<PAGE> 1
Prospectus Supplement No. 4 Filed Pursuant to Rule 424(b)(3)
(to Prospectus dated March 18, 1993) Registration No. 33-57146
125,353 SHARES
ALC COMMUNICATIONS CORPORATION
COMMON STOCK
The Common Stock is traded on the American Stock Exchange ("AMEX") under
the symbol "ALC". The last reported sale price of the Common Stock on March 10,
1994 was $36.50 per share.
This Prospectus Supplement supplements the Prospectus of ALC dated March
18, 1993, a copy of which is attached, and covers a sale by Electra
Communications Holding Corporation ("ECHC") of an aggregate of up to 125,353
shares of Common Stock. ECHC intends to sell these shares from time to time in
one or more transactions by means of (i) ordinary brokers' transactions, (ii)
block transactions (which may involve crosses) to one or more dealers or (iii) a
combination of any such methods of sale, such sales to be, in the case of
transactions on the AMEX, at market prices prevailing at the time of sale and,
in the case of transactions off the floor of the AMEX, at negotiated prices
related to prevailing market prices. In connection therewith, distributors' or
sellers' commissions may be paid or allowed, which will not exceed those
customary in the types of transactions involved. ECHC has advised that it is an
assignee of Prudential as to the Common Stock (and accompanying registration
rights) covered hereby, in its capacity as an assignee of equipment lessors of
CTGI as more particularly described in the Prospectus under the caption "Certain
Relationships and Related Transactions -- Banks and CTI Ownership in the
Company."
-------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------------------------
Attached hereto are the Prospectus of ALC dated March 18, 1993 (which
describes the underlying registration statement and pertinent arrangements) and
a Prospectus of ALC dated September 20, 1993 (which describes a sale of Common
Stock other than the sales to be made pursuant to this Supplement and is
provided solely as a means to provide updated information concerning ALC). Also
attached hereto for the purpose of providing updated information concerning the
Company is the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993, which includes, among other things, the unaudited
consolidated financial statements of the Company for the nine months ended
September 30, 1993 and Management's Discussion and Analysis of Financial
Condition and Results of Operations for the nine months ended September 30,
1993.
Subsequent to the filing of the Form 10-Q for the quarter ended September
30, 1993, and effective December 31, 1993, the Company redeemed the issued and
outstanding Class A Preferred Stock (the "Class A Preferred"). Following such
redemption, the Class A Preferred was retired effective January 4, 1994.
-------------------------------------
The date of this Prospectus Supplement is March 11, 1994
<PAGE> 2
===========================
FORM 10-Q
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1993
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-10831
ALC COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 38-2643582
(State of incorporation) (IRS Employer ID No.)
30300 Telegraph Road, Bingham Farms, Michigan 48025-4510
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (313) 647-4060
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
As of October 29, 1993, the registrant had 32,842,566 shares of Common Stock
outstanding.
===========================
<PAGE> 3
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
Sept. 30, December 31,
1993 1992
--------- ------------
(Unaudited)
(In Thousands)
<S> <C> <C>
Current Assets:
Cash $112 $112
Accounts receivable, less allowance for doubtful
accounts of $3,608,000 and $3,334,000 63,620 45,327
Other current assets 10,845 3,000
------- -------
Total Current Assets $74,577 $48,439
Fixed Assets:
Communication systems $77,147 $74,002
Other equipment and leasehold improvements 30,890 28,371
Construction in progress 9,167 3,443
------- -------
$117,204 $105,816
Less accumulated depreciation and amortization 70,195 63,872
------- -------
Total Fixed Assets $47,009 $41,944
Cost in excess of net assets acquired 49,173 50,317
Deferred tax assets 8,846
Intangibles and other assets 15,964 2,566
------- -------
Total Assets $195,569 $143,266
------- -------
------- -------
</TABLE>
See notes to consolidated financial statements
<PAGE> 4
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
LIABILITIES, CLASS A PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Sept. 30, December 31,
1993 1992
---------- -------------
(Unaudited)
(In Thousands)
<S> <C> <C>
Current Liabilities:
Accounts payable $1,728 $3,508
Accrued liabilities 22,589 11,895
Accrued network costs 35,134 28,676
Taxes other than income 11,799 9,889
Revolving Credit Facility 14,802
Notes payable, capitalized leases and other
long-term debt 581 11,417
-------- --------
Total Current Liabilities $71,831 $80,187
Revolving Credit Facility 1,000
Notes payable, capitalized leases and other
long-term debt 3,445 12,308
Senior Subordinated Notes 84,324
Subordinated Notes 61,983
Class A Preferred Stock, $0.01 par value; authorized--
2,500,000 shares; issued and outstanding--
356,000 shares, aggregate redemption value of $7,119,000
less discount of $297,000 and $364,000 plus accrued but
undeclared dividends of $3,125,000 and $2,904,000 9,947 9,659
Stockholders' Equity (Deficit):
Class B Preferred Stock, $0.01 par value; authorized, issued
and outstanding -- none and 1,000,000 shares $10
Class C Preferred Stock, $0.01 par value; authorized, issued
and outstanding -- none and 1,000,000 shares 10
Preferred Stock, $0.01 par value; authorized -- 14,784,000
shares; issued and outstanding -- none
Common Stock, par value $0.01; authorized -- 200,000,000
shares; issued and outstanding -- 32,384,000 and
23,794,000 shares $324 238
Capital in excess of par value 127,291 110,146
Paid-in capital--Warrants 12,444 17,022
Accumulated deficit (115,037) (148,297)
-------- --------
Total Stockholders' Equity (Deficit) $25,022 ($20,871)
-------- --------
Total Liabilities, Class A Preferred Stock and
Stockholders' Equity (Deficit) $195,569 $143,266
-------- --------
-------- --------
</TABLE>
See notes to consolidated financial statements
<PAGE> 5
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- --------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1993 1992 1993 1992
--------- --------- --------- ---------
(In Thousands Except Per Share Amounts)
<S> <C> <C> <C> <C>
Revenue $113,098 $95,673 $319,175 $280,374
Operating Expenses:
Cost of communication services $60,561 $52,730 $172,852 $164,016
Sales, general and administrative 30,915 28,396 89,005 79,650
Depreciation and amortization 3,318 2,823 8,998 8,396
--------- -------- --------- --------
Total Operating Expenses $94,794 $83,949 $270,855 $252,062
--------- -------- --------- --------
Operating Income $18,304 $11,724 $48,320 $28,312
Interest expense (net of interest & other income (expense)
of $45,000, ($352,000), $176,000 and ($215,000)) 2,050 4,631 8,570 13,044
--------- -------- --------- --------
Income Before Income Taxes, Extraordinary Items and
Cumulative Effect of Accounting Change $16,254 $7,093 $39,750 $15,268
Income taxes 5,400 2,903 12,500 6,425
--------- -------- --------- --------
Income Before Extraordinary Items and Cumulative Effect
of Accounting Change $10,854 $4,190 $27,250 $8,843
Extraordinary Items:
Loss on early retirement of debt (net of
income tax benefit of $4,000,000) (7,490)
Utilization of operating loss carryforward 1,692 4,740
Cumulative effect of change in method of accounting for
income taxes 13,500
--------- -------- --------- --------
Net Income $10,854 $5,882 $33,260 $13,583
--------- -------- --------- --------
--------- -------- --------- --------
Earnings per common and common equivalent share:
Income before extraordinary items and cumulative effect
of accounting change $0.29 $0.15 $0.75 $0.23
Extraordinary items:
Loss on early retirement of debt
Utilization of operating loss carryforward $0.05 ($0.21) $0.23
Cumulative effect of change in method of accounting for
income taxes $0.38
--------- -------- --------- --------
Net Income $0.29 $0.20 $0.92 $0.46
--------- -------- --------- --------
--------- -------- --------- --------
Weighted Average Common and Common Equivalent Shares 36,856 28,663 35,847 20,711
--------- -------- --------- --------
--------- -------- --------- --------
</TABLE>
See notes to consolidated financial statements
<PAGE> 6
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------
Sept. 30, Sept. 30,
1993 1992
--------- ---------
(In Thousands)
<S> <C> <C>
Operating Activities
Net income $33,260 $13,583
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 9,948 9,435
Loss on sale of assets 482
Cumulative effect of change in accounting principle (13,500)
Extraordinary loss on early retirement of debt 7,490
Gain on debenture retirement (60)
Tax benefit from exercise of stock options 2,250
Increase in accounts receivable and
other current assets (17,412) (6,744)
Increase (decrease) in current liabilities 23,538 (1,853)
---------- ----------
Net Cash Provided by Operating Activities $45,574 $14,843
Financing Activities
Proceeds from (payments on) revolving credit agreement ($13,803) $9,361
Proceeds from long-term debt 440 706
Payments on long-term debt (20,995) (16,598)
Proceeds from issuance of stock 10,786 104
Payment to Preferred A Stockholders (1,286)
Retirement of debentures (74,319) (75)
Proceeds from issuance of debentures 84,309
---------- ----------
Net Cash Used in Financing Activities ($13,582) ($7,788)
Investing Activities
Expenditures for fixed assets ($12,252) ($6,374)
Change in other non-current assets (4,200) (680)
Purchase of Call Home America (15,426)
Preferred A Dividends paid (114)
---------- ----------
Net Cash Used in Investing Activities ($31,992) ($7,054)
---------- ----------
Increase (decrease) in Cash During Period $0 $1
Cash at beginning of period 112 223
---------- ----------
Cash at end of period $112 $224
---------- ----------
---------- ----------
Interest paid $8,836 $12,114
---------- ----------
---------- ----------
Income taxes paid $2,237 $1,067
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements
<PAGE> 7
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENT OF CLASS A PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 1993
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Stockholders' Equity
----------------------------------------------------------------
Class A Class B Class C
Preferred Stock Preferred Stock Preferred Stock Common Stock
---------------- ---------------- ---------------- ----------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 356 $9,659 1,000 $10 1,000 $10 23,794 $238
Accretion of discount on
Class A Preferred Stock 67
Accrued dividends on
Class A Preferred Stock 335
Dividends Paid (114)
Conversion of Class B Preferred
to Common Stock (1,000) (10) 1,898 19
Conversion of Class C Preferred
to Common Stock (1,000) (10) 1,898 19
Exercise of options 490 5
Tax benefit from stock option
exercises
Exercise of Warrants 4,304 43
Net income for the nine months
ended September 30, 1993
--- ------ ------ --- ------ --- ------- ----
Balance, September 30, 1993 356 $9,947 0 $0 0 $0 32,384 $324
--- ------ ------ --- ------ --- ------- ----
--- ------ ------ --- ------ --- ------- ----
</TABLE>
<TABLE>
<CAPTION>
Stockholders' Equity
------------------------------------------------------------------
Paid-in capital
-- Warrants Capital in
----------------- excess of Accumulated
Shares Amount par value deficit Total
------ ------ --------- ----------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992 8,869 $17,022 $110,146 ($148,297) ($20,871)
Accretion of discount on
Class A Preferred Stock (67) (67)
Accrued dividends on
Class A Preferred Stock (335) (335)
Dividends Paid 114 114
Conversion of Class B Preferred
to Common Stock (9) 0
Conversion of Class C Preferred
to Common Stock (9) 0
Exercise of options 1,657 1,662
Tax benefit from stock option exercises 2,250 2,250
Exercise of Warrants (4,304) (4,578) 13,544 9,009
Net income for the nine months
ended September 30, 1993 33,260 33,260
------ ------- -------- --------- -------
Balance, September 30, 1993 4,565 $12,444 $127,291 ($115,037) $25,022
------ ------- -------- --------- -------
------ ------- -------- --------- -------
</TABLE>
See notes to consolidated financial statements
<PAGE> 8
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992
NOTE A -- MANAGEMENT'S REPRESENTATION
The consolidated financial statements included herein have been
prepared by ALC management, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. Certain prior year amounts
have been reclassified to conform to current year presentation. In the opinion
of ALC management, all adjustments considered necessary for a fair presentation
have been included and are of a normal recurring nature, and the accompanying
consolidated financial statements present fairly the financial position as of
September 30, 1993 and December 31, 1992, and the results of operations and
cash flows for the three and nine month periods ended September 30, 1993 and
1992.
The balance sheet at December 31, 1992 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. It is suggested that these consolidated
financial statements be read in conjunction with the financial statements and
notes included in the Company's Form 10-K for the fiscal year ended December
31, 1992.
NOTE B -- 1993 FINANCING ACTIVITIES
In March 1993, an equity offering was completed in which an aggregate
of 10,350,000 shares of ALC Common Stock were sold by certain stockholders of
ALC at $14.25 per share. A group of five banks ("Banks") sold 8,386,216 shares
of this ALC Common Stock, of which 3,796,000 were received upon conversion of
all the Class B and Class C Preferred Stock. Upon completion of this offering,
the Banks held an aggregate of 4,321,784 shares of ALC Common Stock,
representing 15.0% of the total voting power of ALC capital stock (10.9%
assuming the exercise of certain warrants and options). Prudential Insurance
Company of America ("Prudential") sold the remaining 1,963,784 shares of which
963,784 represented the exercise of certain 1990 Warrants. ALC did not receive
any of the proceeds from the sale of these shares in the 1993 equity offering,
although it did receive $1.9 million upon Prudential's exercise of certain
1990 Warrants. The Banks have further reduced their ownership interest in the
Company to a minimal position through subsequent sales and the transfer of
other shares to Prudential by four of the five banks.
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In May 1993, the Company completed an offering of $85.0 million 9.0%
Senior Subordinated Notes ("1993 Notes"). Interest on the 1993 Notes is
payable semiannually commencing November 15, 1993. The 1993 Notes will mature
on May 15, 2003, but are redeemable at the option of the Company on or after
May 15, 1998. In the event of a change of control, the holders have the right
to require the Company to purchase all or part of the 1993 Notes. Management
used the $84.3 million of proceeds of this offering to repay the outstanding
1992 Notes in the aggregate amount of $72.4 million, and to reduce the amount
outstanding under the Revolving Credit Facilty. As a result of repaying the
1992 Notes, an extraordinary loss of $11.5 million was recorded on the early
retirement. The loss reflected the difference between the carrying value and
the redemption value of the debt as well as the write off of issuance costs.
The reported loss of $7.5 million was net of the related tax effect of $4.0
million.
Additionally, as of June 30, 1993, the Company executed an agreement
for a $40.0 million line of credit, replacing the previous facility. The new
Revolving Credit Facility expires June 30, 1995. Under the Revolving Credit
Facility, the Company is able to minimize interest expense by structuring the
borrowings under any of three alternatives. Each alternative has a varying
interest rate calculation associated with it. Costs to the Company during the
third quarter of 1993 approximated 6% per annum. The agreement includes
financial covenants which may allow the Company to further reduce interest
expense beginning in July 1994. A .375% per annum charge is made on the unused
portion of the line. Advances under the Revolving Credit Facility are made
based on the level of eligible receivables. As of September 30, 1993, the
Company had $39.0 million of availability under the line.
In September 1993, an equity offering was completed in which an
aggregate of 7,763,391 shares of ALC Common Stock were sold by certain
stockholders of ALC at $25.50 per share. This offering included the exercise
of 3,240,025 1990 Warrants including 2,128,005 held by General Electric Pension
Trust, 1,012,020 held by Prudential and 100,000 held by a major lessor. In
addition, the equity offering included the sale of 4,523,366 shares held by
Prudential. As the result of the sale of their shares, Prudential no longer
has a substantial equity position in ALC. ALC did not receive any proceeds
from the sale of these shares in this offering, but did receive $6.6 million
from the exercise of the 1990 Warrants.
NOTE C -- PURCHASE OF CUSTOMER BASE
During July 1993, the Company acquired the specialized 800 customer
base of Call Home America, Inc. The purchase price was
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
comprised of: (1) approximately $15 million paid in July 1993 and (2) a
payment to be made based on 150% of average monthly revenue generated by the
customers in April, May and June 1994. Call Home America, Inc. has
approximately 50,000 customers, including parents of college students and
frequent travelers, who will continue to receive services under the Call Home
America (R) name. The current level of annualized revenue is approximately $20
million. These customers will be offered other telecommunication services by
Allnet.
The purchase price has been allocated between the value of the
customer base acquired and the covenant not to compete agreement which are
being amortized over seven years and 42 months, respectively.
The following unaudited proforma summary presents the results of
operations as if the transaction had occurred at the beginning of the period
presented. The proforma financial data are not necessarily indicative of the
results that actually would have occurred had the transactions taken place on
the dates presented and do not project the Company's financial position or
results.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1993 1992
-------- --------
<S> <C> <C>
Revenue $329,820 $286,561
Income Before Extraordinary Items and
Cumulative Effect of Accounting Change 29,031 8,488
Net Income 35,041 13,010
Earnings Per Common and Common
Equivalent Share:
Income before extraordinary items and
cumulative effect of accounting change $0.80 $0.20
Net income $0.97 $0.43
</TABLE>
NOTE D -- INCOME TAXES
Effective January 1, 1993, the Company adopted the Financial
Accounting Standards Board Statement No. 109, "Accounting for Income Taxes"
("Statement 109"). Under Statement 109, the liability method is used in
accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when those differences are expected
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to reverse. Prior to the adoption of Statement 109, income tax expense was
determined using the deferred method.
As permitted by Statement 109, the Company has elected not to restate
the financial statements of any prior years. The cumulative effect of the
change increased net income by $13.5 million or $0.38 per share as of January
1, 1993.
The transfer of ALC Common Stock, Class B Preferred and Class C
Preferred by CTI to the Banks in August 1992 resulted in an ownership change
with an Internal Revenue Code Section 382 limitation of approximately $10
million per annum. As a result of this annual limitation, along with the 15
year carryforward limitation, the maximum cumulative net operating losses
("NOLs") and investment tax credits which can be utilized for federal income
tax purposes in 1993 and future years are limited to approximately $130
million. For financial reporting purposes, the deferred tax assets were
restated to $52.9 million during the quarter ended September 30, 1993 to
reflect the change in the federal statutory tax rate representing primarily the
future tax benefits related to those carryforwards and a valuation allowance of
$39.8 million has been recognized to offset these deferred tax assets. The
resulting net asset recorded represents three years of NOL benefit. The
Company has taken a conservative position that realization of the benefit of
the NOLs beyond the three year period is difficult to predict and therefore was
not recorded.
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets as
of September 30, 1993 are as follows:
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
Net operating loss carryforwards $49,297
Allowance for doubtful accounts 1,267
Depreciation 890
Compensation liabilities 701
Capital leases 604
Other 131
--------
Total deferred tax assets 52,892
Valuation allowance (39,027)
--------
Net deferred tax assets $13,865
--------
--------
</TABLE>
The difference between the newly enacted statutory federal income tax
rate of 35.0% and the effective rate for the nine months ended September 30,
1993 of 31.4% results primarily from state income taxes, goodwill amortization,
and the utilization of NOLs. The difference between the effective rate for the
nine months ended
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1993 and the year ended December 31, 1992 results primarily from
recognizing the NOL tax benefits in accordance with Statement 109 along with
reflecting the federal rate adjustment resulting from the Revenue
Reconciliation Act of 1993 during the quarter ended September 30, 1993.
The tax benefit from the exercise of stock options is added to capital
in excess of par value during the period of exercise. During the quarter ended
September 30, 1993, $2,250,000 was added to capital in excess of par value to
reflect the reduction in the tax liability from the exercise of stock options.
NOTE E -- PREFERRED A STOCK
In each of July and October 1993, the Company declared a quarterly
dividends of $0.32 per share on each of the 355,956 outstanding shares of Class
A Preferred Stock. The July dividend was paid on September 30, 1993 to
stockholders of record at the close of business September 13, 1993. The
October dividend is payable December 31, 1993 to stockholders of record at the
close of business December 13, 1993. The dividends were determined according
to the Company's Restated Certificate of Incorporation.
<PAGE> 13
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
For the three month period ended September 30, 1993, the Company
reported net income of $10.9 million on revenue of $113.1 million. This
compares to net income of $5.9 million on revenue of $95.7 million for the same
period in 1992. For the nine months ended September 30, 1993, the Company
reported income of $27.3 million before both the extraordinary loss (recorded
in the second quarter of 1993) and the cumulative effect of an accounting
change (recorded in the first quarter of 1993) on revenue of $319.2 million.
This compares to net income of $13.6 million on revenue of $280.4 million for
the nine months ended September 30, 1992. Gross margin as a percent of net
revenue increased for both the three and nine months ended September 30, 1993
compared to the year earlier periods, while operating income increased $6.6
million and $20.0 million for the three and nine month periods ended September
30, 1993 compared to the same periods one year earlier. The improved operating
results were primarily due to an increase in long distance traffic and network
cost reductions as a percent of revenue.
Operating Results as a Percent of Revenue
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------- ------------------
1993 1992 1993 1992
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Communication svcs. (53.6) (55.1) (54.2) (58.5)
------ ------ ------ ------
Gross Margin 46.4 44.9 45.8 41.5
Sales, gen'l & admin. (27.3) (29.7) (27.9) (28.4)
Depreciation & amort. (2.9) (2.9) (2.8) (3.0)
------ ------ ------ ------
Operating Income 16.2% 12.3% 15.1% 10.1%
</TABLE>
During the first quarter of 1993, the Company adopted Financial
Accounting Standards Board Statement No. 109 "Accounting for Income Taxes"
("Statement 109") which resulted in the recording of a net deferred tax asset
related primarily to future tax benefits which are expected to be realized upon
utilization of a portion of the Company's tax net operating loss carryforwards.
The cumulative effect of the change in method of accounting for income taxes
increased net income $13.5 million for the nine months ended September 30,
1993.
In May 1993, the Company completed an offering of $85.0 million
principal amount 9.0% Senior Subordinated Notes ("1993 Notes") and in June 1993
redeemed all of the 11 7/8% Subordinated Notes ("1992 Notes") then outstanding.
As a result, the Company recorded an extraordinary loss on the early retirement
of debt of
<PAGE> 14
$7.5 million, net of tax. Net income, which reflects both the extraordinary
item and the change in method of accounting, was $33.3 million for the nine
months ended September 30, 1993.
Billable minutes of long distance service have continued to increase
since the third quarter of 1990 when compared to the same quarter in the prior
year and, this quarter, reached the highest level in the Company's history.
The increase in billable minutes results from traffic growth generated by new
customers, minutes from the acquisition of a customer base, increased minutes
per customer and a decrease in billable minutes lost through attrition of
existing customers. The results of operations for the three months ended
September 30, 1993 reflect a continuation of the trend of strong financial
performance as indicated by an 84.5% increase in net income from the comparable
quarter of 1992.
Revenue
Revenue increased by 18.2% and 13.8% for the three and nine months
ended September 30, 1993 from the comparable periods of 1992. This increase is
the result of several factors. Most importantly, billable minutes for the
three months ended September 30, 1993 reached the highest level in the
Company's history, increasing by 21.3% and 16.4% for the three and nine months
ended September 30, 1993 over the comparable periods in 1992. The additional
billable minutes related to the acquisition of the Call Home America, Inc.
customer base in July 1993 represented 3.1% of the increase of the quarter
ended September 30, 1993 compared to the same quarter in the prior year.
The increased revenue from new sales along with growth in revenue from
existing customers continues to outpace revenue lost from the attrition of
customers.
The provision for uncollectible revenue was 2.0% of gross revenue for
the nine months ended September 30, 1993 and 3.1% for the same period of 1992.
The improved bad debt percentages result from strong controls and procedures
implemented to improve the collection process and provide earlier detection of
credit risks.
Operating Expenses
The Company's primary cost is for communication services, which
represents the access costs for originating and terminating calls via local
exchange carriers (primarily Bell Operating Companies). Also included in
communication services are the cost of owning and leasing fixed price long-haul
transmission capacity and the costs of obtaining lesser amounts of usage
sensitive transmission capacity.
The cost of communication services increased during the three and nine
month periods ended September 30, 1993 compared to the same periods in 1992.
This cost, however, declined as a percent of net revenue for the comparable
periods. Through a combination of
<PAGE> 15
the use of high volume fixed price leased facilities to transmit traffic and
reduced international costs through contractual arrangements, the Company has
successfully reduced its network costs as a percent of revenue. The Company
continues to monitor its network configuration to provide better economics.
Sales, general and administrative expenses increased by 8.9% and 11.7%
(but were lower as a percent of revenue) for the three and nine months ended
September 30, 1993 from the same periods one year earlier. The increase
reflects increased commissions and other expenses related to higher sales.
Management continues to emphasize its cost containment programs.
Interest Expense
Net interest expense decreased by $2.6 million and $4.5 million for
the three and nine months ended September 30, 1993 compared to the same periods
in 1992. This resulted from principal payments, reduced interest related to
the replacement of the 1992 Notes with the 1993 Notes, as well as capital lease
expirations.
Income Taxes
Application of Statement 109 as of January 1, 1993 resulted in the
recording of a net deferred tax asset of approximately $13.9 million (restated
at September 30, 1993 to reflect the higher federal statutory rate), related
primarily to the future tax benefits which are expected to be realized upon
utilization of a portion of the Company's tax net operating loss carryforwards
("NOLs"). Statement 109 requires that the tax benefit of NOLs be recorded as
an asset to the extent that management assesses that the realization of such
NOLs is "more likely than not." Management believes that recording of the
deferred tax assets representing three years of NOL benefit is conservative
given the existing limitation of such benefit to approximately $10 million per
year by Internal Revenue Code Section 382 and the likelihood of exceeding the
pre-tax income levels necessary to realize the benefit given the Company's
current operating results. The Company believes that realization of the
benefit of the NOLs beyond the three-year period is difficult to predict and
therefore is not recorded. The Company intends to evaluate the propriety of
the deferred tax asset on an ongoing basis. The Company has not applied
Statement 109 retroactively and thus did not restate prior year financial
statements to reflect adoption of the new rules.
The tax provision for the three and nine months ended September 30,
1993 includes the tax benefit of utilizing NOLs. These provisions also reflect
the impact of the higher federal statutory rate resulting from the Revenue
Reconciliation Act of 1993.
Prior to January 1, 1993, the Company accounted for income taxes in
accordance with Accounting Principles Board Opinion No. 11. The tax
provisions for the three and nine months ended
<PAGE> 16
September 30, 1992 include amounts that would have been payable except for the
availability of NOLs. The tax benefits of the loss carryforwards utilized were
reported as extraordinary items for the three and nine months ended September
30, 1992. In 1992 the Company was subject to regular tax and due to Internal
Revenue Code Section 382 "ownership change", the utilization of NOLs was
limited.
Seasonality
The Company's long distance revenue is subject to seasonal variations.
Because most of the Company's revenue is generated by commercial customers, the
Company traditionally experiences decreases in long-distance usage and revenue
in those periods with holidays, particularly during the fourth quarter.
Liquidity and Capital Resources
For the nine months ended September 30, 1993 and 1992, the Company's
operations were profitable and generated positive cash flow from operations of
$45.6 million and $14.8 million, respectively. The positive cash flow reflects
thirteen consecutive quarters of increased revenue and operating profits
compared to prior year comparable quarters.
The positive cash flow from operations resulted in working capital of
$2.7 million at September 30, 1993 compared to deficit working capital of $31.7
million at December 31, 1992. The increase in working capital is largely
attributable to (a) the new Revolving Credit Facility which resulted in the
reclassification of the facility to a long term liability, (b) the increase in
accounts receivable due to the increase in revenue (c) the increase in other
current assets attributable to the $5.0 million current portion of the deferred
tax asset recorded to reflect the adoption of Statement 109 and (d) the
increase in other current assets due to the current portion of the Call Home
America, Inc. customer base.
In addition to the positive cash flow from operations, the Company's
liquidity position is further strengthened by the unused availability under its
new Revolving Credit Facility. As of June 30, 1993, the Company executed an
agreement for a $40.0 million line of credit, replacing the previous facility.
The new Revolving Credit Facility expires June 30, 1995. Under this Revolving
Credit Facility, the Company is able to minimize interest expense by
structuring the borrowings under any of three alternatives. Each alternative
has a varying interest rate calculation associated with it. Costs to the
Company during the third quarter of 1993 approximated 6% per annum. The
agreement includes financial covenants which allow the Company to further
reduce interest expense beginning in July 1994. A .375% per annum charge is
made on the unused portion of the line. Advances under the Revolving Credit
Facility are made based on the level of eligible receivables. As of September
30, 1993, the Company had
<PAGE> 17
availability of $39.0 million under the line. Further evidence of the
Company's strong liquidity position was the Company's ability to finance the
cash needs of $15 million for the customer base acquisition from net cash flow
from operations during the three months ended September 30, 1993.
Because the Company has chosen to lease rather than own its
transmission facilities, the Company's requirements for capital expenditures
are relatively modest. Capital expenditures totaled $12.3 million for the
first nine months of 1993 and $10.3 million for the year ended 1992. Capital
expenditures during the nine months ended September 30, 1993 included projects
for enhanced efficiency and technical advancement in the network, information
systems and customer service. The future requirements for capital expenditures
relate substantially to traffic growth which necessitates the purchase of
switching and related equipment. In addition, a major component of the capital
budget relates to technological advancements as the Company continually updates
its network capabilities to offer enhanced products and services. The level of
capital expenditures for 1993 is expected to be approximately $18 million.
In March 1993, an equity offering was completed in which an aggregate
of 10,350,000 shares of ALC Common Stock were sold by certain stockholders of
ALC at $14.25 per share. The Banks sold 8,386,216 shares of this ALC Common
Stock, of which 3,796,000 were received upon conversion of all the Class B and
Class C Preferred Stock. Upon completion of this offering, the Banks held an
aggregate of 4,321,784 shares of ALC Common Stock, representing 15.0% of the
total voting power of ALC capital stock (10.9% assuming the exercise of certain
warrants and options). Prudential Insurance Company of America ("Prudential")
sold the remaining 1,963,784 shares of which 963,784 represented the partial
exercise of its 1990 Warrants. ALC did not receive any of the proceeds from
the sale of these shares in the 1993 equity offering, although it did receive
$1.9 million upon Prudential's partial exercise of 1990 Warrants. The Banks
further reduced their ownership interest in the Company to a minimal position
through subsequent sales and the transfer of other shares to Prudential by four
of the five banks.
In May 1993, the Company completed an offering of $85.0 million of
9.0% Senior Subordinated Notes. Interest on the 1993 Notes is payable
semiannually commencing November 15, 1993. The 1993 Notes will mature on May
15, 2003 but are redeemable at the option of the Company on or after May 15,
1998. Management used the $84.3 million of proceeds of this offering to repay
the outstanding 1992 Notes in the aggregate amount of $72.4 million, and to
reduce the amount outstanding under the Revolving Credit Facility. As a result
of repaying the 1992 Notes an extraordinary loss of $7.5 million, net of tax,
was recorded. The 1993 Notes provide additional benefits on both short and long
term liquidity by reducing interest expense as well as deferring redemption
requirements.
<PAGE> 18
During July 1993, the Company acquired the specialized 800 customer
base of Call Home America, Inc. The purchase price was comprised of: (1)
approximately $15 million paid in July, and (2) a payment to be made based on
150% of monthly average revenue generated by the customers in April, May and
June 1994. Call Home America, Inc. has approximately 50,000 customers,
including parents of college students and frequent travelers, who will continue
to receive services under the Call Home America (R) name. The current level of
annualized revenue is approximately $20 million. These customers will also be
offered other telecommunication services by Allnet.
In September 1993, an equity offering was completed in which an
aggregate of 7,763,391 shares of ALC Common Stock were sold by certain
stockholders of ALC at $25.50 per share. This offering included the exercise
of 3,240,025 1990 Warrants including 2,128,005 held by General Electric Pension
Trust, 1,012,020 held by Prudential and 100,000 held by a major lessor. In
addition, the equity offering included the sale of 4,523,366 shares held by
Prudential. As a result of the sale of their shares, Prudential no longer has
a significant equity position in ALC. ALC did not receive any proceeds from
the sale of these shares in this offering, but did receive $6.6 million from
the exercise of the 1990 Warrants.
Management believes that the Company's cash flow from operations,
along with the availability of the Revolving Credit Facility will provide
adequate sources of liquidity to meet the Company's anticipated short and long
term liquidity needs.
<PAGE> 19
PART II: OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
Under the ALC Restated Certificate of Incorporation, as amended (the
"Certificate"), shares of ALC Class A Preferred Stock ("Class A Preferred")
were entitled to quarterly, cumulating (without interest) dividends of $0.40
per share commencing with the quarter ended September 30, 1987 through the
quarter ended December 31, 1991. Thereafter, dividends on the Class A
Preferred are calculated according to a formula set forth in the Certificate
which is as follows: After December 31, 1991, the amount of the dividend which
shall accrue on any given day during the period (the "Accrual Period") for such
share shall be equal to the following:
(a) With respect to any given day during the period of
January 1, 1992, through December 31, 1992,
(i) an amount equal to interest, at the daily rate equivalent
(based upon a 365-day year) of "Adjusted Prime Rate" (as
defined below) in effect on such day, on $6,000,000, plus
(ii) an amount equal to (A) the quotient derived by dividing
$0.40 by the number of days in the quarterly dividend period
within which the given day shall occur, multiplied by (B)
the difference between the total number of Class A Preferred
shares outstanding on such day and 300,000 shares, divided by
(iii) the total number of Class A Preferred shares outstanding on
such day; and
(b) With respect to any given day after December 31, 1992,
(i) an amount equal to interest, at the daily rate equivalent of
"Adjusted Prime Rate" (as defined below) in effect on such
day, on $12,000,000, plus
(ii) an amount equal to (A) the quotient derived by dividing
$0.40 by the number of days in the quarterly dividend period
within which the given day shall occur, multiplied by (B)
the difference between the total number of Class A Preferred
shares outstanding on such day and 600,000 shares, divided by
(iii) the total number of Class A Preferred shares outstanding on
such day; and
(c) For purposes of this formula, the term "Adjusted Prime Rate" shall
mean one percent (1%) plus the "prime rate" published in The Wall
Street Journal
<PAGE> 20
on the first business day of the quarterly dividend period
within which the given day shall occur.
ALC paid $1.5 million in cash dividends to the Class A
Preferred holders in 1988. On July 22, 1993, the Board of Directors of ALC
declared a current quarterly dividend of $0.32 per share on each of the 355,956
issued and outstanding shares of Class A Preferred. The dividend was paid
September 30, 1993 to stockholders of record at the close of business September
13, 1993. On October 21, 1993, the Board of Directors of ALC declared a
current quarterly dividend of $0.32 per share on each of the 355,956 issued and
outstanding shares of Class A Preferred. The dividend is payable on December
31, 1993 to stockholders of record at the close of business December 13, 1993.
As of September 30, 1993, the dividend arrearage on the Class A Preferred was
approximately $3,125,000. Should the Company ever declare a dividend on the
Class A Preferred but then fail to pay within a given time frame a certain
minimum of such declared dividend (according to procedures set forth in the
Company's Certificate), additional dividends shall accrue. The Certificate
provides that ALC must redeem the shares of Class A Preferred at $20.00 per
share plus accrued dividends. If ALC does not make a scheduled redemption,,
the Class A Preferred holders can elect to convert the amount of accrued and
unpaid dividends thereon to ALC Common Stock. Future redemption obligations
relating to the Class A Preferred consist of one scheduled payment of
approximately $7.1 million (plus accrued and unpaid dividends on the shares
then being redeemed) at December 31, 1996.
Item 4. Submission of Matters to a Vote of Security Holders
During the third quarter of the fiscal quarter ended September 30,
1993, a Proxy Statement dated June 14, 1993 was furnished to the Company's
stockholders in connection with the uncontested election of directors as well
as approval of an amendment to the Company's 1990 Stock Option Plan at the
Annual Meeting of Shareholders held July 22, 1993.
(a) Election of directors
In accordance with the Certificate, the holders of the Class A
Preferred and the holders of the ALC Common Stock, each voting as a separate
class, are each entitled to one vote per share and are entitled to elect one
and two members, respectively, of the Board of Directors. In addition, the
affirmative vote of a majority of all the votes entitled to be cast by all
holders of shares of the ALC Class A Preferred and the ALC Common Stock
(collectively, the "ALC Stock") is required to elect in the aggregate four
members of the Board of Directors; provided, however, as to the election of
such directors, (i) each outstanding share of ALC Common Stock is entitled to
one vote and (ii) each outstanding share of the Class A Preferred is entitled
to 0.166 of one vote. The name of each director elected at the meeting, and a
separate tabulation with respect to each nominee, are set forth below:
<PAGE> 21
<TABLE>
<CAPTION>
Class Nominee Votes for Votes Withheld
- ----- ------- --------- --------------
<S> <C> <C> <C>
All Richard D. Irwin 22,806,357 524,835
All Marvin C. Moses 22,805,461 525,731
All John M. Zrno 22,805,757 525,435
All William H. Oberlin 22,805,222 525,970
Common Richard J. Uhl 22,752,083 528,539
Common Michael E. Faherty 22,752,695 527,988
Class A Saulene M. Richer 301,555 3,069
</TABLE>
(b) Approval of an amendment to the Company's 1990 Stock
Option Plan*
Number of votes cast FOR such approval 12,767,881
Number of votes cast AGAINST such approval 7,119,835
Number of ABSTENTIONS 1,678,051
Number BROKER NON-VOTES 1,765,425
- -------------------
* (i) Each outstanding share of ALC Common Stock is entitled to one
vote and (ii) each outstanding share of the Class A Preferred is
entitled to 0.166 of one vote.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
EXHIBIT INDEX
<TABLE>
<CAPTION>
Incorporated Page
Exhibit Filed Herein by Number
Number Description Herewith Reference to: Herein
- ------ ----------- -------------- ------------- ------
<S> <C> <C> <C> <C>
11.1 Computation of
Earnings Per Share X
</TABLE>
The Registrant hereby agrees to furnish the Commission a copy of each of the
Indentures or other instruments defining the rights of security holders of the
long-term debt securities of the Registrant and any of its subsidiaries for
which consolidated or unconsolidated financial statements are required to be
filed.
(b) Reports on Form 8-K
A report on Form 8-K/A was filed by the Company on September 16, 1993
to amend the Form 8-K previously filed by the Company on July 15, 1993 to
describe the acquisition of the customer base of Call Home America, Inc. closed
on July 3, 1993.
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALC COMMUNICATIONS CORPORATION
(Registrant}
By: /s/ Marvin C. Moses
Marvin C. Moses, Executive
Vice President and Chief
Financial Officer
By: /s/ Marilyn M. Lesnau
Marilyn M. Lesnau, Vice
President, Controller and
Chief Accounting Officer
Dated: November 12, 1993
<PAGE> 23
7,040,491 SHARES
[ALLNET LOGO]
[LOGO] COMMUNICATIONS CORPORATION
COMMON STOCK
------------------------
The 7,040,491 shares of Common Stock of ALC Communications Corporation
offered hereby are being sold by the Selling Stockholders. ALC will not receive
any of the proceeds from the sale of the shares of Common Stock, other than the
proceeds it will receive upon the exercise of certain warrants by the Selling
Stockholders. See "Use of Proceeds" and "Selling Stockholders." Of the 7,040,491
shares of Common Stock offered, 5,635,491 shares are being offered hereby in the
United States (the "U.S. Shares") and 1,405,000 shares are being offered in a
concurrent international offering outside the United States and Canada. The
price to the public and aggregate underwriting discounts and commissions per
share will be identical for both offerings. See "Underwriting."
The Common Stock is traded on the American Stock Exchange under the symbol
"ALC." The last reported sale price of the Common Stock on September 20, 1993
was $25.50 per share. See "Price Range of Common Stock."
SEE "RISK FACTORS" FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE
INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Underwriting Proceeds
Price to Discounts and to Selling
Public Commissions(1) Stockholders(2)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $25.50 $.96 $24.54
- -------------------------------------------------------------------------------------------------
Total............................. $179,532,520.50 $6,758,871.36 $172,773,649.14
- -------------------------------------------------------------------------------------------------
Total Assuming Full Exercise of
Over-Allotment Option(3)........ $202,482,520.50 $7,622,871.36 $194,859,649.14
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting."
(2) Before deducting expenses estimated at $100,000, which are payable by ALC.
(3) Assuming exercise in full of the 45-day option granted by the Selling
Stockholders to the Underwriters to purchase up to 900,000 additional
shares, on the same terms, solely to cover over-allotments. See
"Underwriting."
------------------------
The U.S. Shares are offered by the U.S. Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the U.S. Underwriters, and
subject to their right to reject orders in whole or in part. It is expected that
delivery of the Common Stock will be made in New York City on or about September
27, 1993.
------------------------
PAINEWEBBER INCORPORATED
GOLDMAN, SACHS & CO.
WHEAT FIRST BUTCHER & SINGER
CAPITAL MARKETS
------------------------
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 20, 1993.
