantom stock interests and similar incentive compensation arrangements, by any or all executive officers of the Company (including, but not limited to, Mr. Linhart), (iii) deductions for interest expense and any taxes on income and (iv) any other items properly reportable on the audited financial statements of the Company below the "income from operations" line, such as interest income and expense and other types of investment income, loss or expense (provided, however, that gain or loss from the sale or other disposition of depreciable assets used by the Company in the ordinary course of its trade or business shall be taken into account). Section 6. Reimbursement of Expenses. The Company shall reimburse the Executive for his reasonable expenses incurred in providing services to the Company, including expenses for travel, entertainment and similar items, in accordance with the Company's reimbursement policies as determined from time to time by the Board of Directors. The Company shall also reimburse the Executive for his reasonable expenses incurred for continuing legal education and other reasonable expenses of maintaining his membership in good standing in the Ohio Bar. If there is a dispute as to the eligibility of an -64- 4 expense for reimbursement in accordance with the Company's reimbursement policies, then such expense shall be determined to be reimbursable if approved by a majority of the Board of Directors. Section 7. Employee Benefits, Vacations. During the Employment Period, the Executive shall receive the benefits and enjoy the perquisites described below: (a) Benefit Plans. The Company shall continue in effect any perquisite, benefit or compensation plan (in addition to the compensation provided for in Section 5) including its profit sharing plan and 401(k) plan, medical insurance plan, life insurance plan, health and accident plan and disability plan in which the Executive is currently participating, or to maintain plans providing substantially similar benefits (collectively referred to as the "Benefit Plans"); provided, however, that the Company may make modifications in the Benefit Plans so long as such modifications (i) are generally applicable to all salaried employees of the Company and (ii) do not discriminate against the Executive or other highly-compensated employees of the Company. (b) Vacations. The Executive shall be entitled in each Fiscal Year to a vacation of four weeks (20 working days), during which time his compensation shall be paid in full, and such holidays and other nonworking days as are consistent with the policies of the Company for executives generally. Section 8. Stock Options. (a) 1987 and 1991 Options. The Company shall provide to the Executive, pursuant to the Stock Options Addendum attached hereto, stock options (the "1987 and 1991 Stock Options") to acquire common shares of the Company ("Common Shares"). (b) Participation in 1994 Stock Incentive Plan. Executive shall be granted the right to purchase 50,000 Common Shares at 125% of the public offering price for such Common Shares in the IPO, subject to vesting 20% per year over 5 years, the options to expire 10 years after the date of grant. The options shall be granted under and shall be subject to the terms and conditions of the Company's 1994 Stock Incentive Plan and the provisions of such Plan shall control in the event of the termination of Executive's employment. (c) Registration of Option Shares on Form S-8. The Company shall as soon as reasonably practicable following the closing of the IPO file a registration statement on Form S-8 with the Securities and Exchange Commission for the purpose of registering the Common Shares underlying the 1987 and 1991 Options and the 1994 Stock Incentive Plan. Section 9. Company Life Insurance; Medical Examinations. At any time during the Employment Period, the Company may, in its discretion, apply for and procure as owner and for its own benefit, insurance on the life of the Executive, in such amounts and in such form or forms as the Company may determine. The Executive shall have no right to any interest in any such policy or policies, but he shall, at the request of the Company, submit to such medical examinations, supply such information and execute such applications, instruments and other documents as reasonably may be required by the insurance company or companies to whom the Company has applied for such insurance. If requested by the Company, the Executive shall submit to at least one medical examination during each Fiscal Year at such reasonable time and place and by a physician or physicians determined and selected by the Company. All the costs and expenses of said medical examination, including transportation of the Executive to the place of examination and return, shall be paid by the Company. The Executive shall be entitled to a copy of all reports and other information provided to the Company in connection with any examination referred to in this Section 9. Any failure to pass any such medical examination or to meet any health criteria or medical standard shall not of itself be cause for termination of the Employment Period by the Company. Section 10.Certain Company Protection Provisions. The below provisions apply for the protection of the Company. -65- 5 (a) Noncompetition. During the Restricted Period (as hereinafter defined), the Executive shall not directly or indirectly compete with the Company by owning, managing, controlling or participating in the ownership, management or control of, or be employed or engaged by or otherwise affiliated or associated with, any Competitive Business in any location in which the Company is doing business as of the Employment Termination Date. As used herein, the term "Restricted Period" means the Employment Period and a period of [three] years thereafter. As used herein, a "Competitive Business" is any other corporation, partnership, proprietorship, firm, association or other business entity which is engaged in any business from which the Company derives five percent or more of its consolidated revenues during the 12 months preceding the Employment Termination Date or in which the Company has invested five percent or more of its total assets as of the time in question, provided, however, that ownership of not more than five percent of the stock of any publicly traded company shall not be deemed a violation of this provision. (b) Non-Interference. During the Restricted Period, the Executive shall not induce or solicit any employee of the Company or any person doing business with the Company to terminate his or her employment or business relationship with the Company or otherwise interfere with any such relationship. (c) Confidentiality. The Executive agrees and acknowledges that, by reason of the nature of his duties as an officer and employee, he will have or may have access to and become informed of confidential and secret information which is a competitive asset of the Company ("Confidential Information"), including without limitation any lists of customers or subscribers, financial statistics, research data or any other statistics and plans contained in profit plans, capital plans, critical issue plans, strategic plans or marketing or operation plans or other trade secrets of the Company and any of the foregoing which belong to any person or company but to which the Executive has had access by reason of his employment relationship with the Company. The Executive agrees faithfully to keep in strict confidence, and not, either directly or indirectly, to make known, divulge, reveal, furnish, make available or use (except for use in the regular course of his employment duties) any such Confidential Information. The Executive acknowledges that all manuals, instruction books, price lists, information and records and other information and aids relating to the Company's business, and any and all other documents containing Confidential Information furnished to the Executive by the Company or otherwise acquired or developed by the Executive, shall at all times be the property of the Company. Upon termination of the Employment Period, the Executive shall return to the Company any such property or documents which are in his possession, custody or control, but his obligation of confidentiality shall survive such termination of the Employment Period until and unless any such Confidential Information shall have become, through no fault of the Executive, generally known to the trade. The obligations of the Executive under this subSection are in addition to, and not in limitation or preemption of, all other obligations of confidentiality which the Executive may have to the Company under general legal or equitable principles. (d) Remedies. It is expressly agreed by the Executive and the Company that these provisions are reasonable for purposes of preserving for the Company its business, goodwill and proprietary information. It is also agreed that if any provision is found by a court having jurisdiction to be unreasonable because of scope, area or time, then that provision shall be amended to correspond in scope, area and time to that considered reasonable by a court and as amended shall be enforced and the remaining provisions shall remain effective. In the event of any breach of these provisions by the Executive, the parties recognize and acknowledge that a remedy at law will be inadequate and the Company may suffer irreparable injury. The Executive acknowledges that the services to be rendered by him are of a character giving them peculiar value, the loss of which cannot be adequately compensated for in damages; accordingly, the Executive consents to injunctive and other appropriate equitable relief upon the institution of proceedings therefor by the Company in order to protect the Company's rights. Such relief shall be in addition to any other relief to which the Company may be entitled at law or in equity. Section 11.Termination of Employment. (a) Notice of Termination; Employment Termination Date. -66- 6 (1) Any termination of the Executive's employment by the Company or the Executive shall be communicated by written Notice of Termination to the other party thereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated. Furthermore, either the Executive or the Company may give a Notice of Termination to the other party for the purpose of terminating this Agreement, as such, without terminating the Executive's employment with the Company, which Notice of Termination shall have the effect of terminating this