<PAGE> 24
MAP OF THE ALLNET(R) NETWORK
(AS OF MARCH 31, 1993)
[MAP]
DIGITAL SWITCH
- ALLNET(R) SALES SITE
- --- 100% DIGITAL TRANSMISSION
AVAILABLE INFORMATION
ALC Communications Corporation is subject to the informational requirements
of the Securities Exchange Act of 1934, as amended, and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). These materials can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois, 60661-2511; and 7 World Trade Center, 13th Floor, New York, New York,
10008. Copies of such materials can also be obtained from the Commission's
Public Reference Section, 450 Fifth Street, N.W., Washington, D.C., 20549, at
prescribed rates. The Common Stock is listed on the American Stock Exchange and
reports and other materials also may be inspected at the offices of the American
Stock Exchange.
-------------------------
THE U.S. SHARES MAY NOT BE OFFERED OR SOLD, DIRECTLY OR INDIRECTLY, OUTSIDE
THE UNITED STATES OR TO ANY PERSON WHO IS NOT A U.S. PERSON, AS PART OF THE
DISTRIBUTION OF THE U.S. SHARES. FOR A DESCRIPTION OF THIS AND OTHER
RESTRICTIONS ON THE OFFERING AND SALE OF THE SHARES, SEE "UNDERWRITING."
-------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE> 25
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus. All
information set forth herein has been adjusted to reflect a one-for-five reverse
stock split of the Common Stock effected in September 1991. Unless otherwise
indicated, the information in this Prospectus assumes that the Underwriters'
over-allotment option will not be exercised. Investors should carefully consider
the information set forth under the caption "Risk Factors."
THE COMPANY
ALC Communications Corporation ("ALC") is the holding company for Allnet
Communication Services, Inc., and conducts no other business. ALC and Allnet
Communication Services, Inc. are collectively referred to herein as "Allnet" or
the "Company."
Allnet provides long distance telecommunications services primarily to
commercial and, to a lesser extent, residential subscribers in a majority of the
United States and completes subscriber calls to all directly dialable locations
worldwide. Allnet is one of a few nationwide carriers of long distance services
and in 1992 carried in excess of 600 million calls over its network. The Company
transmits long distance telephone calls through its network facilities over
transmission lines which are primarily leased from other long haul transmission
providers. All of the transmission facilities utilized by the Company are
digital, allowing it to offer the highest quality transmission currently
available. Each call is routed through at least one of the Company's 16 digital
switching centers, which select the most efficient and highest quality
transmission alternative among those available to the Company to complete the
call.
The Company views the long distance industry as a three tiered industry
which is dominated on a volume basis by the nation's three largest long distance
providers: American Telephone and Telegraph Company ("AT&T"), MCI
Telecommunications Corporation ("MCI") and Sprint Communications, Inc.
("Sprint"). AT&T, MCI and Sprint, which generate an aggregate of approximately
88% of the nation's long distance revenue of approximately $65 billion, comprise
the first tier. Allnet is positioned in the second tier with four other
companies with annual revenues of $250-$800 million each (without giving effect
to the recent merger of LDDS Communications, Inc., Resurgens Communications
Group, Inc. and Metromedia Communications Corporation (the "LDDS Merger")). The
third tier consists of more than 300 companies with annual revenues of less than
$250 million each, the majority being below $50 million each. Allnet targets
small-and medium-sized commercial customers ($100 to $50,000 in monthly long
distance volume) with the same focus and attention to customer service that
AT&T, MCI and Sprint offer to large commercial customers. Allnet operates its
own switches, develops and implements its own products, monitors and deploys its
transmission facilities and prepares and designs its own billing and reporting
systems. Allnet is one of the few long distance companies with the ability to
offer high quality value-added services to small-and medium-sized commercial
customers on a nationwide basis. Several of the Company's second tier
competitors and all of the third tier competitors are primarily regional in
nature, limited by the size of their transmission systems or dependent on third
parties for their billing services and product offerings.
The Company currently serves approximately 144,000 commercial customers
which account for approximately 89% of the Company's revenue. In order to take
advantage of its non-peak hour capacity, the Company also provides long distance
services to approximately 100,000 residential customers (excluding customers of
Call Home America, Inc., recently acquired by the Company) and is working with a
variety of companies, trade associations and special interest groups to increase
the size of its residential customer base while minimizing the cost of such
residential customer acquisition.
Competition in the industry is based on pricing, customer service, network
quality and value-added services. The prices and promotions offered for the
Company's services are designed to be competitive with other long distance
telephone carriers. The Company markets its products and services through
approximately 445 field sales representatives who provide face-to-face contact
with current and potential customers.
Allnet has made steady improvements in its financial performance since the
beginning of 1990. After five years of losses, Allnet has generated ten
consecutive quarters of profit as of June 30, 1993. This performance is a result
of increases in traffic volume ("billable minutes") and an improvement in
controlling network costs and sales, general and administrative expense. The
increase in billable minutes is a result of several factors, including an
increase in both the size and productivity of the field sales organization,
expanded product offerings, and a reduction in customer attrition.
3
<PAGE> 26
REFINANCING, CLASS A EXCHANGE, 1992 EQUITY OFFERING AND 1993 EQUITY OFFERING
In August 1992, Allnet completed a two phase refinancing begun in 1990,
consisting of a 1990 phase and a 1992 phase (together, the "Refinancing"). As a
result of the Refinancing it rescheduled substantially all of its funded debt.
See "The Refinancing."
In June 1990, The Prudential Insurance Company of America ("Prudential")
and the Trustees of General Electric Pension Trust ("General Electric") were
issued warrants ("1990 Warrants") to purchase 1,975,804 and 2,305,105 shares of
Common Stock, respectively, pursuant to the 1990 Note Agreements (as defined in
"The Refinancing"). Shares to be acquired upon exercise of the 1990 Warrants and
sold in this Offering have been included in this Prospectus pursuant to the
Registration Rights Agreement among Prudential, General Electric and ALC (and
certain other parties) dated June 4, 1990.
In June 1990, in exchange for certain lease concessions DSC Communications
Corporation ("DSC"), a major switch vendor, received from ALC warrants to
purchase 100,000 shares of Common Stock. Such shares have been included in this
Prospectus pursuant to the Registration Rights Agreement between DSC and ALC
dated June 1, 1990.
Prior to August 18, 1992, Communications Transmission, Inc. ("CTI") owned
14,324,000 shares of Common Stock and all of the outstanding shares of the Class
B Senior Convertible Preferred Stock ("Class B Preferred") and the Class C
Senior Convertible Preferred Stock ("Class C Preferred") of ALC, all of which
had been pledged to secure loans CTI owed to five banks (the "Banks"). As part
of a restructuring of CTI, which was accomplished in conjunction with the 1992
phase of the Refinancing, CTI transferred all of these shares pro rata to the
Banks. Subsequent to that transfer, in October 1992, the Banks in the aggregate
sold 3,000,000 shares of Common Stock in the 1992 Equity Offering (as defined in
"The Refinancing"). See "Certain Relationships and Related Transactions -- Banks
and CTI Stock Ownership in the Company."
In addition, pursuant to an agreement between ALC and certain holders of
Class A Preferred Stock (the "Class A Preferred Group"), the Class A Preferred
Group exchanged $58.7 million aggregate redemption value (including accrued
dividends) of ALC Class A Preferred Stock (the "Class A Preferred") for
6,399,227 shares of Common Stock (the "Class A Exchange"). The shares of Common
Stock received by the Class A Preferred Group were sold to the public in the
1992 Equity Offering. As a result of the Class A Exchange, the Company's
aggregate dividend and redemption obligations relating to the shares of Class A
Preferred were significantly reduced, and the stockholders' deficit was improved
by approximately $56 million.
In March 1993, the Banks and Prudential sold an aggregate of 10,350,000
shares of Common Stock to the public (the "1993 Equity Offering"). Immediately
following the 1993 Equity Offering, Prudential received 1,412,000 shares of
Common Stock from the Banks. Subsequently, the Banks (except for one Bank) sold
a sufficient number of shares of Common Stock to result in their realizing full
repayment of debts owed to them by CTI, and transferred the balance of shares of
Common Stock held by them (3,111,366 shares) to Prudential. Certain of these
shares are subject to an escrow agreement. See "Certain Relationships and
Related Transactions."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Selling Stockholders:
Prudential....................................... 4,905,386 shares(1)
General Electric................................. 2,035,105 shares(2)
DSC.............................................. 100,000 shares(2)
Total......................................... 7,040,491 shares
Common Stock to be outstanding after the
Offering......................................... 32,198,415 shares(3)
Use of Proceeds.................................... ALC will not receive any of the proceeds
from the sale of the shares of Common
Stock. The proceeds it receives upon
exercise of warrants by the Selling
Stockholders will be used for general
corporate purposes.
American Stock Exchange Symbol..................... ALC
</TABLE>
- -------------------------
(1) These shares consist of 3,893,366 shares of Common Stock Prudential received
from the Banks, of which 1,378,626 shares are subject to an escrow
agreement, and 1,012,020 shares it will receive upon exercise of 1990
Warrants. See "Certain Relationships and Related Transactions."
(2) These shares will be received pursuant to the exercise of warrants.
(3) Does not include 7,869,467 shares of Common Stock which may be acquired
pursuant to the exercise of other outstanding warrants and options. See
"Principal Stockholders."
4
<PAGE> 27
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------- --------------------
1988 1989 1990 1991 1992 1992 1993
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue..................... $394,115 $333,765 $326,004 $346,873 $376,064 $184,702 $206,077
Operating income (loss)..... (7,765) (1,351) (2,753) 23,850 40,684 16,588 30,016
Interest expense............ 22,178 21,338 21,250 18,128 17,158 8,413 6,520
Income (loss) before
income taxes,
extraordinary items
and the cumulative effect
of accounting change...... (29,943) (22,689) (19,643) 5,722 23,526 8,175 23,496
Income (loss) before
extraordinary items and
cumulative effect of
accounting change......... (29,943) (22,689) (19,643) 2,717 13,826 4,653 16,396
Net income (loss)........... (29,943) (21,324) (19,643) 5,347 20,826 7,701 22,406
Net income (loss) available
for Common
Stockholders(1)........... (35,951) (27,156) (25,402) (339) 16,444 4,918 22,140
Income (loss) per common and
common equivalent share
before extraordinary items
and the cumulative effect
of accounting change...... $ (13.21) $ (10.43) $ (2.29) $ (0.17) $ 0.43 $ 0.09 $ 0.46
Net income (loss) per common
and common
equivalent share.......... $ (13.21) $ (9.93) $ (2.29) $ (0.02) $ 0.74 $ 0.24 $ 0.63
Weighted average common and
common equivalent shares
outstanding............... 2,723 2,735 11,074 17,216 22,141 20,633 35,058
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1993
-----------------------------
DECEMBER 31, 1992 ACTUAL AS ADJUSTED(2)
----------------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................................... $ 143,266 $166,614 $168,137
Total debt(3).................................. 100,510 93,499 88,628
Class A Preferred.............................. 9,659 9,925 9,925
Stockholders' equity (deficit)................. (20,871) 4,574 10,968
</TABLE>
- -------------------------
(1) To arrive at net income (loss) available for Common Stockholders, the
Company's net income (loss) is adjusted by amounts relating to the
accretion of discount on Class A Preferred, the accretion of a contract
payment to certain members of the Class A Preferred Group and dividends on
Class A Preferred accrued but not declared.
(2) As adjusted to reflect the exercise of warrants by the Selling Stockholders.
(3) Excludes trade debt.
5
<PAGE> 28
RISK FACTORS
Investors should carefully consider the following risk factors, in addition
to the other information contained in this Prospectus, before purchasing the
Common Stock offered hereby.
HISTORICAL LOSSES; HIGH DEGREE OF LEVERAGE
For the years ended December 31, 1992 and 1991, Allnet had net income of
$20.8 million and $5.3 million, respectively. Allnet had income, before
extraordinary items and the cumulative effect of an accounting change, of $16.4
million for the six months ended June 30, 1993 and income before extraordinary
items of $4.7 million for the six months ended June 30, 1992. From its formation
in 1985 through the year ended December 31, 1990, the Company incurred
substantial cumulative financial losses. The total accumulated deficit at June
30, 1993 was $125.9 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
At June 30, 1993, the Company's total funded debt aggregated $93.5 million,
excluding $9.9 million in payment obligations relating to the Class A Preferred.
This amount of debt relative to the Company's Stockholders' Equity ($4.6 million
at June 30, 1993) could affect the rates and terms should additional financing
be necessary. In mid-1992, the Company completed the Refinancing, as described
under the caption "The Refinancing."
Although Allnet historically has had negative working capital, the
Company's working capital position at June 30, 1993 was positive $4.3 million.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
COMPETITION
The long distance telecommunications industry is highly competitive.
Competition is based upon pricing, customer service, network quality and
value-added services. AT&T is a dominant competitor in the long distance segment
of the telecommunications services market. In addition to AT&T, Allnet competes
with other national and regional long distance carriers. The Company believes
that there are more than 300 companies in the long distance telecommunications
market. The first tier companies and some of the second tier companies have
substantially greater market share and financial resources than the Company. The
ability of Allnet to compete effectively with other carriers depends upon its
continued ability to maintain high quality services at prices that generally are
comparable to those charged by its competitors. Various regulatory factors can
also have an impact on the Company's ability to compete.
GOVERNMENT REGULATION
Allnet is regulated at the federal level by the Federal Communications
Commission ("FCC") and at the state level by various state public utility
commissions. Allnet is required to file tariffs for its services. The current
trend at both the federal and state level is toward less regulation for Allnet
and its competitors. Regulatory trends have had, and may have in the future,
both positive and negative effects upon Allnet. For example, more markets are
opening up to Allnet, as state regulators allow Allnet to compete in markets
from which it was previously barred. On the other hand, the largest competitor,
AT&T, has gained increased pricing flexibility over the years, allowing it to
price its services more aggressively.
Regulation can also affect the costs of business for Allnet and its long
distance competitors. In order to provide their services, long distance carriers
such as Allnet must purchase "access services" from local exchange carriers to
originate and terminate calls. Presently, pricing of those "access services" is
on an equal rate per minute ("equal per unit") basis for "local transport." On
September 17, 1992, the FCC announced it would (1) maintain the existing "equal
per unit" pricing rules until late 1993, (2) implement an interim rate structure
and pricing plan during the subsequent two years, and (3) commence further
rulemaking for consideration of a permanent rate structure beginning no earlier
than late 1995. See "Business -- Regulation."
6
<PAGE> 29
CUSTOMER TURNOVER
A high level of customer attrition is inherent in the long distance
industry. Attrition (defined as the average of the last three months' revenue
from customers that have terminated or dropped to zero usage as a percentage of
total revenue) averaged 1.9% per month for the six months ended June 30, 1993,
1.8% per month for the year ended December 31, 1992, 2.0% per month for the year
ended December 31, 1991 and 2.2% per month for the year ended December 31, 1990.
To retain its commercial and residential customer base, the Company implements
programs and enhancements such as value-added services, agent and association
sales to residential users, improved customer service and competitive price
adjustments.
AVAILABILITY OF TRANSMISSION CIRCUITS
The future profitability of the Company is based upon its ability to
transmit long distance telephone calls over transmission facilities leased from
others on a cost-effective basis. The Company owns only a minor portion of its
transmission facilities, and its long distance telephone business historically
has been dependent upon lease arrangements with facilities-based carriers for
the transmission of calls. While the Company believes that it now has ample
access to transmission facilities at attractive rates and expects to continue to
have such access in the foreseeable future, this ongoing availability cannot be
assured. See "Business -- Transmission Facilities" and "Certain Relationships
and Related Transactions -- CTI Transactions."
FUTURE SALES OF COMMON STOCK
ALC is not able to estimate the amount, timing or nature of future sales of
Common Stock held by the Selling Stockholders or other holders of significant
amounts of Common Stock, because such sales and option exercise decisions depend
on market conditions, individual circumstances of the holders and other
conditions. Any sales of substantial amounts of Common Stock in the open market
may significantly reduce the market price of the outstanding shares of Common
Stock. Certain of the Company's stockholders and warrantholders have the right
to require the Company to register restricted securities held by them. The
Company has filed a "shelf" registration statement (of which this Offering is a
part) that will permit the sale from time to time, in addition to the shares
being sold in this Offering, of up to 1,370,088 shares of Common Stock,
including 630,000 shares owned by Prudential and 270,000 shares which General
Electric may acquire upon exercise of 1990 Warrants. Of these, 900,000 shares
will be sold in this Offering to the extent the over-allotment option is
exercised. ALC, its directors and officers, and the Selling Stockholders have
agreed, except under certain limited circumstances, not to dispose of any shares
of Common Stock during a period of 180 days (or in the case of the Selling
Stockholders with respect to an underwritten public offering as to which a
registration statement has become effective, 120 days) after the date of this
Prospectus without the prior written consent of the Underwriters. See "Shares
Eligible for Future Sale" and "Underwriting."
7
<PAGE> 30
USE OF PROCEEDS
ALC will not receive any of the proceeds from the sale of the Common Stock.
Proceeds to ALC from exercise of warrants by the Selling Stockholders of $6.4
million will be added to working capital and used for general corporate
purposes.
PRICE RANGE OF COMMON STOCK
The Common Stock has been traded on the American Stock Exchange ("AMEX")
since September 4, 1991 and is listed under the symbol ALC. From July 15, 1990
until September 4, 1991, the Common Stock was traded over-the-counter and listed
on the Over-the-Counter Bulletin Board under the symbol ALCC.
The table below sets forth: (1) the best approximation of the high and low
bid prices of the Common Stock on the over-the-counter market for the first
eight months in 1991; and (2) the ranges of high and low closing sales prices of
the Common Stock as reported on the AMEX composite tape for the last four months
of 1991, calendar year 1992 and the first six months of calendar year 1993. The
over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
1991 1992 1993
-------------- -------------- ----------------
HIGH LOW HIGH LOW HIGH LOW
----- ----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
1st quarter....................... $3.15 $1.05 $7.00 $4.25 $16.13 $12.50
2nd quarter....................... 4.50 2.85 6.00 4.25 20.00 15.50
3rd quarter....................... 5.00 3.10 6.38 5.00 -- --
4th quarter....................... 5.00 3.75 14.13 5.13 -- --
</TABLE>
As of September 17, 1993, there were 2,179 holders of record of the Common
Stock. The high and low closing sales prices per share of the Common Stock for
the period from July 1, 1993 to September 20, 1993, as reported by AMEX, were
$27.00 and $19.75, respectively. The last reported sale price of the Common
Stock on September 20, 1993 was $25.50 per share.
DIVIDEND POLICY
ALC has never declared or paid any cash dividends on the Common Stock. ALC
has paid certain dividends on the Class A Preferred. See "Description of Capital
Stock." Except as otherwise required under the terms of the Class A Preferred,
ALC currently intends to retain its earnings to service debt and finance future
growth and does not anticipate paying any cash dividends on the Common Stock in
the foreseeable future. In addition, the documents governing certain
indebtedness of the Company limit the payment of cash dividends.
8
<PAGE> 31
THE COMPANY
ALC is the holding company for Allnet Communication Services, Inc., and
conducts no other business. Allnet provides long distance telecommunications
services primarily to commercial and, to a lesser extent, residential
subscribers in a majority of the United States and completes subscriber calls to
all directly dialable locations worldwide. Allnet is one of the few nationwide
carriers of long distance services and in 1992 carried in excess of 600 million
calls over its network.
The Company's predecessor, Combined Network, Inc., was founded in Chicago,
Illinois in 1980. Its name was changed in November 1983 to Allnet Communication
Services, Inc. In 1985, Allnet Communication Services, Inc. merged with Lexitel
Corporation, a smaller regional long distance company, and became the wholly
owned subsidiary of ALC. Following the merger, difficulties experienced in
integrating the two companies resulted in revenue declines and net losses. In
addition to internal problems, the industry as a whole was going through rapid
changes, including severe price competition from the three major carriers, AT&T,
MCI and Sprint.
In 1988, CTI purchased preferred stock of ALC for a total equity investment
of $30.0 million, thereby acquiring a controlling interest in ALC, and in 1989
loaned $20.0 million to the Company. CTI's revenue was dependent to a
significant degree upon Allnet as a customer of CTI's transmission services.
Communications Transmission Group, Inc. ("CTGI"), then a wholly owned subsidiary
of CTI, was (and remains) a provider of a significant portion of the Company's
transmission network.
In late 1988, the Company's present management team was installed by CTI
with the goal of restoring the Company to profitability. The management team was
led by former senior executives of Cable and Wireless North America, Inc.
("C&W"), a subsidiary of Cable & Wireless plc, the Great Britain based
telecommunications group, who had built C&W's presence in the long distance
industry in the United States. The management team implemented a number of
changes commencing in 1989, including the following: (i) redirection of sales
and marketing efforts to focus on face-to-face sales to small-and medium-sized
commercial customers; (ii) enhancement of existing product offerings and
introduction of new products with a focus on value-added services; (iii)
increase in training for the sales force and customer service personnel; (iv)
implementation of a comprehensive quality program; (v) consolidation and upgrade
of the transmission network and switching equipment to become 100% digital,
resulting in improved quality and reduced costs; and (vi) renegotiation of
transmission contracts which further reduced costs.
In June 1990, the Company began the Refinancing which was undertaken in
order to allow the operating changes to take effect without the added burden of
significant near term debt retirement schedules. The basic components of the
1990 phase of the Refinancing are outlined under the caption "The Refinancing."
In connection with the 1990 phase of the Refinancing, CTI acquired 14,324,000
shares of Common Stock in addition to its earlier equity interest. In late 1991,
CTI sold the $20.0 million loan due from the Company, to the Banks, CTI's
lenders. In August 1992, CTI conveyed all of its equity interest in ALC to the
Banks in exchange for the release of certain of its obligations to the
respective Banks pro rata, in proportion to these obligations. See "Certain
Relationships and Related Transactions -- Banks and CTI Stock Ownership in the
Company." In June and August 1992, the Company concluded the Refinancing and
rescheduled substantially all of its funded debt to reduce its debt service
requirements over the next several years. The basic components of the 1992 phase
of the Refinancing are outlined under the caption "The Refinancing." Immediately
following the 1993 Equity Offering, Prudential received 1,412,000 shares of
Common Stock from the Banks. In the 1992 Equity Offering, the 1993 Equity
Offering and in subsequent market transactions, the Banks (except for one Bank)
sold a sufficient number of shares of Common Stock to require the transfer of
the remaining shares held by them (3,111,366 shares) to Prudential pursuant to a
prior agreement. In May 1993, the Company paid in full amounts owing under the
Restructured Promissory Note (the $20.0 million loan originally made by CTI).
Allnet has made steady improvements in its financial performance since June
30, 1990. After five years of losses, Allnet has generated ten consecutive
quarters of profit as of June 30, 1993. This performance is a result of
increases in the amount of billable minutes and an improvement in controlling
network costs and sales, general and administrative expense. The increase in
billable minutes is a result of several factors, including an
9
<PAGE> 32
increase in both the size and productivity of the field sales organization,
expanded product offerings, and a reduction in customer attrition.
The Company views the long distance industry as a three tiered industry
which is dominated on a volume basis by the nation's three largest long distance
providers, AT&T, MCI and Sprint, which generate an aggregate of approximately
88% of the nation's long distance revenue of approximately $65 billion and which
comprise the first tier. Allnet is positioned in the second tier with four other
companies with annual revenues of $250-$800 million each (without giving effect
to the LDDS Merger). The third tier consists of more than 300 companies with
annual revenues of less than $250 million each, the majority being below $50
million each. Allnet and its second tier competitors target small-and
medium-sized commercial customers ($100 to $50,000 in monthly long distance
volume) with the same focus and attention to customer service that AT&T, MCI and
Sprint offer to large commercial customers. Allnet operates its own switches,
develops and implements its own products, monitors and deploys its transmission
facilities and prepares and designs its own billing and reporting systems.
Allnet is one of the few long distance companies with the ability to offer high
quality value-added services to small-and medium-sized commercial customers on a
nationwide basis. Several of the Company's second tier competitors and all of
the third tier competitors are primarily regional in nature, limited by the size
of their transmission systems or dependent on third parties for their billing
services and product offerings.
The Company currently serves approximately 144,000 commercial customers
which account for approximately 89% of the Company's revenue. In order to take
advantage of non-peak capacity, the Company also provides long distance services
to approximately 100,000 residential customers (excluding customers of Call Home
America, Inc., recently acquired by the Company) and is working with a variety
of companies, trade associations and special interest groups to increase the
size of its residential customer base while minimizing the cost of such
residential customer acquisition.
The prices and promotions offered for the Company's services are designed
to be competitive with other long distance telephone carriers. The Company
markets its products and services through face-to-face contact with an emphasis
on pricing, customer service, network quality and value-added services. The
successful implementation of this strategy over the past several years has
resulted in increased sales, increased operating profit margins, reduced
customer attrition and more efficient use of the Company's network.
The Company's principal executive offices are located at 30300 Telegraph
Road, Suite 350, Bingham Farms, Michigan 48025. The Company has sales offices
and operations facilities throughout the United States. The Company's telephone
number is (313) 647-4060.
10
<PAGE> 33
CAPITALIZATION
The following table sets forth the consolidated capitalization of ALC as of
June 30, 1993, and as adjusted.
<TABLE>
<CAPTION>
JUNE 30, 1993
---------------------------
ACTUAL AS ADJUSTED(1)
--------- --------------
(IN THOUSANDS)
<S> <C> <C>
Total Short Term Obligations........................................ $ 860 $ 860
--------- --------------
--------- --------------
Long Term Debt:
Revolving Credit Facility......................................... $ 4,871 $ 0
Notes payable, capitalized leases and other long term debt........ 3,455 3,455
Senior Subordinated Notes......................................... 84,313 84,313
--------- --------------
Total Long Term Debt......................................... 92,639 87,768
--------- --------------
Class A Preferred................................................... 9,925 9,925
Stockholders' Equity:
Common Stock...................................................... 289 320
Capital in excess of par value.................................... 114,221 123,909
Paid-in capital warrants.......................................... 15,955 12,630
Accumulated deficit............................................... (125,891) (125,891)
--------- --------------
Total Stockholders' Equity................................... 4,574 10,968
--------- --------------
Total Capitalization.................................... $ 107,138 $ 108,661
--------- --------------
--------- --------------
</TABLE>
- -------------------------
(1) As adjusted to reflect the exercise of warrants by the Selling Stockholders.
11
<PAGE> 34
SELECTED FINANCIAL DATA
The selected financial data presented below for, and as of the end of, each
of the years in the five year period ended December 31, 1992, are derived from
the consolidated financial statements of ALC. Consolidated financial statements
for ALC for the three fiscal years ended December 31, 1992, are included
elsewhere in this Prospectus. The selected financial data as of and for the six
months ended June 30, 1993 and 1992 have been derived from the unaudited
consolidated financial statements of ALC included elsewhere in this Prospectus
and, in the opinion of management, include all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the information set forth
therein. The selected financial data should be read in conjunction with the
financial statements and notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -----------------------
1988 1989 1990 1991 1992 1992 1993
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue.................................... $394,115 $333,765 $326,004 $346,873 $376,064 $184,702 $206,077
Operating expenses:
Cost of communication services........... 263,149 215,555 209,612 212,716 216,889 111,286 112,291
Sales, general and administrative........ 119,954 103,647 102,838 97,964 107,294 51,255 58,090
Depreciation and amortization............ 18,777 15,914 13,320 12,343 11,197 5,573 5,680
Financial restructuring.................. 2,987
-------- -------- -------- -------- -------- -------- --------
Total operating expenses............. 401,880 335,116 328,757 323,023 335,380 168,114 176,061
-------- -------- -------- -------- -------- -------- --------
Operating income (loss).............. (7,765) (1,351) (2,753) 23,850 40,684 16,588 30,016
Interest expense........................... 22,178 21,338 21,250 18,128 17,158 8,413 6,520
Gain on sale of subsidiary................. 4,360
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes,
extraordinary items and cumulative effect
of accounting change..................... (29,943) (22,689) (19,643) 5,722 23,526 8,175 23,496
Income taxes............................... 3,005 9,700 3,522 7,100
-------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary items
and cumulative effect of accounting
change................................... (29,943) (22,689) (19,643) 2,717 13,826 4,653 16,396
Extraordinary items(1)..................... 1,365 2,630 7,000 3,048 (7,490)
Cumulative effect of change in method of
accounting for income taxes............ 13,500
-------- -------- -------- -------- -------- -------- --------
Net income (loss).................... $(29,943) $(21,324) $(19,643) $ 5,347 $ 20,826 $ 7,701 $ 22,406
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Net income (loss) available for Common
Stockholders(2).......................... $(35,951) $(27,156) $(25,402) $ (339) $ 16,444 $ 4,918 $ 22,140
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Income (loss) per common and common
equivalent share before extraordinary
items and the cumulative effect of
accounting change........................ $ (13.21) $ (10.43) $ (2.29) $ (0.17) $ 0.43 $ 0.09 $ 0.46
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Net income (loss) per common and
common equivalent share.................. $ (13.21) $ (9.93) $ (2.29) $ (0.02) $ 0.74 $ 0.24 $ 0.63
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Weighted average common and common
equivalent shares........................ 2,723 2,735 11,074 17,216 22,141 20,633 35,058
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets............................... $167,887 $161,015 $149,375 $140,846 $143,266 $144,480 $166,614
Total debt................................. 101,998 126,323 135,884 124,579 100,510 125,408 93,499
Class A Preferred.......................... 46,175 52,007 57,391 62,434 9,659 66,235 9,925
Stockholders' equity (deficit)............. (51,201) (78,122) (102,070) (102,300) (20,871) (97,352) 4,574
</TABLE>
- -------------------------
(1) Extraordinary item for the year ended December 31, 1989 pertains to gain on
early retirement of debt and for the years ended December 31, 1991 and 1992,
and for the six months ended June 30, 1992, to utilization of net operating
loss carryforwards and for the six months ended June 30, 1993 to the loss on
early retirement of debt.
(2) To arrive at net income (loss) available for Common Stockholders, the
Company's net income (loss) is adjusted by amounts relating to the accretion
of discount on Class A Preferred, the accretion of a contract payment to
certain members of the Class A Preferred Group and dividends on Class A
Preferred accrued but not declared.
12
<PAGE> 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
ALC was formed in 1985 in connection with the merger of Allnet
Communication Services, Inc. and Lexitel Corporation, and the surviving entity
became a wholly-owned subsidiary of ALC.
The Company incurred significant losses for the years ended December 31,
1986 through December 31, 1990. As the result of these losses, the Company
experienced cash flow shortages which required external cash to fund operations.
During this period, CTI made an equity investment of $30.0 million (in 1988),
acquiring a controlling interest in the Company, and loaned the Company $20.0
million (in 1989).
Subsequent to its equity investment, CTI put in place a new management
team, which implemented a number of changes commencing in 1989, including the
following: (i) redirection of sales and marketing efforts to focus on
face-to-face sales to small-and medium-sized commercial customers; (ii)
enhancement of existing product offerings and introduction of new products with
a focus on value-added services; (iii) increase in training for the sales force
and customer service personnel; (iv) implementation of a comprehensive quality
program; (v) consolidation and upgrade of the transmission network and switching
equipment to become 100% digital, resulting in improved quality and reduced
costs; and (vi) renegotiation of transmission contracts which further reduced
costs.
In June 1990, the Company began the Refinancing which allowed for the
continued operation of the Company while providing the interim resources
necessary for financial stability. The 1990 phase of the Refinancing included
the components set forth in the following paragraph, which provided for
additional sources of capital and reduction or deferral of debt payments.
The Note and Warrant Purchase Agreements ("1990 Note Agreements") provided
$7.2 million and included warrants to purchase up to 4,708,999 shares of ALC
Common Stock at $3.00 per share ("1990 Warrants"). Interest and principal
payments were rescheduled for approximately 96% of the Company's outstanding
11 7/8% Senior Subordinated Debentures ("Original Debentures"). The $30.0
million Revolving Credit Facility was renewed until June 1992. The $20.0 million
loan (the "Restructured Promissory Note") from CTI to Allnet was extended until
June 1992 with a reduction in interest rates. A significant transmission
contract between the Company and CTGI, an affiliate of CTI, was modified to
significantly reduce service costs payable by ALC to CTGI. In consideration for
concessions, ALC issued 716,200 shares of ALC Class D Convertible Preferred
Stock ("Class D Preferred") to CTI which was subsequently converted to
14,324,000 shares of ALC Common Stock. Finally, a major equipment lease was
modified to reduce monthly payments.
As a result of the 1990 phase of the Refinancing, the Company had
significant principal and interest payments scheduled in 1992. At the conclusion
of the 1990 phase of the Refinancing, management believed that cash flow from
operations would be inadequate to meet the debt service requirements as
scheduled. Accordingly during 1992, the Company completed the Refinancing which
included the rescheduling of substantially all debt, resulting in significantly
reduced or deferred debt service obligations. The 1992 phase of the Refinancing
provided a revised redemption and maturity schedule that the Company believes
can be met from expected cash flow from operations.
The principal components of the 1992 phase of the Refinancing are outlined
below:
- A "Note Exchange Offer" was completed as of August 6, 1992 whereby
the Company's Original Debentures, Replacement Debentures, PIK
Debentures, and accrued interest on the nonconsenting Debentures
totalling $73.2 million were replaced by 11 7/8% Subordinated Notes
of Allnet Communication Services, Inc. ("11 7/8% Subordinated
Notes"). The Note Exchange Offer was agreed to by 98.8% of the
Debentureholders. The revised redemption schedule of the 11 7/8%
Subordinated Notes effectively rescheduled the earliest redemption
from June 30, 1992 to September 30, 1995. As part of the Note
Exchange Offer, 3,400,000 ALC Common Stock warrants ("1992
Warrants") were issued representing 10.2% of the fully-diluted
equity of ALC at an exercise price of $5.00 per share of ALC Common
Stock.
13
<PAGE> 36
- The Company's prior $30.0 million revolving credit facility (the
"Previous Revolving Credit Facility") was extended to June 30, 1993
and modifications included a new participant and a reduction in the
interest rate.
- The Restructured Promissory Note was restated and extended to June
30, 1995 and a $5.0 million principal prepayment was made. The
amended terms provide for continuation of the 12% interest rate and
quarterly principal payments of $1.3 million commencing on September
15, 1992. In May 1993, the Restructured Promissory Note was paid in
full.
- The 1990 Note Agreements with a principal balance of approximately
$8.0 million were paid down and extended in conjunction with the
Refinancing and subsequently paid in full in December 1992.
- In consideration for participating in the Refinancing, the 4,708,999
1990 Warrants held by General Electric, Grumman Hill Investments,
L.P., Grumman Hill Associates, Inc. and Prudential were amended to
reduce the exercise price from $3.00 to $2.00 per share.
- Equipment leases with a major switch vendor were renegotiated to be
repaid over 24 months until May 1, 1994 with no change in the
interest rate of 14%.
- The Company paid $2.0 million on June 4, 1992 to CTI and received an
$0.8 million note from a then major holder of Class A Preferred
(which note was subsequently paid in full) and $1.2 million of
prepaid transmission capacity from CTGI to be utilized over a period
of 37 months.
- On August 18, 1992, the 14,324,000 shares of ALC Common Stock,
1,000,000 shares of ALC Class B Senior Convertible Preferred Stock
(the "Class B Preferred"), and 1,000,000 shares of ALC Class C
Senior Convertible Preferred Stock (the "Class C Preferred") held by
CTI were transferred to a group of five banks ("Banks") in exchange
for the release of certain portions of CTI's obligations to each of
the Banks. The Class B Preferred and Class C Preferred were
subsequently converted into 3,796,000 shares of ALC Common Stock.
- Effective October 16, 1992, ALC completed a stock offering ("1992
Equity Offering") of 9,863,600 shares of ALC Common Stock at $5.50
per share. A portion of the 1992 Equity Offering relating to
3,464,373 shares was to facilitate the sale of shares for existing
major holders including 3,000,000 shares held by the Banks.
- The remaining 6,399,227 shares that were part of the 1992 Equity
Offering were issued in conjunction with an Exchange Agreement
("Class A Exchange") with the major holders of the Class A Preferred
("Class A Preferred Group"). The members of the Class A Preferred
Group exchanged the 2,144,044 Class A Preferred shares held by them
with an aggregate redemption value of $58.7 million, including all
accrued and unpaid dividends, for shares of ALC Common Stock at an
effective 40% discount. Subsequent to the Class A Exchange, the
Company has 355,956 shares of Class A Preferred outstanding with a
redemption value of $7.1 million, plus accrued and undeclared
dividends of $2.9 million as of December 31, 1992.
- In March 1993, ALC completed a stock offering (the "1993 Equity
Offering") whereby the Banks and Prudential, a holder of 1990
Warrants, sold an aggregate of 10,350,000 shares of ALC Common Stock
to the public. As part of the 1993 Equity Offering, the Banks
converted all outstanding shares of Class B Preferred and Class C
Preferred to ALC Common Stock. The Class B Preferred and Class C
Preferred were retired effective March 25, 1993.
Subsequent financing activities included:
- In May 1993, the Company completed an offering of $85.0 million
principal amount 9.0% Senior Subordinated Notes ("1993 Notes") and
in June 1993 redeemed all of the 11 7/8% Subordinated Notes then
outstanding.
- As of June 30, 1993, the Company executed an agreement for a $40.0
million line of credit (the "Revolving Credit Facility"), replacing
the Previous Revolving Credit Facility. The Revolving
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<PAGE> 37
Credit Facility expires on June 30, 1995 and has lower stated
interest rates than the Previous Revolving Credit Facility.
During 1992, the Company achieved both the successful completion of the
Refinancing and a significant financial turnaround. After five consecutive years
of losses and declining revenues, the Company achieved profitability for 1991,
1992 and the first half of 1993 reflecting an increase in both billable minutes
and revenue and a significant reduction in operating expenses as a percent of
revenue.
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 1993 Compared to Three and Six Months Ended
June 30, 1992
For the three month period ended June 30, 1993, the Company reported income
of $8.4 million before extraordinary loss (related to early retirement of debt)
on revenue of $104.2 million. This compares to net income of $4.4 million on
revenue of $92.7 million for the same period in 1992. For the six months ended
June 30, 1993, the Company reported income of $16.4 million before both the
extraordinary loss and the cumulative effect of an accounting change (which was
recorded in the first quarter of 1993) on revenue of $206.1 million. This
compares to $7.7 million on revenue of $184.7 million for the six months ended
June 30, 1992. Gross margin as a percent of net revenue increased for both the
three and six months ended June 30, 1993 compared to the year earlier periods,
while operating income increased $6.1 million and $13.4 million for the three
and six month periods ended June 30, 1993 compared to the same periods one year
earlier. The improved operating results were primarily due to an increase in
long distance traffic and network cost reductions as a percent of revenue.
OPERATING RESULTS AS A PERCENT OF REVENUE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------- ----------------
1993 1992 1993 1992
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenue................................................... 100.0% 100.0% 100.0% 100.0%
Communication services.................................... (54.5) (59.6) (54.5) (60.2)
----- ----- ----- -----
Gross Margin............................................ 45.5 40.4 45.5 39.8
Sales, general & administrative........................... (28.4) (27.7) (28.2) (27.8)
Depreciation.............................................. (2.7) (3.1) (2.7) (3.0)
----- ----- ----- -----
Operating Income........................................ 14.4 9.6 14.6 9.0
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
During the first quarter of 1993, the Company adopted Financial Accounting
Standards Board Statement No. 109 "Accounting for Income Taxes" ("Statement
109") which resulted in the recording of a net deferred tax asset related
primarily to future tax benefits which are expected to be realized upon
utilization of a portion of the Company's tax net operating loss carryforwards.
The cumulative effect of the change in method of accounting for income taxes
increased net income $13.5 million for the six months ended June 30, 1993.
In May 1993, the Company completed the offering of the 1993 Notes and in
June 1993 redeemed all of the 11 7/8% Subordinated Notes then outstanding. As a
result, the Company recorded an extraordinary loss on the early retirement of
debt of $7.5 million, net of tax. Net income, which reflects both the
extraordinary item and the change in method of accounting, was $902,000 and
$22.4 million for the three and six months ended June 30, 1993, respectively.
Billable minutes have continued to increase since the third quarter of 1990
when compared to the same quarter in the prior year and reached the highest
level this quarter since the second quarter of 1988. The increase in billable
minutes results from traffic growth generated by new customers, increased
minutes per customer and a decrease in billable minutes lost through attrition
of existing customers. The results of operations for the three months ended June
30, 1993 reflect a continuation of the trend of strong financial performance as
indicated by an 89.3% increase in net income (excluding the loss on the early
retirement of
15
<PAGE> 38
debt) from the comparable quarter of 1992. This was accomplished despite a 25
percentage point increase (31% versus 6%) in the net effective tax rate.
Revenue
Revenue increased by 12.5% and 11.6% for the three and six months ended
June 30, 1993 from the comparable periods of 1992. This increase is the result
of several factors. Most importantly, billable minutes reached the highest level
since the second quarter of 1988, increasing by 15.0% and 13.9% for the three
and six months ended June 30, 1993 over the comparable periods in 1992.
The increased revenue from new sales along with growth in revenue from
existing customers continues to outpace revenue lost from the attrition of
customers.
The provision for uncollectible revenue was 2.0% of gross revenue for the
six months ended June 30, 1993 and 3.3% for the same period of 1992. Controls
and procedures have been tightened to improve the collection process and provide
earlier detection of credit risks.
Operating Expenses
The Company's primary cost is for communication services, which represents
the access costs for originating and terminating calls via local exchange
carriers (primarily Bell Operating Companies). Also included in communication
services are the cost of owning and leasing fixed price long-haul transmission
capacity and the costs of obtaining lesser amounts of usage sensitive
transmission capacity.
The cost of communication services increased slightly during the three and
six month periods ended June 30, 1993 compared to the same periods in 1992. This
cost, however, declined as a percent of net revenue for the comparable periods.
Through a combination of the use of high volume fixed price leased facilities to
transmit traffic and reduced international costs through contractual
arrangements, the Company has successfully reduced its network costs as a
percent of revenue. The Company continues to monitor its network configuration
to provide better economics.
Sales, general and administrative expenses increased by 15.2% and 13.3% for
the three and six months ended June 30, 1993 from the same periods one year
earlier (but was only slightly higher as a percent of revenue). The increase
reflects increased commissions and other expenses related to higher sales as
well as approximately $0.5 million of costs incurred due to the 1993 equity
offering. Management continues to emphasize its cost containment programs.
Interest Expense
Net interest expense decreased by $1.3 million and $1.9 million for the
three and six months ended June 30, 1993 compared to the same periods in 1992.
This resulted from principal payments, reduced interest related to the
replacement of the 11 7/8% Subordinated Notes with the 1993 Notes, as well as
capital lease expirations. These improvements were partially offset, in the
first quarter, by higher balances on the Revolving Credit Facility and by
interest expense on the Restructured Promissory Note, which was paid in full in
May 1993.
Years ended December 31, 1992, 1991 and 1990
The Company had net income of $20.8 million on revenue of $376.1 million
for the year ended December 31, 1992. This compares to net income of $5.3
million on revenue of $346.9 million and net loss of $19.6 million on revenue of
$326.0 million for the years ended December 31, 1991 and 1990, respectively.
Operating results for 1990 included a gain of $4.4 million from the sale of CTI
Telecommunications, Inc. and included restructuring costs of $3.0 million.
Operating results improved from an operating loss of $2.8 million for the
year ended December 31, 1990 to operating income of $23.9 million in 1991 and
$40.7 million in 1992. This improvement is the result of increased revenue,
improved gross margin and for 1991, reduced sales, general and administrative
expenses.
16
<PAGE> 39
OPERATING RESULTS AS A PERCENT OF REVENUE
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------
1992 1991 1990
----- ----- -----
<S> <C> <C> <C>
Revenue........................................................... 100.0% 100.0% 100.0%
Communication services............................................ (57.7) (61.3) (64.3)
----- ----- -----
Gross Margin............................................... 42.3 38.7 35.7
Sales, general & administrative................................... (28.5) (28.2) (31.5)
Depreciation...................................................... (3.0) (3.6) (4.1)
Financial restructuring........................................... -- -- (0.9)
----- ----- -----
Operating Income........................................... 10.8 6.9 (0.8)
----- ----- -----
----- ----- -----
</TABLE>
Revenue
Revenue increased 8.4% to $376.1 million from 1991 to 1992 resulting from a
9.6% increase in billable minutes offset somewhat by a slight decrease in the
revenue per minute. Revenue per minute decreased slightly from 1991 to 1992
resulting from lower unit prices which were more than offset by the impact of
reduced cost of communication services as a percentage of revenue. Billable
minutes have continued to increase since the third quarter of 1990 when compared
to the same quarter in the prior year. Most importantly, billable minutes
reached the highest level in 1992 since the year ended December 31, 1988. The
increase in billable minutes results from traffic generated by new customers,
increased minutes per customer and a decrease in billable minutes lost through
attrition of existing customers.
Revenue increased from $326.0 million in 1990 to $346.9 million in 1991.
The 6.4% increase in revenue represents a 7.1% increase in billable minutes. The
increase in billable minutes was a result of several factors, including the
increase in the size of the field sales organization which resulted in increased
new sales, the increased minutes per customer which resulted from expanded
product offerings, and the decrease in billable minutes lost through the
attrition of existing customers.
During 1992, the Company introduced several strategic services to upgrade
existing products. The Company enhanced Allnet Voice Mail by adding additional
features including message notification, and introduced Allnet Broadcast FAX,
which allows the customer to send a fax document to multiple locations
simultaneously. Allnet also introduced a new streamlined dialing method known as
"00 Platform" to reach a long distance operator, customer service, or Allnet
special features. Customers with multi-locations now have a new "800"
enhancement available which connects "800" calls automatically to the customer's
location closest to the originating call.
The Company's field sales representatives have increased from 363 at the
beginning of 1990 to 451 as of December 1992. Management has been successful in
adding field sales representatives in order to increase revenue while still
maintaining control over sales and marketing expenses.
The revenue generated from customers' first full month of service in 1992
was 7.5% higher than in 1991 and 13.8% higher than in 1990. The increased
revenue from new sales along with revenue from existing customers outpaced
revenue lost from customer attrition. Attrition has improved from 2.2% in 1990
to 2.0% in 1991 to 1.8% in 1992.
The provision for uncollectible revenue, which is deducted from gross
revenue to arrive at reported revenue, was 3.0% for the year ended 1992 and 3.4%
for the years ended December 31, 1991 and 1990. During the last three years,
procedures were implemented to improve the collection process and provide
earlier detection of credit risks. Procedures include an expanded system for
initial credit review and screening, monitoring of early usage levels on new
accounts, modification of dunning and collection methods and timing, and
improved collection processes on past due accounts.
Cost of Communication Services
The cost of communication services increased slightly from $209.6 and
$212.7 to $216.9 for the years 1990, 1991, and 1992, respectively. The increase
in cost of communication services is due to the 9.6% and
17
<PAGE> 40
7.1% increase in billable minutes in 1992 and 1991. These increases were offset
by cost reductions for transmission capacity experienced in 1991 and even
further reductions during 1992. The cost of communication services decreased,
however, as a percent of revenue to the lowest rate in the Company's history.
The Company has successfully negotiated the reduction of rates under
contracts with various transmission carriers including CTGI. In addition, the
Company has continued to reconfigure its network to provide better long-term
economics.
The Company's use of high volume, fixed price transmission capacity is
significantly more cost effective than the use of measured services. By
utilizing fixed price leased facilities to transmit traffic, the Company has
successfully driven down its network costs without the capital expenditures
associated with construction of its own fiber optic or digital microwave
network. Over 99% of traffic traverses low cost "on-net" digital facilities.
Other Expenses
Sales, general and administrative expense was $102.8 million, $98.0 million
and $107.3 million for the years 1990, 1991 and 1992, respectively.
Sales, general and administrative expense for 1992 increased $9.3 million
or 9.5% compared to 1991. This increase resulted in sales, general and
administrative expense increasing as a percent of revenue. Sales expense
increased 19.6% from 1991 which resulted from increased advertising and
marketing expenses as well as increased commissions reflecting higher first full
month revenue as well as enhancements to the commission plan to encourage
customer retention. General and administrative expenses have continued to
decrease as a percent of net revenue.
Sales, general and administrative expense for 1991 declined $4.9 million or
4.7% compared to 1990. This decrease resulted in sales, general and
administrative expense declining as a percent of revenue. This reduction
includes the impact of a slight increase of 4.4% in total corporate head count.
Despite a 13% increase in the average number of field sales representatives for
1991 over 1990, sales expense remained relatively constant from 1990 to 1991.
The overall decrease in general and administrative expenses reflects
management's continuing focus on cost containment. Procedures implemented to
improve efficiencies and contain expenses included improved budgeting
techniques; regular, periodic review of actual expenses against budgeted levels;
incentive programs tied directly to achievement of budget objectives; and
enhanced review of general programs and benefit costs.
The decrease in depreciation and amortization from $13.3 million in 1990 to
$12.3 million in 1991 and further to $11.2 million in 1992 is primarily the
result of the termination of depreciation on analog multiplex and switch
equipment, for which the Company provided a reserve, and the termination of
depreciation as assets reach the end of their useful lives. These reductions in
depreciation have been partially offset by depreciation on newly capitalized
assets during the three-year period.
Interest Expense
Interest expense decreased from $18.1 million in 1991 to $17.2 million in
1992. This resulted from a lower prime rate impacting the interest expense on
the Revolving Credit Facility as well as a decrease in interest related to debt
principal payments made in connection with the Refinancing. These improvements
were partially offset by increased expense on the Debentures and the
Restructured Promissory Note. Interest expense for 1992 would have been reduced
by $3.5 million if the $85.0 million aggregate principal amount of Notes had
been outstanding during the entire year and the existing 11 7/8% Subordinated
Notes had been repaid effective December 31, 1991.
Interest expense decreased from $21.3 million in 1990 to $18.1 million in
1991. This decrease was primarily due to reduced interest on the Revolving
Credit Facility resulting from lower average balances and the expiration of
capital leases.
Cash flow was impacted by interest payments beginning in 1991 on the 1990
Notes and the Restructured Promissory Note, which had been previously deferred.
Interest on the Debentures continued to be converted into PIK Debentures through
December 1991. PIK Debentures were exchanged for 11 7/8% Subordinated
18
<PAGE> 41
Notes in the Note Exchange Offer or paid off in September 1992. Interest
payments on the 11 7/8% Subordinated Notes began in July 1992 and are paid
quarterly.
INCOME TAXES
Effective January 1, 1993, the required implementation date, the Company
adopted the Financial Accounting Standards Board Statement 109 "Accounting for
Income Taxes" ("Statement 109"). Application of the new rules resulted in the
recording of a net deferred tax asset of approximately $13.5 million as of
January 1, 1993, related primarily to the future tax benefits which are expected
to be realized upon utilization of a portion of the Company's tax net operating
loss carryforwards ("NOLs"). Statement 109 requires that the tax benefit of NOLs
be recorded as an asset to the extent that management assesses that the
utilization of such NOLs is "more likely than not." Management believes that
recording of the deferred tax assets representing three years of NOL benefit is
conservative given the existing limitation of such NOLs to $10.0 million per
year by Internal Revenue Code Section 382 and the likelihood of exceeding the
necessary pre-tax income levels to realize the benefit given the Company's
current operating results. The Company believes that realization of the benefit
of the NOLs beyond the three-year period is difficult to predict and therefore
is not recorded. The Company intends to evaluate the propriety of the deferred
tax asset on an ongoing basis. The Company has not applied the Statement
retroactively and thus did not restate prior year financial statements to
reflect adoption of the new rules.
Prior to January 1, 1993, the Company accounted for income taxes in
accordance with Accounting Principles Board Opinion No. 11. The tax provisions
for the three and six months ended June 30, 1993 and 1992 and the years ended
December 31, 1992 and 1991 include an amount that would have been payable except
for the availability of NOLs. The tax benefits of the loss carryforwards
utilized were reported as an extraordinary item for years ended 1992 and 1991
and the three and six months ended June 30, 1992. In 1992 the Company was
subject to regular tax and due to an Internal Revenue Code Section 382
"ownership change", the utilization of net operating losses was limited. In
1991, the Company was subject to alternative minimum tax and the operating
losses were utilized to offset 90% of the tax. Due to the operating loss
sustained for the year ended December 31, 1990, no provision for income taxes
was necessary.
Section 382 Limitation
Section 382 (in conjunction with Sections 383 and 384) of the Code provides
rules governing the utilization of certain tax attributes, including a
corporation's NOLs, "built-in-losses," capital loss carryforwards, unused
investment tax credits ("ITCs") and other unused credits, following significant
changes in ownership of a corporation's stock. Generally, Section 382 provides
that if an ownership change occurs, the taxable income of a corporation
available for offset by these tax attributes will be subject to an annual
limitation ("382 Limitation").
As of December 31, 1992, the Company had approximately $147.8 million of
NOLs, $147.8 million of alternative NOLs and $3.6 million of investment tax
credit carryforwards which expire beginning December 31, 1998 through 2005. The
transfer of ALC Common Stock, Class B Preferred and Class C Preferred by CTI to
the Banks in August 1992 resulted in an ownership change with a 382 Limitation
of approximately $10.0 million per annum. As a result of this annual limitation,
along with the 15 year carryforward limitation, the maximum cumulative NOLs and
ITCs which can be utilized for federal income tax purposes in 1993 and future
years are limited to approximately $130.0 million, assuming no future ownership
change or built-in gain recognition. The Company is also subject to numerous
state income tax laws. Many states limit the utilization of NOLs after an
ownership change.
Investors are cautioned that future events beyond the control of the
Company could reduce or eliminate the Company's ability to utilize the tax
benefit of its NOLs and ITCs. Any future ownership change under Section 382
would require a new computation of the 382 Limitation based on the value of the
Company and the long term tax-exempt rate in effect at that time. Furthermore,
the 382 Limitation would be reduced to zero if the Company fails to satisfy the
continuity of business enterprise requirement for the two-year period
19
<PAGE> 42
following an ownership change. Under the continuity of business requirement, the
Company must either continue its historic business or use a significant portion
of its pre-ownership change assets in a business.
SEASONALITY
The Company's long distance revenue is subject to seasonal variations.
Because most of the Company's revenue is generated by commercial customers, the
Company traditionally experiences decreases in long distance usage and revenue
in those periods with holidays. In past years the Company's long distance
traffic, which is primarily commercial, has declined slightly during the fourth
quarter due to the November and December holiday periods. However, in 1992 this
trend was more than offset by strong traffic growth, which was up 12.3% from the
fourth quarter of 1991.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1993 and 1992, the Company's operations
were profitable and generated positive cash flow from operations of $26.7
million and $4.2 million, respectively. The positive cash flow reflects twelve
consecutive quarters of increased revenue and operating profits compared to
prior year comparable quarters.
In addition to the positive cash flow from operations, the Company's
liquidity position is further strengthened by the unused availability under its
new Revolving Credit Facility. As of June 30, 1993, the Company executed an
agreement for a $40.0 million line of credit, replacing the previous facility.
The new Revolving Credit Facility expires June 30, 1995. Under this Revolving
Credit Agreement, the Company is able to minimize interest expense by
structuring the borrowings under any of three alternatives. Each alternative has
a varying interest rate calculation associated with it. Costs to the Company
currently approximate 6% per annum. The agreement includes financial covenants
which may allow the Company to further reduce interest rates beginning in July
1994. A .375% per annum charge is made on the unused portion of the line.
Advances under the Revolving Credit Facility are made based on the level of
eligible receivables. As of July 31, 1993, the Company had availability of $22.9
million under the line.
The Company had working capital of $4.3 million at June 30, 1993 compared
to deficit working capital of $31.7 million at December 31, 1992. The increase
in working capital is largely attributable to (a) the Revolving Credit Facility
which resulted in the reclassification of the Revolving Credit Facility to a
long term liability, (b) the increase in accounts receivable due to the increase
in revenue and (c) the increase in other current assets attributable to the $4.9
million current portion of the deferred tax asset recorded to reflect the
adoption of Statement 109.
Because the Company has chosen to lease rather than own its transmission
facilities, the Company's requirements for capital expenditures are modest.
Capital expenditures totaled $4.0 million for the first half of 1993 and $10.3
million for the year ended 1992. Capital expenditures during the year ended
December 31, 1992 included projects for enhanced efficiency and technical
advancement in the network, information systems and customer service. The future
requirements for capital expenditures relate substantially to traffic growth
which necessitates the purchase of switching and related equipment. In addition,
a major component of the capital budget relates to technological advancements as
the Company continually updates its network capabilities to offer enhanced
products and services. The level of capital expenditures for 1993 is expected to
be between $15 and $18 million.
In March 1993, an equity offering was completed in which an aggregate of
10,350,000 shares of ALC Common Stock were sold by certain stockholders of ALC
at $14.25 per share. The Banks sold 8,386,216 shares of this ALC Common Stock,
of which 3,796,000 were received upon conversion of all the Class B and Class C
Preferred Stock. Upon completion of this offering, the Banks held an aggregate
of 4,321,784 shares of ALC Common Stock, representing 15.0% of the total voting
power of ALC capital stock (10.9% assuming the exercise of certain warrants and
options). Prudential sold the remaining 1,963,784 shares of which 963,784
represented the partial exercise of its 1990 Warrants. ALC did not receive any
of the proceeds from the sale of these shares in the 1993 Equity Offering,
although it did receive $1.9 million upon Prudential's partial exercise
20
<PAGE> 43
of 1990 Warrants. The Banks have further reduced their ownership interest in the
Company to a minimal position through subsequent sales and the transfer of other
shares to Prudential by four of the five banks.
In May 1993, the Company completed an offering of $85.0 million of 9.0%
Senior Subordinated Notes (the "1993 Notes"). Interest on the 1993 Notes is
payable semiannually commencing November 15, 1993. The 1993 Notes will mature on
May 15, 2003 but are redeemable at the option of the Company on or after May 15,
1998. The net proceeds of this offering were used to repay the outstanding
11 7/8% Subordinated Notes in the aggregate amount of $72.4 million, and to
reduce the amount outstanding under the Previous Revolving Credit Facility. As a
result of repaying the 11 7/8% Subordinated Notes an extraordinary loss of $7.5
million, net of tax, was recorded. The issuance of the 1993 Notes provides
additional short and long term liquidity benefits by reducing interest expense
as well as deferring redemption requirements.
During July 1993, the Company acquired the specialized 800 customer base of
Call Home America, Inc. The purchase price was comprised of: (1) approximately
$15 million paid in July, and (2) a payment to be made based on 150% of monthly
average revenue generated by the customers in April, May and June 1994. Call
Home America, Inc. has approximately 50,000 customers, including parents of
college students and frequent travelers, who will continue to receive services
under the Call Home America(R) name. The current level of annualized revenue is
approximately $20 million. These customers will also be offered other
telecommunications services by Allnet.
Management believes that the Company's cash flow from operations, along
with the availability of the Revolving Credit Facility will provide adequate
sources of liquidity to meet the Company's anticipated short and long term
liquidity needs.
21
<PAGE> 44
BUSINESS
ALC is the holding company for Allnet Communication Services, Inc., and
conducts no other business. Allnet provides long distance telecommunications
services primarily to commercial and, to a lesser extent, residential
subscribers in a majority of the United States and completes subscriber calls to
all directly dialable locations worldwide. Allnet is one of the few nationwide
carriers of long distance services and in 1992 carried in excess of 600 million
calls over its network.
INDUSTRY AND COMPETITION
Since 1984, when AT&T was forced to divest its 22 local telephone
companies, (the "AT&T Divestiture Decree") the long distance business has
undergone a transformation. AT&T is a dominant long distance competitor in the
telecommunications services market, with the major alternative long distance
telephone carriers being MCI and Sprint.
The Company views the long distance industry as a three tiered industry
which is dominated on a volume basis by the nation's three largest long distance
providers: AT&T, MCI and Sprint. AT&T, MCI and Sprint, which generate an
aggregate of approximately 88% of the nation's long distance revenue of
approximately $65 billion, comprise the first tier. Allnet is positioned in the
second tier with four other companies with annual revenues of $250-$800 million
each (without giving effect to the LDDS Merger). The third tier consists of more
than 300 companies with annual revenues of less than $250 million each, the
majority being below $50 million each. Allnet targets small-and medium-sized
commercial customers ($100 to $50,000 in monthly long distance volume) with the
same focus and attention to customer service that AT&T, MCI and Sprint offer to
large commercial customers.
The Company believes it is, in one important aspect, in an advantageous
position vis-a-vis the first tier carriers because it focuses on a highly
profitable segment of the long distance industry with high operating margins,
specifically, commercial accounts, whose calling volume consists primarily of
calls made during regular business hours which command peak-hour pricing. Allnet
operates its own switches, develops and implements its own products, monitors
and deploys its transmission facilities and prepares and designs its own billing
and reporting systems. Allnet is one of the few long distance companies with the
ability to offer high quality value-added services to small-and medium-sized
commercial customers on a nationwide basis. Several of the Company's second tier
competitors and all of the third tier competitors are primarily regional in
nature, limited by the size of their transmission systems or dependent on third
parties for their billing services and product offerings.
Despite significant recessionary pressure throughout the United States,
long distance telecommunications traffic grew at an annual rate of approximately
6.5% in 1992 over 1991. Although the industry as a whole grew more slowly than
in prior periods, growth remained positive. The Company's performance has
outpaced industry trends with an increase in traffic of 9.6% and revenue of 8.4%
during 1992. Traffic grew by 7.1% and revenue grew by 6.4% during 1991.
In the long distance telecommunications industry, a certain level of
customer attrition is inherent. Attrition averaged 1.9% per month for the six
months ended June 30, 1993, 1.8% per month for the year ended December 31, 1992,
2.0% per month for the year ended December 31, 1991 and 2.2% per month for the
year ended December 31, 1990. The modest increase in attrition for the six
months ended June 30, 1993 results from increased attrition among 800 customers
due to 800 portability. The net impact of 800 portability, however, is an
increase in both revenue and the number of customers. See "-- Products and
Services -- 800 Services." To retain its commercial and residential customer
base, Allnet continues to implement programs and enhancements such as
value-added services, agent and association sales to residential users, improved
customer service and competitive price adjustments.
PRODUCTS AND SERVICES
Allnet provides a variety of long distance telephone products and services
to commercial and residential subscribers nationwide. The bulk of the Company's
revenue is derived from outbound and inbound long distance services which are
all under the "Allnet(R)" trademark. Many of the Company's products, however,
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<PAGE> 45
differ from those of certain of its second tier and third tier competitors due
to the level of value-added services Allnet offers, the flexibility of product
pricing to maintain competitiveness and the broader geographic reach of Allnet.
In addition, because of the Company's size, the concentration of its commercial
accounts and its aggressive management team, Allnet has been able to rapidly
develop and implement new products.
The variety of products offered are categorized by Allnet based upon
certain primary characteristics: pricing, value-added services, reporting and
800 Services.
Pricing. All of the Company's customers are identified by their telephone
number, dedicated trunk or validated access code, and have a rating which is
used to determine the price per minute that they pay on their outbound or
inbound long distance calls. Rates typically vary by the volume of usage, the
distance of the calls, the time of day that calls are made, the region that
originates the call, and whether or not the product is being provided on a
promotional basis. The outbound commercial product line is broken into three
major types of services.
Regional: Rates vary by area code or region and subscribers pay a flat
rate for all long distance calls within these area codes or regions.
Rates are determined by competitive positioning and vary according to
the 75 regions which Allnet currently services. These products are
priced at the area code level, and rates offered on these products are
the primary method used to compete with small and more regionalized
carriers.
Nationwide: Rates are by mileage bands set at a distance around the call
initiating point.
Long Haul: Rates are designed for users who tend to make substantial
bicoastal and international calls. These products offer
distance-insensitive domestic pricing and two time-of-day period rates,
along with aggressive international pricing options.
The Allnet outbound residential product line is made up of Allnet "Dial 1"
Service which also has two special discount options to service employees of
commercial accounts ("EBP") and members of associations ("ABP").
Different rates are applied to inbound telephone services than to outbound
telephone services. The inbound product line is provided for commercial accounts
which use 800 telephone numbers to receive and pay for calls from customers and
potential prospects and for residential accounts wishing similar type services.
Due to the high losses experienced by the industry with "700" and "900"
numbers which require that charges be paid by the caller, the Company does not
provide these services to its customers.
Value-added Services. When customers subscribe to value-added services on
the Company's network, their calls follow different routes and are charged a fee
based on the services provided. Customers access value-added services through
"Allnet Access(R)," which is an interactive voice response system that allows
subscribers to interact with the phone system by pressing numbers on the
telephone. Allnet Access(R) is a customized platform or menu from which
customers select the desired services to which they have subscribed. For
example, a customer who would like to deliver a prerecorded message would dial
an Allnet Access(R) 800 number or through a new streamlined dialing method known
as "00 Platform" from an Allnet presubscribed Touch Tone(R) telephone and select
"call delivery" from the voice menu. If the customer had subscribed to other
services, these services would be offered on the menu as well. Once the customer
makes a selection, the call is routed and charged accordingly.
The Company's value-added services are aimed primarily at the business
subscriber, although Allnet also offers products for residential customers.
Value-added services include: Allnet Call Delivery(R), a message delivery
service which enables a customer to send a prerecorded message to a number;
VoiceQuote, an interactive stock quotation service; Allnet InfoReach(R),
numerous audio/text programs such as news and weather; a voice mail service;
Option USA(R), a service to provide calls to the U.S. from selected
international locations on Allnet Access(R); and three different
teleconferencing services.
During calendar year 1992 Allnet launched a full spectrum of facsimile
services including Allnet Broadcast FAX(R), which allows the customer to send or
fax documents to multiple locations at the
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<PAGE> 46
same time; fax on demand, which allows the customer to make a fax document
available to people who call an 800 number; fax mail, which allows a customer to
receive facsimile messages in a fax mailbox and pick them up at a later date; PC
software, which allows the customer to manage his facsimile lists and documents
from a PC; and special international pricing to accommodate short duration
facsimile traffic.
During 1993 Allnet began to focus on mobile products and services, offering
MobileLine, the resale of cellular service, provided by the regional Bell
Operating Companies ("BOCs"), along with consolidated billing. In addition,
Allnet currently plans to introduce PageLine, a nationwide paging resale and
consolidated billing product, in the fourth quarter of 1993.
Reporting. Allnet offers its customers a variety of billing options and
media (two sizes of paper invoices [8 1/2X11 or 4X7 inches], diskette, and
magnetic tape) aimed primarily at business customers. When a new commercial
account is opened at Allnet, the customer is offered the opportunity to custom
design the format of its reports. For example, Allnet can include company
accounting codes or internal auditing codes for each call made with each billing
statement. If a customer would like to change a particular reference code for a
telephone line, the code can be changed automatically. The Company's primary
product in this area is "Allnet ESP(R)" or Executive Summary Profile. A typical
Allnet ESP(R) statement breaks out calls in a number of ways: by initiating
caller number, by terminating number, by ranking, by department, by frequently
dialed number/area/country or by time of day. Allnet customers pay a fixed
monthly fee for these custom-tailored billing services. In late 1992, Allnet
ESP(R) II was launched which gives customers graphic reports of traffic patterns
on a nationwide basis by state, within state by area of dominant influence
("ADI") and within ADI by zip code. The Company believes this will be useful to
certain customers for direct response and customer service applications.
The Company also launched its proprietary personal computer reporting
service, Allnet Invoice ManagerSM ("AIM"), which allows customers to design
their own reports, prepare separate itemized bills, do mark-up reporting and
generate numerous other customized reports.
800 Services. The Company greatly expanded its 800 product offerings,
capitalizing on opportunities resulting from FCC mandated portability in May
1993 (which allows customers to select a different long distance carrier without
changing their 800 number). These new offerings include area code blocking and
routing; time of day routing; Home ConnectionSM 800, fractional 800 service
which allows residential customers to acquire 800 service utilizing a 4-digit
security Personal Identification Number ("PIN"); Multi-PointSM 800 services,
which allow the customer to use accounting codes on an 800 number or route a
single 800 number to numerous locations simultaneously; Follow-Me 800, which
allows a customer to change his routing from a touch tone telephone; and
TargetlineSM 800, which routes calls to the closest location and provides custom
prompts based upon a customer specific database. To supplement the Company's
continued internal growth in this market, the Company seeks strategic external
growth opportunities. For example, in July 1993, the Company acquired the
specialized 800 customer base of Call Home America, Inc. Call Home America, Inc.
has approximately 50,000 customers, including parents of college students and
frequent travelers, who will continue to receive services under the Call Home
America(R) name. These customers, who are currently generating annualized
revenue of approximately $20 million, will also be able to utilize a wide range
of other telecommunications services from Allnet.
MARKETING
Approximately 60% of the Company's employees are engaged in sales,
marketing or customer services. Allnet markets its services and products through
personal contacts with an emphasis on customer service, network quality,
value-added services, reporting, rating and promotional discounts. Allnet
currently operates a sales network with 49 offices in the United States. The
Company employs 921 sales, marketing and customer service individuals, of which
445 are field sales representatives. Field sales representatives focus on making
initial sales to commercial users. They solicit business through face-to-face
meetings with small-to medium-sized businesses. Each field sales representative
earns a commission dependent on the customer's usage and value-added services.
The Company's sales strategy is to make frequent personal contact with existing
and potential customers.
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<PAGE> 47
The prices and promotions offered for the Company's services are designed
to be competitive with other long distance carriers. Prices will vary as to
interstate or intrastate calls as well as with the distance, duration and
time-of-day of a call. In addition, Allnet may offer promotional discounts based
upon duration of commitment to purchase services, incremental increases in
service or "free" trial use of the many value-added and reporting services.
Volume discounts are also offered based upon amount of monthly usage in the day,
evening and night periods or based solely on total volume of usage.
Allnet has three groups which provide ongoing customer service designed to
maximize customer satisfaction and increase usage. First, customer service
personnel located in Southfield, Michigan are available telephonically free of
charge 24 hours a day, seven days a week. Allnet opened a second customer
service center in Columbus, Ohio to process calls from customers with
significant usage levels who have been enrolled in the Company's "select
service" programs. Second, corporate account specialists provide proactive
telephonic support to mid-sized commercial accounts. Third, communications
specialists provide personal service to larger commercial accounts.
Allnet services more than 244,000 customers, excluding Call Home America,
Inc. customers recently acquired. Of these customers, approximately 144,000 are
commercial accounts, with the remainder being residential accounts. During the
past two years, Allnet has become more geographically diversified, adding new
markets as necessary. Allnet is currently focusing on an agent and association
program to increase customer acquisition in specific target markets and small
remote markets.
Allnet continues to explore ways to increase traffic on its network during
non-peak hours, including marketing strategies to tap specific residential
target markets such as association with popular consumer items or cultural
events and organizations.
TRANSMISSION FACILITIES
The ability of Allnet to operate profitably is largely dependent on
utilizing transmission circuits at cost effective rates. Allnet has generally
avoided the large capital requirements of building its own network by entering
into low cost fixed price contracts for bulk transmission capacity. Allnet
transmits its nationwide long distance services through state-of-the-art
transmission equipment. Allnet has sufficient switching capacity, local access
circuits and long distance circuits to permit subscribers to obtain access to
its switching centers and its long distance circuits on a basis which the
Company believes exceeds industry standards regarding clarity, busy signals or
delays. The Company has end-to-end control of each long distance call through
surveillance equipment located at each switching center and major points of
presence.
The Allnet network utilizes fiber optic and digital microwave transmission
circuits to complete long distance calls. With the exception of twelve digital
microwave links located in California for which Allnet holds the FCC licenses,
such facilities are leased on a fixed price basis under both short and long term
contracts. In recent years abundant availability and declining prices have
dictated a strategy of generally obtaining new capacity for terms between six
months and one year. While the Company has several long term contracts, these
contracts have either annual "mark-to-market" clauses or, in one case, a "most
favored nation" clause. These provisions function to keep the price the Company
pays at or near current market rates. An important aspect of the Company's
operation is planning the mix of the types of circuits and transmission capacity
to be leased or used for each network switching center so that calls are
completed on a basis which is cost effective for the Company without
compromising prompt service and high quality to subscribers. Over 99% of the
Company's domestic traffic is carried on owned or leased facilities ("on-net").
In establishing a network switching center, the Company can select
equipment with varying capacities in order to meet the anticipated needs of the
service origination area or areas served by the center. The equipment used by
the Company is, for the most part, designed to permit expansion to its capacity
by the addition of standard components. If the maximum capacity of the equipment
in any center is reached, the Company replaces it with higher capacity switching
equipment and attempts to move the replaced unit to a network switching center
in a different service origination area. The Company is dependent upon the local
telephone company for installing local access circuits and providing related
service when establishing a network switching center. As of June 30, 1993, the
Company had 16 network switching centers which
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<PAGE> 48
originate traffic in 193 Local Access Transport Areas ("LATAs"). International
service is provided through participation in the International Carrier Group
("ICG") with three other second tier long distance companies. The ICG in turn
contracts with other long distance companies and foreign entities to provide
high quality international service at competitive rates.
REGULATION
Generally, the current trend is toward lessened regulation for both Allnet
and its competitors. Regulatory trends have had, and may have in the future,
both positive and negative effects upon Allnet. For example, more markets are
opening up to Allnet, as state regulators allow Allnet to compete in markets
from which it was previously barred. On the other hand, the largest competitor,
AT&T, has gained increased pricing flexibility over the years, allowing it to
price its services more aggressively.
As a nondominant Interexchange Carrier ("IXC"), Allnet is not required to
maintain a certificate of public convenience and necessity with the FCC other
than with respect to international calls, although the FCC retains general
regulatory jurisdiction over the sale of interstate long distance services by
IXCs, including the requirement that calls be charged on a nondiscriminatory,
just and reasonable basis. Although the FCC had previously ruled that
nondominant carriers, such as Allnet, do not need to file tariffs for their
interstate service offerings, a recent Court of Appeals decision has vacated
that FCC ruling. The Company believes that the potential impact of the Court of
Appeals decision on Allnet will be minimal and primarily administrative in
nature. Allnet has already taken any necessary steps to comply with that
decision, including filing an interstate tariff with the FCC. The Company
believes that it has operated and continues to operate in compliance with all
applicable tariffing and related requirements of the Communications Act of 1934,
as amended. On August 18, 1993, the FCC announced its intention to reduce the
requirements regarding the filing of tariffs for non-dominant carriers,
including Allnet.
In the FCC decision implementing certain provisions of the Telephone
Operator Consumer Services Improvement Act ("TOCSIA"), Allnet was designated
subject to the payment of charges by "private payphone owners." Allnet presently
is challenging that designation, as it does not believe that it is engaged in
the sort of activity intended to be regulated under TOCSIA. In addition, by
virtue of its ownership of interstate microwave facilities located in California
(as described in "Transmission Facilities"), Allnet is subject to the FCC's
common carrier radio service regulations.
In 1984, pursuant to the AT&T Divestiture Decree, AT&T divested its 22
BOCs. In 1987, as part of the triennial review of the AT&T Divestiture Decree,
the U.S. District Court for the District of Columbia denied the BOCs' petition
to enter, among other things, the inter-LATA (local access transport areas) long
distance telecommunications market. The District Court's ruling was appealed to
the United States Court of Appeals for the District of Columbia which, in 1990,
affirmed the District Court's decision to retain the inter-LATA prohibition for
the BOCs. If the BOCs ultimately are permitted to provide inter-LATA long
distance telecommunications services, existing IXCs, including Allnet, would
likely face substantial additional competition from local BOC monopolies.
As part of the AT&T Divestiture Decree, the divested BOCs were required to
charge AT&T and all other carriers (including Allnet) equal per minute rates for
"local transport" service (the transmission of switched long distance traffic
between the BOCs' central offices and the IXCs' points of presence). BOC and
other local exchange company ("LEC") tariffs for local transport service have
been based upon these "equal per unit" rules since 1984, pursuant to the AT&T
Divestiture Decree and the FCC's waiver of its inconsistent local transport
pricing rules. Although the portion of the AT&T Divestiture Decree containing
this rule ceased to be effective by its terms on September 1, 1991, the FCC had
extended its effect until it concluded the rulemaking proceeding in which it
considered whether to retain or modify the "equal per unit" local transport
pricing structure. On September 17, 1992, the FCC voted to maintain the existing
"equal per unit" pricing rules until late 1993. A two year transition plan would
then begin. In a press release issued on the date of the FCC's vote, the FCC
stated that it was taking a cautious approach by adopting an interim rate
structure and pricing plan that has minimal effects on medium and small
long-distance carriers. The text of the FCC Decision provides generic
descriptions of how access rates should be assessed. Based on the
aforementioned, Allnet does not anticipate a material impact during 1994 and
1995; however, further information, including
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<PAGE> 49
the actual access rates, will have to be made available to better assess any
impact. The local exchange carriers are expected to file the rates for the
interim plan on September 1, 1993, for effectiveness on December 1, 1993. To
moderate IXC costs, the FCC has ordered that non-recurring charges for
reconfiguring a carrier's access lines should be waived until May 1994, to
accommodate the change in access pricing structure.
The FCC has left open the access rate structure issue for the post 1995
period. The FCC issued a Further Notice of Proposed Rulemaking for consideration
of a permanent rate structure to take effect beginning no earlier than late
1995. The FCC has also recently voted to allow expanding competition for
monopoly local access through expanded local switched access interconnection.
This could ultimately provide Allnet with alternatives to purchasing its local
access from the monopoly local exchange carriers.
The FCC has issued orders stating that carriers, such as Allnet, were
entitled to refunds for overcharges paid to a number of local exchange carriers
during the 1985-1986 and 1987-1988 periods. These awards have, in most cases,
been paid to Allnet. Although these awards are in the aggregate significant,
they are not a material portion of the Company's total access costs. Some local
exchange carriers have appealed the orders and some of the awards which were
paid are conditioned on the outcome of the appeals. In addition Allnet has
pending claims for overcharges during the 1989-1990 period. At this time, Allnet
is not aware of any pending rulings on these additional claims.
The intrastate long distance telecommunications operations of Allnet are
also subject to various state laws and regulations, including certification
requirements. Generally, Allnet must obtain and maintain certificates of public
convenience and necessity as well as tariffs from regulatory authorities in most
states in which it offers intrastate long distance services, and in most of
these jurisdictions must also file and obtain prior regulatory approval of
tariffs for its intrastate offerings. At the present time, Allnet can provide
originating "Dial 1" Service to customers in all 50 states and the District of
Columbia. Those services may terminate in any state in the United States, and
may also terminate to countries abroad. Of the states in which Allnet provides
originating service, only 31 have public utility commissions that actively
assert regulatory oversight over the services currently offered by Allnet. Like
the FCC, many of these regulating jurisdictions are relaxing the regulatory
restrictions currently imposed on telecommunication carriers for intrastate
service. In addition, some of these states restrict the offering of intra-LATA
long distance services by Allnet and other IXCs. However, the general trend is
toward opening up these markets to Allnet and other IXCs. Those states that do
permit the offering of intra-LATA services by IXCs generally require that end
users desiring to access these services dial special access codes which places
Allnet and other IXCs at a disadvantage as compared to LEC intra-LATA toll
service which generally requires no access code.
There can be no assurance that the regulatory authorities in one or more
states or the FCC will not take action having an adverse effect on the business
or financial condition of Allnet.
PATENTS
In December 1992, MCI filed a lawsuit in the United States District Court
for the District of Columbia against AT&T. The complaint seeks, among other
things, a declaration that certain AT&T patents relating to basic long distance
services, toll-free "800" service, and other telephone services are invalid or
unenforceable against MCI (and other similarly situated telecommunications
providers). AT&T counterclaimed against MCI for patent infringement.
Contemporaneously with the filing of its declaratory judgment action, MCI
requested the court in the AT&T Divestiture Decree case to rule that AT&T should
be barred from asserting its pre-divestiture patents to impede competition in
the interexchange telecommunications market. Both of the foregoing actions are
currently pending.
AT&T has generally indicated that it believes that long distance
telecommunications companies may be infringing on certain AT&T patents and has
offered to license such patents. AT&T has numerous patents, some of which may
pertain to the provision of services similar to those currently provided or to
be provided by the Company or to equipment similar to that used or to be used by
the Company. If it were ultimately determined that the Company has infringed on
any AT&T patents and the Company is required to license such patents and pay
damages for infringement, such costs could have an adverse effect on the
Company.
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EMPLOYEES
As of June 30, 1993, Allnet had 1,537 employees, none of whom were subject
to any collective bargaining agreements.
PROPERTIES
On June 30, 1993, Allnet had under lease approximately 113,000 square feet
of office space in Bingham Farms, Michigan for executive and administrative
functions, approximately 43,000 square feet in Southfield, Michigan for customer
service, collections, and data processing. Allnet also leases approximately
458,000 square feet in the aggregate for sales and administrative offices,
network switching centers and unmanned operations sites in 101 other locations
in the continental United States.
Most of the leased premises are for an initial term of five-to-ten years
with, in many cases, options to renew. All properties presently being used for
operations of Allnet are suitable, well maintained and equipped for the purposes
for which they are used.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Board of Directors of ALC consists of seven positions: one elected by
the holders of Class A Preferred; two by the holders of Common Stock (in each
case, voting as a separate class); and four elected by all stockholders voting
together as one class. All of those positions are presently filled.