Agreement on the Scheduled Employment Termination Date as in effect on the date of giving such Notice of Termination. (2) "Employment Termination Date" shall mean the date on which the Employment Period and the Executive's right and obligation to perform employment services for the Company shall terminate effective upon the first to occur of the following, it being understood that in no event may the Employment Period be terminated other than as the result of one of the following events: (A) If the Executive's employment is terminated for Disability, the date which is thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the performance of his duties on a full-time basis during such thirty (30) day period); (B) If the Executive's employment is terminated by the Executive for Good Reason or otherwise by voluntary action of the Executive (see Section 11(e)), the date specified in the Notice of Termination, which date (except with the written consent of the Company to the contrary) shall not be more than sixty (60) days after the date that the Notice of Termination is given; (C) The death of the Executive; (D) The Scheduled Employment Termination Date; (E) If the Executive's employment is terminated by the Company for Cause (see Section 11(b)(1)), the date on which a Notice of Termination is given; provided that if within thirty (30) days after any Notice of Termination is given the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Employment Termination Date shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding and final arbitration award or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected); and (F) If the Executive's employment is terminated by the Company other than for Cause, Disability or death of the Executive, the date specified in the Notice of Termination which date (except with the written consent of the Executive to the contrary) shall not be more than 60 days after the date that the Notice of Termination is given. (b) Termination for Cause. (1) The Company may terminate the Executive's employment and the Employment Period for Cause. For the purposes of this Agreement, the Company shall have "Cause" to terminate employment hereunder only (A) if termination shall have been the result of an act or acts of misconduct materially injurious to the Company, monetarily or otherwise, or (B) upon the willful and continued failure by the Executive substantially to perform his duties with the Company (other than any such failure resulting from incapacity due to mental or physical illness) after a demand in writing for substantial performance is delivered by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed his duties, and such failure results in demonstrably material injury to the Company. The Executive's employment shall in no event be considered to have been terminated by the Company for Cause if such termination took place as the result of (i) bad judgment or negligence, or (ii) any act or omission without intent of gaining therefrom directly or indirectly a profit to which the Executive was not legally entitled, or (iii) any act or omission believed in good faith to have been in or not opposed to the interest of the Company, or (iv) any act or omission in respect of which a determination is made that the Executive met the applicable standard of -67- 7 conduct prescribed for indemnification or reimbursement or payment of expenses under the Code of Regulations of the Company or the laws of the State of Ohio, in each case as in effect at the time of such act or omission. The Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board of Directors at a meeting of the Board of Directors called and held for the purpose (after not less than 30 days written notice to the Executive and an opportunity for him, together with his counsel, to be heard before the Board of Directors, such notice of meeting to indicate the specific termination provision of this Agreement relied upon and specify in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated), finding that in the good faith opinion of the Board of Directors the Executive was guilty of conduct set forth above in clauses (A) or (B) of the second sentence of this paragraph and specifying the particulars thereof in detail. (2) If the Executive's employment shall be terminated for Cause, the Company shall pay the Executive (A) within 10 days of such termination, his unpaid Base Compensation through the Employment Termination Date at the rate in effect at the time Notice of Termination is given plus (B) within 10 days after issuance of the Company's audited financial statements for the Fiscal Year in which the Employment Termination Date occurs, the Deferred Portion of any Incentive Bonus Compensation payable with respect to any previous Fiscal Year (without regard to the termination of Executive's employment), plus a pro-rata share of the Current Portion of any Incentive Bonus Compensation computed with respect to the Fiscal Year in which occurs the Employment Termination Date as if such termination had not occurred, plus (C) within 10 days following the issuance of the Company's audited financial statements for its Fiscal Year following the Fiscal Year in which the Employment Termination Date occurs, if the Deferred Portion of any Incentive Bonus Compensation would otherwise have been payable to Executive had his employment not been terminated, a pro-rata share of the Deferred Portion so payable. (c) Termination for Disability. The Company may terminate the Executive's employment because of the Disability of the Executive and thereafter shall pay to the Executive (or his successors) (1) his unpaid Base Compensation through the sixth full month following the Employment Termination Date at his then effective Base Compensation rate, plus (2) the Deferred Portion of any Incentive Bonus Compensation accrued and deferred with respect to any previous Fiscal Year, the full amount of which shall become immediately payable without regard to the deferral provisions of Section 5(b), plus (3) an amount equal to a pro-rata share of any Incentive Bonus Compensation calculated through the sixth full month following the Employment Termination Date as though all of such six month period were part of the Fiscal Year in which occurred the Employment Termination Date, (but otherwise as though such termination had not occurred) and assuming for purposes of calculating the amounts due, the largest amount of Incentive Bonus Compensation accrued for any of the two most recently completed Fiscal Years. No portion of such Incentive Bonus Compensation shall be deferred pursuant to the provisions of clause (i) of Section 5(b). In addition, the Executive shall be entitled to the amounts and benefits specified in Paragraphs (2) and (3) of Section 11(f) of this Agreement. (d) Termination Upon Executive's Death. In the event of the Executive's death, the Company shall pay to the Executive's estate (1) any unpaid amount of Base Compensation through the date of death at the then effective Base Compensation rate plus (2) the Deferred Portion of any Incentive Bonus Compensation accrued and deferred with respect to any previous Fiscal Year, the full amount of which shall become immediately payable without regard to the deferral provisions of Section 5(b), plus (3) an amount equal to the pro-rata share of any Incentive Bonus Compensation calculated with respect to the Fiscal Year in which the death occurs and assuming for purposes of calculating the amounts due, the largest amount of Incentive Bonus Compensation accrued for any of the two most recently completed Fiscal Years. No portion of such Incentive Bonus Compensation shall be deferred pursuant to the provisions of clause (i) of Section 5(b). All previously granted stock options, rights, warrants and awards shall fully vest on the death of the Executive, except that the provisions of the Company's Stock Incentive Plan and any other Benefit Plan shall control the benefits and awards covered thereby. (e) Termination of Employment by the Executive. -68- 8 (1) The Executive may terminate his employment for Good Reason and receive the payments and benefits specified in Section 11(f) in the same manner as if the Company had terminated his employment. For purposes of this Agreement, "Good Reason" will exist if any one or more of the following occur: (A) Failure by the Company to honor any of its obligations under this Agreement, including, without limitation, its obligations under Section 3 (Employment Capacity and Duties), Section 4 (Executive Performance Covenants), Section 5 (Compensation), Section 6 (Reimbursement of Expenses), Section 7 (Employee Benefits, Vacations, Life Insurance), Section 8 (Stock Options), Section 12 (Indemnification) and Section 13 (Successors and Assigns); or (B) Any purported termination by the Company of the Executive's employment that is not effected pursuant to a Notice of Termination satisfying the requirements of Section 11(a) above and, for purposes of this Agreement, no such purported termination shall be effective. (C) If there is a Change in Control of the Company (as defined below) and the employment of the Executive is concurrently or subsequently terminated (i) by the Company without Cause, (ii) by service of a Notice of Termination or (iii) by the resignation of the Employee because he has reasonably determined in good faith that his titles, authorities, responsibilities, salary, bonus opportunities or benefits have been materially diminished, or that a material adverse change in his working conditions has occurred or the Company has breached this Agreement. For the purpose of this Agreement, a Change in Control of the Company has occurred when: (x) any person (defined for the purposes of this Section 11 to mean any person within the meaning of Section 13(d) of the Securities Exchange Act of 1934 (the "Exchange Act")), other than the Company, or an employee benefit plan established by the Board of Directors of the Company, acquires, directly or indirectly, the beneficial ownership (determined under Rule 13 d-3 of the regulations promulgated by the Securities and Exchange Commission under Section 13(d) of the Exchange Act) of securities issued by the Company having 20% or more of the voting power of all of the voting securities issued by the Company in the election of directors at the next meeting of the holders of voting securities to be held for such purpose; or (y) a majority of the directors elected at any meeting of the holders of voting securities of the Company are