The following table sets forth the executive officers and directors of the
Company as of August 25, 1993. Executives are elected annually and serve at the
pleasure of the Board.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- ------------------------------------------------
<S> <C> <C>
Richard D. Irwin..................... 58 Chairman of the Board of Directors
John M. Zrno......................... 55 President, Chief Executive Officer and Director
Marvin C. Moses...................... 48 Executive Vice President, Chief Financial
Officer, Assistant Secretary and Director
William H. Oberlin................... 48 Chief Operating Officer, Executive Vice
President -- Sales and Marketing and Director
Gregory M. Jones..................... 43 Senior Vice President
Dennis R. Banks...................... 50 Vice President -- Field Operations
Stephen G. Canton.................... 37 Vice President -- Sales
S. Danielle Conroyd.................. 46 Vice President -- Human Resources
Steven A. Fernald.................... 46 Vice President -- Engineering
Connie R. Gale....................... 47 Vice President, General Counsel and Secretary
Charles I. Gragg, III................ 35 Vice President -- Marketing
Marilyn M. Lesnau.................... 40 Vice President, Controller (Chief Accounting
Officer)
Thomas A. Marino..................... 51 Vice President -- Administrative and Technical
Services
David C. Patterson................... 48 Vice President -- Management Information Systems
David J. Thomas...................... 42 Vice President, Treasurer
Richard J. Uhl....................... 52 Director
Michael E. Faherty................... 58 Director
Saulene M. Richer.................... 47 Director
</TABLE>
RICHARD D. IRWIN has held the position of Chairman of the Board of
Directors since August 1988. He is the President of Grumman Hill Associates,
Inc. ("Grumman Hill"), a merchant banking firm, having held that position since
its formation in 1985. Prior to the formation of Grumman Hill, Mr. Irwin was a
Managing Director of Dillon, Read & Co. Inc. from 1983 through 1985. Mr. Irwin
is also a member of the Board of Directors of Mountain Medical Equipment, Inc.
and Pharm Chem Laboratories, Inc.
JOHN M. ZRNO has held the positions of President, Chief Executive Officer
and Director since August 1988. From December 1981 until joining Allnet, Mr.
Zrno held a number of executive positions with Cable & Wireless North America,
Inc., the most recent of which was President and Chief Executive Officer.
Between
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<PAGE> 51
1972 and 1981, Mr. Zrno first served as an officer of MCI, then as an officer of
American Satellite Corporation, a satellite common carrier, and finally as an
officer of F/S Communications Corporation, an independent telephone interconnect
company.
MARVIN C. MOSES has held the positions of Executive Vice President, Chief
Financial Officer and Assistant Secretary since October 1988. Mr. Moses was
elected as a Director in September 1989. From February 1982 through September
1988, Mr. Moses held a number of executive positions with Cable & Wireless North
America, Inc., the most recent of which was Chief Financial Officer and Senior
Vice President. From 1980 through February 1982, Mr. Moses worked with Atlantic
Research Corporation, where he was involved in obtaining project financing for
an alternative energy product. From 1975 to 1980, Mr. Moses was Vice President
- -- Finance and Chief Financial Officer of GTE Telenet, a data communications
company now part of Sprint.
WILLIAM H. OBERLIN has held the position of director since July 22, 1993,
and has held the position of Chief Operating Officer since July 1990 and the
position of Executive Vice President -- Sales and Marketing since October 1988.
From November 1983 through September 1988, Mr. Oberlin held a number of
executive positions with Cable & Wireless North America, Inc., the most recent
of which was Senior Vice President -- Sales and Marketing. During 1983, Mr.
Oberlin was founder and principal stockholder of Electronic Express, Inc., a
facsimile-based priority mail and delivery system. From April 1982 through March
1983, Mr. Oberlin was Chief Executive Officer of DHL Business Systems, Inc., a
worldwide manufacturer and distributor of word processing terminals. From 1974
through April 1982, Mr. Oberlin was employed by Sprint. From September 1979
through April 1982, Mr. Oberlin was President of Southern Pacific/Distributed
Message Systems, Inc., distributors of facsimile machines and electronic mail
services.
GREGORY M. JONES has held the position of Senior Vice President since
December 1990 and had formerly served as Vice President -- Marketing since
January 1989. Mr. Jones was previously director of Sure Check and Retail
Services, Inc., a wholly owned subsidiary of Comp-U-Check, Inc. From July 1979
to June 1987 Mr. Jones held various positions with MCI including director of
marketing for MCI Midwest in Chicago, senior manager of telemarketing, and
senior manager of customer service.
DENNIS R. BANKS has held the position of Vice President -- Field Operations
since January 1992 and formerly served as director of Eastern region operations
since November 1982. Mr. Banks commenced his employment with the Company July
1982 as manager of transmission and switch engineering. From June 1978 through
June 1982 Mr. Banks was a manager of the Network Management Center for ITT. From
1973 through May 1978 Mr. Banks held various positions with MCI, the most recent
of which was field operations manager, Northeast Ohio.
STEPHEN G. CANTON has held the position of Vice President -- Sales since
May 1991 and formerly served as Regional Vice President -- East at the
Washington D.C. sales office since November 1989 and as regional sales director
since December 1988. Mr. Canton was a sales executive with Cable & Wireless
North America, Inc. from 1983 through 1986 and 1987 through 1988 as well as with
Bell Atlantic during the interim period between 1986 and 1987.
S. DANIELLE CONROYD has held the position of Vice President -- Human
Resources since April 1989. From October 1987 to April 1989 Ms. Conroyd was a
Senior Vice President, Human Resources for Mercy Hospitals of Detroit. From
March 1980 to September 1987 Ms. Conroyd was Vice President, Human Resources for
Mount Carmel Hospital in Detroit.
STEVEN A. FERNALD has held the position of Vice President -- Engineering
since May 1991 and formerly served as director of the Network Control Center
since January 1989 and manager of the Network Control Center since June 1986.
Mr. Fernald was a manager at Sprint from June 1975 to June 1986.
CONNIE R. GALE has held the position of Vice President since January 1991
and has held the positions of General Counsel and Secretary since October 1988,
commencing her employment with the Company in December 1986 as Associate General
Counsel and Assistant Secretary. Ms. Gale previously served as corporate counsel
for Chrysler Corporation from July 1973 to February 1980 and for American
Natural
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<PAGE> 52
Resources, Inc. from February 1980 to March 1981. Ms. Gale was Associate General
Counsel at Federal-Mogul Corporation from April 1981 to November 1986.
CHARLES I. GRAGG, III has held the position of Vice President -- Marketing
since September 1992 and formerly served as director of marketing since
September 1991. Mr. Gragg was previously Vice President, Marketing for Phase II
Corporation, a telecommunications consulting firm specializing in overseas
cellular and paging systems, where he served in a number of positions since
November 1986. From November 1985 to November 1986, Mr. Gragg was Vice President
Marketing and a director of Kensington Communications, a microcomputer
accessories and software firm. Mr. Gragg has also held senior management
positions with Computer Sciences Corporation's Infonet division and Western
Union.
MARILYN M. LESNAU has held the position of Vice President since May 1993
and has held the position of Controller since March 1988, commencing her
employment with the Company in September 1986 as director, corporate accounting.
From 1984 to March 1986 Ms. Lesnau served as director of sales and director of
finance for Dayton Hudson Corporation. Ms. Lesnau's previous experience included
seven years with Ernst & Young, a certified public accounting firm.
THOMAS A. MARINO has held the position of Vice President -- Administrative
and Technical Services since April 1992 and formerly served as director of
network administration since January 1987, commencing his employment in June
1986 as director of programs and projects. From February 1974 to June 1986, Mr.
Marino held various operations and management positions with Sprint, the most
recent of which was Eastern area director -- network operations. From January
1964 to January 1974, Mr. Marino held various positions with Western Union
Telegraph Company, the most recent of which was technical services supervisor.
DAVID C. PATTERSON has held the position of Vice President -- Management
Information Systems since January 1991. Mr. Patterson had previously served as a
director of data processing since the commencement of his employment with the
Company in August 1989. From February 1972 through August 1989, Mr. Patterson
was a data processing manager for Electronic Data Systems, a subsidiary of
General Motors Corporation.
DAVID J. THOMAS has held the position of Vice President since January 1991
and has held the position of Treasurer since October 1989. Mr. Thomas served in
a variety of managerial capacities in the areas of network cost management,
revenue protection and credit and collections since the commencement of his
employment with the Company in January 1983. Mr. Thomas previously was employed
by Ford Motor Company as assistant to the Controller and by Abbott Laboratories
in several analytical capacities.
RICHARD J. UHL has held the position of Director since September 3, 1991.
Mr. Uhl is the President and a member of the Board of Directors since 1985 of
Chicago Holdings, Inc. ("CHI"), a privately owned company which manages several
lease portfolios owned by it and its subsidiaries and which invests in operating
companies on a selective basis, generally taking a controlling equity position.
Since November 1990 he has also been the Chief Executive Officer and a member of
the Board of Directors of Hurrah Stores, Inc. ("Hurrah"). Hurrah is a subsidiary
of CHI, which through a wholly-owned subsidiary operates approximately 125
junior women's clothing stores, principally in the midwest. Mr. Uhl has also
been President of Steiner Financial Corporation, another subsidiary of CHI,
since December 1987. Prior to 1991, Mr. Uhl served in a number of executive
capacities as well as on the Boards of Directors of certain finance
organizations as well as a distributor of personal computer equipment, and a
manufacturer of automotive products.
MICHAEL E. FAHERTY has held the position of Director since June 23, 1992.
Mr. Faherty primarily works (since 1977) as a business consultant and in the
contract executive business, in connection with which Mr. Faherty currently
serves as the President and Chief Executive Officer of Shared Financial Systems,
Inc., having held those positions since January 1992. Shared Financial Systems,
Inc. is a worldwide provider of software and consulting services to data
processing market segments that utilize on-line transaction processing. As part
of his duties as a contract executive, he has worked for Digital Sound
Corporation, Systeme Corporation, Advanced Business Communications, Inc.,
BancTec, Inc. and Intec Corporation. Mr. Faherty is
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<PAGE> 53
also a member of the Board of Directors of BancTec, Inc., Biomagnetic
Technologies, Inc. and Davox Corporation.
SAULENE M. RICHER has held the position of director since July 22, 1993.
Ms. Richer has held the position of Senior Vice President -- Marketing,
Technology & Retail Operations of Brenton Bank, N.A. since March 1990. From
March 1973 through February 1990, Ms. Richer held various executive sales and
marketing positions with International Business Machines Corporation, the most
recent of which was director, Opportunity Development. Ms. Richer is also a
member of the Board of Directors of United Way of Central Iowa.
The Board of Directors held twelve regularly scheduled and special meetings
in the aggregate during the fiscal year from January 1, 1992 through December
31, 1992.
Several important functions of the Board of Directors of ALC have been
performed by committees comprised of members of the Board of Directors. The
Amended and Restated Bylaws of ALC (the "Bylaws") prescribe the functions and
the standards for membership on the Audit Committee. Subject to those standards,
the Board of Directors acting as a body appoints the members of the Audit
Committee at the meeting of the Board of Directors coincident with the annual
meeting of stockholders. However, the Board of Directors has the power at any
time to change the authority or responsibility delegated to the committee or the
members serving on the committee. Under the Bylaws, the Audit Committee performs
the following functions: (i) recommends to the Board of Directors annually a
firm of independent public accountants to act as auditors of the Company; (ii)
reviews with the auditors the scope of the annual audit; (iii) reviews
accounting and reporting principles, policies and practices; (iv) reviews with
the auditors the results of their audit and the adequacy of accounting,
financial and operating controls; and (v) performs such other duties as are
delegated to it by the Board of Directors. The members of the Audit Committee
during the 1992 fiscal year were, prior to July 24, 1992, Ralph J. Swett,
Richard D. Irwin and Richard J. Uhl; prior to August 17, 1992, Ralph J. Swett,
Richard D. Irwin, Richard J. Uhl and Michael E. Faherty; and, subsequent to
August 17, 1992, Richard D. Irwin, Richard J. Uhl and Michael E. Faherty. During
1992, the Audit Committee met four times. Ralph J. Swett resigned from the Board
of Directors and its committees effective August 17, 1992.
The Board, pursuant to the Bylaws, also established a Compensation
Committee. The Compensation Committee has the authority to: (i) establish the
compensation (including salaries and bonuses) of the officers; (ii) establish
incentive compensation plans for the officers; (iii) administer the stock option
plans and grants of options under those plans; and (iv) perform such other
duties as are from time to time delegated to the Compensation Committee by the
Board of Directors. The members of the Compensation Committee during fiscal
1992, prior to July 24, 1992, were Ralph J. Swett, Richard D. Irwin and Richard
J. Uhl; prior to August 17, 1992, Ralph J. Swett, Richard D. Irwin, Richard J.
Uhl and Michael E. Faherty, and, subsequent to August 17, 1992, Richard D.
Irwin, Richard J. Uhl and Michael E. Faherty. During 1992, the Compensation
Committee met five times.
The Board of Directors does not have a standing committee responsible for
nominating individuals to become directors.
OFFICER AND DIRECTOR COMPENSATION
Director Compensation
From 1988 through 1991, the Company's practice was that directors who are
not employees of ALC would receive remuneration of up to $12,000 per year for
their services as Board members (one-half of the fee is dependent upon per
meeting attendance at the four regularly scheduled Board meetings). For 1992,
and to be continued for 1993, Richard J. Uhl and Michael E. Faherty will receive
remuneration of up to $20,000 per year for their services as Board members. Of
that fee, $8,000 is dependent upon per meeting attendance at the four regularly
scheduled Board meetings. Ralph J. Swett and Richard D. Irwin waived their right
to fees throughout their respective service on the Board. On September 3, 1991,
ALC granted Richard J. Uhl an option to purchase 40,000 shares of Common Stock
at $4.25 per share, the market price at date of grant. The option vested 25% on
each of January 1, 1992, June 1, 1992, January 1, 1993 and June 1, 1993 and
expires on
31
<PAGE> 54
the earlier of 60 days subsequent to Mr. Uhl's death, resignation or removal as
a director and September 3, 1998. On June 23, 1992, ALC granted Michael E.
Faherty an option to purchase 40,000 shares of Common Stock at $4.63 per share,
the market price at date of grant. The option vested 25% on June 23, 1992, 50%
on January 1, 1993 and 25% on June 1, 1993 and expires on the earlier of 60 days
subsequent to Mr. Faherty's death, resignation or removal as a director and June
23, 1998. In addition, Grumman Hill, of which Richard D. Irwin is President,
entered into an Advisory Agreement with Stock Option (the "Advisory Agreement")
with the Company. Pursuant to the terms of the Advisory Agreement, Grumman Hill
performs certain advisory services with respect to the management, operation and
business development activities of the Company. In exchange for such services,
Grumman Hill will receive an annual fee of $100,000 and was initially granted a
stock option to purchase at a price of $11.25 per share 153,163 shares of Common
Stock. In conjunction with the 1990 phase of the Refinancing, this option was
regranted at an exercise price of $3.50 per share. The option was subsequently
assigned to Grumman Hill Investments, L.P. ("Grumman Hill, L.P.") (of which Mr.
Irwin is the General Partner). Grumman Hill, L.P. is entitled to exercise the
option in full. The Company anticipates that the Common Stock issuable upon the
exercise of the option may be registered under the Securities Act. The option
will expire on September 7, 1998. Grumman Hill received an additional advisory
fee of $150,000 due to its efforts in the 1990 phase of the Refinancing, which
then was reinvested in the Company as part of the 1990 phase of the Refinancing.
The Company paid Grumman Hill an advisory fee of $250,000 in connection with its
efforts in the 1992 phase of the Refinancing.
Executive Compensation
SUMMARY COMPENSATION TABLE
The following table summarizes the total compensation paid to the Chief
Executive Officer and the four most highly compensated executive officers at the
end of calendar year 1992 for each of the past three fiscal years during which
the named executive acted as an executive officer.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
-----------------------
ANNUAL COMPENSATION
-------------------------------------------- AWARDS
OTHER -------
ANNUAL OPTION/ ALL OTHER
COMPENSATION SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) (#)(2) ($)(3)
- -------------------------------- ---- -------- -------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
John M. Zrno.................... 1992 $307,755 $175,000 284,983 $500
President, Chief Executive 1991 292,025 105,000 --
Officer, Director 1990 282,994 68,000 637,231
Marvin C. Moses................. 1992 $234,998 $135,000 217,398 $500
Executive Vice President, 1991 223,256 81,000 --
Chief Financial Officer, 1990 214,837 51,000 524,838
Assistant Secretary, Director
William H. Oberlin.............. 1992 $234,893 $135,000 217,398 $500
Chief Operating Officer, 1991 223,172 81,000 --
Executive Vice President-Sales 1990 215,288 38,000 524,838
and Marketing
Gregory M. Jones................ 1992 $135,090 $ 49,708 $ 860(4) 55,092 $500
Senior Vice President 1991 128,260 25,425 --
1990 118,250 19,965 71,102
Connie R. Gale.................. 1992 $130,250 $ 48,280 47,385 $500
Vice President, General 1991 122,000 28,750 10,000
Counsel and Secretary
</TABLE>
- -------------------------
(1) Total perquisites for each officer were less than either $50,000 or 10% of
total salary and bonus.
(2) Options granted in 1992 include options granted in 1990 and amended in 1992
(the exercise price was not changed).
(3) Consists of Company contributions to defined contribution plan during 1992
in the amount of $500 for each officer listed.
(4) Represents gross up for income taxes relating to a perquisite.
32
<PAGE> 55
Stock Option Awards During Last Fiscal Year
The following table sets forth information about stock option awards
granted to the Chief Executive Officer and the four most highly compensated
executive officers during 1992.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
- ------------------------------------------------------------------------------------- ANNUAL RATES OF
% OF TOTAL STOCK PRICE
OPTIONS/SARS APPRECIATION FOR
GRANTED TO EXERCISE OR OPTION TERM*
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION --------------------
NAME GRANTED(#)(1) FISCAL YEAR ($/SH) DATE(6) 5%($) 10%($)
- -------------------------- ------------ ------------ ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
John M. Zrno.............. 137,214(2)(3) 8.60% $3.50 6/6/2000 $302,557 $763,596
52,657(4) 3.30% $4.50 5/14/2002 $149,283 $376,761
95,112(5) 5.96% $5.88 7/24/2002 $352,333 $889,221
Marvin C. Moses........... 114,236(2)(3) 7.16% $3.50 6/6/2000 $251,890 $635,723
36,762(4) 2.31% $4.50 5/14/2002 $104,220 $263,032
66,400(5) 4.16% $5.88 7/24/2002 $245,972 $620,787
William H. Oberlin........ 114,236(2)(3) 7.16% $3.50 6/6/2000 $251,890 $635,723
36,762(4) 2.31% $4.50 5/14/2002 $104,220 $263,032
66,400(5) 4.16% $5.88 7/24/2002 $245,972 $620,787
Gregory M. Jones.......... 15,102(2)(3) 0.95% $3.50 6/6/2000 $ 33,300 $ 84,043
15,000(4) 0.94% $4.50 5/14/2002 $ 42,525 $107,325
24,990(5) 1.57% $5.88 7/24/2002 $ 92,573 $233,637
Connie R. Gale............ 9,390(2)(3) 0.59% $3.50 6/6/2000 $ 20,705 $ 52,255
13,500(4) 0.85% $4.50 5/14/2002 $ 38,273 $ 96,593
24,495(5) 1.54% $5.88 7/24/2002 $ 90,739 $229,009
</TABLE>
- -------------------------
* These amounts represent assumed rates of appreciation which may not
necessarily be achieved. The actual gains, if any, are dependent on the market
value of the Company's stock at a future date as well as the option holder's
continued employment throughout the vesting period. Appreciation reported is
net of exercise price.
(1) All options were granted at market value on date of grant. The 1990 Stock
Option Plan allows the exercise price and tax withholding obligations to be
paid by delivery of already owned shares or with shares purchased pursuant
to the exercise, subject to certain conditions. Vesting may be accelerated
in the event of certain situations resulting in a change of ownership of
the Company. The Compensation Committee, as administrator of the Company's
stock option plans, has discretion to modify the terms of outstanding
options, subject to certain limitations set forth in the plans.
(2) The options become exercisable over a three year period, 50% on June 6,
1992, 25% on each of June 6, 1993 and June 6, 1994.
(3) Amendment of options granted in 1990 at the same exercise price, but which
were formerly exercisable only upon the occurrence of certain events as
provided in the option agreement.
(4) 25% of the options become exercisable each year over a four year period with
vesting beginning on May 14, 1993.
(5) 25% of the options become exercisable each year over a four year period with
vesting beginning on July 24, 1993.
(6) Unless earlier terminated due to such events as termination of employment or
death.
OPTION EXERCISES AND FISCAL YEAR END OPTION VALUES
Neither the Chief Executive Officer nor any of the four most highly
compensated executive officers exercised any options during 1992. The following
table shows the number of exercisable and unexercisable
33
<PAGE> 56
options held at the end of 1992 by the named executive officers, and the
aggregate value of in-the-money, unexercised options held by each named officer.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS/SARS
OPTIONS/SARS AT FY END(#) AT FY END ($)(1)
------------------------------ -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John M. Zrno..................... 450,041 334,959 $4,725,431 $ 3,238,041
Marvin C. Moses.................. 359,694 268,306 3,776,787 2,622,419
William H. Oberlin............... 359,694 268,306 3,776,787 2,622,419
Gregory M. Jones................. 63,551 47,541 667,286 424,704
Connie R. Gale................... 49,695 42,690 512,798 376,447
</TABLE>
- -------------------------
(1) Values are calculated by determining the difference between the fair market
value of the Common Stock at December 31, 1992 and the exercise price of
the options.
EMPLOYMENT CONTRACTS AND TERMINATION OR CHANGE IN CONTROL ARRANGEMENTS
In late 1988, ALC entered into employment agreements with John M. Zrno,
Marvin C. Moses and William H. Oberlin. These arrangements have initial four
year terms, amended in 1991 to extend for an additional two years. One of the
provisions of each employment agreement is that, in the event the officer's
employment is terminated for any reason except death, disability, voluntary
resignation or cause, such officer will continue to receive his current salary
from twelve to twenty-four months. Should the officer be terminated without
cause, the stock options granted in the agreement would fully vest and remain
exercisable for the succeeding twelve months.
According to the employment agreements with Messrs. Zrno, Moses and
Oberlin, each officer may receive incentive compensation as determined by the
Board of Directors, based on the Board's determination of the officer's
individual achievements.
Effective February 1, 1990, officers below the level of Executive Vice
President entered into severance agreements wherein the Company agreed to
provide salary continuation and certain employee benefits for a period from
six-to-twelve months should an officer be terminated from employment prior to
January 31, 1991. These agreements were renewed in February 1991, August 1992
and July 1993. As amended, the agreements cover termination from employment
prior to December 31, 1995. Mr. Jones and Ms. Gale have entered into such
agreements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Richard D. Irwin, Chairman of the Board of Directors since August 1988 and
a member of the Compensation Committee, is a former officer of the Company
because, prior to March 1991, the position of Chairman of the Board was an
officer position under the Company's Bylaws.
Grumman Hill, of which Richard D. Irwin is President, entered into the
Advisory Agreement with the Company in 1988. Pursuant to the terms of the
Advisory Agreement, Grumman Hill performs certain advisory services with respect
to the management, operation and business development activities of the Company.
In exchange for such services, Grumman Hill will receive an annual fee of
$100,000 and was initially granted a stock option to purchase 153,163 shares of
Common Stock at a price of $11.25 per share. In conjunction with the 1990 phase
of the Refinancing, this option was regranted at an exercise price of $3.50 per
share. The option was subsequently assigned to Grumman Hill, L.P. (of which Mr.
Irwin is the General Partner). Grumman Hill, L.P. is entitled to exercise the
option in full. It is anticipated that the Common Stock issuable upon the
exercise of the option may be registered under the Securities Act. The option
will expire on September 7, 1998.
Grumman Hill and Grumman Hill, L.P. participated in the cash financing as
part of the 1990 phase of the Refinancing. These entities held 1990 Notes in the
aggregate original principal amount of $650,000 and were issued 1990 Warrants to
purchase up to 428,090 shares in the aggregate of the Common Stock.
34
<PAGE> 57
Grumman Hill received an additional advisory fee of $150,000 due to its efforts
in the 1990 phase of the Refinancing, which then was reinvested in the Company
(and was included in the aggregate principal amount of the $650,000 of 1990
Notes) as part of the 1990 phase of the Refinancing. The Company paid Grumman
Hill an advisory fee of $250,000 in connection with its efforts in the 1992
phase of the Refinancing. The Grumman Hill and Grumman Hill, L.P. 1990 Notes
were amended and replaced in August 1992. Such amended and restated 1990 Notes,
in the principal amounts of $167,516 and $558,386, respectively, were paid in
full as of December 1992.
Prior to the Note Exchange Offer, Grumman Hill, L.P., the Grumman Hill
Associates Pension Plan, Mr. Irwin and Mr. Irwin's Individual Retirement Account
held approximately $2.5 million, $75,000, $339,000 and $188,000, respectively,
in principal amount of Replacement Debentures (exclusive of PIK Debentures
issued or issuable in respect of certain interest payments on the Replacement
Debentures). As a consequence of the Note Exchange Offer, prior to January 28,
1993 Mr. Irwin and Grumman Hill L.P. and affiliates owned $4.1 million in
principal amount of 1992 Notes and owned 194,393 additional 1992 Warrants (as
defined in "The Refinancing"). Mr. Irwin subsequently purchased 40,000 shares of
Common Stock in the 1992 Equity Offering, which, together with other options and
warrants, give these entities the right to purchase in the aggregate up to
815,646 shares of Common Stock. On January 28, 1993, Grumman Hill L.P. sold $1.0
million in principal amount of 1992 Notes. In June 1993, the 1992 Notes were
paid in full.
As of the date of this Prospectus, Mr. Irwin, Mr. Faherty (as general
partner of a family-owned partnership), Mr. Uhl, Mr. Zrno and Mr. Moses own
$500,000, $600,000, $200,000, $75,000 and $25,250, respectively, in principal
amount of 1993 Notes which they acquired either in the 1993 Note Offering or in
open-market transactions.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
BANKS AND CTI STOCK OWNERSHIP IN THE COMPANY
On June 20, 1988, ALC entered into a Securities Purchase Agreement with
CTI, pursuant to which CTI purchased 1,000,000 shares of Class B Preferred and
1,000,000 shares of Class C Preferred for an aggregate of $30.0 million. Each
share of Class B Preferred and Class C Preferred was convertible into shares of
Common Stock as described below. In addition, the holders of Class B Preferred
and Class C Preferred had the right to elect two and one directors of ALC,
respectively, thereby controlling election of three of the seven Board members.
As part of the 1993 Equity Offering, all shares of Class B Preferred and Class C
Preferred were converted to Common Stock, and the Company took appropriate
action whereby the directors previously elected by the holders of Class B
Preferred and Class C Preferred are elected by all stockholders voting as a
single class. CTI's purchases of the Class B Preferred and the Class C Preferred
were financed by advances under its credit arrangements with the Banks and
Prudential. In 1989, CTI loaned $20.0 million to the Company.
In conjunction with the 1990 phase of the Refinancing, ALC issued 716,200
shares of newly created Class D Preferred Stock (the "Class D Preferred") to CTI
in exchange for certain financing and lease concessions and for a waiver by CTI
of certain anti-dilution rights under the Certificate relating to the shares of
Class B Preferred and Class C Preferred. All outstanding shares of the Class D
Preferred were subsequently converted into 14,324,000 shares of Common Stock.
In August 1992, CTI conveyed the Common Stock, Class B Preferred and Class
C Preferred owned by it to each of the Banks pro-rata in exchange for the
release of certain portions of CTI's obligations to each of the Banks. Thus, the
Banks, in the aggregate, acquired all of the Class B Preferred and Class C
Preferred of ALC, as well as 14,324,000 shares of Common Stock. In October 1992,
the Banks sold, in the aggregate, 3,000,000 shares of Common Stock in the 1992
Equity Offering.
Each share of Class B Preferred and Class C Preferred was convertible at
the option of the holder into 1.898 shares of Common Stock. As owners of
1,000,000 shares of Class B Preferred, 1,000,000 shares of Class C Preferred and
11,324,000 shares of Common Stock, the Banks were entitled to an aggregate of
15,120,000 votes, which represented 54.4% of the total voting power of ALC
capital stock (or 38.3% assuming
35
<PAGE> 58
the exercise of certain warrants and options). In the 1993 Equity Offering, the
Banks sold 8,386,216 shares of Common Stock, of which 3,796,000 were received
upon conversion of all outstanding shares of Class B Preferred and Class C
Preferred. After the 1993 Equity Offering, the Banks held an aggregate of
4,321,784 shares of Common Stock, representing 15.0% of the then total voting
power of ALC capital stock (10.9% assuming the exercise of certain warrants and
options).
In August 1992, the Banks entered into a Stock Option Agreement (the "Stock
Option") and a Residual Stock Option Agreement (the "Residual Option" and,
together with the Stock Option, the "Options") with Prudential. By exercise of
the Options, Prudential had the ability to acquire all of the shares of Class B
Preferred, Class C Preferred and Common Stock owned by the Banks.
The Stock Option covered 1,000,000 shares of Common Stock owned by the
Banks. As part of the 1993 Equity Offering, Prudential exercised the Stock
Option and sold the 1,000,000 shares of Common Stock acquired thereby.
The Residual Option covered all of the shares of Class B Preferred and
Class C Preferred, and all shares of Common Stock (other than the shares covered
by the Stock Option), owned by the Banks. The exercise price for the Residual
Option was an amount calculated by a formula that equaled the amount of the debt
of CTI released by the Banks on August 18, 1992, as adjusted upward to reflect
costs incurred by the Banks in connection with the Banks' ownership of the
securities of ALC or otherwise arising as a result of the original loan to CTI
and to adjust for proceeds of dispositions which are shared with Prudential (as
described below), and downward to reflect proceeds realized after such date by
the Banks from the securities of ALC owned by them or otherwise received as a
result of components of the original loan to CTI, including net proceeds
received by the Banks from the 1993 Equity Offering. Upon the sale by the Banks
of shares of Common Stock in the 1993 Equity Offering, the Residual Option
terminated.
Prudential agreed with a group of CTGI's equipment lessors to allow them to
share in up to half of the shares of ALC stock acquired by Prudential pursuant
to the Residual Option or received from the Banks, in each case under certain
circumstances. Further, in August 1992 the Banks agreed under certain
circumstances to transfer to Prudential 10% of the shares subject to the
Residual Option upon disposition of any shares of ALC stock owned by them. In
addition, each Bank agreed that after each Bank has received its pro rata
portion of an amount calculated by the formula used to determine the aggregate
exercise price for the Residual Option, plus interest thereon at 10% per annum
from August 6, 1992 to the date of determination, each Bank would pay Prudential
any additional proceeds received by it from the disposition of any shares of the
ALC stock owned by it as a result of the August 1992 transactions and to deliver
to Prudential any remaining shares of such ALC stock. In accordance with an
agreement entered into in August 1992, the Banks paid Prudential 10% of their
net proceeds from the 1992 Equity Offering, and transferred 1,412,000 shares of
Common Stock (10% of the shares of Common Stock subject to the Residual Option
on such date) to Prudential as a consequence of the 1993 Equity Offering.
Subsequently, all of the Banks (except for one Bank) disposed of a sufficient
number of shares to result in such Banks receiving their respective pro rata
portions of the amount of debt of CTI released by the Banks on August 18, 1992
(plus interest), and such Banks transferred all of their remaining shares of
Common Stock (3,111,366 shares) to Prudential.
Pursuant to a certain escrow agreement (the "Escrow Agreement") among
Prudential, Nissho Iwai American Corporation, as administrative lessor for
certain of CTGI's equipment lessors, and Sanwa Bank & Trust Company of New York,
as Escrow Agent, on August 27, 1993, Prudential deposited 1,555,683 shares of
Common Stock (the "Escrow Shares") with the Escrow Agent. Under the terms of the
Escrow Agreement, subject to contractual restrictions to which Prudential is
subject contained in one or more underwriting agreements relating to ALC stock,
the Escrow Agent has the power to sell the Escrow Shares under certain
circumstances.
In August 1992, Prudential entered into an agreement with ALC whereby
Prudential agreed that neither it nor its affiliates would sell shares of ALC
stock acquired pursuant to the Residual Option prior to the earlier to occur of
(i) June 1, 1993, or (ii) the Company experiencing a significant decrease in
results of operations from previous levels, or in the event of a bankruptcy
proceeding, except (a) in a public offering, (b) pursuant to Rule 144
promulgated by the Commission pursuant to the Securities Act of 1933, as amended
(the
36
<PAGE> 59
"Securities Act"), (c) pursuant to its agreement with CTGI's equipment lessors,
(d) to certain types of institutional buyers, so long as no one institutional
buyer (and its affiliates) purchases more than 10% of the shares subject to the
Residual Option and so long as the institutional buyers do not act in concert,
or (e) to any affiliates of Prudential, provided that such affiliates agree to
the foregoing sales restrictions. This agreement expired on June 1, 1993. In
addition, the Banks agreed with ALC that the Banks would not sell any shares of
ALC stock owned by them prior to July 31, 1993 except (a) for the 3,000,000
shares of Common Stock sold in the 1992 Equity Offering, (b) pursuant to
exercise of the Options, (c) in a public offering or (d) if the Company
experiences a significant decrease in results of operations from previous levels
or in the event of a bankruptcy proceeding. ALC had agreed with the Banks that
it would not issue in excess of 8,000,000 shares of Common Stock prior to the
earlier of (a) August 6, 1994 or (b) the date on which the Banks collectively
hold less than 8,000,000 shares of Common Stock or Common Stock equivalents. As
a result of the 1993 Equity Offering, this restriction on ALC terminated. In
addition, ALC agreed with Prudential that it would not issue in excess of
8,000,000 shares of Common Stock prior to the earlier of (a) March 31, 1994, or
(b) the expiration of the Residual Option. As a result of the 1993 Equity
Offering, this restriction on ALC also terminated.
Pursuant to a Registration Rights Agreement dated June 4, 1990, the Banks,
Prudential, General Electric and Grumman Hill (and their transferees of
securities covered by such agreement) each had the right to require ALC to
register the 1990 Warrants, shares of Common Stock issuable upon exercise of the
1990 Warrants, shares of Common Stock issuable upon conversion of the Class B
Preferred and Class C Preferred, and the shares of Common Stock previously held
by the Banks, in each case held by such party, to permit a public sale of such
shares under the Securities Act of 1933 and applicable state securities laws.
The parties could demand, in the aggregate, six such registrations, and may join
in an unlimited number of ALC initiated registrations. Pursuant to an Assignment
of Rights Agreement dated August 6, 1992 among the Banks and ALC (the
"Assignment of Rights"), ALC agreed to register the 1992 Equity Offering and to
prepare and file the registration statement of which the 1993 Equity Offering
was, and this Prospectus is, a part and comply with applicable state securities
laws within 90 days after the consummation of the 1992 Equity Offering, to
permit a public sale by the Banks from time to time of the shares of Common
Stock held by the Banks after the 1992 Equity Offering or issuable to them upon
conversion of the Class B Preferred and Class C Preferred, subject to certain
lock-up restrictions. Also in the Assignment of Rights, ALC gave the Banks the
right to participate on a preemptive basis in certain future private issuances
of Common Stock by ALC. Pursuant to the Registration Rights Agreement, both
Prudential and General Electric have included in the registration statement of
which this Prospectus is a part, the shares of Common Stock which are being sold
in this Offering, and which may be sold by them, upon exercise of their 1990
Warrants.
CTI TRANSACTIONS
Allnet leases a significant portion of its digital service transmission
capacity from CTGI pursuant to a Digital Service Agreement dated February 10,
1989. The Digital Service Agreement provided for a minimum monthly payment of
$1.5 million through November, 1992 and $1.2 million through the ten year term
of the Digital Service Agreement. As part of the 1990 phase of the Refinancing,
Allnet and CTGI entered into an Amendment which amended the digital phase of the
Service Agreement to (a) provide for a credit to reduce the service cost payable
by Allnet to CTGI by $500,000 per month for the period from May 1, 1990 to
December 31, 1990 and by $700,000 per month thereafter; (b) if necessary,
commencing in June 1991, adjust the credit further to reflect the market rate at
the time of such adjustment, provided that the credit shall not be less than
$700,000 per month; (c) give Allnet the right to relocate its circuits out of
available inventory on the CTGI owned system; and (d) terminate the Digital
Service Agreement on June 1, 1999. A further favorable market rate adjustment of
$114,000 was applied to the monthly credit, effective June 1991 through May
1993. The parties subsequently agreed to additional favorable market rate
adjustments effective June 1993 through May 1994.
On August 10, 1989, ALC executed a note with CTI for financing of $5.0
million. On September 29, 1989 ALC renewed the existing note and executed a
second note for an additional $15.0 million. The notes were to expire the
earlier of September 25, 1990 or the date on which ALC secured additional
financing or
37
<PAGE> 60
consummated a private debt placement. As part of the 1990 phase of the
Refinancing, the notes were restructured into the Restructured Promissory Note
(as defined in "The Refinancing"), a single promissory note from Allnet in the
amount of $20.0 million. During the third quarter of 1991, the Restructured
Promissory Note owed to CTI was sold to the Banks. In June and August 1992,
Allnet and the Banks extended the due date on the Restructured Promissory Note,
and certain defaults and covenants were waived to permit Allnet and ALC to make
the Note Exchange Offer. See "The Refinancing." The Restructured Promissory Note
was paid in full in May 1993.
In June 1992, Allnet bought certain assets from CTI for $2.0 million, which
CTI then paid to the Banks to be applied against debt owed by CTI to the Banks.
In this purchase, Allnet purchased from CTI the "Founder's Refund" for $1.2
million and a promissory note with a balance of approximately $0.8 million in
principal and interest payable from Melvyn Goodman, secured by 53,777 shares of
Class A Preferred. The "Founder's Refund" is the right set forth in that certain
lease agreement between MSM Associates (as successor to Mutual Signal
Corporation by assignment), and Allnet (as successor to Lexitel Corporation by
merger), dated December 5, 1985, that provides that Allnet shall receive an
annual payment based upon the net cash flow and revenue from the fiber optic
system of MSM Associates, subject, however to MSM Associates having sufficient
cash or cash equivalents on hand at April 30 of the following year, the date
when such annual payment is due. Allnet in turn assigned the Founder's Refund to
CTGI for $1.2 million in prepaid transmission services. The promissory note and
related interest payable was paid in full upon closing of the 1992 Equity
Offering.
In December 1985, a predecessor to Allnet entered into a fiber optic lease
agreement with Mutual Signal Corporation for an initial term of twelve years for
capacity over a fiber optic system linking major metropolitan centers in
Michigan. In 1989, CTI acquired all of the outstanding stock of Mutual Signal
Corporation and subsequently had the fiber optic lease agreement assigned to MSM
Associates of which Mutual Signal Corporation is a 50.0% owner and general
partner. In 1991 and 1992, Allnet paid approximately $3.7 million and $2.3
million, respectively, for services under that lease. As part of the 1992 phase
of the Refinancing, MSM Associates and Allnet entered into an amendment to the
lease to provide Allnet certain credits reducing the service cost payable by
Allnet thereunder and to provide MSM Associates with a 120-day option to further
amend the lease to (a) give Allnet the right to request reconfiguration of its
circuits thereunder; (b) provide that Allnet will be paid commissions and act as
consultant under certain circumstances; and (c) provide an option to extend the
lease. This option to amend was exercised by MSM Associates effective November
1992. Also as part of a 1992 restructuring of CTI, CTI transferred its interest
in Mutual Signal Corporation to TIFD VII, Inc., a wholly owned indirect
subsidiary of General Electric Capital Corporation.
TRANSACTIONS WITH GENERAL ELECTRIC AND PRUDENTIAL
General Electric and Prudential participated in the cash financing as part
of the 1990 phase of the Refinancing. As a result, General Electric held a 1990
Note in the original principal amount of $3.5 million and was issued 1990
Warrants to purchase up to 2,305,105 shares of the Common Stock. In addition,
prior to the Note Exchange Offer, through subsequent purchases, General Electric
held $23.8 million in principal amount of the outstanding Original and
Replacement Debentures (as defined in "The Refinancing") (exclusive of PIK
Debentures issued or issuable in respect of certain interest payments due on
certain Debentures), which constituted 43% of the total outstanding amount of
those Debentures. As a consequence of the Note Exchange Offer, General Electric
owns 1,494,845 1992 Warrants (as defined in "The Refinancing"), which, when
added to the 1990 Warrants, give General Electric the right to purchase up to a
total of 3,799,950 shares of Common Stock. General Electric subsequently
purchased 500,000 shares of Common Stock in the 1992 Equity Offering; the
Company has been informed 400,000 shares were subsequently sold in the open
market. Also as a consequence of the Note Exchange Offer, General Electric owned
$31.8 million in principal amount of 1992 Notes (which the Company was informed
were subsequently sold by General Electric). All of the 1992 Notes were paid in
full in June 1993.
Pursuant to the 1990 Note Agreement between ALC and General Electric, as
amended in August 1992, General Electric also has the right to nominate one
person for election to the Board of Directors of ALC. There was no such nominee
proposed by General Electric for election at the most recent Annual Meeting of
38
<PAGE> 61
Stockholders. The General Electric 1990 Note was amended and replaced in August
1992. Such amended and restated 1990 Note in the principal amount of $3,908,700
was paid in full as of December 1992. General Electric continues to have the
right to nominate one person for election to the ALC Board of Directors based on
the terms of the 1990 Note Agreement, as amended in August 1992, due to its
equity ownership. Subsequent to this Offering, General Electric will no longer
have equity ownership sufficient to maintain this right.
Prudential was the holder of a 1990 Note in the original principal amount
of $3.0 million which was paid in full as of August 1992. After its sale of
shares in the 1993 Equity Offering, Prudential retained the right to purchase up
to 1,012,020 shares of the Common Stock pursuant to 1990 Warrants. These shares
will be sold in this Offering.
FINANCIAL SERVICES
Richard D. Irwin has been a director of CTI since June 1986 and is
President of Grumman Hill. See "Compensation Committee Interlocks and Insider
Participation."
CLASS A EXCHANGE
In an Exchange Agreement dated September 8, 1992 (the "Class A Exchange
Agreement"), the members of the Class A Preferred Group agreed to exchange all
or any portion of the shares of Class A Preferred held by them (2,144,044
shares) (with accrued and unpaid dividends thereon) for shares of Common Stock,
according to a formula based on the $5.50 offering price for the shares of
Common Stock being sold in the 1992 Equity Offering and the then present
redemption value for the Class A Preferred being exchanged at a 40% discount.
Pursuant to the Class A Exchange Agreement, ALC was allowed to choose the amount
of shares of Class A Preferred to be exchanged by the Class A Preferred Group,
which were exchanged for shares of Common Stock.
As part of the 1992 Equity Offering, ALC exchanged 2,144,044 shares of
Class A Preferred for the 6,399,227 shares of Common Stock the Class A Preferred
Group sold in the 1992 Equity Offering.
39
<PAGE> 62
THE REFINANCING
In 1990, the Company began an overall refinancing of substantially all of
its funded debt. The 1990 phase provided for a two year period (until June 1992)
during which the Company could attempt to improve operations without the near
term demands on cash flow associated with most elements of its funded debt. As a
result of the 1990 phase, approximately $78 million of debt was due to be paid
between June and December 1992. Although it was the Company's expectation that a
subsequent renegotiation of these obligations in or before June 1992 would be
required, no specific arrangements or agreements were made to that end as part
of the 1990 phase. In October 1992, the Company completed the second phase (the
1992 phase) of the Refinancing. The concluding actions taken in the 1992 phase,
which were taken in conjunction with an overall restructuring of CTI, have
allowed the Company to substantially defer or reduce its debt service
obligations.
ACTIONS TAKEN IN THE 1990 PHASE:
A renewal of the $30.0 million accounts receivable revolving credit
facility (the "Previous Revolving Credit Facility") with Foothill Capital
Corporation until June 3, 1992 and the assignment of a 40% participation
interest in the Revolving Credit Facility to Prudential.
The issuance to DSC, a major switch vendor, of the warrants being
exercised as part of this Offering in exchange for concessions with respect
to lease payments for switching equipment.
The purchase of $7.2 million of notes of the Company (the "1990
Notes") pursuant to Note and Warrant Purchase Agreements (the "1990 Note
Agreements") by Prudential, General Electric, Grumman Hill and Grumman
Hill, L.P. (collectively, the "1990 Investors"), and the issuance to the
1990 Investors of Warrants (the "1990 Warrants") to purchase up to
4,708,999 shares of the Common Stock at $3.00 per share.
The execution of an Additional Financing Agreement with the 1990
Investors, whereby the Company could seek, and the 1990 Investors had the
option of providing, up to $5.0 million of additional financing on
substantially the same terms as those contained in the 1990 Note
Agreements.
The extension until June 4, 1992 of the $20.0 million loan (the
"Restructured Promissory Note") from CTI to Allnet, coupled with the
forgiveness of certain interest payments and fees thereon and a lower
interest rate effective January 1, 1991. The Restructured Promissory Note
was subsequently sold by CTI to the Banks.
The modification of a significant transmission contract between Allnet
and CTGI, then a wholly owned subsidiary of CTI.
The issuance to CTI of 716,200 shares of the new Class D Preferred of
ALC (which was subsequently converted to 14,324,000 shares of Common Stock)
in exchange for concessions described above and the one-time waiver by CTI
of certain anti-dilution rights associated with its shares of Class B
Preferred and Class C Preferred.
The agreement by the holders of approximately 96% of the outstanding
Original Debentures (as defined below) to reschedule interest and principal
payment requirements and to waive certain defaults.
The agreement with three holders of the Class A Preferred, who held
approximately 86% of the then outstanding Class A Preferred, providing for,
under certain circumstances, the redemption of shares of Class A Preferred
below the otherwise applicable mandatory redemption price, and the
modification of the mandatory redemption schedule for all Class A
Preferred.
ACTIONS TAKEN IN THE 1992 PHASE:
The extension to June 30, 1993 of the Previous Revolving Credit
Facility with the borrowing rates reduced, the termination of Prudential's
participation interest in the Revolving Credit Facility, and the sale of a
participation interest to Star Bank, N.A.
40
<PAGE> 63
Further amendment of lease agreements with DSC, pursuant to which DSC
agreed to amortize the $9.9 million balance due June 1, 1992 under existing
equipment leases over the subsequent twenty-four months with no change in
the current interest rate of 14.0%.
The reduction of the exercise price on the 1990 Warrants to $2.00 per
share. The due date of approximately $4.6 million (including accrued and
unpaid interest through March 31, 1991 added to principal) in principal
amount of the 1990 Notes issued to the 1990 Investors other than Prudential
was extended to June 30, 1993 and the interest rate on such 1990 Notes was
reduced from 15% to 13% per annum, all effective as of August 7, 1992.
Prudential was paid in full on its 1990 Note but continues to hold 1990
Warrants.
The termination of the Additional Financing Agreement, which had not
been utilized.
The amendment and restatement of the Loan Agreement which governed the
Restructured Promissory Note and the extension of the Restructured
Promissory Note to June 30, 1995 with quarterly principal payments
commencing on September 15, 1992 and additional annual payments if the
Company met certain excess cash tests and a $5.0 million principal
prepayment made in August 1992.
The payment of $2.0 million for the purchase of an $0.8 million note
from a member of the Class A Preferred Group, which note was secured by
53,777 shares of the Class A Preferred, as well as for the purchase of a
certain Founders Refund right, which right was used to acquire $1.2 million
of prepaid transmission capacity from CTGI.
The transfer to the Banks of the 14,324,000 shares of Common Stock,
1,000,000 shares of Class B Preferred, and 1,000,000 shares of Class C
Preferred held by CTI in exchange for the release of certain portions of
CTI's obligations to each of the Banks. The Class B Preferred and Class C
Preferred were convertible into 3,796,000 shares of Common Stock.
The completion of an exchange offer (the "Note Exchange Offer")
pursuant to which approximately 99% of the Original Debentures, the 11 7/8%
Senior Subordinated Debentures of ALC due December 31, 1995 (the
"Replacement Debentures") and the PIK Debentures (the Original Debentures,
the Replacement Debentures and the PIK Debentures are collectively, the
"Debentures" and the holders of the Debentures are collectively referred to
as "Debentureholders") were exchanged for 11 7/8% Subordinated Notes due
June 30, 1999 (the "1992 Notes") and warrants (the "1992 Warrants") to
purchase shares of Common Stock at an exercise price of $5.00 per share of
Common Stock. The 1992 Notes had a redemption schedule which provided for
the mandatory equal quarterly redemption of 6.25% of principal beginning on
September 30, 1995 through June 30, 1999 and, under certain circumstances,
were required to be redeemed earlier.
The Class A Exchange. See "Certain Relationships and Related
Transactions -- Class A Exchange."
RELATED ACTIONS SUBSEQUENT TO THE REFINANCING:
In October 1992, an equity offering (the "1992 Equity Offering") was
completed pursuant to which the Banks, the Class A Preferred Group and
Kansas City Southern Industries, Inc. sold an aggregate of 9,863,600 shares
of Common Stock at $5.50 per share. ALC did not receive any of the proceeds
from the sale of the shares of Common Stock in the 1992 Equity Offering.
In October 1992, the $0.8 million note due to the Company by a member
of the Class A Preferred Group was paid in full.
In December 1992, General Electric, Grumman Hill and Grumman Hill,
L.P. were paid in full on their 1990 Notes as amended and replaced in
August 1992, but continued to hold the 1990 Warrants.
In March 1993, an equity offering (the "1993 Equity Offering") was
completed pursuant to which the Banks and Prudential sold an aggregate of
10,350,000 shares of Common Stock at $14.25 per share. As part of the 1993
Equity Offering, the Banks converted all of the shares of Class B Preferred
and
41
<PAGE> 64
Class C Preferred to shares of Common Stock, and Prudential exercised its
1990 Warrant as to 963,784 shares. ALC did not receive any of the proceeds
from the sale of the shares of Common Stock in the 1993 Equity Offering,
although it did receive $1.9 million upon Prudential's partial exercise of
its 1990 Warrant.
In May 1993, Allnet publicly sold $85.0 million of its 1993 Notes. The
proceeds of this sale were used to redeem the 1992 Notes and to reduce the
amount outstanding under the Previous Revolving Credit Facility.
Concurrently with this sale, the Restructured Promissory Note was paid in
full.
In June 1993, the Company entered into the Revolving Credit Facility
to replace the Previous Revolving Credit Facility.
SELLING STOCKHOLDERS
The following chart sets forth the number of shares of Common Stock held by
each of the Selling Stockholders indicated below as of the date of this
Prospectus and the number of shares of Common Stock to be offered in the
Offering by each of the parties indicated below. See also "Principal
Stockholders."
<TABLE>
<CAPTION>
SHARES OF NUMBER OF SHARES
COMMON STOCK SHARES OF AND PERCENTAGE OF
HELD PRIOR COMMON STOCK OUTSTANDING
TO TO BE OFFERED IN COMMON STOCK
SELLING STOCKHOLDER THE OFFERING THE OFFERING OWNED AFTER OFFERING
- ---------------------------------------------- ------------ ----------------- ---------------------
<S> <C> <C> <C> <C>
The Prudential Insurance Company of
America..................................... 5,535,386 4,905,386 630,000(1) 2.0%
Trustees of General Electric Pension Trust.... 4,019,950 2,035,105 1,984,845(1) 6.2%
DSC Communications Corporation................ 100,000 100,000 0 0%
------------ ----------------- ---------
Total....................................... 9,655,336 7,040,491 2,614,845(1)
------------ ----------------- ---------
------------ ----------------- ---------
</TABLE>
- -------------------------
(1) Of these, 900,000 shares will be sold to the extent the over-allotment
option is exercised.
The shares of Common Stock to be issued to Prudential and General Electric
upon the exercise of their warrants and which are being sold hereunder have been
included in this Prospectus pursuant to the Registration Rights Agreement among
Prudential, General Electric and ALC (and certain other parties) dated June 4,
1990. The shares of Common Stock to be issued to DSC upon this exercise of its
warrants and which are being sold hereunder have been included in this
Prospectus pursuant to the Registration Rights Agreement between DSC and ALC
dated June 1, 1990.
42
<PAGE> 65
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership
of the stock of ALC as of August 25, 1993 by each person known by ALC to be the
beneficial owner of more than 5.0% of any class of stock, each director of ALC
and all executive officers and directors of ALC as a group. The figures
presented are based upon information available to ALC.
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF NUMBER OF PERCENTAGE
SHARES OF SHARES OF OF
COMMON STOCK CLASS A VOTING POWER
NAME AND ADDRESS OF (% OF PREFERRED OF ALL
BENEFICIAL OWNER CLASS)* (% OF CLASS)* STOCK*
- ---------------------------------------------------------------- ------------ ------------- ------------
<S> <C> <C> <C>
The Prudential Insurance Company
of America.................................................... 5,535,386(1) -- 18.4%
Prudential Plaza (18.4%)
751 Broad Street
Newark, NJ 07102
Trustees of General Electric Pension Trust...................... 4,019,950(2) -- 12.2%
c/o G.E. Investments Corp. (12.2%)
3003 Summer Street
Stamford, CT 06904
FMR Corp.(3).................................................... 1,965,700(4) -- 6.8%
82 Devonshire Street (6.8%)
Boston, MA 02109
David Gale(5)................................................... -- 62,635(6) **
167 Dune Road (17.6%)
Bridgehampton, N.Y. 11932
Delta Dividend Group, Inc.(5)................................... -- 58,721 **
167 Dune Road (16.5%)
Bridgehampton, N.Y. 11932
Richard D. Irwin................................................ 815,646(7) 5,000 2.7%
15 Ketchum Street (2.7%) (1.4%)
Westport, CT 06880
Grumman Hill Investments, L.P................................... 639,155(8) -- 2.1%
15 Ketchum Street (2.2%)
Westport, CT 06880
Grumman Hill Associates, Inc.................................... 103,490(**)(9) -- **
15 Ketchum Street
Westport, CT 06880
Saulene M. Richer............................................... 19,366(**) 115,432 **
300 Walnut, No. 183 (32.4%)
Des Moines, IA 50309
John M. Zrno.................................................... 498,018(10) 1,667(**) 1.7%
Suite 350 (1.7%)
30300 Telegraph Road
Bingham Farms, MI 48025
Marvin C. Moses................................................. 423,059(11) 1,667(**) 1.4%
Suite 350 (1.4%)
30300 Telegraph Road
Bingham Farms, MI 48025
Richard J. Uhl.................................................. 40,200(**)(12) -- **
One Thousand RIDC Plaza
Pittsburgh, PA 15238
Michael E. Faherty.............................................. 40,000(**)(13) -- **
15301 Dallas Parkway, Suite 600
Dallas, TX 75248
William H. Oberlin.............................................. 428,059(14) 1,666(**) 1.5%
Suite 350 (1.5%)
30300 Telegraph Road
Bingham Farms, MI 48025
Gregory M. Jones................................................ 942(**) -- **
Suite 350
30300 Telegraph Road
Bingham Farms, MI 48025
</TABLE>
43
<PAGE> 66
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF NUMBER OF PERCENTAGE
SHARES OF SHARES OF OF
COMMON STOCK CLASS A VOTING POWER
NAME AND ADDRESS OF (% OF PREFERRED OF ALL
BENEFICIAL OWNER CLASS)* (% OF CLASS)* STOCK*
- ---------------------------------------------------------------- ------------ ------------- ------------
<S> <C> <C> <C>
Connie R. Gale.................................................. 65,148(**)(15) -- **
Suite 350
30300 Telegraph Road
Bingham Farms, MI 48025
All current executive officers and directors as group (17
persons)...................................................... 2,623,710(16) 10,000 8.3%
(8.3%) (2.8%)
</TABLE>
- -------------------------
* Percentage calculation based on 29,051,290 shares of Common Stock, and
355,956 shares of Class A Preferred, issued and outstanding on August 25,
1993, plus shares of Common Stock which may be acquired pursuant to warrants
and options exercisable within sixty days by such individual or group
listed.
** Less than one percent.
(1) Includes 1,012,020 shares of Common Stock which may be acquired pursuant to
the exercise of outstanding warrants.
(2) Includes 3,799,950 shares of Common Stock which may be acquired pursuant to
the exercise of outstanding warrants.
(3) Based on information set forth in a Schedule 13G, dated February 14, 1993,
filed with the Securities and Exchange Commission.
(4) Includes all shares held by Fidelity Management & Research Company (acting
as investment adviser) and by Fidelity Management Trust Company (acting as
investment manager), which are wholly-owned subsidiaries of FMR Corp. These
shares are deemed to be beneficially owned by Edward Johnson 3d; Mr.
Johnson is the Chairman of the Board and a member of a controlling group
with respect to FMR Corp.
(5) Based on information set forth in Amendment No. 2 to Statement on Schedule
13D, dated February 11, 1993, filed with the Securities and Exchange
Commission. The Company has been informed that there is no business or
familial relationship between Ms. Connie R. Gale and Mr. David Gale ("Gale"
is Ms. Gale's married name), or between Ms. Gale and Mr. Gale's affiliates.
(6) Includes 58,721 shares of Class A Preferred held by Delta Dividend Group,
Inc., which are deemed to be beneficially owned by Mr. Gale, its sole
executive officer, the sole director and the controlling stockholder.
(7) Includes 153,163 shares of Common Stock which may be acquired pursuant to
the exercise of outstanding stock options held by Grumman Hill, L.P. and
622,483 shares of Common Stock which may be acquired pursuant to the
exercise of outstanding warrants held individually and by Grumman Hill and
Grumman Hill, L.P. These Grumman Hill and Grumman Hill, L.P. shares are
deemed to be beneficially owned by Mr. Irwin, as President and Director of
Grumman Hill and as General Partner of Grumman Hill, L.P.
(8) Includes 485,992 shares of Common Stock which may be acquired pursuant to
the exercise of outstanding warrants and 153,163 shares of Common Stock
which may be acquired pursuant to the exercise of outstanding stock
options.
(9) These shares of Common Stock may be acquired pursuant to the exercise of
outstanding warrants.
(10) Includes 495,578 shares of Common Stock which Mr. Zrno has the right to
acquire pursuant to the exercise of outstanding stock options, and 800
shares of Common Stock which Mr. Zrno's wife and mother-in-law own jointly
(Mr. Zrno disclaims beneficial interest as to these shares).
(11) Includes 415,059 shares of Common Stock which Mr. Moses has the right to
acquire pursuant to the exercise of outstanding stock options, 3,000 shares
of Common Stock which Mr. Moses owns as custodian for his children under
UGMA and 1,000 shares of Common Stock which Mr. Moses' daughter owns (Mr.
Moses disclaims beneficial interest as to the latter 1,000 shares).
(12) Includes 40,000 shares of Common Stock which Mr. Uhl has the right to
acquire pursuant to the exercise of outstanding stock options.
(13) Shares of Common Stock which Mr. Faherty has the right to acquire pursuant
to the exercise of outstanding stock options.
(14) Includes 418,059 shares of Common Stock which Mr. Oberlin has the right to
acquire pursuant to the exercise of outstanding stock options, and 4,000
shares of Common Stock which Mr. Oberlin's daughters own (Mr. Oberlin
disclaims beneficial interest as to the latter 4,000 shares).
(15) Includes 61,542 shares of Common Stock which Ms. Gale has the right to
acquire pursuant to the exercise of outstanding stock options.
(16) Includes 1,924,018 shares of Common Stock which executive officers and
directors of ALC have the right to acquire pursuant to the exercise of
outstanding stock options and 622,483 shares of Common Stock which Mr.
Irwin has the right to acquire or is deemed to have the right to acquire
pursuant to the exercise of outstanding stock warrants held individually
and by Grumman Hill and Grumman Hill, L.P.
44
<PAGE> 67
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of ALC consists of 200,000,000 shares of
Common Stock, par value $0.01, of which 29,051,290 shares are issued and
outstanding; 2,500,000 shares of Class A Preferred, $0.01 par value, of which
355,956 shares are issued and outstanding; and 14,783,800 shares of Preferred
Stock (the "Preferred Stock"), $0.01 par value, of which no shares are issued
and outstanding. After this Offering, 32,198,415 shares of Common Stock will be
issued and outstanding.
COMMON STOCK. The holders of Common Stock (i) are entitled to vote with one
share per vote; (ii) have equal ratable rights to dividends from funds legally
available thereof if, as and when declared by the Board of Directors; (iii) are
entitled to share ratably in any distribution to holders of Common Stock upon
liquidation of ALC; and (iv) do not have preemptive rights (except for certain
pre-emptive rights granted by contract to the Banks). Common Stock is not
convertible or redeemable. Dividends may not be paid on Common Stock if (i) any
dividends are due on, or ALC has any past-due obligation to redeem, Preferred
Stock, or Class A Preferred; or (ii) a dividend is not permissible under the
terms of the Indenture Agreement governing the 1993 Notes. Since its inception,
ALC has not declared or paid dividends on the Common Stock. The Board of
Directors is authorized to issue additional shares of the authorized Common
Stock without stockholder approval. Accordingly, holders of Common Stock may be
subject to potential future dilution of the value of the Common Stock they own
or have the right to acquire.
CLASS A PREFERRED. The Class A Preferred was entitled to quarterly,
cumulative (without interest) dividends of $0.40 per share commencing with the
quarter ended September 30, 1987 through the quarter ended December 31, 1991.
Thereafter, dividends on the Class A Preferred are calculated according to a
formula set forth in the Certificate using an adjusted prime rate of interest
based on the prime rate published in the Wall Street Journal on the first
business day of a given quarterly dividend period. Under the Delaware General
Corporation Law, ALC may pay dividends only out of surplus or net profits for
the fiscal year in which the dividends are declared and/or the preceding fiscal
year. ALC paid $1.5 million in cash dividends to the Class A Preferred holders
in 1988 in connection with the purchase by CTI of the Class B Preferred and
Class C Preferred. ALC has declared a cash dividend of $0.32 per share on the
Class A Preferred, payable September 30, 1993 to the stockholders of record on
September 13, 1993. The Certificate provides that ALC must redeem the shares of
Class A Preferred at $20.00 per share plus accrued dividends. If ALC does not
make a scheduled redemption, the Class A Preferred holders can elect to convert
the amount of Class A Preferred which should have been redeemed (plus accrued
and unpaid dividends thereon) to Common Stock. As of June 30, 1993, dividends
accrued on the Class A Preferred were $3.1 million. Future redemption
obligations relating to the Class A Preferred consist of one scheduled payment
of approximately $7.1 million (plus accrued and unpaid dividends on the shares
then being redeemed) at December 31, 1996. As of September 17, 1993, the
remaining shares of Class A Preferred were held by 1,632 stockholders. Holders
of the Class A Preferred are entitled to a number of votes equal to .166 of one
vote per share of Class A Preferred.
PREFERRED. The Board of Directors is entitled to issue up to 14,783,800
shares of Preferred Stock without stockholder approval. Preferred Stock can be
issued from time to time in one or more classes containing one or more series.
The Board of Directors has full authority to determine the features of such
stock, including the dividend rate, whether such stock will be redeemable (and,
if so, the price and terms for redemption), any preferential amount payable to
holders in the event of liquidation, whether such stock will be convertible
(and, if so, the terms and conditions of such conversion), and whether and to
what extent voting rights will attach to such stock. Such Preferred Stock may be
issued with extraordinary voting or other rights which could have an
anti-takeover effect or could be issued in an attempt to discourage or prevent a
takeover bid. Accordingly, holders of Common Stock may be subject to possible
future dilution of the value or other adverse effects which might result from
the issuance of additional Preferred Stock.
45
<PAGE> 68
CLASSIFICATION OF THE BOARD
The Board of Directors of ALC consists of seven director positions. The
Class A Preferred holders are entitled to elect one member of the Board; the
holders of Common Stock are entitled to elect two members of the Board; and all
of the stockholders as a class are entitled to elect four members of the Board.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, ALC will have outstanding 32,198,415
shares of Common Stock, without taking into account shares of Common Stock
issuable upon exercise of outstanding options and warrants or issuable upon
conversion of any preferred stock. All of these outstanding shares are freely
tradable without registration or further registration under the Securities Act,
except for any shares held by "affiliates" of ALC within the meaning of the
Securities Act, which shares will be subject to the resale limitations of Rule
144 promulgated under the Securities Act ("Rule 144"). In addition, if ALC fails
to redeem shares of Class A Preferred according to the mandatory redemption
schedule, the Class A Preferred holders may elect to convert the shares which
should have been redeemed, plus accrued and unpaid dividends thereon, to Common
Stock. See "Description of Capital Stock."
The Company has filed a "shelf" registration statement (of which this
Offering is a part) which will permit the sale from time to time, in addition to
the shares being sold in this Offering, of up to 1,370,088 shares of Common
Stock, including 630,000 shares owned by Prudential and 270,000 shares which
General Electric may acquire upon exercise of 1990 Warrants. Of these, 900,000
shares will be sold in this Offering to the extent the over-allotment option is
exercised. The directors and officers and certain stockholders of the Company,
including the Selling Stockholders, have agreed not to sell (other than in
certain limited circumstances) any shares of Common Stock owned by them within
180 days (or, in the case of the Selling Stockholders with respect to an
underwritten public offering as to which a registration statement has become
effective, 120 days) after the date of this Prospectus without the written
consent of the Underwriters.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including persons deemed to be affiliates, whose
restricted securities have been fully paid for and held for at least two years
from the later of the date of issuance by ALC or acquisition from an affiliate,
may sell such securities in brokers' transactions or directly to market makers,
provided that the number of shares sold in any three-month period may not exceed
the greater of 1.0% of the then outstanding shares of Common Stock
(approximately 322,000 shares immediately after the Offering) or the average
weekly trading volume of the Common Stock on the American Stock Exchange during
the four calendar weeks preceding the sale. Sales under Rule 144 are also
subject to certain notice requirements and the availability of certain public
information about the Company. After three years have elapsed from the later of
the issuance or restricted securities by ALC or their acquisition from an
affiliate, such securities may be sold without limitation by persons who are not
affiliates under the rule.
Sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices and impair the Company's ability to
raise capital at such times through the sale of its equity securities. See "Risk
Factors -- Future Sales of Common Stock."
46
<PAGE> 69
UNDERWRITING
The U.S. Underwriters named below, have severally agreed, subject to the
terms and conditions set forth in the U.S. Underwriting Agreement (the "U.S.
Underwriting Agreement") among the Selling Stockholders, the Company and the
U.S. Underwriters to purchase from the Selling Stockholders, and the Selling
Stockholders have agreed to sell to the U.S. Underwriters, the number of shares
of Common Stock set forth opposite their respective names below:
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
---------
<S> <C>
PaineWebber Incorporated...................................... 1,878,497
Goldman, Sachs & Co........................................... 1,878,497
Wheat, First Securities, Inc. ................................ 1,878,497
---------
Total............................................... 5,635,491
---------
---------
</TABLE>
In addition, PaineWebber International (U.K.) Ltd., Goldman Sachs
International Limited and Wheat, First Securities, Inc. (the "International
Underwriters") have severally agreed, subject to the terms and conditions set
forth in the International Underwriting Agreement (the "International
Underwriting Agreement") among the Selling Stockholders, the Company and the
International Underwriters, to purchase 1,405,000 shares of Common Stock and to
offer and sell such shares outside of the United States and Canada concurrently
with the offering and sale of shares of Common Stock by the U.S. Underwriters.
The U.S. Underwriting Agreement provides that the obligations of the U.S.
Underwriters to purchase the shares of Common Stock listed above are subject to
certain conditions. The U.S. Underwriting Agreement also provides that the U.S.
Underwriters are committed to purchase all of the shares of Common Stock offered
hereby, if any are purchased (without consideration of any shares that may be
purchased through the Underwriters' over-allotment option). In general, the
closing with respect to the sale of the shares of Common Stock pursuant to the
U.S. Underwriting Agreement is a condition to the closing with respect to the
sale of the shares of Common Stock pursuant to the International Underwriting
Agreement and vice versa. The public offering price per share and the total
underwriting discount per share are identical under the U.S. Underwriting
Agreement and the International Underwriting Agreement.
The Company and the Selling Stockholders have been advised by the U.S.
Underwriters that the U.S. Underwriters propose to offer the shares of Common
Stock to the public at the offering price set forth on the cover page of this
Prospectus and to certain securities dealers at such price less a concession not
in excess of $.55 per share and that the U.S. Underwriters and such dealers may
reallow a concession not in excess of $.10 per share to other dealers, including
the U.S. Underwriters. After the shares of Common Stock are released for sale to
the public, the public offering price and the concession and discount to dealers
may be changed by the U.S. Underwriters.
Each U.S. Underwriter has agreed that, as part of the distribution of the
shares of Common Stock, (a) it is not purchasing any shares of Common Stock for
the account of anyone other than a United States Person and (b) it has not
offered or sold, and will not offer or sell, directly or indirectly, any shares
of Common Stock or distribute this Prospectus to any person outside the United
States or to anyone other than a United States Person. Each International
Underwriter has agreed that, as part of the distribution of shares of Common
Stock, (a) it is not purchasing any shares of Common Stock for the account of
any United States Person or Canadian Person and (b) it has not offered or sold,
and will not offer or sell, directly or indirectly, any shares of Common Stock
or distribute this Prospectus to any person within the United States or Canada
or to any United States Person or Canadian Person. The foregoing limitations do
not apply to stabilization transactions or to certain other transactions
specified in the Agreement Between described below. As used herein, "United
States Person" means any individual who is resident in the United States, or any
corporation, pension, profit-sharing or other trust or other entity organized
under or governed by the laws of the United States or any political subdivision
thereof (other than a foreign branch of any United States Person), and includes
any United States branch of a non-United States Person. "Canadian Person" means
any individual who is resident in Canada, or any corporation, pension,
profit-sharing or other trust or other entity organized under or
47
<PAGE> 70
governed by the laws of Canada or any political subdivision thereof (other than
a foreign branch of any Canadian Person), and includes any Canadian branch of a
non-Canadian Person.
The U.S. Underwriters and the International Underwriters have entered into
an Agreement between U.S. and International Underwriters (the "Agreement
Between") that provides for the coordination of their activities. Pursuant to
the Agreement Between, sales may be made between the U.S. Underwriters and the
International Underwriters of such number of shares of Common Stock as may be
mutually agreed upon. The per share price of any shares so sold shall be the
public offering price, less an amount not greater than the per share amount of
the concession to dealers set forth above. To the extent there are sales between
the U.S. Underwriters and the International Underwriters, the number of shares
of Common Stock initially available for sale by the U.S. Underwriters or by the
International Underwriters may be more or less than the amount appearing on the
cover page of this Prospectus.
The Selling Stockholders have granted to the U.S. Underwriters an option,
expiring at the close of business on the 45th day subsequent to the date of this
Prospectus, to purchase up to an aggregate of 900,000 additional shares of
Common Stock at the public offering price set forth on the cover page of this
Prospectus, less underwriting discounts and commissions. The U.S. Underwriters
may exercise such option only to cover over-allotments, if any, incurred in the
sale of the shares. To the extent that the option is exercised, each of the U.S.
Underwriters will be obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the percentage it
is required to purchase of the total number of shares of Common Stock it was
obligated to purchase under the U.S. Underwriting Agreement.
ALC and its directors and officers, the Selling Stockholders, Grumman Hill
and Grumman Hill L.P. have agreed not to offer, sell or otherwise dispose of any
shares of Common Stock except in certain limited circumstances for a period of
180 days (or, in the case of the Selling Stockholders, with respect to an
underwritten public offering as to which a registration statement has become
effective, 120 days) after the date of this Prospectus without the prior written
consent of the U.S. Underwriters.
The Company and the Selling Stockholders have agreed to indemnify the U.S.
Underwriters and the International Underwriters against certain liabilities,
including liabilities under the Act, or to contribute to payments which the U.S.
Underwriters and the International Underwriters may be required to make in
respect thereof.
In connection with the 1992 and 1993 Equity Offerings, PaineWebber
Incorporated and Wheat, First Securities, Inc., and in connection with the 1993
Note Offering, the U.S. Underwriters, for their services as underwriters and
representatives of the underwriters, received customary underwriters' discounts
and commissions.
48
<PAGE> 71
LEGAL MATTERS
The legality of the securities offered hereby has been passed upon for ALC
by Jaffe, Raitt, Heuer & Weiss, Professional Corporation, Detroit, Michigan.
Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York, is acting as
counsel for the Underwriters in connection with certain legal matters relating
to the sale of the shares of Common Stock offered hereby.
EXPERTS
The consolidated financial statements of ALC Communications Corporation and
consolidated subsidiary at December 31, 1992 and 1991, and each of the three
years in the period ending December 31, 1992, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young, independent auditors,
as set forth in their report thereon appearing elsewhere herein, and in the
Registration Statement, and are included in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
49
<PAGE> 72
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONSOLIDATED BALANCE SHEETS as of June 30, 1993 (unaudited) and December 31, 1992...... F-2
CONSOLIDATED STATEMENTS OF INCOME for the three and six months ended
June 30, 1993 and 1992 (unaudited)................................................... F-3
CONSOLIDATED STATEMENTS OF CASH FLOWS for the six months ended
June 30, 1993 and 1992 (unaudited)................................................... F-4
CONSOLIDATED STATEMENT OF CLASS A PREFERRED STOCK AND
STOCKHOLDERS' EQUITY for the six months ended June 30, 1993 (unaudited).............. F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the six months ended
June 30, 1993 and 1992............................................................... F-6
REPORT OF INDEPENDENT AUDITORS......................................................... F-9
CONSOLIDATED BALANCE SHEETS as of December 31, 1992 and 1991........................... F-10
CONSOLIDATED STATEMENTS OF OPERATIONS for the years ended
December 31, 1992, 1991 and 1990..................................................... F-11
CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended
December 31, 1992, 1991 and 1990..................................................... F-12
CONSOLIDATED STATEMENTS OF CLASS A PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT for the years ended December 31, 1992, 1991 and 1990........... F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended
December 31, 1992, 1991 and 1990..................................................... F-14
</TABLE>
F-1
<PAGE> 73
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER
JUNE 30, 31,
1993 1992
----------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets:
Cash......................................................................... $ 2,100 $ 112
Accounts receivable, less allowance for doubtful accounts of $3,392,000 and
$3,334,000................................................................. 53,319 45,327
Other current assets......................................................... 8,361 3,000
----------- -----------
Total Current Assets..................................................... $ 63,780 $ 48,439
Fixed Assets:
Communication systems........................................................ $ 75,346 $ 74,002
Other equipment and leasehold improvements................................... 30,565 28,371
Construction in progress..................................................... 4,186 3,443
----------- -----------
$ 110,097 $ 105,816
Less accumulated depreciation and amortization............................... 68,518 63,872
----------- -----------
Total Fixed Assets....................................................... $ 41,579 $ 41,944
Cost in excess of net assets acquired.......................................... 49,554 50,317
Deferred taxes and other assets................................................ 11,701 2,566
----------- -----------
Total Assets............................................................. $ 166,614 $ 143,266
----------- -----------
----------- -----------
LIABILITIES, CLASS A PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable............................................................. $ 1,242 $ 3,508
Accrued liabilities.......................................................... 13,600 11,895
Accrued network costs........................................................ 33,346 28,676
Taxes other than income...................................................... 10,428 9,889
Revolving Credit Facility.................................................... 14,802
Notes payable, capitalized leases and other long-term debt................... 860 11,417
----------- -----------
Total Current Liabilities................................................ $ 59,476 $ 80,187
Revolving Credit Facility...................................................... 4,871
Notes payable, capitalized leases and other long-term debt..................... 3,455 12,308
Senior Subordinated Notes...................................................... 84,313
Subordinated Notes............................................................. 61,983
Class A Preferred Stock, $0.01 par value; authorized -- 2,500,000 shares;
issued and outstanding -- 356,000 shares, aggregate redemption value of
$7,119,000 less discount of $319,000 and $364,000 plus accrued but undeclared
dividends of $3,125,000 and $2,904,000....................................... 9,925 9,659
Stockholders' Equity (Deficit):
Class B Preferred Stock, $0.01 par value; authorized, issued and outstanding
-- none and 1,000,000 shares............................................... 10
Class C Preferred Stock, $0.01 par value; authorized, issued and outstanding
-- none and 1,000,000 shares............................................... 10
Preferred Stock, $0.01 par value; authorized -- 14,784,000 shares; issued and
outstanding -- none........................................................
Common Stock, par value $0.01; authorized -- 200,000,000 shares; issued and
outstanding -- 28,939,000 and 23,794,000 shares............................ 289 238
Capital in excess of par value............................................... 114,221 110,146
Paid-in capital -- Warrants.................................................. 15,955 17,022
Accumulated deficit.......................................................... (125,891) (148,297)
----------- -----------
Total Stockholders' Equity (Deficit)..................................... $ 4,574 $ (20,871)
----------- -----------
Total Liabilities, Class A Preferred Stock and Stockholders' Equity
(Deficit).................................................................... $ 166,614 $ 143,266
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements
F-2
<PAGE> 74
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1993 1992 1993 1992
-------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue............................................. $104,233 $ 92,659 $206,077 $184,702
Operating Expenses:
Cost of communication services.................... $ 56,824 $ 55,236 $112,291 $111,286
Sales, general and administrative................. 29,575 25,671 58,090 51,255
Depreciation and amortization..................... 2,826 2,830 5,680 5,573
-------- -------- -------- --------
Total Operating Expenses..................... $ 89,225 $ 83,737 $176,061 $168,114
-------- -------- -------- --------
Operating Income............................. $ 15,008 $ 8,922 $ 30,016 $ 16,588
Interest expense (net of interest & other income of
$79,000, $57,000, $131,000 and $137,000).......... 2,866 4,214 6,520 8,413
-------- -------- -------- --------
Income Before Income Taxes, Extraordinary Items and
Cumulative Effect of Accounting Change............ $ 12,142 $ 4,708 $ 23,496 $ 8,175
Income taxes........................................ 3,750 1,996 7,100 3,522
-------- -------- -------- --------
Income Before Extraordinary Items and Cumulative
Effect of Accounting Change....................... $ 8,392 $ 2,712 $ 16,396 $ 4,653
Extraordinary Items:
Loss on early retirement of debt (net of income
tax benefit of $4,000,000)..................... (7,490) (7,490)
Utilization of operating loss carryforward........ 1,722 3,048
Cumulative effect of change in method of accounting
for income taxes.................................. 13,500
-------- -------- -------- --------
Net Income................................... $ 902 $ 4,434 $ 22,406 $ 7,701
-------- -------- -------- --------
-------- -------- -------- --------
Earnings per common and common equivalent share:
Income before extraordinary items and cumulative
effect of accounting change.................... $ 0.23 $ 0.07 $ 0.46 $ 0.09
Extraordinary items:
Loss on early retirement of debt............... $ (0.21) $ (0.21)
Utilization of operating loss carryforward..... $ 0.08 $ 0.15
Cumulative effect of change in method of
accounting for income taxes.................... $ 0.38
-------- -------- -------- --------
Net Income........................................ $ 0.02 $ 0.15 $ 0.63 $ 0.24
-------- -------- -------- --------
-------- -------- -------- --------
Weighted Average Common and Common Equivalent
Shares............................................ 35,635 20,634 35,058 20,633
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 75
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
JUNE 30, JUNE 30,
1993 1992
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Operating Activities:
Net income............................................................. $ 22,406 $ 7,701
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization....................................... 6,629 6,195
Loss on sale of assets.............................................. 3 46
Cumulative effect of change in accounting principle................. (13,500)
Extraordinary loss on early retirement of debt...................... 7,490
Gain on debenture retirement........................................ (60)
Increase in accounts receivable and other current assets............ (7,116) (4,710)
Increase (decrease) in current liabilities.......................... 10,828 (5,014)
-------- --------
Net Cash Provided by Operating Activities...................... $ 26,740 $ 4,158
Financing Activities:
Proceeds from (payments on) Revolving Credit Facility.................. $ (9,931) $ 3,915
Proceeds from long-term debt........................................... 84,310 325
Payments on long-term debt............................................. (20,560) (3,761)
Proceeds from issuance of stock........................................ 3,305 30
Retirement of debentures............................................... (74,319) (75)
-------- --------
Net Cash Provided by (Used in) Financing Activities............ $(17,195) $ 434
Investing Activities:
Expenditures for fixed assets.......................................... $ (4,049) $ (3,828)
Change in other non-current assets..................................... (3,512) (849)
Proceeds from sale of fixed assets..................................... 4 15
-------- --------
Net Cash Used in Investing Activities.......................... $ (7,557) $ (4,662)
-------- --------
Increase (decrease) in Cash During Period...................... $ 1,988 $ (70)
Cash at beginning of period.............................................. 112 223
-------- --------
Cash at end of period.................................................... $ 2,100 $ 153
-------- --------
-------- --------
Interest paid............................................................ $ 5,770 $ 3,613
-------- --------
-------- --------
Income taxes paid........................................................ $ 2,188 $ 449
-------- --------
-------- --------
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 76
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENT OF CLASS A PREFERRED STOCK AND STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1993
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
-------------------------
CLASS C
CLASS A CLASS B PREFERRED
PREFERRED STOCK PREFERRED STOCK STOCK
--------------- --------------- -------
SHARES AMOUNT SHARES AMOUNT SHARES
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992....................................................... 356 $9,659 1,000 $ 10 1,000
Accretion of discount on Class A Preferred Stock................................. 45
Accrued undeclared dividends on Class A Preferred Stock.......................... 221
Conversion of Class B Preferred to Common Stock.................................. (1,000) (10)
Conversion of Class C Preferred to Common Stock.................................. (1,000)
Exercise of options..............................................................
Exercise of Warrants.............................................................
Net income for the six months ended June 30, 1993................................