persons who were not nominated for such election by the Board of Directors of the Company or a duly constituted committee of the Board of Directors of the Company having authority in such matters; or (z) the Company merges or consolidates with or transfers substantially all of its assets to another person. (2) The Executive shall have the right voluntarily to terminate his employment other than for Good Reason prior to the Scheduled Employment Termination Date, and if the Executive shall so terminate his employment, he shall be entitled only to payment of the amounts which would be payable under Section 11(b)(2) had he been terminated for Cause. (f) Compensation Upon Certain Termination. (1) If the Company shall terminate the Executive's employment other than pursuant to Section 11(b), (c) or (d), or if the Executive shall terminate his employment for Good Reason pursuant to Section 11(e)(1) (but not a termination voluntarily by the Executive other than for Good Reason under Section 11(e)(2)), then the Company shall pay to the Executive the following amounts: (A) (1) His unpaid Base Compensation through the Employment Termination Date at his then effective Base Compensation rate, plus (2) the Deferred Portion of any Incentive Bonus Compensation accrued and deferred with respect to any previous Fiscal Year, the full amount of which shall become immediately payable without regard to the deferral provisions of Section 5(b), plus (3) an amount equal to a pro-rata share of the amount of any Incentive Bonus Compensation payable to him with respect to the Fiscal Year in which occurs the Employment Termination Date (assuming for purposes of calculating Incentive Bonus Compensation, the largest amount thereof accrued for any of the two most recently completed Fiscal Years) and no part thereof shall be subject to the deferral provisions of clause (i) of Section 5(b). (B) In addition, the Company shall pay to the Executive promptly in a single lump sum in cash an amount equal to the product of (i) three, multiplied by (ii) 100% of the aggregate total amount which would have been payable to -69- 9 Executive under Section 5 for the entire Fiscal Year in which occurs the Employment Termination Date as if his employment had not been terminated (and without deduction or offset for any amounts actually paid for such Fiscal Year on account of Base Compensation or Incentive Bonus Compensation, under Section 5, this Section 11 or otherwise), and assuming for purposes of calculating (x) the Base Compensation, 100% of the amount thereof at the annual rate payable for such Fiscal Year pursuant to Section 5(a) and (y) the Incentive Bonus Compensation, the largest amount thereof accrued for any of the two most recently completed Fiscal Years. For purposes of the foregoing calculation, no part of the Incentive Bonus Compensation shall be subject to the deferral provisions of clause (i) of Section 5(b). (C) The Company shall also pay all legal fees and expenses incurred as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination, in seeking to obtain or enforce any right or benefit provided by this Agreement, or in interpreting this Agreement). The Company agrees, in the event the Executive desires to relocate within one year after the Date of Termination, to pay for (or reimburse) all reasonable moving expenses incurred relating to a change of principal residence in connection with such relocation and to indemnify the Executive in connection with any loss he may sustain in the sale of his primary residence. (D) The Executive shall be under no obligation to seek other employment and there shall be no offset against any amounts due the Executive under this Agreement on account of any remuneration attributable to any subsequent employment that the Executive may obtain (any amounts due under this Section 11(f) are in the nature of severance payments, or liquidated damages, or both, and are not in the nature of a penalty). (2) Unless the Executive is terminated for Cause, the Company shall maintain in full force and effect, for the Executive's continued benefit through the Scheduled Employment Termination Date, all active and retired Benefit Plans and other benefit programs or arrangements in which he was entitled to participate immediately prior to the Scheduled Employment Terminate Date (except as specified in Section 7(a) of this Agreement), provided that continued participation is possible under the general terms and provisions of such plans and programs. In the event that participation in any such plan or program is barred, the Company shall arrange to provide him with benefits substantially similar to those which he is entitled to receive under such plans and programs. (3) Unless the Executive is terminated for Cause, the Company shall allow the Executive at Company expense, to continue to utilize the services of Ernst & Young, Steven D. Elsea & Co., and/or another accountant or attorney of his choice for assistance in enforcing this Agreement and preparation of his tax returns for the year following termination of employment. (g) Compensation Upon Disability. During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness, he shall continue to receive his full Base Compensation at the rate then in effect and his full Incentive Bonus Compensation calculated according to the provisions of Section 5(b); all until this Agreement is terminated pursuant to Section 11(c) hereof. Thereafter, his benefits shall be determined in accordance with the Company's Benefit Plans. Section 12. Certain Tax Matters (a) Optional Right of Partial Disclaimer It is recognized that under certain circumstances: (1) Payments or benefits provided to the Executive under this Agreement and/or under the attached Stock Option Addendum or the Company's 1994 Stock Incentive Plan Agreements might give rise to an "excess parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, or any successor provision thereof. (2) It might be beneficial to the Executive to disclaim some portion of the payment or benefit in order to avoid such "excess parachute payment" and thereby avoid the imposition of an excise tax resulting therefrom. -70- 10 (3) Under such circumstances it would not be to the disadvantage of the Company to permit the Executive to disclaim any such payment or benefit in order to avoid the "excess parachute payment" and the excise tax resulting therefrom. Accordingly, the Executive may, at the Executive's option, exercisable at any time or from time to time, disclaim any entitlement to any portion of the payment or benefits arising under this Agreement and/or under the attached Stock Option Addendum or the Company's 1994 Incentive Stock Plan which would constitute "excess parachute payments," and it shall be the Executive's choice as to which payments or benefits shall be so surrendered, if and to the extent that the Executive exercises such option, so as to avoid "excess parachute payments." (b) Additional Payments (1) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined (as hereafter provided) that any payment or distribution to or for the Executive's benefit, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement (including without limitation the attached Stock Option Addendum or the 1994 Stock Incentive Plan or other similar agreement), or similar right (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986 (or any successor provision thereto), or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment or payments (a "Gross-Up Payment") in an amount such that, after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (2) Subject to the provisions of Section 12(b) (5), all determinations required to be made under this Section Section 12(b), including whether an Excise Tax is payable by the Executive, the amount of such Excise Tax, whether a Gross-Up Payment is required, and the amount of such Gross-Up Payment, shall be made by Steven Elsea C.P.A. or a nationally-recognized legal or accounting firm (the "Firm") selected by the Executive in the Executive's sole discretion. The Executive agrees to direct the Firm to submit its determination and detailed supporting calculations to both the Executive and the Company as promptly as practicable. If the Firm determines that any Excise Tax is payable by the Executive and that a Gross-Up Payment is required, the Company shall pay the Executive the required Gross-Up Payment within ten business days after receipt of such determination and calculations. If the Firm determines that no Excise Tax is payable by the Executive, it shall, at the same time as it makes such determination, furnish the Executive with an opinion that the Executive has substantial authority not to report any Excise Tax on the Executive's federal income tax return. Any determination by the Firm as to the amount of the Gross-Up Payment shall be binding upon the Executive and the Company. As a result of the uncertainty in the application of Section 4999 of the Internal Revenue Code of 1986 (or any successor provision thereto) at the time of the initial determination by the Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"). In the event that the Company exhausts its remedies pursuant to Section 12(b)(5) hereof and the Executive thereafter is required to make a payment of any Excise Tax, the Executive may direct the Firm to determine the amount of the Underpayment (if any) that has occurred and to submit its determination and detailed supporting calculations to both the Executive and the Company as promptly as possible. Any such Underpayment shall be promptly paid by the Company to the Executive, or for the Executive's benefit, within ten business days after receipt of such determination and calculations. (3) The Executive and the Company shall each provide the Firm access to and copies of any books, records and documents in the possession of the Company or the Executive, as the case may be, reasonably requested by the Firm, and otherwise cooperate with the Firm in connection with the preparation and issuance of the determination contemplated by Section 12(b)(2) hereof. -71- 11 (4) The fees and expenses of the Firm for its services in connection with the determinations and calculations contemplated by Section 12(b)(2) hereof shall be borne by the Company. If such fees and expenses are initially paid by the Executive, the Company shall reimburse the Executive the full amount of such fees and expenses within ten business days after receipt from the Executive of a statement therefor and reasonable evidence of the Executive's payment thereof. (5) The Executive agrees to notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as promptly as practicable but no later than 10 business days after the Executive actually receives notice of such claim. The Executive agrees to further apprise the Company of the nature of such claim and the date on which such claim is requested to be paid (in each case, to the extent known by the Executive). The Executive agrees not to pay such claim prior to the earlier of (a) the expiration of the 30-calendar-day period following the date on which the Executive gives such notice to the Company and (b) the date that any payment with respect to such claim is due. If the Company notifies the Executive in writing at least five business days prior to the expiration of such period that it desires to contest such claim, the Executive agrees to: (a) provide the Company with any written records or documents in the Executive's possession relating to such claim reasonably requested by the Company; (b) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including without limitation accepting legal representation with respect to such claim by an attorney competent in respect of the subject matter and reasonably selected by the Company; (c) cooperate with the Company in good faith in order effectively to contest such claim; and (d) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, from and against any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this Section 12(b)(5), the Company shall control all proceedings taken in connection with the contest of any claim contemplated by this Section 12(b)(5) and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim (provided, however, that the Executive may participate therein at the Executive's own cost and expense) and may, at its option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay the tax claimed and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance; and provided further, however, that any extension of the statute of limitations relating to payment of taxes for the Executive's taxable year with respect to which the contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of any such contested claim shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (6) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 12(b)(5) hereof, the Executive receives any refund with respect to such claim, the Executive agrees (subject to the Company's complying with the requirements of Section 12(b)(5) hereof) to promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after any taxes applicable thereto). If, after the Executive's receipt of an amount advanced by the Company pursuant to Section 12(b)(5) hereof, a determination is made that the Executive is not entitled to any -72- 12 refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 calendar days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid pursuant to this Section 12(b). Section 13. Indemnification. As an employee, officer and director of the Company, the Executive shall be indemnified against all liabilities, damages, fines, costs and expenses by the Company in accordance with the indemnification provisions of the Company's Code of Regulations as in effect on the date hereof, and otherwise to the fullest extent to which employees, officers and directors of a corporation organized under the laws of Ohio may be indemnified pursuant to Section 1701.13(E), Ohio Revised Code, as the same may be amended from time to time (or any subsequent statute of similar tenor and effect), subject to the terms and conditions of such statute. Section 14. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Columbus, Ohio in accordance with the rules of the American Arbitration Association then in effect; provided that all arbitration expenses shall be borne by the Company. Notwithstanding the pendency of any dispute or controversy concerning termination or the effects thereof, the Company will continue to pay the Executive his full compensation in effect immediately before any Notice of Termination giving rise to the dispute was given (including, but not limited to, Base Salary and incentive pay) and continue him as a participant in all compensation, benefit and insurance plans in which he was then participating, until the dispute is finally resolved. Judgment may be entered on the arbitrators' award in any court having jurisdiction; provided, however, that the Executive shall be entitled to seek specific performance of his right to be paid until the Employment Termination Date during the pendency of any dispute or controversy arising under or in connection with this Agreement. Section 15. Successors and Assigns. Except as hereinafter expressly provided, the agreements, covenants, terms and provisions of this Agreement shall bind the respective heirs, executors, administrators, successors and assigns of the parties. Specifically, and not by way of limitation of the foregoing, the Executive shall be bound by the terms and conditions of this Agreement to any successor assignee of the Company's rights and obligations hereunder as a result of any merger, consolidation or sale or lease of all or substantially all of the Company's business and assets. If any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company fails, concurrently with the effectiveness of any such succession, to agree in writing in form and substance reasonably satisfactory to the Executive expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place, then the Executive shall have the right, effected by notice to such successor not later than 90 days after the effectiveness of such succession, to terminate the Employment Period under Section 11(e) as though such failure was an uncured breach by the Company of a material covenant or agreement of the Company contained in this Agreement. If the Executive should die while any amounts are payable to him hereunder, or if by reason of his death payments are to be made to him hereunder, then this Agreement shall inure to the benefit of and be enforceable by the Executive's executors, administrators, heirs, distributees, devisees and legatees and all amounts payable hereunder shall then be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee or other designee or, if there is no such designee, to his estate. This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign or transfer this Agreement or any rights or obligations hereunder, except as hereinbefore provided in this Section 15. Without limiting the foregoing, the Executive's right to receive payments hereunder shall not be assignable or transferable, whether by pledge, creation of a security interest or otherwise, other than a transfer by his will or by the laws of descent or distribution, and in the event of any attempted assignment or transfer contrary to this paragraph the Company shall have no liability to pay to the purported assignee or transferee any amount so attempted to be assigned or transferred. As used in this Agreement, the "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in the first paragraph of this Section 15 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. -73- 13 Section 16. Notices. Any notice or other communication required or desired to be given hereunder shall be in writing and shall be deemed sufficiently given when personally delivered or when mailed by first class certified mail, return receipt requested and postage prepaid, addressed to the parties at their respective addresses set forth under their respective signatures below or such other person or addresses as shall be given by notice of any party. Section 17. Waiver; Remedies Cumulative. No waiver of any right or option hereunder by any party shall operate as a waiver of any other right or option, or the same right or option as respects any subsequent occasion for its exercise, or of any legal remedy. No waiver by any party of any breach of this Agreement or of any agreement or covenant contained herein shall be held to constitute a waiver of any other breach or a continuation of the same breach. All remedies provided by this Agreement are in addition to all other remedies by it or the law provided. Section 18. Governing Law; Severability. This Agreement is made and is expected to be performed in Ohio, and the various terms, provisions, covenants and agreements, and the performance thereof, shall be construed, interpreted and enforced under and with reference to the laws of the State of Ohio. It is the intention of the Company and the Executive to comply fully with all laws and matters of public policy relating to employment agreements and restrictive covenants, and this Agreement shall be construed consistently with such laws and public policy to the extent possible. If and to the extent any one or more covenants, agreements, terms and provisions of this Agreement or any portion or portions thereof shall be held invalid or unenforceable by a court of competent jurisdiction, then such covenants, agreements, terms and provisions (or portions thereof) shall be deemed separable from the remaining covenants, agreements, terms and provisions of this Agreement and such holding shall in no way affect the validity or enforceability of any of the other covenants, agreements, terms and provisions hereof. Section 19. Miscellaneous. This Agreement constitutes the entire understanding of the parties hereto with respect to the subject matter hereof. This Agreement may not be modified, changed or amended except in a writing signed by each of the parties hereto. This Agreement may be signed in multiple counterparts, each of which shall be deemed an original hereof. The captions of the several Sections and subSections of this Agreement are not a part of the context hereof, are inserted only for convenience in locating such Sections and subSections and shall be ignored in construing this Agreement. Section 20. Agreement Void. This Agreement shall be void and of no force and effect if, and only if, the Company does not close on the IPO on or before December 31, 1994. [SIGNATURES FOLLOW ON NEXT PAGE] IN WITNESS WHEREOF, the Company and the Executive have executed multiple counterparts of this Agreement. Company: Executive: AMERILINK CORPORATION 1900 East Dublin-Granville Road Columbus, Ohio 43229 By: Name: Larry R. Linhart Name: Larry R. Linhart Title: Chairman of the Board Address: 65 South Merkle Road of Directors, President Columbus, Ohio 43209 and Chief Executive Officer and by: -74- 14 Name: Robert Powelson Title: Secretary [STOCK OPTION ADDENDUM