-- ------ ------ -- -------
Balance, June 30, 1993........................................................... 356 $9,925 0 $ 0 0
--- ------ ------ ---- -------
--- ------ ------ ---- -------
<CAPTION>
PAID-IN-CAPITAL
COMMON STOCK -- WARRANTS
--------------- ----------------
AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ -------
<S> <C> <C> <C> <C>
Balance, December 31, 1992....................................................... $ 10 23,794 $238 8,869 $17,022
Accretion of discount on Class A Preferred Stock.................................
Accrued undeclared dividends on Class A Preferred Stock..........................
Conversion of Class B Preferred to Common Stock.................................. 1,898 19
Conversion of Class C Preferred to Common Stock.................................. (10) 1,898 19
Exercise of options.............................................................. 370 3
Exercise of Warrants............................................................. 979 10 (979) (1,067)
Net income for the six months ended June 30, 1993................................
-- ------ ------ ------ -------
Balance, June 30, 1993........................................................... $ 0 28,939 $289 7,890 $15,955
-- ------ ------ ------ -------
-- ------ ------ ------ -------
<CAPTION>
CAPITAL
IN
EXCESS OF ACCUMULATED
PAR VALUE DEFICIT TOTAL
--------- ----------- --------
<S> <C> <C> <C>
Balance, December 31, 1992....................................................... $ 110,146 $(148,297) $(20,871)
Accretion of discount on Class A Preferred Stock................................. (45) (45)
Accrued undeclared dividends on Class A Preferred Stock.......................... (221) (221)
Conversion of Class B Preferred to Common Stock.................................. (9) 0
Conversion of Class C Preferred to Common Stock.................................. (9) 0
Exercise of options.............................................................. 1,297 1,300
Exercise of Warrants............................................................. 3,062 2,005
Net income for the six months ended June 30, 1993................................ 22,406 22,406
--------- ----------- --------
Balance, June 30, 1993........................................................... $ 114,221 $(125,891) $ 4,574
--------- ----------- --------
--------- ----------- --------
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 77
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1993 AND 1992
NOTE A -- MANAGEMENT'S REPRESENTATION
The consolidated financial statements included herein have been prepared by
ALC management, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and note disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. Certain prior year amounts have been reclassified to
conform to current year presentation. In the opinion of ALC management, all
adjustments considered necessary for a fair presentation have been included and
are of a normal recurring nature, and the accompanying consolidated financial
statements present fairly the financial position as of June 30, 1993 and
December 31, 1992, the results of operations and cash flows for the three and
six month periods ended June 30, 1993 and 1992.
The balance sheet at December 31, 1992 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. It is suggested that these consolidated financial
statements be read in conjunction with the financial statements and notes
included in the Company's Form 10-K for the fiscal year ended December 31, 1992.
NOTE B -- 1993 FINANCING ACTIVITIES
In March 1993, an equity offering was completed in which an aggregate of
10,350,000 shares of ALC Common Stock were sold by certain stockholders of ALC
at $14.25 per share. A group of five banks ("Banks") sold 8,386,216 shares of
this ALC Common Stock, of which 3,796,000 were received upon conversion of all
the Class B and Class C Preferred Stock. Upon completion of this offering, the
Banks held an aggregate of 4,321,784 shares of ALC Common Stock, representing
15.0% of the total voting power of ALC capital stock (10.9% assuming the
exercise of certain warrants and options). The Prudential Insurance Company of
America ("Prudential") sold the remaining 1,963,784 shares of which 963,784
represented the exercise of certain 1990 Warrants. ALC did not receive any of
the proceeds from the sale of these shares in the 1993 equity offering, although
it did receive $1.9 million upon Prudential's exercise of certain 1990 Warrants.
The Banks have further reduced their ownership interest in the Company to a
minimal position through subsequent sales and the transfer of other shares to
Prudential by four of the five banks.
In May 1993, the Company completed an offering of $85.0 million 9.0% Senior
Subordinated Notes ("1993 Notes"). Interest on the 1993 Notes is payable
semiannually commencing November 15, 1993. The 1993 Notes will mature on May 15,
2003, but are redeemable at the option of the Company on or after May 15, 1998.
In the event of a change of control, the holders have the right to require the
Company to purchase all or part of the 1993 Notes. Management used the $84.3
million of proceeds of this offering to repay the outstanding 1992 Notes in the
aggregate amount of $72.4 million, and to reduce the amount outstanding under
the Revolving Credit Facility. As a result of repaying the 11 7/8% Subordinated
Notes an extraordinary loss of $11.4 million was recorded on the early
retirement. The loss reflected the difference between the carrying value and the
redemption value of the debt as well as the write off of issuance costs. The
transaction was recorded with a net tax effect of $4.0 million.
Additionally, as of June 30, 1993, the Company executed an agreement for a
$40.0 million line of credit, replacing the previous facility. The new Revolving
Credit Facility expires June 30, 1995. Under the Revolving Credit Agreement, the
Company is able to minimize interest expense by structuring the borrowings under
any of three alternatives. Each alternative has a varying interest rate
calculation associated with it. Costs to the Company currently approximate 6%
per annum. The agreement includes financial covenants which may allow the
Company to further reduce interest expense beginning in July 1994. A .375% per
annum charge is made on the unused portion of the line. Advances under the
Revolving Credit Facility are made based on the level of eligible receivables.
As of July 1, 1993, the Company had $33.8 million of availability under the
line.
F-6
<PAGE> 78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- INCOME TAXES
Effective January 1, 1993, the Company adopted the Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes" ("Statement
109"). Under Statement 109, the liability method is used in accounting for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Prior to
the adoption of Statement 109, income tax expense was determined using the
deferred method.
As permitted by Statement 109, the Company has elected not to restate the
financial statements of any prior years. The cumulative effect of the change
increased net income by $13.5 million or $0.38 per share as of January 1, 1993.
The transfer of ALC Common Stock, Class B Preferred and Class C Preferred
by CTI to the Banks in August 1992 resulted in an ownership change with an
Internal Revenue Code Section 382 limitation of approximately $10.0 million per
annum. As a result of this annual limitation, along with the 15 year
carryforward limitation, the maximum cumulative net operating losses ("NOLs")
and investment tax credits which can be utilized for federal income tax purposes
in 1993 and future years are limited to approximately $130.0 million. For
financial reporting purposes, deferred tax assets of $48.0 million representing
primarily the future tax benefits related to those carryforwards have been
recorded and a valuation allowance of $38.0 million has been recognized to
offset these deferred tax assets. The resulting net asset recorded represents
three years of NOL benefit. The Company has taken a conservative position that
realization of the benefit of the NOLs beyond the three year period is difficult
to predict and therefore was not recorded.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of June 30, 1993 are as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Net operating loss carryforwards.............................................. $ 48,000
Allowance for doubtful accounts............................................... 1,234
Depreciation.................................................................. 867
Compensation liabilities...................................................... 683
Capital leases................................................................ 588
Other......................................................................... 128
--------------
Total deferred tax assets..................................................... 51,500
Valuation allowance........................................................... (38,000)
--------------
Net deferred tax assets....................................................... $ 13,500
--------------
--------------
</TABLE>
The difference between the statutory federal income tax rate of 34.0% and
the effective rate for the six months ended June 30, 1993 of 30.2% results
primarily from state income taxes, goodwill amortization, and the utilization of
NOLs. The difference between the effective rate for the six months ended June
30, 1993 and the year ended December 31, 1992 results primarily from recognizing
the NOL tax benefits in accordance with Statement 109.
NOTE D -- SUBSEQUENT EVENTS
During July 1993, the Company acquired the specialized 800 customer base of
Call Home America, Inc. The purchase price was comprised of: (1) approximately
$15 million paid in July 1993 and (2) a payment to be made based on 150% of
average monthly revenue generated by the customers in April, May and June 1994.
Call Home America, Inc. has approximately 50,000 customers, including parents of
college students and frequent travelers, who will continue to receive services
under the Call Home America (R) name. The current
F-7
<PAGE> 79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
level of annualized revenue is approximately $20 million. These customers will
be offered other telecommunications services by Allnet.
In July 1993, the Company declared a quarterly dividend of $0.32 per share
on each of the 355,956 outstanding shares of Class A Preferred Stock. The
dividend is payable September 30, 1993 to stockholders of record at the close of
business September 13, 1993. The dividends were determined according to the
Company's Restated Certificate of Incorporation.
F-8
<PAGE> 80
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
ALC Communications Corporation
We have audited the accompanying consolidated balance sheets of ALC
Communications Corporation and consolidated subsidiary as of December 31, 1992
and 1991, and the related consolidated statements of operations, cash flows, and
preferred stock and stockholders' deficit for each of the three years in the
period ended December 31, 1992. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ALC Communications
Corporation and consolidated subsidiary at December 31, 1992 and 1991, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1992, in conformity with generally
accepted accounting principles.
ERNST & YOUNG
January 25, 1993
Detroit, Michigan
F-9
<PAGE> 81
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1992 1991
------------ ------------
<S> <C> <C>
(IN THOUSANDS)
ASSETS
Current Assets:
Cash.................................................................. $ 112 $ 223
Accounts receivable, less allowance for doubtful accounts of
$3,334,000 and
$3,676,000 (Note C)................................................. 45,327 42,979
Other current assets.................................................. 3,000 1,875
------------ ------------
Total Current Assets........................................... $ 48,439 $ 45,077
Fixed Assets: (Notes A, C & E)
Communication systems................................................. $ 74,002 $ 70,384
Other equipment and leasehold improvements............................ 28,371 27,695
Construction in progress.............................................. 3,443 1,349
------------ ------------
$105,816 $ 99,428
Less accumulated depreciation and amortization........................ 63,872 57,761
------------ ------------
Total Fixed Assets............................................. $ 41,944 $ 41,667
Cost in excess of net assets acquired less accumulated amortization of
$10,673,000 and $9,149,000 (Note A)................................... 50,317 51,841
Other assets............................................................ 2,566 2,261
------------ ------------
Total Assets................................................... $143,266 $ 140,846
------------ ------------
------------ ------------
LIABILITIES, CLASS A PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable and accrued liabilities.............................. $ 15,403 $ 10,218
Accrued network costs................................................. 28,676 34,716
Taxes other than income............................................... 9,889 10,181
Revolving Credit Facility (Notes B & C)............................... 14,802 9,402
Notes payable, capitalized leases and other long-term debt
(Notes B, C, E, & G)................................................ 11,417 42,616
Senior Subordinated Debentures (Notes B & C).......................... 29,640
Class A Preferred Stock (Notes B & D)................................. 1,018
------------ ------------
Total Current Liabilities...................................... $ 80,187 $ 137,791
Notes payable, capitalized leases and other long-term debt (Notes B, C,
E, & G)............................................................... 12,308 3,261
Subordinated Notes (Notes B & C)........................................ 61,983
Senior Subordinated Debentures (Notes B & C)............................ 39,660
Class A Preferred Stock, $0.01 par value; authorized -- 2,500,000
shares; issued and outstanding -- 356,000 and 2,500,000 shares,
aggregate redemption value of $7,119,000 and $48,928,000 less discount
of $364,000 and $2,994,000 plus accrued but undeclared dividends of
$2,904,000 and $16,500,000 (Notes B & D).............................. 9,659 62,434
Stockholders' Deficit:
Class B Preferred Stock, $0.01 par value; authorized, issued and
outstanding -- 1,000,000 shares (Notes F & G)....................... 10 10
Class C Preferred Stock, $0.01 par value; authorized, issued and
outstanding -- 1,000,000 shares (Notes F & G)....................... 10 10
Preferred Stock, $0.01 par value; authorized -- 14,784,000 shares;
issued and outstanding -- none......................................
Common Stock, par value $0.01; authorized -- 200,000,000 shares;
issued and outstanding -- 23,794,000 and 17,221,000 shares (Notes B,
C & F).............................................................. 238 172
Capital in excess of par value........................................ 110,146 57,718
Paid-in capital -- Warrants (Notes C & E)............................. 17,022 8,913
Accumulated deficit................................................... (148,297) (169,123)
------------ ------------
Total Stockholders' Deficit.................................... $(20,871) $ (102,300)
------------ ------------
Total Liabilities, Class A Preferred Stock and Stockholders'
Deficit........................................................... $143,266 $ 140,846
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements
F-10
<PAGE> 82
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1992 1991 1990
-------- -------- --------
<S> <C> <C> <C>
(IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
Revenue................................................ $376,064 $346,873 $326,004
Operating Expenses:
Cost of communication services, including amounts
with related parties of $16,004,000, $18,000,000
and $22,553,000 (Note G).......................... $216,889 $212,716 $209,612
Sales, general and administrative.................... 107,294 97,964 102,838
Depreciation and amortization........................ 11,197 12,343 13,320
Financial restructuring.............................. 2,987
-------- -------- --------
Total Operating Expenses........................ $335,380 $323,023 $328,757
-------- -------- --------
Operating Income (Loss)......................... $ 40,684 $ 23,850 $ (2,753)
Interest expense including amounts with related parties
of $5,000,000, $4,640,000 and $2,887,000 (net of
interest and other income (expense) of ($369,000),
$278,000, and $675,000).............................. 17,158 18,128 21,250
Gain on sale of subsidiary............................. 4,360
-------- -------- --------
Income (Loss) before Income Taxes and Extraordinary
Item................................................. $ 23,526 $ 5,722 $(19,643)
Income taxes (Note H).................................. 9,700 3,005
-------- -------- --------
Income (loss) before Extraordinary Item................ $ 13,826 $ 2,717 $(19,643)
Extraordinary item -- utilization of operating loss
carryforwards (Note H)............................... 7,000 2,630
-------- -------- --------
Net Income (Loss)............................... $ 20,826 $ 5,347 $(19,643)
-------- -------- --------
-------- -------- --------
Income (loss) per common and common equivalent share
before extraordinary item (Note F)................... $ 0.43 $ (0.17) $ (2.29)
-------- -------- --------
-------- -------- --------
Net income (loss) per common and common equivalent
share (Note F)....................................... $ 0.74 $ (0.02) $ (2.29)
-------- -------- --------
-------- -------- --------
Weighted average common and common equivalent shares... 22,141 17,216 11,074
-------- -------- --------
-------- -------- --------
</TABLE>
See notes to consolidated financial statements
F-11
<PAGE> 83
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1992 1991 1990
-------- -------- --------
<S> <C> <C> <C>
(IN THOUSANDS)
Operating Activities
Net income (loss)............................................ $ 20,826 $ 5,347 $(19,643)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Gain from sale of subsidiary.............................. (4,360)
Non-cash restructuring expense............................ 716
Depreciation expense...................................... 9,372 10,508 11,435
Amortization of intangible assets and bond discount....... 4,415 3,520 4,637
Accrued interest converted to debentures.................. 7,998 4,246
Loss on sale of assets.................................... 722 95
Gain on debenture retirement.............................. (59)
(Increase) decrease in accounts receivable and other
current assets.......................................... (3,371) 2,558 (4,485)
Increase (decrease) in current liabilities................ (1,523) (2,774) 2,172
-------- -------- --------
Net Cash Provided by (Used in) Operating Activities..... $ 30,382 $ 27,252 $ (5,282)
Financing Activities
Proceeds from (payments on) Revolving Credit Facility
(Notes B & C)............................................. $ 5,400 $ (9,896) $ 3,317
Proceeds from long-term debt................................. 1,321 7,707
Payments on long-term debt................................... (22,818) (12,562) (13,142)
Proceeds from issuance of stock (Note F)..................... 607 109 738
Contract payment to the Class A Preferred Group (Note D)..... (1,286)
Payment of stock issuance costs.............................. (620)
Retirement of debentures (Note C)............................ (947)
-------- -------- --------
Net Cash Used in Financing Activities..................... $(19,664) $(21,028) $ (1,380)
Investing Activities
Expenditures for fixed assets................................ $(10,254) $ (6,401) $ (5,108)
Transfer lease security deposit to current................... 5,599
Change in other non-current assets........................... (596) (67) 686
Proceeds from sale of fixed assets........................... 21 125 353
Proceeds from sale of subsidiary............................. 5,234
-------- -------- --------
Net Cash Provided by (Used in) Investing Activities....... $(10,829) $ (6,343) $ 6,764
-------- -------- --------
Increase (Decrease) in Cash During Year................... $ (111) $ (119) $ 102
Cash at beginning of year...................................... 223 342 240
-------- -------- --------
Cash at end of year............................................ $ 112 $ 223 $ 342
-------- -------- --------
-------- -------- --------
Interest paid.................................................. $ 15,572 $ 9,945 $ 9,541
-------- -------- --------
-------- -------- --------
Income taxes paid.............................................. $ 1,862 $ 225 $ 0
-------- -------- --------
-------- -------- --------
</TABLE>
See notes to consolidated financial statements
F-12
<PAGE> 84
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CLASS A PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
<TABLE>
<CAPTION>
STOCKHOLDERS' DEFICIT
---------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS D
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
---------------- --------------- --------------- --------------- ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------- ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Balance, December 31, 1989.............. 2,500 $52,007 1,000 $ 10 1,000 $ 10 2,747 $ 27
Accretion of discount on Class A
Preferred Stock....................... 1,384
Employee stock purchases (Note F)....... 70 1
Accrued undeclared dividends on Class A
Preferred Stock (Note D).............. 4,000
Accretion of contract payment to the
Class A Preferred Group............... 375
Issuance of Class D Preferred Stock
(Note F).............................. 716 $7
Issuance of warrants (Note C)...........
Conversion of Class D Preferred Stock to
Common Stock (Note F)................. (716) (7) 14,324 143
Net loss for the year ended December 31,
1990..................................
------ ------- ------ ------ ------ ------ ------ -- ------ -------
Balance, December 31, 1990.............. 2,500 $57,766 1,000 $ 10 1,000 $ 10 0 $0 17,141 $171
Accretion of discount on Class A
Preferred Stock....................... 1,043
Employee stock purchases (Note F)....... 71 1
Accrued undeclared dividends on Class A
Preferred Stock (Note D).............. 4,000
Accretion of contract payment to the
Class A Preferred Group............... 643
Exercise of Stock Options (Note F)...... 9
Net income for the year ended December
31, 1991..............................
------ ------- ------ ------ ------ ------ ------ -- ------ ------
Balance, December 31, 1991.............. 2,500 $63,452 1,000 $ 10 1,000 $ 10 0 $0 17,221 $172
Accretion of discount on Class A
Preferred Stock....................... 860
Accrued undeclared dividends on Class A
Preferred Stock (Note D).............. 3,254
Accretion of contract payment to the
Class A Preferred Group............... 268
Contract payment to the Class A
Preferred Group....................... (1,286)
Exercise of Stock Options (Note F)...... 174 2
Issuance of warrants (Notes B & C)......
Repricing of warrants (Notes B & C).....
Conversion of Class A Preferred Stock to
Common Stock (Notes B & D)............ (2,144) (56,889)
Issuance of Common Stock
(Notes B & D)......................... 6,399 64
Stock Issuance costs....................
Net income for the year ended December
31, 1992..............................
------ ------- ------ ------ ------ ------ ------ -- ------ ------
Balance, December 31, 1992.............. 356 $ 9,659 1,000 $ 10 1,000 $ 10 0 $0 23,794 $238
------ ------- ------ ------ ------ ------ ------ -- ------ ------
------ ------- ------ ------ ------ ------ ------ -- ------ ------
<CAPTION>
PAID-IN CAPITAL
-- WARRANTS CAPITAL IN ACCUM-
---------------- EXCESS ULATED
SHARES AMOUNT PAR VALUE DEFICIT TOTAL
------ ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1989.............. 660 $ 8,484 $ 68,174 $ (154,827) $ (78,122)
Accretion of discount on Class A
Preferred Stock....................... (1,384) (1,384)
Employee stock purchases (Note F)....... 308 309
Accrued undeclared dividends on Class A
Preferred Stock (Note D).............. (4,000) (4,000)
Accretion of contract payment to the
Class A Preferred Group............... (375) (375)
Issuance of Class D Preferred Stock
(Note F).............................. 709 716
Issuance of warrants (Note C)........... 4,809 429 429
Conversion of Class D Preferred Stock to
Common Stock (Note F)................. (136) 0
Net loss for the year ended December 31,
1990.................................. (19,643) (19,643)
------ ------- ---------- ---------- ----------
Balance, December 31, 1990.............. 5,469 $ 8,913 $ 63,296 $ (174,470) $ (102,070)
Accretion of discount on Class A
Preferred Stock....................... (1,043) (1,043)
Employee stock purchases (Note F)....... 79 80
Accrued undeclared dividends on Class A
Preferred Stock (Note D).............. (4,000) (4,000)
Accretion of contract payment to the
Class A Preferred Group............... (643) (643)
Exercise of Stock Options (Note F)...... 29 29
Net income for the year ended December
31, 1991.............................. 5,347 5,347
------ ------- ---------- ---------- ----------
Balance, December 31, 1991.............. 5,469 $ 8,913 $ 57,718 $ (169,123) $ (102,300)
Accretion of discount on Class A
Preferred Stock....................... (860) (860)
Accrued undeclared dividends on Class A
Preferred Stock (Note D).............. (3,254) (3,254)
Accretion of contract payment to the
Class A Preferred Group............... (268) (268)
Contract payment to the Class A
Preferred Group.......................
Exercise of Stock Options (Note F)...... 605 607
Issuance of warrants (Notes B & C)...... 3,400 3,400 3,400
Repricing of warrants (Notes B & C)..... 4,709 4,709
Conversion of Class A Preferred Stock to
Common Stock (Notes B & D)............ 56,825 56,825
Issuance of Common Stock
(Notes B & D)......................... 64
Stock Issuance costs.................... (620) (620)
Net income for the year ended December
31, 1992.............................. 20,826 20,826
------ ------- ---------- ---------- ----------
Balance, December 31, 1992.............. 8,869 $17,022 $110,146 $ (148,297) $ (20,871)
------ ------- ---------- ---------- ----------
------ ------- ---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements
F-13
<PAGE> 85
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Corporate Structure
ALC Communications Corporation ("ALC") was incorporated in 1985 in order to
accomplish the combination of Allnet Communication Services, Inc. and Lexitel
Corporation ("Lexitel"). From August 1988 through August 1992, ALC was a
majority owned subsidiary of Communications Transmission, Inc. ("CTI") (see
Notes B & G). ALC and Allnet Communication Services Inc. are collectively
referred to herein as the "Company" or "Allnet".
In February 1988 the Company acquired all of the outstanding common stock
of Clark Telecommunications, Inc. of South Bend, Indiana for $2.8 million in
cash and notes. This company was operated as a wholly-owned subsidiary of Allnet
under the name CTI Telecommunications, Inc. On January 30, 1990, Allnet sold CTI
Telecommunications, Inc. in a cash transaction and recorded a gain of $4.4
million.
Description of Business
Allnet, the operating subsidiary of ALC, is a communications common carrier
licensed by the Federal Communications Commission to offer long distance
telephone and other communication services to both commercial and residential
subscribers. Allnet provides twenty-four hour long distance telephone services
terminating worldwide, utilizing a variety of transmission methods, primarily
fiber optic facilities and digital microwave.
Basis of Consolidation
The consolidated financial statements include the accounts of ALC and its
wholly-owned subsidiary, Allnet Communication Services, Inc. Significant
intercompany transactions have been eliminated.
Fixed Assets
Fixed assets are stated at cost. Depreciation is provided on the
straight-line method over the estimated useful lives or lease terms of the
assets. Maintenance and repairs are charged to operations as incurred.
Intangible Assets
The cost in excess of net assets acquired of $61.0 million, resulting from
the acquisition of Lexitel is being amortized on a straight line basis over 40
years. Amortization expense, including amortization of cost in excess of net
assets acquired and cost associated with the issuance of debentures, was $1.8
million, $1.8 million and $1.9 million for the years ended December 31, 1992,
1991 and 1990, respectively.
Revenue Recognition
Customers are billed as of monthly cycle dates. Revenue is recognized as
service is provided and unbilled usage is accrued.
Accrued Facility Costs
In the normal course of business, the Company estimates its accrual for
facility costs. Subsequently, the accrual is adjusted based on invoices received
from local exchange carriers.
Income Taxes
Income taxes are presently accounted for in accordance with Accounting
Principles Board Opinion No. 11. In February 1992, the Financial Accounting
Standards Board issued Statement of Financial
F-14
<PAGE> 86
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounting Standards No. 109 "Accounting for Income Taxes." The Company will
adopt this Statement as of January 1, 1993, the required implementation date.
Application of the new rules as of January 1, 1993, will result in the recording
of a net deferred tax asset of approximately $13.5 million related primarily to
the future tax benefits which are expected to be realized upon utilization of a
portion of the Company's net operating loss carryforwards ("NOLs"). Any
subsequent realization of NOLs will be reflected in the income tax provision in
the year realized and not as an extraordinary item. The Company has determined
it will not apply the Statement retroactively and thus will not restate prior
year financial statements to reflect adoption of the new rules.
Reclassifications
Certain prior year amounts have been reclassified to conform to current
year presentation.
NOTE B -- REFINANCING EVENTS
During 1992, the Company completed a comprehensive refinancing plan
("Refinancing") which included the rescheduling of substantially all debt and
resulted in significantly reduced or deferred debt service obligations. The
Refinancing provided a revised redemption and maturity schedule that will enable
the Company to meet these obligations from expected cash flow from operations.
The principal components of the 1992 phase of the Refinancing are outlined
in the following paragraphs.
- A "Note Exchange Offer" was completed as of August 6, 1992 whereby
the Company's Original Debentures, Replacement Debentures, PIK
Debentures, and accrued interest on the nonconsenting Debentures
totalling $73.3 million were replaced by 11 7/8% Subordinated Notes
of Allnet ("1992 Notes"). The Note Exchange Offer was agreed to by
98.8% of the then existing Debentureholders. The revised redemption
schedule of the 1992 Notes effectively reschedule the earliest
redemption from June 30, 1992 to September 30, 1995. As part of the
Note Exchange Offer, 3,400,000 Common Stock warrants ("1992
Warrants") were issued representing 10.2% of the fully-diluted
equity of ALC at an exercise price of $5.00 per share of Common
Stock.
- The Revolving Credit Facility was extended to June 30, 1993 and
modifications included a new participant and a reduction in the
borrowing rates.
- The Restructured Promissory Note was restated and extended to June
30, 1995 and a $5.0 million principal prepayment was made. The
amended terms provide for continuation of the 12% interest rate and
quarterly principal payments of $1.3 million commencing on September
15, 1992.
- The 1990 Note Agreements with a principal balance of approximately
$8.0 million were paid down and extended in conjunction with the
Refinancing and subsequently paid in full in December 1992.
- The 4,708,999 1990 Warrants held by General Electric Pension Trust,
Grumman Hill Investments Inc., Grumman Hill L.P. and Prudential were
amended to reduce the exercise price from $3.00 to $2.00 per share
in consideration for participating in the Refinancing.
- Equipment leases with a major switch vendor were renegotiated to be
repaid over 24 months with no change in the interest rate of 14%.
- The Company paid $2.0 million on June 4, 1992 to CTI and received an
$0.8 million note from a major holder of Class A Preferred (which
note was subsequently paid in full) and $1.2 million of prepaid
transmission capacity from Communications Transmission Group, Inc.
("CTGI"), an affiliate of CTI, to be utilized over a period of 37
months.
F-15
<PAGE> 87
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- On August 18, 1992, the 14,324,000 shares of Common Stock, 1,000,000
shares of Class B Preferred, and 1,000,000 shares of Class C
Preferred held by CTI were transferred to a group of five banks
("Banks") in exchange for the release of certain portions of CTI's
obligations to each of the Banks. The Class B Preferred and Class C
Preferred are convertible into 3,796,000 shares of Common Stock.
- Effective October 16, 1992, the Company commenced a stock offering
("1992 Equity Offering") for 9,863,600 shares of Common Stock at
$5.50 per share. A portion of the 1992 Equity Offering relating to
3,464,373 shares was to facilitate the sale of shares for existing
major holders including 3,000,000 shares held by the Banks.
- The remaining 6,399,227 shares that were part of the 1992 Equity
Offering were issued in conjunction with an Exchange Agreement
("Class A Exchange") with the major holders of the Class A Preferred
("Class A Preferred Group"). The members of the Class A Preferred
Group agreed to exchange the 2,144,044 Class A Preferred shares they
held with an aggregate redemption value of $58.7 million, including
all accrued and unpaid dividends, for shares of Common Stock at an
effective 40% discount.
On January 19, 1993 the Company filed a shelf registration with the
Securities and Exchange Commission for 19,500,909 shares held by certain
stockholders, or issuable upon exercise of certain outstanding warrants or
conversion of outstanding Class B Preferred and Class C Preferred. Several
factors, such as market conditions, will determine when and how many of these
shares will be sold. Any such offering of shares will provide for a broader
public ownership of the Company's Common Stock. None of the proceeds from these
stock sales will accrue to the Company other than through exercise of warrants
in connection with the shelf registration.
NOTE C -- LONG-TERM DEBT AND OTHER FINANCING
Long-term debt, including the amount due within one year, consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1992 1991
------- --------
(IN THOUSANDS)
<S> <C> <C>
Restructured Promissory Note.......................................... $12,566 $ 20,698
1990 Note Agreements.................................................. 7,961
11 7/8% Senior Subordinated Debentures due 1995 -- face value of
$55,000,000 less discount of $4,091,000............................. 50,909
Accrued interest on Debentures........................................ 18,391
11 7/8% Subordinated Notes due 1999 -- face value of $72,380,000 less
discount of $10,397,000............................................. 61,983
Capitalized lease obligations (see Note E)............................ 8,851 15,373
Other long-term debt.................................................. 2,308 1,845
------- --------
$85,708 $115,177
Due within one year................................................... 11,417 72,256
------- --------
$74,291 $ 42,921
------- --------
------- --------
</TABLE>
Revolving Credit Facility
The Revolving Credit Facility is a $30.0 million facility which expires on
June 30, 1993. The agreement allows for inclusion of up to 80% of billed and 45%
of unbilled receivables in eligible receivables under the line. Advances and
guarantees secured by billed receivables bear interest of 3.0% per annum in
excess of the reference rate (6.0% as of December 31, 1992); however, advances
secured by unbilled receivables bear
F-16
<PAGE> 88
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest of 3.75% per annum in excess of the reference rate. In addition, a 1/2%
per annum charge is made on the unused portion of the line.
As of December 31, 1992, the amount of credit available under the line was
$30.0 million and was reduced by the Company's borrowings of $14.8 million. The
unused portion of the line was $15.2 million.
Restructured Promissory Note
In the third quarter of 1989, the Company executed a $5.0 million note and
a $15.0 million note with CTI for bridge financing, both of which were due on
September 25, 1990. Terms of the notes required interest to be accrued at 18%,
payable quarterly commencing November 30, 1989. The Company failed to make the
interest payments due under those notes on February 26 and May 29, 1990. In June
1990, these notes were restructured into a note in the amount of $20.0 million
due on June 4, 1992. The agreement provided that interest payments from December
1, 1989 through December 31, 1990 and certain loan fees due to CTI were forgiven
(in the aggregate, approximately $4.2 million). Effective January 1, 1991, the
interest rate was lowered to 12% per annum, and interest became payable
quarterly beginning on March 31, 1991. The note is secured by a security
interest in substantially all of the assets of Allnet (generally, second in
priority behind the Company's Revolving Credit Facility).
During the third quarter of 1991, the note ("Restructured Promissory Note")
was sold to the Banks. In August 1992, the Restructured Promissory Note was
restated and extended to June 30, 1995 and a $5.0 million principal payment was
made. The amended terms provide for quarterly principal payments of $1.3 million
commencing on September 15, 1992. The interest rate remains at 12% per annum.
1990 Note Agreements
In June 1990, Allnet issued, pursuant to the 1990 Note Agreements, $7.2
million face amount of notes due June 4, 1992 ("1990 Notes") and warrants ("1990
Warrants"), valued at $0.4 million, to purchase up to 4,708,999 shares of its
Common Stock for total cash consideration of $7.2 million. In June 1992, the
1990 Note Agreements were extended to August 15, 1992 and the interest rate was
modified from 15% to 13%. In August 1992, the Company made a principal payment
of $3.4 million and the term for the remainder of the 1990 Notes was extended to
June 30, 1993. In December 1992, the 1990 Notes were paid in full.
In August 1992, in consideration for participating in the Refinancing, the
exercise price of the 1990 Warrants was modified from $3.00 per share to $2.00
per share. The 1990 Warrants expire on June 4, 2005. The purchase price and
number of shares purchasable are subject to adjustment in certain events
involving the Company's securities. One of the holders of the 1990 Warrants is
entitled to nominate a representative for election to the Board of Directors.
11 7/8% Senior Subordinated Debentures of ALC
Various terms and conditions under the Company's 11 7/8% Senior
Subordinated Debentures ("Original Debentures") were amended as of June 1, 1990
and agreed upon by approximately 96% of the Debentureholders. The amendment
("Replacement Debentures") included modifications to interest payments to the
consenting Debentureholders, including the acceptance of additional Debentures
("PIK Debentures") in lieu of cash as payment for certain interest payments. The
amendment also included modification of the mandatory redemption schedule for
the Original Debentures, Replacement Debentures and PIK Debentures (collectively
the "Debentures") held by the consenting Debentureholders. The Debentures held
by the nonconsenting Debentureholders were to be redeemed according to the
original schedule. At December 31, 1991, the book value of Debentures held by
nonconsenting Debentureholders maturing within one year of $1.4 million, and
accrued interest of $0.7 million on the nonconsenting Debentures were recorded
as current liabilities.
F-17
<PAGE> 89
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Original Debentures had been issued with detachable warrants
(exercisable until December 1995) to purchase 660,000 Common Shares at a price
of $63.75 per share, subject to adjustment in certain events. The cost
associated with the issuance of the Debentures, approximately $2.9 million is
included in other assets and is being amortized over 10 years.
In August 1992, the "Note Exchange Offer" was completed whereby the
Company's existing Debentures of $54.9 million face value, PIK Debentures of
$18.4 million face value and accrued interest on the nonconsenting Debentures
were replaced by 11 7/8% Subordinated Notes of Allnet. The Debentureholders who
did not agree to the Note Exchange Offer were paid in September 1992 the full
amount of their principal, the related PIK Debentures and accrued interest all
totalling approximately $0.9 million.
11 7/8% Subordinated Notes of Allnet
On August 6, 1992, Allnet issued the 1992 Notes with a face value of $72.4
million in exchange for the Company's Debentures (including PIK Debentures) and
accrued interest thereon. The 1992 Notes bear interest at 11 7/8% per annum
payable quarterly. The 1992 Notes have a redemption schedule which provides for
the mandatory equal quarterly redemption of 6.25% of principal beginning on
September 30, 1995 through June 30, 1999. The 1992 Notes are guaranteed by ALC
and are secured by a subordinated security interest in substantially all of the
assets of Allnet. The payment of dividends as well as stock repurchases are
restricted by terms of the Indenture. Since ALC conducts no other business than
as a holding company for Allnet, the guarantee of ALC will not provide the
Noteholders with any significant additional security.
The Indenture provides for a limitation on indebtedness of Senior
Indebtedness not to exceed $50.0 million, excluding capitalized leases, the
Revolving Credit Facility, Restructured Promissory Note and the 1992 Notes.
Indebtedness is subject to further tests which limit aggregate indebtedness,
excluding the Revolving Credit Facility to $106.0 million at December 31, 1992.
At December 31, 1992, the Company was limited to additional aggregate
indebtedness of $20.3 million. The Indenture also places restrictions on ALC or
Allnet from making any dividend, redemption or other payments with respect to
its equity securities.
The 1992 Notes were issued with 3,400,000 1992 Warrants exercisable at
$5.00 per share. The 1992 Warrants expire on June 30, 1997.
The difference of $3.4 million between the exercise price of the 1992
Warrants and the fair value of the Company's Common Stock at the time of
issuance has been recorded as a discount on the 1992 Notes and credited to
paid-in capital -- warrants. This portion of the 1992 Note discount is being
amortized over the life of the 1992 Warrants. The reduction in exercise price of
the 1990 Warrants of $4.7 million was recorded as a discount on the 1992 Notes
and an increase to paid-in capital -- warrants. The 1992 Note discount related
to the 1990 Warrants is being amortized over the life of the 1992 Notes.
Other Long-Term Debt
Other long-term debt includes notes payable of $0.2 million secured by
switches, leasehold improvements, office furniture and equipment. The carrying
value of the assets securing these notes is $0.2 million and $0.3 million at
December 31, 1992 and 1991. The average interest rate for this debt is 7%. The
remaining $2.1 million of other long term debt represents deferred liabilities
relating to certain operating leases.
F-18
<PAGE> 90
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Principal Requirements
The principal requirements of long-term debt at December 31, 1992 are as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Year Ended December 31:
1993.............................................................. $ 11,417
1994.............................................................. 8,593
1995.............................................................. 12,158
1996.............................................................. 18,258
1997.............................................................. 18,309
1998 and thereafter............................................... 27,370
--------------
$ 96,105
Less discount on 1992 Notes....................................... 10,397
--------------
$ 85,708
--------------
--------------
</TABLE>
NOTE D -- REDEEMABLE PREFERRED STOCK
As of December 31, 1992, the Company has 355,956 shares of Class A
Preferred outstanding with a redemption value of $7.1 million. Holders of Class
A Preferred are entitled to a number of votes equal to .166 of one vote per
share of Class A Preferred. These shares began accruing dividends at the rate of
$1.60 per annum in July 1987. As of December 31, 1992 and 1991, there were $2.9
million and $16.5 million in cumulative dividends in arrears, or $8.16 per share
and $6.60 per share, respectively on Class A Preferred. Under the General
Corporation Law of Delaware, the Company's state of incorporation, the Company
does not currently have adequate surplus to enable it to pay any dividends.
As of December 31, 1991, the Company had 2,500,000 shares of Class A
Preferred outstanding with a redemption value of $48.9 million plus accrued
dividends. In October 1992, pursuant to the Class A Exchange with the Class A
Preferred Group the Company exchanged 2,144,044 shares of Class A Preferred for
6,399,227 shares of Common Stock at an effective 40% discount.
As a result of the 1992 Equity Offering, the Company's mandatory redemption
obligation has been reduced to one scheduled payment of approximately $7.1
million (plus accrued and unpaid dividends) at December 31, 1996.
In accordance with the Restated Certificate of Incorporation of ALC
("Certificate") affecting Class A Preferred, the amount of the dividend which
shall accrue is equivalent to interest, on $20 per share, at a rate calculated
as the weighted average of 1% plus prime rate. Certain additional dividends will
accrue if the Company fails to pay the "Minimum Dividend" as described in the
Certificate.
In September 1992, ALC paid an aggregate amount of approximately $1.3
million to certain members of the Class A Preferred Group in connection with a
concession agreement with the Class A Preferred Group entered into in June 1990.
F-19
<PAGE> 91
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E -- LEASE TRANSACTIONS
Future minimum rental payments under capital leases and noncancellable
operating leases with initial or remaining terms of one or more years at
December 31, 1992 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
<S> <C> <C>
Year Ended December 31:
1993............................................................ $ 7,172 $ 33,417
1994............................................................ 2,613 27,114
1995............................................................ 63 23,902
1996............................................................ 24 20,401
1997............................................................ 15,064
1998 and thereafter............................................. 28,674
------- ---------
Minimum Lease Payments.......................................... $ 9,872 $ 148,572
---------
---------
Less amount representing interest............................... 1,021
-------
Present Value of Future Lease Payments.......................... $ 8,851
-------
-------
</TABLE>
Lease arrangements frequently include renewal options and/or bargain
purchase or fair market value purchase options, and for leases relating to
office space, rent increases based on the Consumer Price Index or similar
indices.
Non-cancellable operating leases relate primarily to building and office
space, office equipment, and intercity transmission facilities. Rental expense
was $52.3 million, $56.9 million and $63.0 million for the years ended December
31, 1992, 1991 and 1990, respectively.
The amounts included in fixed assets financed by capital leases are:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1992 1991
------- -------
<S> <C> <C>
(IN THOUSANDS)
Communications systems.......................................... $19,878 $22,587
Other equipment and leasehold improvements...................... 912 1,088
------- -------
$20,790 $23,675
Accumulated depreciation........................................ 9,427 8,476
------- -------
$11,363 $15,199
------- -------
------- -------
</TABLE>
In June 1990, in connection with the Company's 1990 phase of its
Refinancing, the terms of a major capital lease agreement were revised to reduce
monthly payments with the difference deferred until the June 1992 termination
date. In consideration for the deferral of lease payments, the Company issued
warrants to purchase 100,000 Common Shares at a price of $3.00 per share to a
major lessor. In June 1992, the lease was renegotiated resulting in a lease
extension until May 1994. The interest rate was unchanged.