FOLLOWS ON NEXT PAGE] STOCK OPTION ADDENDUM to Executive Employment Agreement between AmeriLink Corporation and Larry R. Linhart ("Executive") Performance-Based Option As of ______________, 1994 Subject to all of the terms and conditions contained herein, the undersigned AMERILINK CORPORATION, an Ohio corporation (the "Company"), hereby grants to LARRY R. LINHART (the "Executive") the following options to purchase shares (the "Executive Option Shares") of the Company's common stock, without par value ("Common Shares") as follows: Recitals: A. Pursuant to Stock Purchase and Close Corporation Agreement dated January 15, 1987, among AmeriLink Corp., an Ohio corporation (the "Operating Company") and its shareholders, E. Len Gibson ("Gibson"), Robert L. Powelson ("Powelson") and the Executive, Gibson and Powelson granted to the Executive (together with Gibson and Powelson, the "Shareholders") the option to purchase up to five percent (5%) of the common stock of the Operating Company, up to two and one-half percent (2-1/2%) each from Gibson and Powelson, upon the terms and conditions therein stated (such options being herein called the "1987 Options"); B. Under a certain "Second Amendment to Stock Purchase and Close Corporation Agreement" dated November 30, 1991 among the Operating Company and the Shareholders, Gibson and Powelson granted to the Executive the option to purchase up to an additional eight and one-third percent (8-1/3%) of the common stock of the Operating Company, up to four and one-sixth percent (4-1/6%) each, from Gibson and Powelson, upon the terms and conditions therein stated (such options being herein called the "1991 Options"); and C. The Shareholders are parties to a certain Recapitalization Agreement and Plan of Merger, pursuant to which, among other things, the Shareholders will contribute all of their Common Stock in the Operating Company to AmeriLink Holdings Corporation, an Ohio corporation ("AHC") and receive in exchange, common shares of AHC in proportion to their respective equities in AHC, and AHC has, in turn, assumed the obligation of Gibson and Powelson to perform their obligations pursuant to the 1987 Options and the 1991 Options and has agreed to issue and sell to Executive, upon his exercise of such options, a proportionate equivalent number of common shares of AHC upon his exercise of such options and payment of the purchase price thereof in accordance with the terms and conditions thereof, and to cause the successors and assigns of AHC to be bound by and agree to perform such duties and obligations of Powelson and Gibson under the 1987 Options and 1991 Options; and D. Pursuant to the Recapitalization Agreement, AHC is about to or has merged with and into the Company and pursuant thereto, among other things, the Company has agreed to assume and perform the obligations of AHC with -75- 15 respect to the performance of the 1987 Options and the 1991 Options and the performance of the obligations of Gibson and Powelson thereunder; and E. The Company and Executive are entering into this Stock Option Addendum for the purpose of amending (but only in the respects hereinafter reflected) and restating the 1987 Options and the 1991 Options. Restated Option Agreement Performance-Based Option The Company and Executive hereby agree as follows: Subject to all of the terms and conditions contained herein, the Company hereby grants to Executive the following performance-based options to purchase Common Shares: 1. 1987 Options. The Company hereby grants to Executive the right and option to purchase from the Company 135,000 Common Shares (the "1987 Option") upon the following terms and conditions: (a) Term of 1987 Option. The 1987 Option shall be effective throughout the Employment Period and must be exercised on or before the Employment Termination Date, subject, however to the provisions of Section 5 below. (b) Purchase Price. The purchase price for the 1987 Option shall be $4.00 per Common Share (the "1987 Exercise Price"). (c) Options Non-transferable. Executive's option rights with respect to the 1987 Option are non-transferable and are personal to Executive and may be exercised only by Executive and by no one else. 2. 1991 Options. In addition to the 1987 Option, the Company grants to Executive the right and option to purchase from the Company 225,000 Common Shares (the "1991 Option") upon the following terms and conditions: (a) Term of 1991 Option. The 1991 Option shall remain effective throughout the Employment Period and for a period of 180 days following the Employment Termination Date. (b) Purchase Price. The purchase price for the 1991 Option shall be $6.35 per Common Share. (c) Time of Exercise. Except as set forth herein, there are no conditions to the exercise or the exercisability by the Executive of 1991 Options. 3. Securities Act. etc. In the absence of an effective Registration Statement under the Securities Act of 1933, as from time to time in effect (the "Act"), relating thereto, the Company shall not be required to register a transfer of shares delivered or deliverable upon exercise of the 1987 and the 1991 Option ("Delivered Shares") on its books unless the Company shall have been provided with an opinion of counsel satisfactory to it prior to such transfer that registration under the Act is not required in connection with the transaction resulting in such transfer. Each certificate evidencing Delivered Shares or issued upon any transfer of Delivered Shares shall bear an appropriate restrictive legend, except that such certificate shall not bear such a restrictive legend if the opinion of counsel referred to above is to the further effect that such legend is not required in order to establish compliance with the provisions of the Act. Nothing in this paragraph 3 shall modify or otherwise effect the provisions applicable to the Delivered Shares of, or the obligations of the Executive pursuant to, paragraph 4 hereof or the Shareholders Agreement referred to therein. 4. Shareholders Agreement. By acceptance of the 1987 and 1991 Options, Executive agrees that all shares issued upon the exercise hereof shall become "Shares" for purposes of the Shareholders Agreement dated [as of the date hereof] among the Company and the Shareholders (as defined therein). -76- 16 5. Termination, Exercise, etc. (a) The 1987 and 1991 Options shall expire and terminate, to the extent not previously exercised, as to all 1987 and 1991 Option Shares, whether or not they have become exercisable on the termination of the Executive's employment by the Company; provided, however that: (i) in the event the employment of the Executive by the Company shall be terminated by reason of the Executive's death, the [1987 and] 1991 Options shall, to the extent exercisable, at the date of the Executive's death, be exercisable by the Executive's estate or any trust established solely for the benefit of one or more of the Executive's heirs (such estate and each such trust being referred to herein, collectively, as the "Estate") during the period beginning on the date of the Executive's death and ending on the one hundred eightieth (180th) day thereafter; (ii) in the event the employment of the Executive by the Company shall be terminated other than by reason of the Executive's death, the [1987 and] 1991 Options shall, to the extent exercisable at the date of such termination, be exercisable by the Executive during the period beginning on the date of such termination and ending on the ninetieth (90th) day thereafter; and (iii) no termination of the [1987 and] 1991 Options shall modify or otherwise affect the provisions applicable to the Delivered Shares of, or the obligations of the Executive pursuant to, the Shareholders Agreement referred to in Section 4 hereof. (b) Subject to the preceding paragraph 5(a) and the other provisions of this Addendum, the [1987 and] 1991 Options may, to the extent exercisable but not previously exercised, be exercised at any time and from time to time, in whole or in part, by written notice delivered to the Company signed by the Executive or the Estate thereof. Such notice shall state the number of [1987 and] 1991 Option Shares in respect to which the [1987 and] 1991 Options are being exercised, shall contain the acknowledgement and agreement of the Executive or the Estate thereof that the Delivered Shares are subject to the Shareholders Agreement as Shares thereunder and shall also contain such representations and warranties of the Executive or the Estate thereof as the Company may then deem necessary or desirable in order to comply with federal or state securities laws or as may otherwise be reasonably requested by the Company; and shall be accompanied either (i) by payment in full (in cash, by personal check or by any other method acceptable to the Company) of the full Exercise Price in respect thereof or (ii) delivery to the Company of that number of Common Shares owned by the Executive and having a fair market value (determined reasonably and in good faith by the Board of Directors and, if reasonably possible, prior to such exercise) equal to the full Exercise Price in respect thereof. In addition, the Company shall have the right to require that the Executive or the Estate thereof, when exercising the 1987 and 1991 Options in whole or in part, remit to the Company an amount sufficient to satisfy any federal, state or local withholding tax requirements (or make other arrangements satisfactory to the Company with regard to such taxes prior to the delivery of any Delivered Shares pursuant to such exercise, including without limitation by withholding Delivered Shares otherwise deliverable upon such exercise, and, if requested by the Executive or such Estate, the Company shall so withhold at least a number of Delivered Shares requested to be so withheld by the Executive at the time of such exercise. As soon as practicable after such notice and payment shall have been received, the Company shall deliver a certificate or certificates representing the number of Delivered Shares with respect to which the Performance-Based Option was exercised, registered in the name of the person or persons exercising the Performance-Based Option. (c) All Delivered Shares that shall be purchased upon the exercise of the 1987 and 1991 Options as provided herein shall be fully paid and non-assessable. 6. Certain Conditions. In the event the Company (i) pays a dividend or makes a distribution on its Common Stock in shares of Common Stock, (ii) subdivides its outstanding shares of Common Stock into a greater number of shares, (iii) combines its outstanding shares of Common Stock into a smaller number of shares, (iv) makes a distribution on its Common Stock in shares of its capital stock other than Common Stock, (v) issues by reclassification of its Common Stock any shares of its capital stock, or (vi) consummates any merger, reorganization or consolidation pursuant to which any securities or other consideration is issued to the holders of outstanding shares of capital stock of the Company (each an "Adjustment Event"), then, upon the exercise of the 1987 and 1991 Options in whole or in part on or after the record date for determining the holders of record of outstanding shares to which such Adjustment Event shall apply, the Executive shall be entitled to receive such securities of the Company or other consideration as the Executive would have -77- 17 held immediately after the consummation of such Adjustment Event had the Delivered Shares issuable upon such exercise been held by the Executive on such record date. 7. Hardship Withdrawal. Notwithstanding any other provision hereof, the Optionee shall not be entitled to exercise this option during the period of twelve months immediately following the date upon which the Optionee receives a "hardship withdrawal" from a retirement plan sponsored by the Company which then qualifies under Section 401(k) of the Internal Revenue Code of 1986, as amended, and during such twelve month period all rights of the Optionee to exercise this option shall be suspended. 8. Miscellaneous. Except as specifically otherwise provided in Section 6 hereof as to exercise by the Executive's Estate, the 1987 and 1991 Options may not be assigned or transferred, in whole or in part, whether by operation of law, upon death or otherwise, by the Executive without the written consent of the Company which the Company may withhold in its sole and absolute discretion, with or without any reason. Neither the 1987 Option nor the 1991 Option are intended to constitute an "incentive stock option" as that term is used in Section 422 of the Internal Revenue Code of 1986, as amended, and shall not be treated as incentive stock options. The 1987 and 1991 Options shall be governed by and construed in accordance with the laws of the State of Ohio. AMERILINK CORPORATION By Name: Title: AMERILINK CORPORATION AMENDMENT NO. 1 TO EXECUTIVE EMPLOYMENT AGREEMENT This AMENDMENT NO. 1 TO EXECUTIVE EMPLOYMENT AGREEMENT (the"Amendment") is made in Columbus, Ohio effective as of ______________, 1997, by and between AMERILINK CORPORATION, an Ohio corporation (the "Company"), and LARRY R. LINHART, an individual residing in New Albany, Ohio (the "Executive"), who, for and in consideration of the mutual promises hereinafter made and other good and valuable consideration, each of them intending to be bound hereby, agree that that certain Executive Employment Agreement dated as of August 19, 1994 between the Company and the Executive, including the Stock Option Addendum of even date therewith (together, the "Agreement") shall be and hereby is modified and amended as hereinafter provided: SECTION 1. DEFINITIONS. As used herein, capitalized terms shall have the meanings set forth in the Agreement unless expressly otherwise defined herein. SECTION 2. COMPENSATION. Section 5(b) of the Agreement is hereby amended and restated in its entirety as follows: (b) Incentive Bonus Compensation. The Executive shall be paid "Incentive Bonus Compensation" for each Fiscal Year in an amount equal to 5% of the Qualifying Excess Income (as hereinafter defined), if any, for such Fiscal Year. The Incentive Bonus Compensation earned for any Fiscal Year shall be payable to the Executive by the Company within 10 days after the issuance of the Company's audited financial statements for the Fiscal Year involved. As used herein, the "Qualifying Excess Income" for any Fiscal Year shall mean the amount, if any, by which the Aggregate Operating Income for the Fiscal Year, up to a maximum Aggregate Operating Income amount of $3,706,500, exceeds $1,588,500 (with both numbers being adjusted annually by the COLA Adjustment as of the beginning of each Fiscal Year commencing with the Fiscal Year which begins in 1995). The "Aggregate Operating Income" for any Fiscal Year -78- 18 shall be equal to the Net Income of the Company for the Fiscal Year, calculated before taking into account (i) deductions for any item of compensation, fees or bonuses paid or payable by the Company or any of the Subsidiaries to any of the Shareholders, whether as officer, director, consultant, agent, contractor or otherwise, (ii) deductions for non-cash compensation expense associated with the exercise of stock options or the granting of other rights or interests in securities of the Company, so-called phantom stock interests and similar incentive compensation arrangements, by any or all executive officers of the Company (including, but not limited to, Mr. Linhart), (iii) deductions for interest expense and any taxes on income and (iv) any other items properly reportable on the audited financial statements of the Company below the "income from operations" line, such as interest income and expense and other types of investment income, loss or expense (provided, however, that gain or loss from the sale or other disposition of depreciable assets used by the Company in the ordinary course of its trade or business shall be taken into account). SECTION 3. TERMINATION OF EMPLOYMENT. (a) Section 11(b)(2) of the Agreement is hereby amended and restated in its entirety as follows: (2) If the Executive's employment shall be terminated for Cause, the Company shall pay the Executive (A) within 10 days of such termination, his unpaid Base Compensation through the Employment Termination Date at the rate in effect at the time Notice of Termination is given plus (B) within 10 days of such termination, the amount of any unpaid Incentive Bonus Compensation earned with respect to any previous Fiscal Year (without regard to the termination of Executive's employment or of the time of delivery of the Company's annual audited financial statements), plus (C) within 10 days following the issuance of the Company's audited financial statements for its Fiscal Year in which the Employment Termination Date occurs, a pro-rata share of any Incentive Bonus Compensation with respect to the Fiscal Year in which the Employment Termination Date occurs, which would otherwise have been payable to Executive had his employment not been so terminated. (b) Section 11(c) of the Agreement is hereby amended and restated in its entirety as follows: (c) Termination for Disability. The Company may terminate the Executive's employment because of the Disability of the Executive and thereafter shall pay to the Executive (or his successors) (1) his unpaid Base Compensation through the sixth full month following the Employment Termination Date at his then effective Base Compensation rate, plus (2) the amount of any Incentive Bonus Compensation with respect to any previous Fiscal Year, which shall become immediately payable without regard to the time of delivery of the company's annual audited financial statements, plus (3) an amount equal to a pro-rata share of any Incentive Bonus Compensation calculated through the sixth full month following the Employment Termination Date as though all of such six-month period were part of the Fiscal Year in which occurred the Employment Termination Date (but otherwise as though such termination had not occurred), and which shall be immediately payable assuming for purposes of calculating the amounts due, the largest amount of Incentive Bonus Compensation accrued for any of the two most recently completed Fiscal Years. In addition, the Executive shall be entitled to the amounts and benefits specified in Paragraphs (2) and (3) of Section 11(f) of this Agreement. (c) Section 11(d) shall be and hereby is amended and restated in its entirety as follows: (d) Upon Executive's Death. In the event of the Executive's death, the Company shall pay to the Executive's estate (1) any unpaid amount of Base Compensation through the date of death at the then effective Base Compensation rate plus (2) the amount of any Incentive Bonus Compensation earned and unpaid with respect to any previous Fiscal Year, which shall become immediately payable without regard to the time of delivery of the Company's annual audited financial statements, plus (3) an amount equal to the pro-rata share of any Incentive Bonus Compensation calculated with respect to the Fiscal Year in which the death occurs, and which shall be immediately payable assuming for purposes of calculating the amounts due, the largest amount of Incentive Bonus Compensation accrued for any of the two most recently completed Fiscal Years (but otherwise as though such Termination had not occurred). All previously granted stock options, rights, warrants and awards shall fully vest on the death of the Executive, except that the -79- 19 provisions of the Company's Stock Incentive Plan and any other Benefit Plan shall control the benefits and awards covered thereby. (d) Clauses (A) and (B) of Paragraph (1) of Section 11(f) (Compensation Upon Certain Termination), shall be and hereby are amended and restated in their entirety as follows: (A) (i) His unpaid Base Compensation through the Employment Termination Date at his then effective Base Compensation rate, plus (ii) the amount of any Incentive Bonus Compensation earned and unpaid with respect to any previous Fiscal Year, which shall become immediately payable without regard to the time of delivery of the Company's annual audited financial statements, plus (iii) an amount equal to a pro-rata share of the amount of any Incentive Bonus Compensation calculated with respect to the Fiscal Year in which occurs the Employment Termination Date, and which shall be immediately due and payable assuming for purposes of calculating the amounts due, the largest amount thereof accrued for any of the two most recently completed Fiscal Years. (B) In addition, the Company shall pay to the Executive promptly in a single lump sum in cash an amount equal to the product of (i) three, multiplied by (ii) 100% of the aggregate total amount which would have been payable to Executive under Section 5 of this Agreement for the entire Fiscal Year in which occurs the Employment Termination Date as if his employment had not been terminated (and without deduction or offset for any amounts actually paid for such Fiscal