NOTE F -- EARNINGS PER SHARE AND STOCKHOLDERS' DEFICIT
Earnings per share
Earnings per share are computed using weighted average shares outstanding
and Common Stock equivalents. To arrive at income available for Common
Stockholders, the Company's net income or loss is adjusted by amounts relating
to the accretion of discount on Class A Preferred, the accretion of a contract
payment to certain members of the Class A Preferred Group and dividends on Class
A Preferred accrued but
F-20
<PAGE> 92
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not declared. Anti-dilutive securities include warrants and options and for 1991
and 1990 also include Class B and Class C Preferred Stock. Earnings per share
for the third and fourth quarters of 1992 include the impact of the exercise of
outstanding stock options and warrants utilizing the Treasury Stock Method. The
impact of the 1992 Equity Offering on earnings per share was not material.
Common Stock
On September 3, 1991, the Company effected a one-for-five reverse stock
split of all authorized and outstanding shares of the Company's Common Stock.
The number of authorized shares remained at 200,000,000. The par value of a
share of stock was unchanged. All share amounts used in the accompanying
financial statements and notes thereto have been adjusted to reflect the reverse
stock split.
Effective October 16, 1992, the Company commenced the 1992 Equity Offering
for 9,863,600 shares of Common Stock at $5.50 per share. A portion of the 1992
Equity Offering relating to 3,464,373 shares was to facilitate the sale of
shares for existing major stockholders. The remainder of 6,399,227 shares that
were part of the 1992 Equity Offering were issued in conjunction with the Class
A Exchange. ALC did not receive any proceeds from the sale of the shares.
Class B Preferred and Class C Preferred
In 1988, CTI purchased, for an aggregate purchase price of $30.0 million,
all the shares of the Company's Class B Preferred and Class C Preferred. On
August 18, 1992, all of the Class B Preferred and the Class C Preferred were
transferred to the Banks. Each share of Class B Preferred or Class C Preferred
may be converted, at the option of the holder, into 1.898 shares or a total of
3,796,000 common shares, subject to adjustment, for the outstanding Class B
Preferred and Class C Preferred. The holder of each share of Class B Preferred
or Class C Preferred is entitled to a preference in liquidation over holders of
any other class of capital stock in amounts ranging from $21.00 during the
period from July 1, 1992 to June 30, 1993 to $22.50 after June 30, 1993.
No dividends shall accrue or be payable on the Class B Preferred or Class C
Preferred. Holders of Class B Preferred and Class C Preferred are entitled to a
number of votes equal to the number of shares of Common Stock into which their
shares are convertible.
Conversion of Class D Preferred
In June 1990, ALC issued 716,200 shares of Class D Preferred to CTI in
exchange for the concessions relating to the Allnet contract with CTGI for
transmission capacity, concessions relating to the Restructured Promissory Note,
and for a waiver by CTI of certain anti-dilution rights under the Company's
Certificate relating to the shares of Class B Preferred and Class C Preferred
which would otherwise have resulted from the Refinancing. Effective October 12,
1990, upon the amendment of the Certificate to increase the number of authorized
shares of Common Stock to 200,000,000, each share of outstanding Class D
Preferred was converted into 20 shares of Common Stock. During 1992, the
authorized shares of Class D Preferred were retired by the Company.
Employee Stock Purchase Plan
In October 1988, the Board adopted and the stockholders approved an
Employee Stock Purchase Plan, which became effective January 1, 1989. During
1991 and 1990, 71,171, and 70,362 shares were issued under the plan,
respectively. The Plan was terminated as of employee contributions through
December 31, 1990 because total shares projected to be issued in the subsequent
six month period would have exceeded the shares authorized under the Plan. Final
shares were issued in January 1991.
F-21
<PAGE> 93
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employee Stock Options
In October 1988, the Board adopted and the stockholders approved an
increase in the number of shares issuable under the ALC 1986 Option Plan. In
September 1990, the Stockholders approved the 1990 Stock Option Plan. The
maximum number of shares for which options may be granted under both plans is
4,000,000 (adjusted for certain events such as a recapitalization). The plans
provide for the granting of stock options and stock appreciation rights to key
employees.
Shares under option are summarized below:
<TABLE>
<CAPTION>
OPTION PRICE
NUMBER ---------------------------------
OF PER
SHARES SHARE TOTAL
--------- ---------------- --------------
<S> <C> <C> <C>
(IN THOUSANDS)
Shares under option December 31, 1989.......... 870,476 $10.00 - $48.75 $ 12,415
Options cancelled.............................. (815,677) $ 5.00 - $21.25 (8,072)
Options regranted.............................. 815,677 $ 3.50 2,855
Options granted................................ 2,234,725 $ 3.50 - $ 5.00 8,001
Options terminated............................. (105,848) $ 3.50 - $48.75 (1,744)
--------- ---------------- --------------
Shares under option December 31, 1990.......... 2,999,353 $ 3.50 - $48.75 $ 13,455
Options terminated............................. (294,799) $ 3.50 - $48.75 (3,986)
Options granted................................ 106,000 $ 3.50 - $ 4.40 448
Options exercised.............................. (8,838) $ 3.50 (31)
--------- ---------------- --------------
Shares under option December 31, 1991.......... 2,801,716 $ 3.50 - $ 4.40 $ 9,886
Options cancelled.............................. (554,000) $ 3.50 (1,939)
Options regranted.............................. 554,000 $ 3.50 1,939
Options terminated............................. (65,119) $ 3.50 - $ 5.88 (271)
Options granted................................ 1,055,876 $ 4.38 - $ 5.88 5,604
Options exercised.............................. (173,345) $ 3.50 (607)
--------- ---------------- --------------
Shares under option December 31, 1992.......... 3,619,128 $ 3.50 - $ 5.88 $ 14,612
--------- ---------------- --------------
--------- ---------------- --------------
Options exercisable, December 31, 1990......... 622,662 $ 3.50 - $48.75 $ 5,120
--------- ---------------- --------------
--------- ---------------- --------------
Options exercisable, December 31, 1991......... 1,009,002 $ 3.50 $ 3,532
--------- ---------------- --------------
--------- ---------------- --------------
Options exercisable, December 31, 1992......... 2,012,566 $ 3.50 - $ 4.68 $ 7,131
--------- ---------------- --------------
--------- ---------------- --------------
</TABLE>
NOTE G -- TRANSACTIONS WITH RELATED PARTIES
The Company leases transmission capacity, multiplexing and various other
technical equipment through both capital and operating leases from CTGI, an
affiliate of a major stockholder through August 1992. Amounts paid under the
leases were $17.7 million, $19.7 million and $24.4 million for the years ended
December 31, 1992, 1991 and 1990, respectively.
In June 1992, the Company paid $2.0 million to CTI for the purchase of
certain assets including an $0.8 million note from a major holder of Class A
Preferred which was paid in full upon closing of the 1992 Equity Offering.
Consideration for the transaction also includes $1.2 million of prepaid
transmission capacity from CTGI to be utilized over a 37 month period.
During August 1992, CTI conveyed 14,324,000 shares of Common Stock,
1,000,000 shares of Class B Preferred and 1,000,000 shares of Class C Preferred
to the Banks in exchange for the release of certain obligations of CTI. This
exchange effected a transfer of controlling interest in the Company from CTI to
the Banks. Pursuant to this transfer, Prudential became a related party through
beneficial ownership of options on
F-22
<PAGE> 94
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the stock held by the Banks. During 1992, Prudential held $3.4 million of 1990
Notes which were paid in full in August 1992. As of December 31, 1992,
Prudential owned 1990 Warrants to purchase 1,975,804 shares of Common Stock.
Prudential was also a major participant in the Revolving Credit Facility through
August 1992 which entitled it to a share of the interest on the line of credit.
The transfer of stock from CTI to the Banks gave NationsBank of Texas, N.A.
("NationsBank") and The First National Bank of Chicago ("First National")
related party status through their ownership of Common, Class B Preferred and
Class C Preferred. Additionally, each of these banks is a major participant in
the Restructured Promissory Note. As of December 31, 1992, NationsBank owned
3,893,866 shares of Common Stock and 343,860 shares of Class B Preferred and
343,860 shares of Class C Preferred and held a portion of the Restructured
Promissory Note with principal balance of $4.3 million. As of December 31, 1992,
First National owned 2,781,333 shares of Common Stock and 245,614 shares of
Class B Preferred and 245,614 shares of Class C Preferred as well as a portion
of the Restructured Promissory Note totalling $3.1 million.
General Electric Pension Trust ("GEPT") holds warrants entitling them to
2,305,105 shares of Common Stock at $2.00 and 1,494,845 shares of Common Stock
at $5.00 per share. Other holdings included 1990 Notes of $3.9 million which
were paid in full in December 1992. During 1991, GEPT purchased $31.8 million
Debentures which were exchanged and subsequently sold in September 1992. GEPT
also purchased 500,000 shares of Common Stock in the 1992 Equity Offering. GEPT
may be deemed beneficial owner of an additional 120,000 shares of Common Stock.
Grumman Hill Associates, Inc. and Grumman Hill Investments L.P., of which
Richard D. Irwin (the Chairman of the Board of Directors of the Company) is the
General Partner, held 1990 Notes in the aggregate principal amount of $0.7
million which were paid off during 1992. As of December 31, 1992, these entities
held $4.1 million of 1992 Notes, 194,393 of the 1992 Warrants and 428,090 of the
1990 Warrants to purchase shares of the Company's Common Stock. Additionally,
during 1988, Grumman Hill Associates, Inc. was granted options to purchase
approximately 153,000 of Common Stock. These options were subsequently assigned
to Grumman Hill Investments, L.P.
The Company has paid consulting and investment banking advisory fees
amounting to approximately $0.4 million, $0.1 million and $0.3 million for the
years ended December 31, 1992, 1991 and 1990, respectively, to firms whose
directors and principals are or were directors of ALC.
NOTE H -- TAXES ON INCOME
The 1992 and 1991 provisions for income taxes include a charge to
operations for income taxes that would have been payable except for the
availability of net operating loss carryforwards ("NOLs"). The tax benefits of
the loss carryforwards utilized were reported as an extraordinary item in the
1992 and 1991 Consolidated Statements of Operations. These provisions were
determined based on the statutory tax rates applied to pre-tax income adjusted
for permanent differences related primarily to the amortization of the cost in
excess of net assets acquired. Due to the operating loss sustained for the year
ended December 31, 1990, no provision for income taxes was necessary.
F-23
<PAGE> 95
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense and the extraordinary item as shown in the Consolidated
Statements of Operations are composed of the following:
<TABLE>
<CAPTION>
1992 1991
---------- ----------
<S> <C> <C>
Federal
Income tax expense................................ $8,075,000 $2,240,000
Extraordinary item................................ 6,445,000 2,095,000
State
Income tax expense................................ 1,625,000 765,000
Extraordinary item................................ 555,000 535,000
</TABLE>
Due to the change of ownership which occurred in August 1992 and the
resulting limitation on the utilization of NOLs, the Company is now subject to
regular tax resulting in federal taxes currently payable of $1.6 million for
1992. In 1991, the Company was subject to alternative minimum tax which was
imposed at a 20% rate on the Company's alternative minimum taxable income. Net
operating losses were used to offset 90% of this tax. Federal taxes currently
payable were $0.1 million in 1991.
The 1992 and 1991 provisions for state and local income taxes reflect the
effect of filing separate Company state income tax returns for members of the
consolidated group. This amount is reduced, where appropriate, by the state
portion of operating loss carryforwards. State income taxes currently payable
were $1.1 million in 1992 and $0.2 million in 1991.
A reconciliation between the statutory federal and the effective income tax
rates follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
PRE-TAX
INCOME
-------------
1992 1991
----- ----
<S> <C> <C>
Income tax at statutory rate........................................... 34.0% 34.0%
Goodwill amortization.................................................. 2.2 9.1
State tax expense (net of federal benefit)............................. 4.6 8.9
Other.................................................................. .4 .5
----- ----
Income tax provision................................................... 41.2% 52.5%
----- ----
----- ----
</TABLE>
The Company has tax net operating loss, alternative tax net operating loss
and investment tax credit ("ITC") carryforwards which expire on December 31 of
the following years:
<TABLE>
<CAPTION>
ALTERNATIVE
TAX NET TAX NET INVESTMENT
OPERATING LOSS OPERATING LOSS TAX CREDIT
-------------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
1998........................................ $ 16,938 $ 16,885
1999........................................ 15,090 15,090 $2,841
2000........................................ 18,290 18,290 774
2001........................................ 18,073 18,073
2002........................................ 18,959 18,959
2003........................................ 26,896 26,875
2004........................................ 19,173 19,150
2005........................................ 14,411 14,445
-------------- -------------- ----------
$147,830 $147,767 $3,615
-------------- -------------- ----------
-------------- -------------- ----------
</TABLE>
F-24
<PAGE> 96
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amount of carryforwards which can be utilized annually to offset future
taxable income is, however, limited because of the Internal Revenue Code Section
382 "ownership changes" which occurred in 1989 and 1992. Under provisions of
Section 382, the utilization of these NOLs is presently limited to approximately
$10.0 million per year. This annual limitation, along with the 15 year
carryforward limitation, results in a maximum cumulative NOL and ITC
carryforward which may be utilized of approximately $130.0 million as of
December 31, 1992.
NOTE I -- STATEMENTS OF CASH FLOWS
The following non-cash investing and financing transactions are not
reflected in the Consolidated Statements of Cash Flows but are shown as
supplemental information:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1992 1991 1990
---- ---- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Capitalized lease obligations incurred in connection with
acquisitions of fixed assets............................... $187 $640 $1,518
</TABLE>
NOTE J -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1992 1992 1992 1992
--------- -------- ------------- ------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue...................................... $92,043 $ 92,659 $95,673 $ 95,689
Gross profit................................. $35,993 $ 37,423 $42,943 $ 42,816
Income before extraordinary item............. $ 1,941 $ 2,712 $ 4,190 $ 4,983
Net income................................... $ 3,267 $ 4,434 $ 5,882 $ 7,243
Income per common and common equivalent
share before extraordinary item............ $ 0.03 $ 0.07 $ 0.15 $ 0.16
Net income per common and common
equivalent share........................... $ 0.09 $ 0.15 $ 0.20 $ 0.23
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1991 1991 1991 1991
--------- -------- ------------- ------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue...................................... $85,914 $ 86,541 $88,168 $ 86,250
Gross profit................................. $32,829 $ 33,283 $34,448 $ 33,597
Income (loss) before extraordinary item...... $ 757 $ 909 $ 1,133 $ (82)
Net income................................... $ 1,307 $ 1,534 $ 1,888 $ 618
Loss per common and common equivalent
share before extraordinary item............ $ (0.04) $ (0.02) $ (0.01) $ (0.09)
Net income (loss) per common and common
equivalent share........................... $ (0.01) $ 0.01 $ 0.02 $ (0.05)
</TABLE>
F-25
<PAGE> 97
------------------------------------
------------------------------------
NO PERSON HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATIONS IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE 7,040,491 SHARES
CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER
INFORMATION AND REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY [ALLNET LOGO]
SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER [LOGO] COMMUNICATIONS
TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER
THAN THE REGISTERED SECURITIES TO CORPORATION
WHICH IT RELATES. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES
IN WHICH SUCH OFFER OR SOLICITATION
IS UNLAWFUL.
COMMON STOCK
------------------
PROSPECTUS
- ------------------------------------ -------------------
TABLE OF CONTENTS
PAGE
------
Available Information.................. 2
Prospectus Summary..................... 3
Risk Factors........................... 6
Use of Proceeds........................ 8
Price Range of Common Stock............ 8 PAINEWEBBER INCORPORATED
Dividend Policy........................ 8
The Company............................ 9
Capitalization......................... 11 GOLDMAN, SACHS & CO.
Selected Financial Data................ 12
Management's Discussion and Analysis of
Financial Condition and Results of WHEAT FIRST BUTCHER & SINGER
Operations........................... 13
Business............................... 22 CAPITAL MARKETS
Management............................. 28
Certain Relationships and Related
Transactions......................... 35
The Refinancing........................ 40
Selling Stockholders................... 42
Principal Stockholders................. 43
Description of Capital Stock........... 45
Shares Eligible for Future Sale........ 46
Underwriting........................... 47
Legal Matters.......................... 49
Experts................................ 49 SEPTEMBER 20, 1993
Index to Consolidated Financial
Statements........................... F-1
- ------------------------------------ ---------------------
- ------------------------------------ ---------------------
<PAGE> 98
19,500,909 SHARES
[ALLNET LOGO]
[LOGO] COMMUNICATIONS CORPORATION
COMMON STOCK
------------------------
This Prospectus covers the sale by the Selling Stockholders of up to
19,500,909 shares of Common Stock of ALC Communications Corporation, including
(i) 11,324,000 shares of Common Stock currently outstanding, (ii) 4,380,909
shares, subject to adjustment, of Common Stock issuable upon exercise of certain
outstanding warrants held by General Electric, Prudential and DSC having an
exercise price of $2.00 per share for General Electric and Prudential and $3.00
per share for DSC (collectively, the "Participating Warrants") and (iii)
3,796,000 shares, subject to adjustment, of Common Stock issuable upon
conversion of outstanding Class B and Class C Preferred. ALC will not receive
any of the proceeds from the sale of the shares of Common Stock other than the
proceeds upon the exercise of the Participating Warrants. See "Use of Proceeds"
and "Selling Stockholders."
Certain banks control, in the aggregate, 54.4% of the present voting power
of ALC (38.3% assuming exercise of certain warrants and options). After any sale
of shares pursuant to this Prospectus, their holdings will depend on how many
shares are sold by them. See "Risk Factors -- Control," "Principal Stockholders"
and "Selling Stockholders."
The Selling Stockholders may sell the shares of Common Stock to or through
underwriters or dealers, and also may sell the shares of Common Stock directly
to other purchasers or through agents. The distribution of the shares of Common
Stock may be effected from time to time in one or more transactions at a fixed
price or prices, which may be changed, or at market prices prevailing at the
time of sale, at prices related to such prevailing market prices or at
negotiated prices. If underwriters, dealers or agents are used, a prospectus or
prospectus supplement describing that particular sale ("Prospectus Supplement")
will be delivered which sets forth the names of the underwriters, dealers and
agents involved in the sale of the shares of Common Stock, the amount, if any,
to be purchased by the underwriters or agents and the compensation, if any, of
such underwriters or agents and any applicable commissions or discounts and the
net proceeds to the Selling Stockholders from the sale of the shares of Common
Stock.
The Common Stock is traded on the American Stock Exchange under the symbol
"ALC." The last reported sale price of the Common Stock on February 25, 1993 was
$14 per share. See "Price Range of Common Stock."
SEE "RISK FACTORS" FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE
INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS MARCH 18, 1993
<PAGE> 99
MAP OF THE ALLNET(R) NETWORK
[MAP]
DIGITAL SWITCH
- ALLNET(R) SALES SITE
- --- 100% DIGITAL TRANSMISSION
AVAILABLE INFORMATION
ALC Communications Corporation is subject to the informational requirements
of the Securities Exchange Act of 1934, as amended, and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). These materials can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois, 60661-2511; and 7 World Trade Center, 13th Floor, New York, New York,
10008. Copies of such materials can also be obtained from the Commission's
Public Reference Section, 450 Fifth Street, N.W., Washington, D.C., 20549, at
prescribed rates. The Common Stock is listed on the American Stock Exchange and
reports and other materials also may be inspected at the offices of the American
Stock Exchange.
-------------------------
2
<PAGE> 100
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus. All
information set forth herein has been adjusted to reflect a one-for-five reverse
stock split of the Common Stock effected in September 1991. Investors should
carefully consider the information set forth under the caption "Risk Factors."
THE COMPANY
ALC Communications Corporation ("ALC") is the holding company of Allnet
Communication Services, Inc. and conducts no other business. ALC and Allnet
Communication Services, Inc. are collectively referred to herein as "Allnet" or
the "Company."
Allnet provides long distance telecommunications services primarily to
commercial and, to a lesser extent, residential subscribers in the majority of
the United States and completes subscriber calls to all directly dialable
locations worldwide. Allnet is one of a few nationwide carriers of long distance
services and in 1992 carried in excess of 600 million calls over its network.
The Company transmits long distance telephone calls through its network
facilities over transmission lines which are primarily leased from other long
haul transmission providers. All of the transmission facilities utilized by the
Company are digital, allowing it to offer the highest quality transmission
currently available. Each call is routed through at least one of the Company's
16 digital switching centers, which select the most efficient and highest
quality transmission alternative among those available to the Company to
complete the call.
The Company views the long distance industry as a three tiered industry
which is dominated on a volume basis by the nation's three largest long distance
providers: American Telephone and Telegraph Company ("AT&T"), MCI
Telecommunications Corporation ("MCI") and Sprint Communications, Inc.
("Sprint"). AT&T, MCI and Sprint, which generate an aggregate of approximately
88% of the nation's long distance revenue of approximately $65 billion, comprise
the first tier. Allnet is positioned in the second tier with four other
companies with annual revenues of $250-$800 million each. The third tier
consists of more than 300 companies with annual revenues of less than $250
million each, the majority below $50 million each. Allnet targets small-and
medium-sized commercial customers ($100 to $50,000 in monthly long distance
volume) with the same focus and attention to customer service that AT&T, MCI and
Sprint offer to large commercial customers. Allnet operates its own switches,
develops and implements its own products, monitors and deploys its transmission
facilities and prepares and designs its own billing and reporting systems.
Allnet is one of the few long distance companies with the ability to offer high
quality value-added services to small-and medium-sized commercial customers on a
nationwide basis. Several of the Company's second tier competitors and all of
the third tier competitors are primarily regional in nature, limited by the size
of their transmission systems or dependent on third parties for their billing
services and product offerings.
The Company currently serves approximately 151,000 commercial customers
which account for approximately 89% of the Company's revenue. In order to take
advantage of its non-peak hour capacity, the Company also provides long distance
services to approximately 112,000 residential customers and is working with a
variety of companies, trade associations and special interest groups to increase
the size of its residential customer base while minimizing the cost of such
residential customer acquisition.
Competition in the industry is based on pricing, customer service, network
quality and value-added services. The prices and promotions offered for the
Company's services are designed to be competitive with other long distance
telephone carriers. The Company markets its products and services through
approximately 451 field sales representatives who provide face-to-face contact
with current and potential customers.
Allnet has made steady improvements in its financial performance since the
beginning of 1990. After five years of losses, Allnet has generated eight
consecutive quarters of profit as of December 31, 1992. This performance is a
result of increases in traffic volume ("billable minutes") and an improvement in
controlling network costs and sales, general and administrative expense. The
increase in billable minutes is a result of several factors, including an
increase in both the size and productivity of the field sales organization,
expanded product offerings, and a reduction in customer attrition.
3
<PAGE> 101
REFINANCING, CLASS A EXCHANGE AND 1992 EQUITY OFFERING
In August 1992, Allnet completed a two phase refinancing begun in 1990,
consisting of a 1990 phase and a 1992 phase (together, the "Refinancing"). As a
result of the Refinancing it rescheduled substantially all of its funded debt.
See "The Refinancing."
Prior to August 18, 1992, Communications Transmission, Inc. ("CTI") owned
14,324,000 shares of Common Stock and all of the outstanding shares of the Class
B Senior Convertible Preferred Stock ("Class B Preferred") and the Class C
Senior Convertible Preferred Stock ("Class C Preferred") of ALC, all of which
had been pledged to secure loans CTI owed to five banks (the "Banks," as defined
in "Selling Stockholders"). As part of a restructuring of CTI, which was
accomplished in conjunction with the 1992 phase of the Refinancing, CTI
transferred all of these shares pro rata to the Banks. Subsequent to that
transfer, in October 1992, the Banks in the aggregate sold 3,000,000 shares of
Common Stock in the 1992 Equity Offering (as defined in "The Refinancing"). As
of February 15, 1993, the Company was indebted to the Banks in the principal
amount of $10.2 million. See "Certain Relationships and Related Transactions --
Banks and CTI Stock Ownership in the Company."
In addition, pursuant to an agreement between ALC and certain holders of
Class A Preferred Stock (the "Class A Preferred Group"), the Class A Preferred
Group exchanged $58.7 million aggregate redemption value (including accrued
dividends) of ALC Class A Preferred Stock (the "Class A Preferred") for
6,399,227 shares of Common Stock (the "Class A Exchange"). The shares of Common
Stock received by the Class A Preferred Group were sold to the public in the
1992 Equity Offering. As a result of the Class A Exchange, the Company's
aggregate dividend and redemption obligations relating to the shares of Class A
Preferred were significantly reduced, and the stockholders' deficit was improved
by over $56 million.
In June 1990, The Prudential Insurance Company of America ("Prudential")
and the Trustees of General Electric Pension Trust ("General Electric") were
issued 1990 Warrants to purchase 1,975,804 and 2,305,105 shares of Common Stock,
respectively, pursuant to the 1990 Note Agreements (as defined in "The
Refinancing"). In addition, Prudential has the right to acquire, and may offer
in this Offering, all shares held by the Banks pursuant to the Stock Option and
Residual Option (as defined in "Certain Relationships and Related Transactions
- -- Banks and CTI Stock Ownership in the Company"). Such shares have been
included in this Prospectus pursuant to the Registration Rights Agreement among
Prudential and General Electric and ALC (and certain other parties) dated June
4, 1990.
In June 1990, in exchange for certain lease concessions DSC Communications
Corporation ("DSC"), a major switch vendor, received from ALC Participating
Warrants to purchase 100,000 shares of Common Stock. Such shares have been
included in this Prospectus pursuant to the Registration Rights Agreement
between DSC and ALC dated June 1, 1990.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Selling Stockholders:(1) SHARES
Banks................................................. 15,120,000(2)
General Electric...................................... 2,305,105(3)
Prudential............................................ 1,975,804(3)(4)
DSC .................................................. 100,000(3)
Total............................................... 19,500,909
Common Stock to be outstanding after the Offering(5).... 32,095,689
Use of Proceeds......................................... ALC will not receive any of the proceeds from
the sale of the shares of Common Stock. The
proceeds it receives upon exercise of the
Participating Warrants will be used for
general corporate purposes.
American Stock Exchange Symbol.......................... ALC
</TABLE>
- -------------------------
(1) Selling Stockholders are defined in "Selling Stockholders."
(2) The Banks currently hold 11,324,000 shares of Common Stock. An additional
3,796,000 shares, subject to adjustments, will be received by the Banks
from ALC upon the conversion of 1,000,000 shares of Class B Preferred and
1,000,000 shares of Class C Preferred currently held by the Banks (which
amounts represent all of the outstanding shares of Class B Preferred and
Class C Preferred).
(3) These shares will be received pursuant to the exercise of outstanding
warrants.
(4) In addition, Prudential has the right to acquire, and may offer in this
Offering, all shares held by the Banks pursuant to the Stock Option and
Residual Option (as defined in "Certain Relationships and Related
Transactions -- Banks and CTI Stock Ownership in the Company").
(5) Does not include 7,982,116 shares of Common Stock which may be acquired
pursuant to the exercise of other outstanding warrants and options. See
"Principal Stockholders."
4
<PAGE> 102
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1988 1989 1990 1991 1992
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue......................................... $394,115 $333,765 $326,004 $346,873 $376,064
Operating income (loss)......................... (7,765) (1,351) (2,753) 23,850 40,684
Interest expense................................ 22,178 21,338 21,250 18,128 17,158
Income (loss) before income taxes and
extraordinary item............................ (29,943) (22,689) (19,643) 5,722 23,526
Income (loss) before extraordinary item......... (29,943) (22,689) (19,643) 2,717 13,826
Net income (loss)............................... (29,943) (21,324) (19,643) 5,347 20,826
Net income (loss) available for Common
Stockholders(1)............................... (35,951) (27,156) (25,402) (339) 16,444
Income (loss) per common and common equivalent
share before extraordinary item............... $ (13.21) $ (10.43) $ (2.29) $ (0.17) $ 0.43
Net income (loss) per common and common
equivalent share.............................. $ (13.21) $ (9.93) $ (2.29) $ (0.02) $ 0.74
Weighted average common and common equivalent
shares outstanding............................ 2,723 2,735 11,074 17,216 22,141
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1992
------------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Total assets....................................................................... $ 143,266
Total debt(2)...................................................................... 100,510
Class A Preferred.................................................................. 9,659
Stockholders' deficit.............................................................. (20,871)
</TABLE>
- -------------------------
(1) To arrive at net income (loss) available for Common Stockholders, the
Company's net income (loss) is adjusted by amounts relating to the
accretion of discount on Class A Preferred, the accretion of a contract
payment to certain members of the Class A Preferred Group and dividends on
Class A Preferred accrued but not declared.
(2) Excludes trade debt.
5
<PAGE> 103
RISK FACTORS
Investors should carefully consider the following risk factors, in addition
to the other information contained in this Prospectus, before purchasing the
Common Stock offered hereby.
FINANCIAL CONSIDERATIONS
From its formation in 1985 through the year ended December 31, 1990, the
Company incurred substantial cumulative financial losses. For the years ended
December 31, 1991 and 1992, Allnet had net income of $5.3 million and $20.8
million, respectively. The total accumulated deficit at December 31, 1992 was
$148.3 million. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Allnet has substantial debt. At December 31, 1992, the Company's total
funded debt aggregated $100.5 million, excluding $9.7 million in payment
obligations relating to the Class A Preferred. In the past, the Company's highly
leveraged structure has affected its ability to obtain additional financing and
the terms and conditions on which financing could be obtained. The Company
recently completed the Refinancing, as described under the caption "The
Refinancing."
Allnet historically has had negative working capital. The Company's working
capital position at December 31, 1992 was negative $31.7 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Allnet has significant tax net operating loss carryforwards ("NOLs"). The
amount that can be utilized to offset future income is limited under Section 382
of the Internal Revenue Code of 1986, as amended (the "Code"), because the
Company had ownership changes in 1989 and 1992. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Income Taxes."
COMPETITION
The long distance telecommunications industry is highly competitive.
Competition is based upon pricing, customer service, network quality and
value-added services. AT&T is a dominant competitor in the long distance segment
of the telecommunications services market. In addition to AT&T, Allnet competes
with other national and regional long distance carriers. The Company believes
that there are more than 300 companies in the long distance telecommunications
market. The first tier companies and some of the second tier companies have
substantially greater market share and financial resources than the Company. The
ability of Allnet to compete effectively with other carriers depends upon its
continued ability to maintain high quality services at prices that generally are
comparable to those charged by its competitors. Various regulatory factors can
also have an impact on the Company's ability to compete.
REGULATION
Allnet is regulated at the federal level by the Federal Communications
Commission ("FCC") and at the state level by various state public utility
commissions. Allnet is required to file tariffs for its services. The current
trend at both the federal and state level is toward less regulation for Allnet
and its competitors. Regulatory trends have had, and may have in the future,
both positive and negative effects upon Allnet. For example, more markets are
opening up to Allnet, as state regulators allow Allnet to compete in markets
from which it was previously barred. On the other hand, the largest competitor,
AT&T, has gained increased pricing flexibility over the years, allowing it to
price its services more aggressively.
Regulation can also affect the costs of business for Allnet and its long
distance competitors. In order to provide their services, long distance carriers
such as Allnet must purchase "access services" from local exchange carriers to
originate and terminate calls. Presently, pricing of those "access services" is
on an equal rate per minute ("equal per unit") basis for "local transport." On
September 17, 1992, the FCC announced it would (1) maintain the existing "equal
per unit" pricing rules until late 1993, (2) implement an interim rate structure
and pricing plan during the subsequent two years, and (3) commence further
rulemaking for consideration of a permanent rate structure beginning no earlier
than late 1995. See "Business -- Regulation."
6
<PAGE> 104
CUSTOMER TURNOVER
A high level of customer attrition is inherent in the long distance
industry. Attrition (defined as the average of the last three months' revenue
from customers that have terminated or dropped to zero usage as a percentage of
total revenue) averaged 1.8% per month for the year ended December 31, 1992,
2.0% per month for the year ended December 31, 1991 and 2.2% per month for the
year ended December 31, 1990. To retain its commercial and residential customer
base, the Company implements programs and enhancements such as value-added
services, agent and association sales to residential users, improved customer
service and competitive price adjustments.
AVAILABILITY OF TRANSMISSION CIRCUITS
The future profitability of the Company is based upon its ability to
transmit long distance telephone calls over transmission facilities leased from
others on a cost-effective basis. The Company owns only a minor portion of its
transmission facilities, and its long distance telephone business historically
has been dependent upon lease arrangements with facilities-based carriers for
the transmission of calls. While the Company believes that it now has ample
access to transmission facilities at attractive rates and expects to continue to
have such access in the foreseeable future, this ongoing availability cannot be
assured. See "Business -- Transmission Facilities" and "Certain Relationships
and Related Transactions -- CTI Transactions."
CONTROL
The Board of Directors of ALC consists of seven directors. Because of their
respective ownership of Common Stock, Class B Preferred and Class C Preferred,
the Banks in the aggregate currently control 54.4% of the voting power of ALC
(38.3% assuming exercise of certain warrants and options). The Banks currently
have the power collectively to elect six out of seven directors, to prevent any
change of control or other extraordinary transaction with respect to ALC (except
if the options referred to below are exercised) and otherwise to control the
vote on all matters which are submitted for stockholder vote. See "Description
of Capital Stock." The Banks have advised the Company that the Banks have no
pre-existing understanding or agreement to exercise their voting rights as a
group. The extent to which the Banks collectively will continue to hold a
controlling interest will depend on the extent to which they convert shares of
the Class B Preferred and Class C Preferred as well as the number of shares
actually sold in this Offering or otherwise.
Five of the director positions are filled. The directorship which may be
filled by the Class A Preferred holders and one directorship which may be filled
by the Class B Preferred holders are currently vacant. See "Management --
Executive Officers and Directors."
In August 1992, the Company, the Banks and Prudential entered into various
agreements which provide, among other things that (a) Prudential may exercise
before July 31, 1993 certain options to acquire all of the Common Stock, Class B
Preferred and Class C Preferred owned by the Banks, (b) certain other parties
may share with Prudential in the exercise of the foregoing options and the
proceeds realized upon sale of any shares acquired pursuant thereto, and (c)
Prudential and the Banks will sell or otherwise transfer prior to June 1, 1993
or July 31, 1993, respectively, the Common Stock, Class B Preferred and Class C
Preferred owned by them only under certain circumstances. In addition to
restrictions imposed pursuant to the lock-up agreements referred to in "Risk
Factors -- Future Sales of Common Stock" and "Shares Eligible for Future Sale,"
the Banks' ability to sell shares of Common Stock in this Offering depends, in
large part, on whether and to what extent Prudential waives or does not exercise
its rights under the agreements among the Company, the Banks and Prudential. On
February 12, 1993, the Banks gave Prudential notice of their intention to sell
shares of Common Stock in this Offering. Prudential's right to exercise the
Residual Option (as defined in "Certain Relationships and Related Transactions
- -- Banks and CTI Stock Ownership in the Company") will be suspended after March
15, 1993. However, this suspension will lapse if the Banks do not sell any
shares of Common Stock by April 15, 1993. If the Banks sell any shares of Common
Stock before April 15, 1993, the Residual Option will no longer be of any
practical effect. If Prudential exercises the Stock Option and the Residual
Option prior to any sales of shares by the Banks in this Offering or otherwise,
it would have the power to elect up to six out of seven directors and otherwise
to control the vote on all matters which are submitted for stockholder vote.
Prudential may offer in this Offering any shares acquired from the Banks upon
exercise of its
7
<PAGE> 105
options. See "Certain Relationships and Related Transactions -- Banks and CTI
Stock Ownership in the Company."
FUTURE SALES OF COMMON STOCK
ALC is not able to estimate the amount, timing or nature of future sales of
Common Stock held by the Selling Stockholders pursuant to this Offering, or
sales by other holders of significant amounts of Common Stock, because such
sales and option exercise decisions depend on market conditions, individual
circumstances of the holders and other conditions. Any sales of substantial
amounts of Common Stock in the open market may significantly reduce the market
price of the outstanding shares of Common Stock. Certain of the Company's
stockholders or holders of convertible securities have the right to require the
Company to register restricted securities held by them. The Company agreed to
file the registration statement of which this Prospectus is a part within 90
days after the consummation of the 1992 Equity Offering in order to permit the
Banks to sell from time to time, subject to certain lock-up restrictions
discussed below, any or all of the shares (15,120,000 shares, subject to
adjustment) of Common Stock they own or may acquire upon conversion of the Class
B Preferred and Class C Preferred. See "Certain Relationships and Related
Transactions -- Banks and CTI Stock Ownership in the Company" and "The
Refinancing." The registration statement of which this Prospectus is a part also
relates to up to 4,380,909 shares of Common Stock which General Electric,
Prudential and DSC may acquire upon exercise of the Participating Warrants. As
part of the 1992 Equity Offering, ALC and its directors and officers, the
Selling Stockholders, and certain other major stockholders of the Company,
except under certain limited circumstances, agreed not to dispose of any shares
of Common Stock during a period of 180 days (in the case of the Banks with
respect to an underwritten public offering as to which a registration statement
has become effective, 120 days) after October 16, 1992, the date of the
prospectus relating to the 1992 Equity Offering, without the prior written
consent of the underwriters in the 1992 Equity Offering. See "Shares Eligible
for Future Sale." Any underwriter who participates in a sale of stock pursuant
to this Prospectus may require additional agreements not to dispose of shares of
Common Stock. Any such agreements will be described in a Prospectus Supplement.
8
<PAGE> 106
USE OF PROCEEDS
ALC will not receive any of the proceeds from the sale of the Common Stock.
Proceeds to ALC from exercise of the Participating Warrants will be added to
working capital and used for general corporate purposes. Assuming the exercise
of all of the Participating Warrants, ALC would receive $8.9 million upon such
exercise.
PRICE RANGE OF COMMON STOCK
The Common Stock has been traded on the American Stock Exchange ("AMEX")
since September 4, 1991 and is listed under the symbol ALC. From July 15, 1990
until September 4, 1991, the Common Stock was traded over-the-counter and listed
on the Over-the-Counter Bulletin Board under the symbol ALCC.
The table below sets forth: (1) the best approximation of the high and low
bid prices of the Common Stock on the over-the-counter market for the first
eight months in 1991; and (2) the ranges of high and low closing sales prices of
the Common Stock as reported on the AMEX composite tape for the last four months
of 1991 and calendar year 1992. The over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
1991 1992
-------------- --------------
HIGH LOW HIGH LOW
----- ----- ----- -----
<S> <C> <C> <C> <C>
1st quarter....................................... $3.15 $1.05 $7.00 $4.25
2nd quarter....................................... 4.50 2.85 6.00 4.25
3rd quarter....................................... 5.00 3.10 6.38 5.00
4th quarter....................................... 5.00 3.75 14.13 5.13
</TABLE>
As of February 15, 1993, there were 2,350 holders of record of the Common
Stock. The high and low closing sales prices per share of the Common Stock for
the period from January 1, 1993 to February 25, 1993, as reported by AMEX, were
$14.63 and $12.50, respectively. The last reported sale price of the Common
Stock on February 25, 1993 was $14.00 per share.
DIVIDEND POLICY
ALC has never declared or paid any cash dividends on the Common Stock. ALC
has paid certain dividends on the Class A Preferred. See "Description of Capital
Stock." Except as otherwise required under the terms of the Class A Preferred,
ALC currently intends to retain its earnings to service debt and finance future
growth and does not anticipate paying any cash dividends on the Common Stock in
the foreseeable future. In addition, the documents governing certain
indebtedness of the Company preclude the payment of cash dividends.
9
<PAGE> 107
THE COMPANY
ALC is the holding company for Allnet Communication Services, Inc. and
conducts no other business. Allnet provides long distance telecommunications
services primarily to commercial and, to a lesser extent, residential
subscribers in the majority of the United States and completes subscriber calls
to all directly dialable locations worldwide. Allnet is one of the few
nationwide carriers of long distance services and in 1992 carried in excess of
600 million calls over its network.
The Company's predecessor, Combined Network, Inc., was founded in Chicago,
Illinois in 1980. Its name was changed in November 1983 to Allnet Communication
Services, Inc. In 1985, Allnet Communication Services, Inc. merged with Lexitel
Corporation, a smaller regional long distance company, and became the wholly
owned subsidiary of ALC. Following the merger, difficulties experienced in
integrating the two companies resulted in revenue declines and net losses. In
addition to internal problems, the industry as a whole was going through rapid
changes, including severe price competition from the three major carriers, AT&T,
MCI and Sprint.
In 1988, CTI purchased preferred stock of ALC for a total equity investment
of $30.0 million, thereby acquiring a controlling interest in ALC, and in 1989
loaned $20.0 million to the Company. CTI's revenue was dependent to a
significant degree upon Allnet as a customer of CTI's transmission services.
Communications Transmission Group, Inc. ("CTGI"), then a wholly owned subsidiary
of CTI, was (and remains) a provider of a significant portion of the Company's
transmission network.
In late 1988, the Company's present management team was installed by CTI
with the goal of restoring the Company to profitability. The management team was
led by former senior executives of Cable and Wireless North America, Inc.