Year on account of Base Compensation or Incentive Bonus Compensation, under Section 5, this Section 11 or otherwise), and assuming for purposes of calculating (x) the Base Compensation, 100% of the amount thereof at the annual rate payable for such Fiscal Year pursuant to Section 5(a) above and (y) the Incentive Bonus Compensation, the largest amount thereof accrued for any of the two most recently completed Fiscal Years. AMERILINK CORPORATION Amendment No. 2 To Executive Employment Agreement This AMENDMENT NO. 2 TO EXECUTIVE EMPLOYMENT AGREEMENT (the "Amendment") is made in Columbus, Ohio effective as of August 4, 1998, by and between AMERILINK CORPORATION, an Ohio corporation (the "Company"), and LARRY R. LINHART, an individual residing in New Albany, Ohio (the "Executive"), who, for and in consideration of the mutual promises hereinafter made and other good and valuable consideration, each of them intending to be bound hereby, agree that that certain Executive Employment Agreement dated as of August 19, 1994 between the Company and the Executive, as amended by Amendment No. 1 to Executive Employment Agreement dated on or about April 29, 1997 (together, the "Agreement") shall be and hereby is modified and amended as hereinafter provided: Section 1. Definitions. As used herein, capitalized terms shall have the meanings set forth in the Agreement except as expressly otherwise defined herein. As used in the Agreement, the following terms shall have the following meanings, and any prior or different definition of any of the following terms shall be and hereby is amended and restated as set forth below: "Common Shares" means the common shares, without par value, of the Company. "Compensation Committee" means the Compensation Committee of the Board of Directors, as constituted from time to time. "Extended Employment Period" means the period of time commencing on the first day of the Fiscal Year which began March 31, 1998 and ending on the Employment Termination Date. -80- 20 "IBT" means, for each Fiscal Year, the dollar amount of the consolidated net income before income taxes of the Company and its subsidiaries determined in accordance with generally accepted accounting principles, consistently applied in accordance with past practice. The amount of IBT reflected on the Company's annual financial statements prepared in accordance with generally accepted accounting principles and audited by Ernst & Young, LLP or such other accounting firm of national reputation as may be selected as the Company's auditor from time to time, shall be conclusively binding on the Company and the Executive for purposes of this Agreement. "Incentive Bonus Compensation" means the amounts payable to the Executive pursuant to paragraphs (b), (c), (d) and (e) of Section 5 of the Agreement. "Restricted Stock" means awards of Common Shares granted as "restricted stock awards" pursuant to Section 10 of the Company's 1994 Stock Incentive Plan as the same shall be extended and amended from time to time with the approval of the Executive (which shall be deemed evidenced by his approval thereof by his vote in favor thereof as a Director of the Company or his signature thereof on behalf of the Company in his capacity as President of the Company), or pursuant to equivalent provisions of a subsequent stock incentive plan adopted hereafter by the Company with the approval of the Executive (evidenced as indicated above). "Scheduled Employment Termination Date" means March 31, 2008. "Target Adjustment Amount" means, for the first Fiscal Year of the Extended Employment Period, an amount of Target IBT equal to $30,000,000, and for each subsequent Fiscal Year of the Extended Employment Period, an amount of Target IBT equal to 110% of the Target Adjustment Amount applicable to the previous Fiscal Year. "Target IBT" means, for each Fiscal Year, the forecasted amount of IBT to be earned by the Company pursuant to a budgetary forecast or financial plan which shall be prepared annually by the Executive in consultation with senior executives of the Company and approved by resolution of the Board of Directors annually prior to the beginning of such Fiscal Year (or such later date as shall be approved by the Board of Directors) in order to establish levels of Incentive Bonus Compensation with respect to such Fiscal Year in accordance with Section 5(b) of the Agreement. "Target Range" means, for each Fiscal Year, a range of amounts of IBT having a lower limit equal to 95% of Target IBT and an upper limit equal to 105% of Target IBT, and including all amounts of IBT equal to and greater than such lower limit and equal to and less than such upper limit, each of such lower and upper limits of the Target Range to be in the dollar amounts specified by the Compensation Committee in connection with its approval of the forecasted amount of Target IBT for such Fiscal Year. Section 2. Compensation. Section 5 of the Agreement is hereby amended and supplemented by adding thereto the following paragraphs (c), (d) and (e), as follows: (c) Alternate Incentive Bonus Compensation. For each Fiscal Year during the Extended Employment Period in which IBT equals or is less than $5,000,000, Incentive Bonus Compensation shall be determined exclusively in accordance with the provisions of Section 5(b), above. For each Fiscal Year during the Extended Employment Period in which IBT exceeds $5,000,000, notwithstanding the provisions of Section 5(b), above, Incentive Bonus Compensation shall be determined exclusively in accordance with the provisions of this Section 5(c) and Section 5(d) and (e), below. For each such Fiscal Year in which IBT exceeds $5,000,000, the Executive shall be paid "Incentive Bonus Compensation" in an amount equal to the percentages of IBT for such Fiscal Year determined as follows: (i) If IBT for such Fiscal Year exceeds $5,000,000 but does not equal or exceed the lower limit of the Target Range for such Fiscal Year, the Incentive Bonus Compensation for such Fiscal Year shall equal 2.5% of total IBT for such Fiscal Year. (ii) If IBT for such Fiscal Year equals or exceeds the lower limit of the Target Range for such Fiscal Year, the Incentive Bonus Compensation for such Fiscal Year shall equal 3.1% of the amount of total IBT for such Fiscal year up to but not -81- 21 exceeding the upper limit of the Target Range for such Fiscal Year, plus the sum of the amounts, if any, calculated pursuant to clause (iii), below. (iii) If IBT in such Fiscal Year exceeds the upper limit of the Target Range for such Fiscal Year, the Executive shall be entitled to additional Incentive Bonus Compensation equal to (A) 3.5% of the amount of such excess IBT up to, but not exceeding, $1,000,000 plus (B) 3.7% of the amount, if any, by which such excess IBT exceeds $1,000,000 but does not exceed $2,000,000, plus (C) 4% of the amount, if any, by which such excess IBT exceeds $2,000,000 but does not exceed $3,000,000 plus (D) 5% of the amount, if any, by which such excess IBT exceeds $3,000,000, but does not exceed $4,000,000 plus (E) 2% of the amount, if any, by which such excess IBT exceeds $4,000,000. (d) Adjustment. For any Fiscal Year, in the event that Target IBT exceeds the Target Adjustment Amount, the amount of Incentive Bonus Compensation payable for such Fiscal Year shall be adjusted by multiplying the amount calculated as set forth in clauses (i), (ii) and (iii) of Section 5(c) above by a fraction, the numerator of which is the Target Adjustment Amount and the denominator of which is the Target IBT less one-half of the amount by which the Target IBT exceeds the Target Adjustment Amount. (ii) In the event that the Company or any of its subsidiaries shall, whether by merger, consolidation, combination, purchase of assets or other form of acquisition, acquire during any Fiscal Year another business (an "Acquisition") the financial operations of which (A) were not taken into account in the determination of Target IBT for such Fiscal Year and (B) will, in accordance with generally accepted accounting principles, be reported for such Fiscal Year on a consolidated basis with the operations of the Company and its consolidated subsidiaries, whether as a "pooling" or a "purchase" (as such terms are defined according to generally accepted accounting principles), the Board of Directors may, in its discretion after consultation with the Executive, make such adjustment to the Incentive Bonus Compensation for such Fiscal Year, to the extent based on IBT directly attributable to such Acquisition, as the Board of Directors may determine to be equitable to the Executive and the Company in the circumstances. (iii) The Board of Directors shall be exclusively responsible, and is hereby authorized, to make all determinations on behalf of the Company with respect to the calculation of Incentive Bonus Compensation. In the event that the Board of Directors and the Executive shall be unable to resolve any dispute relating to the calculation of Incentive Bonus Compensation for any Fiscal Year, the issue may be referred by either party to Ernst & Young, LLP, or such other accounting firm of national reputation as shall then be the Company's auditor, and the determination of the issue by such firm shall be final and binding on all parties. (d) Payment of Incentive Bonus Compensation. The Executive's Incentive Bonus Compensation for each Fiscal Year during the Extended Employment Period shall be payable within 10 days after the issuance of the Company's audited financial statements for the related Fiscal Year. The Incentive Bonus Compensation shall be payable in a combination of cash, deferred compensation pursuant to a deferred compensation plan as provided below, and Restricted Stock. That portion of the Incentive Bonus Compensation for any such Fiscal Year (the "Cash Portion") which is the greater of (i) 75% of the Base Compensation of the Executive for such Fiscal Year, or (ii) such larger portion as the Board of Directors shall determine after consideration of the Company's compensation policies for other executive officers of the Company and such other criteria as it shall determine to be relevant, shall be paid to the Executive in cash or a combination of cash and deferred compensation allocated as provided in the deferred compensation plan to be adopted by the Company as provided below. The balance of the Incentive Bonus Compensation remaining after payment of the Cash Portion (the "Restricted Stock Portion") shall be paid by the issuance and delivery of that number of shares of Restricted Stock which equals the dollar amount of the Restricted Stock Portion divided by the average closing price per share of the Common Shares on the last 10 trading days of such Fiscal Year. The Company shall use diligent efforts to adopt a deferred compensation plan reasonably acceptable to the Executive pursuant to which receipt by the Executive of a part of the Cash Portion may be deferred and made payable pursuant to such deferred compensation plan. In connection with the payment of the Restricted Stock Portion for any Fiscal Year, the only restrictions which shall apply to such Restricted Stock grants shall be the requirement of continued employment hereunder during the three Fiscal Years immediately following such Fiscal Year, provided, however, that if the -82- 22 Scheduled Employment Termination Date is less than three years from the date of grant, the restrictions shall be limited to the time period which ends on the Scheduled Employment Termination Date. Section 3. Employee Benefits; Vacations. (a) Section 7(a) of the Agreement is hereby amended and restated in its entirety as follows: (a) Benefit Plans. The Executive shall be entitled to participate in a deferred compensation plan which the Company shall use reasonable efforts to adopt on terms and conditions reasonably acceptable to the Executive. The Company shall continue in effect any perquisite, benefit or compensation plan (in addition to the deferred compensation provided for above) including its profit-sharing plan and 401K plan, medical insurance plan, life insurance plan, health and accident plan and disability plan in which the Executive is currently participating, or shall maintain plans providing substantially similar or improved benefits (collectively referred to as the "Benefit Plans"); provided, however, that the Company may make modifications to the Benefit Plans so long as such modifications (i) are generally applicable either to all salaried employees of the Company, or, in connection with plans which apply only to executive officers and/or other so-called highly compensated employees of the Company, are generally applicable to such executive officers and/or highly compensated employees, and, in either case, (ii) do not discriminate adversely against the Executive or other highly-compensated employees of the Company. (b) Vacations. The Executive shall be entitled in each Fiscal Year to a vacation of six weeks (30 working days) during the first five Fiscal Years of the Extended Employment Period, and eight weeks (40 working days) during the last five Fiscal Years of the Extended Employment Period, during all of which time his compensation shall be paid in full, in addition to such holidays and other non-working days as are consistent with the policies of the Company for its executives generally. The Executive's unused vacation days for any Fiscal Year shall not carry forward to any subsequent Fiscal Year. In addition, the Executive shall be entitled to take a three-month sabbatical leave of absence during any Fiscal Year of the last five Fiscal Years of the Extended Employment Period, in lieu of his vacation time for such Fiscal Year, during all of which time his compensation shall be paid in full. Section 4. Termination of Employment. Section 11(a)(1) is hereby amended and restated in its entirety as follows: Notice of Termination; Employment Termination Date. Any termination of the Executive's employment by the Company or the Executive shall be communicated by written Notice of Termination to the other party thereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated. If the Executive's employment shall be terminated for any reason, or for no reason, other than termination for Cause pursuant to Section 11(b) or voluntary termination of employment by the Executive other than for Good Reason prior to the Scheduled Employment Termination Date pursuant to Section 11(e)(2), all Restricted Stock held by the Executive immediately, automatically and without any requirement of any further action on the part of the Company or the Executive, shall be deemed fully vested without any applicable restrictions, and shall be promptly issued to the Executive without legend (except as to customary restrictions relating to applicable securities laws); and all Incentive Bonus Compensation then remaining unpaid, including any part of the Restricted Stock Portion for which shares of Restricted Stock have not then been issued to the Executive, and all Incentive Bonus Compensation for the Fiscal Year in which the Employment Termination Date shall occur, shall be payable in cash without reference to any requirement otherwise applicable hereunder for payment partially in cash, partially in Restricted Stock and/or partially pursuant to any deferred compensation plan adopted by the Company. Section 5. Stock Options. As a material part of the consideration to the Executive for entering into this Amendment, the Company, through the Compensation Committee or otherwise, shall grant to the Executive options to purchase 200,000 Common Shares under and subject to the provisions of the Company's 1994 Stock Incentive Plan, as amended and supplemented as hereinafter set forth (the "Plan"), at the price per share equal to the value thereof on the date of the Company's 1998 Annual Meeting of Shareholders, which shall be deemed for purposes of the Agreement to be the closing price per share of the Common Shares on the NASDAQ National Market on the immediately preceding trading day; provided, however, that the -83- 23 maximum number of such options which may be qualified as Incentive Stock Options under Section 422 of the Internal Revenue Code of 1986 as amended ("ISO's") shall be granted as such ISO's at a price per share equal to 110% of the closing price of the Common Shares on the NASDAQ National Market on such day. The term of such options shall be for ten years (except that in the case of the ISO's, the term shall be limited to five years) and such options shall vest and become exercisable ratably over the four successive years following the date of grant. The Company agrees to adopt and propose for approval at its 1998 Annual Meeting of Shareholders, an amendment to the 1994 Stock Incentive Plan which shall increase by 600,000 the number of shares available for grant thereunder, and the Company shall use its reasonable best efforts to solicit approval of the Shareholders of the Company of such amendment at such meeting. Notwithstanding any of the provisions of this Agreement, this Amendment is and shall be conditioned upon (i) the grant by the Company of the options described above in this Section 5, (ii) the adoption of an amendment to the Plan conforming to the provisions of this Section 5 and (iii) the approving vote of the Shareholders of the Company at the 1998 Annual Meeting with respect to said amendment to the Plan. Section 6. Ratification and Confirmation of Agreement. The provisions of the Agreement, as herein above restated and amended, are and remain in full force and effect, and, as so amended and restated, the Agreement is hereby fully ratified and confirmed. IN WITNESS WHEREOF, the Company and the Executive have executed multiple counterparts of this Agreement. COMPANY: EXECUTIVE: AMERILINK CORPORATION /s/ Larry R. Linhart 1900 East Dublin-Granville Road ------------------------- Columbus, Ohio 43229 Name: Larry R. Linhart Address: 4683 Yantis Road New Albany, Ohio 43054 By: /s/ Joseph L. Govern -------------------------------------------- Name: Joseph L. Govern Title: Senior Vice President - Operations and by: /s/ Richard W. Rubenstein ------------------------------------------- Name: Richard W. Rubenstein Title: Assistant Secretary SECTION 4. RATIFICATION AND CONFIRMATION OF AGREEMENT. The provisions of the Agreement, as herein above restated and amended, are and remain in full force and effect, and, as so amended and restated, the Agreement is hereby fully ratified and confirmed. IN WITNESS WHEREOF, the Company and the Executive have executed multiple counterparts of this Agreement. COMPANY: EXECUTIVE: AMERILINK CORPORATION -84- 24 1900 East Dublin-Granville Road Columbus, Ohio 43229 By: --------------------------------- ----------------------------------- Name: Larry R. Linhart Name: Larry R. Linhart Title: Chairman of the Board Address: 65 South Merkle Road of Directors, President Columbus, Ohio 43209 and Chief Executive Officer and by: ----------------------------- Name: Robert Powelson Title: Secretary EX-21.1 4 EXHIBIT 21.1 1 EXHIBIT 21.1 SUBSIDIARIES OF AMERILINK CORPORATION The following are the only subsidiaries of AmeriLink Corporation: Name of Subsidiary Jurisdiction of Incorporation ------------------ ----------------------------- AmeriLink Corp. Ohio Nacom Corporation Ohio AmeriLink Holdings Corporation Ohio AmeriLink of Indiana, L.L.C. Delaware AmeriLink of Kentucky, L.L.C. Delaware AmeriLink of Texas , Limited Partnership Delaware Nacom Cable Corp. Delaware AmeriLink Management Corporation Ohio Midwest Computer Cable, Inc. Ohio -85- EX-23.1 5 EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-96424) pertaining to: (i) AmeriLink Corporation 1994 Stock Incentive Plan, (ii) the Stock Option Agreement dated as of August 19, 1994, between AmeriLink Corporation and Joseph L. Govern, and (iii) the Stock Option Addendum to Executive Employment Agreement dated August 19, 1994, between AmeriLink Corporation and Larry R. Linhart; (Form S-8 No. 333-79423) pertaining to AmeriLink Corporation 1994 Stock Incentive Plan and (Form S-3 No. 33-96422) pertaining to registration of 100,000 shares of its common stock of our report dated May 11, 1999, except for Note 12 as to which the date is May 21, 1999 with respect to the consolidated financial statements of AmeriLink Corporation included in its Annual Report (Form 10-K) for the year ended March 28, 1999. /s/ Ernst & Young LLP Columbus, Ohio June 2, 1999 -86- EX-27 6 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF 3-28-99, AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE FIFTY-TWO WEEKS ENDED 3-28-99, OF AMERILINK CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000924774 AMERILINK CORPORATION 1,000 YEAR MAR-28-1999 MAR-30-1998 MAR-28-1999 5,959 0 12,321 237 2,100 26,573 6,367 0 40,351 6,600 0 0 0 25,873 7,878 40,351 65,211 65,211 39,512 63,575 0 116 0 2,100 877 1,223 0 0 0 1,223 0.29 0.28 PROPERTY, PLANT AND EQUIPMENT IS REPORTED NET OF ACCUMULATED DEPRECIATION ON THE CONSOLIDATED BALANCE SHEET
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