("C&W"), a subsidiary of Cable & Wireless plc, the Great Britain based
telecommunications group, who had built C&W's presence in the long distance
industry in the United States. The management team implemented a number of
changes commencing in 1989, including the following: (i) redirection of sales
and marketing efforts to focus on face-to-face sales to small-and medium-sized
commercial customers; (ii) enhancement of existing product offerings and
introduction of new products with a focus on value-added services; (iii)
increase in training for the sales force and customer service personnel; (iv)
implementation of a comprehensive quality program; (v) consolidation and upgrade
of the transmission network and switching equipment to become 100% digital,
resulting in improved quality and reduced costs; and (vi) renegotiation of
transmission contracts which further reduced costs.
In June 1990, the Company began the Refinancing which was undertaken in
order to allow the operating changes to take effect without the added burden of
significant near term debt retirement schedules. The basic components of the
1990 phase of the Refinancing are outlined under the caption "The Refinancing."
In connection with the 1990 phase of the Refinancing, CTI acquired 14,324,000
shares of Common Stock in addition to its earlier equity interest. In late 1991,
CTI sold the $20.0 million loan due from the Company, to the Banks, CTI's
lenders. In August 1992, CTI conveyed all of its equity interest in ALC to the
Banks in exchange for the release of certain of its obligations to the
respective Banks pro rata, in proportion to these obligations. As a result, the
Banks, in the aggregate, currently have the voting power to elect six of seven
directors of ALC and otherwise to control the vote on all matters which are
submitted for stockholder vote. See "Risk Factors -- Control" and "Certain
Relationships and Related Transactions -- Banks and CTI Stock Ownership in the
Company." In June and August 1992, the Company concluded the Refinancing and
rescheduled substantially all of its funded debt to reduce its debt service
requirements over the next several years. The basic components of the 1992 phase
of the Refinancing are outlined under the caption "The Refinancing."
Allnet has made steady improvements in its financial performance since June
30, 1990. After five years of losses, Allnet has generated eight consecutive
quarters of profit as of December 31, 1992. This performance is a result of
increases in the amount of billable minutes and an improvement in controlling
network costs and sales, general and administrative expense. The increase in
billable minutes is a result of several factors, including an increase in both
the size and productivity of the field sales organization, expanded product
offerings, and a reduction in customer attrition.
10
<PAGE> 108
The Company views the long distance industry as a three tiered industry
which is dominated on a volume basis by the nation's three largest long distance
providers, AT&T, MCI and Sprint, which generate an aggregate of approximately
88% of the nation's long distance revenue of approximately $65 billion and which
comprise the first tier. Allnet is positioned in the second tier with four other
companies with annual revenues of $250-$800 million each. The third tier
consists of more than 300 companies with annual revenues of less than $250
million each, the majority below $50 million each. Allnet and its second tier
competitors target small-and medium-sized commercial customers ($100 to $50,000
in monthly long distance volume) with the same focus and attention to customer
service that AT&T, MCI and Sprint offer to large commercial customers. Allnet
operates its own switches, develops and implements its own products, monitors
and deploys its transmission facilities and prepares and designs its own billing
and reporting systems. Allnet is one of the few long distance companies with the
ability to offer high quality value-added services to small-and medium-sized
commercial customers on a nationwide basis. Several of the Company's second tier
competitors and all of the third tier competitors are primarily regional in
nature, limited by the size of their transmission systems or dependent on third
parties for their billing services and product offerings.
The Company currently serves approximately 151,000 commercial customers
which account for approximately 89% of the Company's revenue. In order to take
advantage of non-peak capacity, the Company also provides long distance services
to approximately 112,000 residential customers and is working with a variety of
companies, trade associations and special interest groups to increase the size
of its residential customer base while minimizing the cost of such residential
customer acquisition.
The prices and promotions offered for the Company's services are designed
to be competitive with other long distance telephone carriers. The Company
markets its products and services through face-to-face contact with an emphasis
on pricing, customer service, network quality and value-added services. The
successful implementation of this strategy over the past several years has
resulted in increased sales, increased operating profit margins, reduced
customer attrition and more efficient use of the Company's network.
The Company's principal executive offices are located at 30300 Telegraph
Road, Suite 350, Bingham Farms, Michigan 48025. The Company has sales offices
and operations facilities throughout the United States. The Company's telephone
number is (313) 647-4060.
11
<PAGE> 109
CAPITALIZATION
The following table sets forth the consolidated capitalization of ALC as of
December 31, 1992.
<TABLE>
<CAPTION>
DECEMBER 31,
1992
---------------
<S> <C>
(IN THOUSANDS)
Short Term Obligations:
Revolving Credit Facility................................................... $ 14,802
Notes payable, capitalized leases and other long term debt.................. 11,417
---------------
Total Short Term Obligations........................................... $ 26,219
---------------
---------------
Long Term Debt:
Notes payable, capitalized leases and other long term debt.................. $ 12,308
Subordinated Notes.......................................................... 61,983
---------------
Total Long Term Debt................................................... 74,291
---------------
Class A Preferred............................................................. 9,659
Stockholders' Deficit:
Class B Preferred........................................................... 10
Class C Preferred........................................................... 10
Common Stock................................................................ 238
Capital in excess of par value.............................................. 110,146
Paid-in capital warrants.................................................... 17,022
Accumulated deficit......................................................... (148,297)
---------------
Total Stockholders' Deficit............................................ (20,871)
---------------
Total Capitalization.............................................. $ 63,079
---------------
---------------
</TABLE>
12
<PAGE> 110
SELECTED FINANCIAL DATA
The selected financial data presented below for, and as of the end of, each
of the years in the five year period ended December 31, 1992, are derived from
the consolidated financial statements of ALC. Consolidated financial statements
for ALC for the three fiscal years ended December 31, 1992, are included
elsewhere in this Prospectus. The selected financial data should be read in
conjunction with the financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1988 1989 1990 1991 1992
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue............................................ $394,115 $333,765 $326,004 $346,873 $376,064
Operating expenses:
Cost of communication services................... 263,149 215,555 209,612 212,716 216,889
Sales, general and administrative................ 119,954 103,647 102,838 97,964 107,294
Depreciation and amortization.................... 18,777 15,914 13,320 12,343 11,197
Financial restructuring.......................... 2,987
-------- -------- -------- -------- --------
Total operating expenses..................... 401,880 335,116 328,757 323,023 335,380
-------- -------- -------- -------- --------
Operating income (loss)...................... (7,765) (1,351) (2,753) 23,850 40,684
Interest expense................................... 22,178 21,338 21,250 18,128 17,158
Gain on sale of subsidiary......................... 4,360
-------- -------- -------- -------- --------
Income (loss) before income taxes and extraordinary
item............................................. (29,943) (22,689) (19,643) 5,722 23,526
Income taxes....................................... 3,005 9,700
-------- -------- -------- -------- --------
Income (loss) before extraordinary item............ (29,943) (22,689) (19,643) 2,717 13,826
Extraordinary item(1).............................. 1,365 2,630 7,000
-------- -------- -------- -------- --------
Net income (loss)............................ $(29,943) $(21,324) $(19,643) $ 5,347 $ 20,826
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net income (loss) available for Common
Stockholders(2).................................. $(35,951) $(27,156) $(25,402) $ (339) $ 16,444
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Income (loss) per common and common
equivalent share before extraordinary item....... $ (13.21) $ (10.43) $ (2.29) $ (0.17) $ 0.43
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net income (loss) per common and
common equivalent share.......................... $ (13.21) $ (9.93) $ (2.29) $ (0.02) $ 0.74
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average common and common equivalent
shares........................................... 2,723 2,735 11,074 17,216 22,141
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets....................................... $167,887 $161,015 $149,375 $140,846 $143,266
Total debt......................................... 101,998 126,323 135,884 124,579 100,510
Class A Preferred.................................. 46,175 52,007 57,391 62,434 9,659
Stockholders' deficit.............................. (51,201) (78,122) (102,070) (102,300) (20,871)
</TABLE>
- -------------------------
(1) Extraordinary item for the year ended December 31, 1989 pertains to gain on
early extinguishment of debt and for the years ended December 31, 1991 and
1992, to utilization of net operating loss carryforwards.
(2) To arrive at net income (loss) available for Common Stockholders, the
Company's net income (loss) is adjusted by amounts relating to the
accretion of discount on Class A Preferred, the accretion of a contract
payment to certain members of the Class A Preferred Group and dividends on
Class A Preferred accrued but not declared.
13
<PAGE> 111
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
ALC was formed in 1985 in connection with the merger of Allnet
Communication Services, Inc. and Lexitel Corporation, and the surviving entity
became a wholly-owned subsidiary of ALC.
The Company incurred significant losses for the years ended December 31,
1986 through December 31, 1990. As the result of these losses, the Company
experienced cash flow shortages which required external cash to fund operations.
During this period, CTI made an equity investment of $30.0 million (in 1988),
acquiring a controlling interest in the Company, and loaned the Company $20.0
million (in 1989).
Subsequent to its equity investment, CTI put in place a new management
team, which implemented a number of changes commencing in 1989, including the
following: (i) redirection of sales and marketing efforts to focus on
face-to-face sales to small-and medium-sized commercial customers; (ii)
enhancement of existing product offerings and introduction of new products with
a focus on value-added services; (iii) increase in training for the sales force
and customer service personnel; (iv) implementation of a comprehensive quality
program; (v) consolidation and upgrade of the transmission network and switching
equipment to become 100% digital, resulting in improved quality and reduced
costs; and (vi) renegotiation of transmission contracts which further reduced
costs.
In June 1990, the Company began the Refinancing which allowed for the
continued operation of the Company while providing the interim resources
necessary for financial stability. The 1990 phase of the Refinancing included
the components set forth in the following paragraph, which provided for
additional sources of capital and reduction or deferral of debt payments.
The Note and Warrant Purchase Agreements ("1990 Note Agreements") provided
$7.2 million and included warrants to purchase up to 4,708,999 shares of Common
Stock of ALC at $3.00 per share ("1990 Warrants"). Interest and principal
payments were rescheduled for approximately 96% of the Company's outstanding
11 7/8% Senior Subordinated Debentures ("Original Debentures"). The $30.0
million Revolving Credit Facility was renewed until June 1992. The Restructured
Promissory Note of $20.0 million was extended until June 1992 with a reduction
in interest rates. A significant transmission contract between the Company and
CTGI, an affiliate of CTI, was modified to significantly reduce service costs
payable by ALC to CTGI. In consideration for concessions, ALC issued 716,200
shares of Class D Preferred to CTI which was subsequently converted to
14,324,000 shares of Common Stock. Finally, a major equipment lease was modified
to reduce monthly payments.
As a result of the 1990 phase of the Refinancing, the Company had
significant principal and interest payments scheduled in 1992. At the conclusion
of the 1990 phase of the Refinancing, management believed that cash flow from
operations would be inadequate to meet the debt service requirements as
scheduled. Accordingly during 1992, the Company completed the Refinancing which
included the rescheduling of substantially all debt, resulting in significantly
reduced or deferred debt service obligations. The 1992 phase of the Refinancing
provided a revised redemption and maturity schedule that the Company believes
can be met from expected cash flow from operations.
The principal components of the 1992 phase of the Refinancing are outlined
below:
- A "Note Exchange Offer" was completed as of August 6, 1992 whereby
the Company's Original Debentures, Replacement Debentures, PIK
Debentures, and accrued interest on the nonconsenting Debentures
totalling $73.2 million were replaced by 11 7/8% Subordinated Notes
of Allnet Communication Services, Inc. ("1992 Notes"). The Note
Exchange Offer was agreed to by 98.8% of the current
Debentureholders. The revised redemption schedule of the 1992 Notes
effectively rescheduled the earliest redemption from June 30, 1992
to September 30, 1995. As part of the Note Exchange Offer, 3,400,000
Common Stock warrants ("1992 Warrants") were issued representing
10.2% of the fully-diluted equity of ALC at an exercise price of
$5.00 per share of Common Stock.
14
<PAGE> 112
- The Revolving Credit Facility was extended to June 30, 1993 and
modifications included a new participant and a reduction in the
borrowing rates.
- The Restructured Promissory Note was restated and extended to June
30, 1995 and a $5.0 million principal prepayment was made. The
amended terms provide for continuation of the 12% interest rate and
quarterly principal payments of $1.3 million commencing on September
15, 1992.
- The 1990 Note Agreements with a principal balance of approximately
$8.0 million were paid down and extended in conjunction with the
Refinancing and subsequently paid in full in December 1992.
- In consideration for participating in the Refinancing the 4,708,999
1990 Warrants held by General Electric Pension Trust, Grumman Hill
Investments Inc., Grumman Hill L.P. and Prudential Insurance Company
of America were amended to reduce the exercise price from $3.00 to
$2.00 per share.
- Equipment leases with a major switch vendor were renegotiated to be
repaid over 24 months until May 1, 1994 with no change in the
interest rate of 14%.
- The Company paid $2.0 million on June 4, 1992 to CTI and received an
$0.8 million note from a major holder of Class A Preferred (which
note was subsequently paid in full) and $1.2 million of prepaid
transmission capacity from CTGI to be utilized over a period of 37
months.
- On August 18, 1992, the 14,324,000 shares of Common Stock, 1,000,000
shares of Class B Preferred, and 1,000,000 shares of Class C
Preferred held by CTI were transferred to a group of five banks
("Banks") in exchange for the release of certain portions of CTI's
obligations to each of the Banks. The Class B Preferred and Class C
Preferred are convertible into 3,796,000 shares of Common Stock.
- Effective October 16, 1992, the Company completed a stock offering
("1992 Equity Offering") for 9,863,600 shares of Common Stock at
$5.50 per share. A portion of the 1992 Equity Offering relating to
3,464,373 shares was to facilitate the sale of shares for existing
major holders including 3,000,000 shares held by the Banks.
- The remaining 6,399,227 shares that were part of the 1992 Equity
Offering were issued in conjunction with an Exchange Agreement
("Class A Exchange") with the major holders of the Class A Preferred
("Class A Preferred Group"). The members of the Class A Preferred
Group agreed to exchange the 2,144,044 Class A Preferred shares held
by them with an aggregate redemption value of $58.7 million,
including all accrued and unpaid dividends, for shares of Common
Stock at an effective 40% discount.
During 1992, the Company achieved both the successful completion of the
Refinancing and a significant financial turnaround. After five consecutive years
of losses and declining revenues, the Company has achieved eight consecutive
quarters of income through the quarter ended December 31, 1992. The 1992 results
of operations reflect an increase in both billable minutes and revenue and a
significant reduction in operating expenses as a percent of revenue.
RESULTS OF OPERATIONS
Years ended December 31, 1992, 1991 and 1990
The Company had net income of $20.8 million on revenue of $376.1 million
for the year ended December 31, 1992. This compares to net income of $5.3
million on revenue of $346.9 million and net loss of $19.6 million on revenue of
$326.0 million for the years ended December 31, 1991 and 1990, respectively.
Operating results for 1990 included a gain of $4.4 million from the sale of CTI
Telecommunications, Inc. and included restructuring costs of $3.0 million.
15
<PAGE> 113
Operating results improved from an operating loss of $2.8 million for the
year ended December 31, 1990 to operating income of $23.9 million in 1991 and
$40.7 million in 1992. This improvement is the result of increased revenue,
improved gross margin and for 1991, reduced sales, general and administrative
expenses.
Revenue
Revenue increased 8.4% to $376.1 million from 1991 to 1992 resulting from a
9.6% increase in billable minutes offset somewhat by a slight decrease in the
revenue per minute. Billable minutes have continued to increase since the third
quarter of 1990 when compared to the same quarter in the prior year. Most
importantly, billable minutes reached the highest level in 1992 since the year
ended December 31, 1988. The increase in billable minutes results from traffic
generated by new customers, increased minutes per customer and a decrease in
billable minutes lost through attrition of existing customers.
Revenue increased from $326.0 million in 1990 to $346.9 million in 1991.
The 6.4% increase in revenue represents a 7.1% increase in billable minutes. The
increase in billable minutes was a result of several factors, including the
increase in the size of the field sales organization which resulted in increased
new sales, the increased minutes per customer which resulted from expanded
product offerings, and the decrease in billable minutes lost through the
attrition of existing customers.
During 1992, the Company introduced several strategic services to upgrade
existing products. The Company enhanced Allnet Voice Mail by adding additional
features including message notification, and introduced Allnet Broadcast FAX(R),
which allows the customer to send a fax document to multiple locations
simultaneously. Allnet also introduced a new streamlined dialing method known as
"00 Platform" to reach a long distance operator, customer service, or Allnet
special features. Customers with multi-locations now have a new "800"
enhancement available which connects "800" calls automatically to the customer's
location closest to the originating call.
The Company's field sales representatives have increased from 363 at the
beginning of 1990 to 451 as of December 1992. Management has been successful in
adding field sales representatives in order to increase revenue while still
maintaining control over sales and marketing expenses.
The revenue generated from customers' first full month of service in 1992
was 7.5% higher than in 1991 and 13.8% higher than in 1990. The increased
revenue from new sales along with revenue from existing customers outpaced
revenue lost from customer attrition. Attrition (defined as the average of the
last three months revenue from customers that have terminated or dropped to zero
usage as a percentage of total revenue) has improved from 2.2% in 1990 to 2.0%
in 1991 to 1.8% in 1992.
The provision for uncollectible revenue, which is deducted from gross
revenue to arrive at reported revenue, was 3.0% for the year ended 1992 and 3.4%
for the years ended December 31, 1991 and 1990. During the last three years,
procedures were implemented to improve the collection process and provide
earlier detection of credit risks. Procedures include an expanded system for
initial credit review and screening, monitoring of early usage levels on new
accounts, modification of dunning and collection methods and timing, and
improved collection processes on past due accounts.
Cost of Communication Services
The Company's primary cost is for communication services, which represents
the costs of originating and terminating calls via local exchange carriers
(primarily Bell Operating Companies). Also included in communication services
are the costs of obtaining usage sensitive and fixed price transmission capacity
from carriers on a short term basis and the cost of owning and leasing bulk
transmission capacity.
The cost of communication services increased slightly from $209.6 and
$212.7 to $216.9 for the years 1990, 1991, and 1992, respectively. The increase
in cost of communication services is due to the 9.6% and 7.1% increase in
billable minutes in 1992 and 1991. These increases were offset by cost
reductions for transmission capacity experienced in 1991 and even further
reductions during 1992. The cost of communication services decreased, however,
as a percent of revenue from 64% for 1990, 61% for 1991, to 58% for 1992, the
lowest rate in the Company's history.
16
<PAGE> 114
The Company has successfully negotiated the reduction of rates under
contracts with various transmission carriers including CTGI. In addition, the
Company has continued to reconfigure its network to provide better long-term
economics.
The Company's use of high volume, fixed price transmission capacity is
significantly more cost effective than the use of measured services. By
utilizing fixed price leased facilities to transmit traffic, the Company has
successfully driven down its network costs without the capital expenditures
associated with construction of its own fiber optic or digital microwave
network. Over 99% of traffic traverses low cost "on-net" digital facilities.
Other Expenses
Sales, general and administrative expense was $102.8 million, $98.0 million
and $107.3 million for the years 1990, 1991 and 1992, respectively.
Sales, general and administrative expense for 1992 increased $9.3 million
or 9.5% compared to 1991. This increase resulted in sales, general and
administrative expense increasing from 28.2% to 28.5% of revenue. Sales expense
increased 19.6% from 1991 which resulted from increased advertising and
marketing expenses as well as increased commissions reflecting higher first full
month revenue as well as enhancements to the commission plan to encourage
customer retention. General and administrative expenses have continued to
decrease as a percent of net revenue.
Sales, general and administrative expense for 1991 declined $4.9 million or
4.7% compared to 1990. This decrease resulted in sales, general and
administrative expense declining from 31.5% to 28.2% of revenue. This reduction
includes the impact of a slight increase of 4.4% in total corporate head count.
Despite a 13% increase in the average number of field sales representatives for
1991 over 1990, sales expense remained relatively constant from 1990 to 1991.
The overall decrease in general and administrative expenses reflects
management's continuing focus on cost containment. Procedures implemented to
improve efficiencies and contain expenses included improved budgeting
techniques; regular, periodic review of actual expenses against budgeted levels;
incentive programs tied directly to achievement of budget objectives; and
enhanced review of general programs and benefit costs.
The decrease in depreciation and amortization from $13.3 million in 1990 to
$12.3 million in 1991 and further to $11.2 million in 1992 is primarily the
result of the termination of depreciation on analog multiplex and switch
equipment, for which the Company provided a reserve, and the termination of
depreciation as assets reach the end of their useful lives. These reductions in
depreciation have been partially offset by depreciation on newly capitalized
assets during the three-year period.
Interest Expense
Interest expense decreased from $18.1 million in 1991 to $17.2 million in
1992. This resulted from a lower prime rate impacting the interest expense on
the Revolving Credit Facility as well as a decrease in interest related to debt
principal payments made in connection with the Refinancing. These improvements
were partially offset by increased expense on the Debentures and the
Restructured Promissory Note.
Interest expense decreased from $21.3 million in 1990 to $18.1 million in
1991. This decrease was primarily due to reduced interest on the Revolving
Credit Facility resulting from lower average balances and the expiration of
capital leases.
Cash flow was impacted by interest payments beginning in 1991 on the 1990
Notes and the Restructured Promissory Note, which had been previously deferred.
Interest on the Debentures continued to be converted into PIK Debentures through
December 1991. PIK Debentures were exchanged for 1992 Notes in the Note Exchange
Offer or paid off in September 1992. Interest payments on the 1992 Notes began
in July 1992 and are paid quarterly.
17
<PAGE> 115
INCOME TAXES
Income taxes are presently accounted for in accordance with Accounting
Principles Board Opinion No. 11. In February 1992, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" ("Statement"). The Company will adopt the
Statement as of January 1, 1993, the required implementation date. Application
of the new rules as of January 1, 1993, will result in the recording of a net
deferred tax asset of approximately $13.5 million related primarily to the
future tax benefits which are expected to be realized upon utilization of a
portion of the Company's tax net operating loss carryforwards ("NOLs"). The
Statement requires that the tax benefit of NOLs be recorded as an asset to the
extent that management assesses that the utilization of such NOLs is "more
likely than not." Management believes that recording of the deferred tax assets
representing three years of NOL benefit is conservative given the existing
limitation of such benefit to $10.0 million per year by Code Section 382 and the
likelihood of exceeding the necessary pre-tax income levels to realize the
benefit given the Company's current operating results. The Company has further
taken a conservative position that realization of the benefit of the NOLs beyond
the three-year period is difficult to predict and therefore is not recorded. The
Company intends to evaluate the propriety of the deferred tax asset on an
ongoing basis. The Company has determined it will not apply the Statement
retroactively and thus will not restate prior year financial statements to
reflect adoption of the new rules.
The tax provisions for the year ended December 31, 1992 and 1991 include an
amount that would have been payable except for the availability of NOLs. The tax
benefits of the loss carryforwards utilized were reported as an extraordinary
item for years ended 1992 and 1991. In 1992 the Company was subject to regular
tax and due to a Code Section 382 "ownership change", the utilization of net
operating losses was limited. In 1991, the Company was subject to alternative
minimum tax and the operating losses were utilized to offset 90% of the tax. Due
to the operating loss sustained for the year ended December 31, 1990, no
provision for income taxes was necessary.
Section 382 Limitation
Section 382 (in conjunction with Sections 383 and 384) of the Code provides
rules governing the utilization of certain tax attributes, including a
corporation's NOLs, "built-in-losses," capital loss carryforwards, unused
investment tax credits ("ITCs") and other unused credits, following significant
changes in ownership of a corporation's stock. Generally, Section 382 provides
that if an ownership change occurs, the taxable income of a corporation
available for offset by these tax attributes will be subject to an annual
limitation ("382 Limitation"). The 382 Limitation equals the product of the
"long term tax-exempt rate" and the value of a corporation immediately before
the ownership change, subject to adjustment for certain built-in gains of the
corporation. To the extent the 382 Limitation exceeds the Federal taxable income
of the corporation for a given year, the 382 Limitation for the subsequent year
is increased by such excess. An ownership change will occur if the percentage of
stock of the corporation owned by one or more "five-percent shareholders"
(taking into account certain aggregation and segregation rules) increases by
more than fifty percentage points during any "testing period." A testing period
is normally the preceding three-year period, but if an ownership change has
previously occurred, a shorter testing period beginning on the date following an
ownership change is used. Generally, options or warrants to acquire stock will
be treated as stock which has been acquired by the option holder or right holder
if the effect of such treatment is to cause an ownership change to have
occurred. Such treatment of options and warrants may be made at the date of
grant of such options or warrants, or upon the occurrence of other events
("testing dates"). Generally, options that are in existence at the time of an
ownership change are no longer counted for purposes of determining future
ownership changes so long as they continue to be held by the same person who
owned the option at the time of the previous ownership change.
As of December 31, 1992, the Company has approximately $147.8 million of
NOLs, $147.8 million of alternative NOLs and $3.6 million of investment tax
credit carryforwards which expire beginning December 31, 1998 through 2005. The
transfer of Common Stock, Class B Preferred and Class C Preferred by CTI to the
Banks in August 1992 resulted in an ownership change with a 382 Limitation of
approximately $10.0 million per annum. As a result of this annual limitation,
along with the 15 year carryforward limitation,
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the maximum cumulative NOLs and ITCs which can be utilized for federal income
tax purposes in 1993 and future years are limited to approximately $130.0
million, assuming no future ownership change or built-in gain recognition. The
Company is also subject to numerous state income tax laws. Many states limit the
utilization of NOLs after an ownership change.
Investors are cautioned that future events beyond the control of the
Company could reduce or eliminate the Company's ability to utilize the tax
benefit of its NOLs and ITCs. Any future ownership change under Section 382
would require a new computation of the 382 Limitation based on the value of the
Company and the long term tax-exempt rate in effect at that time. If this
Offering in combination with previous transactions were to result in another
ownership change under Code Section 382, the impact is not expected to be
material due to the long-term tax-exempt rate and value of the Company at this
time. Furthermore, the 382 Limitation would be reduced to zero if the Company
fails to satisfy the continuity of business enterprise requirement for the
two-year period following an ownership change. Under the continuity of business
requirement, the Company must either continue its historic business or use a
significant portion of its pre-ownership change assets in a business.
SEASONALITY
The Company's long distance revenue is subject to seasonal variations.
Because most of the Company's revenue is generated by commercial customers, the
Company traditionally experiences decreases in long distance usage and revenue
in those periods with holidays. In past years the Company's long distance
traffic, which is primarily commercial, has declined slightly during the fourth
quarter due to the November and December holiday periods. However, in 1992 this
trend was more than offset by strong traffic growth, which was up 12.3% from the
fourth quarter of 1991.
LIQUIDITY AND CAPITAL RESOURCES
For the years ended December 31, 1992 and 1991, the Company's operations
were profitable and generated positive cash flow from operations of $30.4
million and $27.3 million, respectively. The positive cash flow reflects ten
consecutive quarters of increased revenue from prior comparable quarters and of
operating profits as of December 31, 1992. ALC had operating losses and negative
cash flow from its commencement of operations in 1985 through the year ended
December 31, 1990 (except for the year ended December 31, 1986). Such operating
losses were historically financed through various debt arrangements, including
the Revolving Credit Facility.
In addition to the positive cash flow from operations, the Company's short
term liquidity position is further strengthened by the unused availability under
the Revolving Credit Facility. The Revolving Credit Facility is a $30.0 million
revolving facility which expires June 30, 1993, and which the Company expects to
replace by that date. Advances can be made based on the level of receivables. As
of December 31, 1992, the Company had borrowings of $14.8 million and additional
borrowing availability of $15.2 million. The borrowings under the line has
increased by $5.4 million from December 31, 1991 as funds borrowed have been
used to retire more expensive debt such as the 1990 Notes.
The Company had negative working capital of $31.7 million at December 31,
1992 compared to negative $92.7 million at December 31, 1991. The increase in
working capital is substantially the result of the reclassification of the
Debentures to long-term liabilities, the reclassification to long-term and the
reduced balance of the Restructured Promissory Note, and the payoff of the 1990
Note Agreements. Of the $31.7 million negative working capital position at
December 31, 1992, $11.4 million reflected the current portion of long term
obligations and $14.8 million reflected borrowings under the Revolving Credit
Facility which is anticipated to be renegotiated, extended or replaced before
June 1993. Management believes that an ongoing negative working capital position
will not have a material adverse impact on the Company.
Because the Company has chosen to lease rather than own its transmission
facilities, the Company's requirements for capital expenditures are modest.
Capital expenditures totaled $10.3 million in 1992. Capital expenditures during
the year ended December 31, 1992 included projects for enhanced efficiency and
technical advancement in the network, information systems and customer service.
The future investment
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requirements for capital expenditures relate directly to traffic growth which
necessitates the purchase of switching and related equipment. In addition, a
major component of the capital budget relates to technological advancements as
the Company continually updates its network capabilities to offer enhanced
products and services. The level of capital expenditures for 1993 is expected to
be approximately $15.0 million.
During 1992, the Company completed the Refinancing which included the
rescheduling of substantially all debt resulting in significantly reduced or
deferred debt service obligations. The Refinancing resulted in a revised
redemption and maturity schedule that deferred a significant amount of the
previous scheduled current liabilities over a period through June 30, 1999.
The most significant impact of the Refinancing on the long-term liquidity
position of the Company resulted from the Note Exchange Offer which deferred the
earliest redemption requirement from $29.6 million during 1992 to a quarterly
redemption of $4.5 million beginning September 30, 1995. The other major portion
of the Refinancing that affected long-term liquidity was the Class A Exchange
which reduced the redemption requirements from $19.6 million in 1993 and $9.8
million in each of 1994, 1995, and 1996 to a single redemption requirement of
$7.1 million at December 31, 1996.
While no assurances can be given, management believes that the Company's
operations, along with continued availability of the Revolving Credit Facility
(or similar arrangements), will provide adequate sources of liquidity to meet
the Company's anticipated short and long term liquidity needs.
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BUSINESS
ALC is the holding company for Allnet Communication Services, Inc. and
conducts no other business. Allnet provides long distance telecommunications
services primarily to commercial and, to a lesser extent, residential
subscribers in the majority of the United States and completes subscriber calls
to all directly dialable locations worldwide. Allnet is one of the few
nationwide carriers of long distance services and in 1992 carried in excess of
600 million calls over its network.
INDUSTRY AND COMPETITION
Since 1984, when AT&T was forced to divest its 22 local telephone
companies, (the "AT&T Divestiture Decree") the long distance business has
undergone a transformation. AT&T is a dominant long distance competitor in the
telecommunications services market, with the major alternative long distance
telephone carriers being MCI and Sprint.
The Company views the long distance industry as a three tiered industry
which is dominated on a volume basis by the nation's three largest long distance
providers: AT&T, MCI and Sprint. AT&T, MCI and Sprint, which generate an
aggregate of approximately 88% of the nation's long distance revenue of
approximately $65 billion, comprise the first tier. Allnet is positioned in the
second tier with four other companies with annual revenues of $250-$800 million
each. The third tier consists of more than 300 companies with annual revenues of
less than $250 million each, the majority below $50 million each. Allnet targets
small-and medium-sized commercial customers ($100 to $50,000 in monthly long
distance volume) with the same focus and attention to customer service that
AT&T, MCI and Sprint offer to large commercial customers.
The Company believes it is, in one important aspect, in an advantageous
position vis-a-vis the first tier carriers because it focuses on a highly
profitable segment of the long distance industry with high operating margins,
specifically, commercial accounts, whose calling volume consists primarily of
calls made during regular business hours which command peak-hour pricing. Allnet
operates its own switches, develops and implements its own products, monitors
and deploys its transmission facilities and prepares and designs its own billing
and reporting systems. Allnet is one of the few long distance companies with the
ability to offer high quality value-added services to small-and medium-sized
commercial customers on a nationwide basis. Several of the Company's second tier
competitors and all of the third tier competitors are primarily regional in
nature, limited by the size of their transmission systems or dependent on third
parties for their billing services and product offerings.
Despite significant recessionary pressure throughout the United States,
long distance telecommunications traffic grew at an annual rate of approximately
6.5% in 1992 over 1991. Although the industry as a whole grew more slowly than
in prior periods, growth remained positive. The Company's performance has
outpaced industry trends with an increase in traffic of 9.6% and revenue of 8.4%
during 1992. Traffic grew by 7.1% and revenue grew by 6.4% during 1991.
In the long distance telecommunications industry, a certain level of
customer attrition is inherent. Attrition averaged 1.8% per month for the year
ended December 31, 1992, 2.0% per month for the year ended December 31, 1991 and
2.2% per month for the year ended December 31, 1990. To retain its commercial
and residential customer base, Allnet continues to implement programs and
enhancements such as value-added services, agent and association sales to
residential users, improved customer service and competitive price adjustments.
PRODUCTS AND SERVICES
Allnet provides a variety of long distance telephone products and services
to commercial and residential subscribers nationwide. The bulk of the Company's
revenue is derived from outbound and inbound long distance services which are
all under the "Allnet(R)" trademark. Many of the Company's products, however,
differ from those of certain of its second tier and third tier competitors due
to the level of value-added services Allnet offers, the flexibility of product
pricing to maintain competitiveness and the broader geographic reach of
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Allnet. In addition, because of the Company's size, the concentration of its
commercial accounts and its aggressive management team, Allnet has been able to
rapidly develop and implement new products.
The variety of products offered are categorized by Allnet based upon
certain primary characteristics: pricing, value-added services, reporting and
800 Services.
Pricing. All of the Company's customers are identified by their telephone
number, dedicated trunk or validated access code, and have a rating which is
used to determine the price per minute that they pay on their outbound or
inbound long distance calls. Rates typically vary by the volume of usage, the
distance of the calls, the time of day that calls are made, the region that
originates the call, and whether or not the product is being provided on a
promotional basis. The outbound commercial product line is broken into three
major types of services.
Regional: Rates vary by area code or region and subscribers pay a flat
rate for all long distance calls within these area codes or regions.
Rates are determined by competitive positioning and vary according to
the 75 regions which Allnet currently services. These products are
priced at the area code level, and rates offered on these products are
the primary method used to compete with small and more regionalized
carriers.
Nationwide: Rates are by mileage bands set at a distance around the call
initiating point.
Long Haul: Rates are designed for users who tend to make substantial
bicoastal and international calls. These products offer
distance-insensitive domestic pricing and two time-of-day period rates,
along with aggressive international pricing options.
The Allnet outbound residential product line is made up of Allnet "Dial 1"
Service which also has two special discount options to service employees of
commercial accounts ("EBP") and members of associations ("ABP").
Different rates are applied to inbound telephone services than to outbound
telephone services. The inbound product line is provided for commercial accounts
which use 800 telephone numbers to receive and pay for calls from customers and
potential prospects and for residential accounts wishing similar type services.
Due to the high losses experienced by the industry with "700" and "900"
numbers which require that charges be paid by the caller, the Company does not
provide these services to its customers.
Value-added Services. When customers subscribe to value-added services on
the Company's network, their calls follow different routes and are charged a fee
based on the services provided. Customers access value-added services through
"Allnet Access(R)," which is an interactive voice response system that allows
subscribers to interact with the phone system by pressing numbers on the
telephone. Allnet Access(R) is a customized platform or menu from which
customers select the desired services to which they have subscribed. For
example, a customer who would like to deliver a prerecorded message would dial
an Allnet Access(R) 800 number or through a new streamlined dialing method known
as "00 Platform" from an Allnet presubscribed Touch Tone(R) telephone and select
"call delivery" from the voice menu. If the customer had subscribed to other
services, these services would be offered on the menu as well. Once the customer
makes a selection, the call is routed and charged accordingly.
The Company's value-added services are aimed primarily at the business
subscriber, although Allnet also offers products for residential customers.
Value-added services include: Allnet Call Delivery(R), a message delivery
service which enables a customer to send a prerecorded message to a number;
VoiceQuote, an interactive stock quotation service; Allnet InfoReach(R),
numerous audio/text programs such as news and weather; a voice mail service;
Option USA(R), a service to provide calls to the U.S. from selected
international locations on Allnet Access(R); and three different
teleconferencing services.
During calendar year 1992 Allnet launched a full spectrum of facsimile
services including Allnet Broadcast FAX(R), which allows the customer to send or
fax documents to multiple locations at the same time; fax on demand, which
allows the customer to make a fax document available to people who call an 800
number; fax mail, which allows a customer to receive facsimile messages in a fax
mailbox and pick them
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up at a later date; PC software, which allows the customer to manage his
facsimile lists and documents from a PC; and special international pricing to
accommodate short duration facsimile traffic.
Reporting. Allnet offers its customers a variety of billing options and
media (two sizes of paper invoices [8 1/2X11 or 4X7 inches], diskette, and
magnetic tape) aimed primarily at business customers. When a new commercial
account is opened at Allnet, the customer is offered the opportunity to custom
design the format of its reports. For example, Allnet can include company
accounting codes or internal auditing codes for each call made with each billing
statement. If a customer would like to change a particular reference code for a
telephone line, the code can be changed automatically. The Company's primary
product in this area is "Allnet ESP(R)" or Executive Summary Profile. A typical
Allnet ESP(R) statement breaks out calls in a number of ways: by initiating
caller number, by terminating number, by ranking, by department, by frequently
dialed number/area/country or by time of day. Allnet customers pay a fixed
monthly fee for these custom-tailored billing services. In late 1992, Allnet
ESP(R) II was launched which gives customers graphic reports of traffic patterns
on a nationwide basis by state, within state by area of dominant influence
("ADI") and within ADI by zip code. The Company believes this will be useful to
certain customers for direct response and customer service applications.
The Company also launched its proprietary personal computer reporting
service, Allnet Invoice ManagerSM ("AIM"), which allows customers to design
their own reports, prepare separate itemized bills, do mark-up reporting and
generate numerous other customized reports.
800 Services. In preparation for FCC mandated portability in May 1993
(which will allow customers to select a different long distance carrier without
changing their 800 number) the Company has greatly expanded its 800 product
offerings. These new offerings include area code blocking and routing; time of
day routing; Home ConnectionSM 800, fractional 800 service which allows
residential customers to acquire 800 service utilizing a 4 digit security
Personal Identification Number ("PIN"); Multi-PointSM 800 services, which allow
the customer to use accounting codes on an 800 number or route a single 800
number to numerous locations simultaneously; Follow-Me 800, which allows a
customer to change his routing from a touch tone telephone; and TargetlineSM
800, which routes calls to the closest location and provides custom prompts
based upon a customer specific database.
In the third quarter of 1992, eight months prior to FCC mandated
portability, Allnet offered AT&T customers the opportunity to become portable
and use Allnet products, services and rating without changing their 800 number.
The Company believes that Allnet is the only nationwide carrier to provide this
service. This functionality combined with the Allnet single bill for all
services, customized reporting, routing functionality and combined volume
discounts has met with significant customer response.
MARKETING
Approximately 60% of the Company's employees are engaged in sales,
marketing or customer services. Allnet markets its services and products through
personal contacts with an emphasis on customer service, network quality,
value-added services, reporting, rating and promotional discounts. Allnet
currently operates a sales network with 49 offices in the United States. The
Company employs 953 sales, marketing and customer service individuals, of which
451 are field sales representatives. Field sales representatives focus on making
initial sales to commercial users. They solicit business through face-to-face
meetings with small-to medium-sized businesses. Each field sales representative
earns a commission dependent on the customer's usage and value-added services.
The Company's sales strategy is to make frequent personal contact with existing
and potential customers.
The prices and promotions offered for the Company's services are designed
to be competitive with other long distance carriers. Prices will vary as to
interstate or intrastate calls as well as with the distance, duration and
time-of-day of a call. In addition, Allnet may offer promotional discounts based
upon duration of commitment to purchase services, incremental increases in
service or "free" trial use of the many value-added and reporting services.
Volume discounts are also offered based upon amount of monthly usage in the day,
evening and night periods or based solely on total volume of usage.
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Allnet has three groups which provide ongoing customer service designed to
maximize customer satisfaction and increase usage. First, customer service
personnel located in Southfield, Michigan are available telephonically free of
charge 24 hours a day, seven days a week. Allnet recently opened a second
customer service center in Columbus, Ohio to process calls from customers with
significant usage levels who have been enrolled in the Company's "select
service" programs. Second, corporate account specialists provide proactive
telephonic support to mid-sized commercial accounts. Third, communications
specialists provide personal service to larger commercial accounts.
Allnet services more than 263,000 customers located in almost every state
in the country. Of these customers, approximately 151,000 are commercial
accounts, with the remainder being residential accounts. During the past two
years, Allnet has become more geographically diversified, adding new markets as
necessary. Allnet is currently focusing on an agent and association program to
increase customer acquisition in specific target markets and small remote
markets.
Allnet continues to explore ways to increase traffic on its network during
non-peak hours, including marketing strategies to tap specific residential
target markets such as association with popular consumer items or cultural
events and organizations.
TRANSMISSION FACILITIES
The ability of Allnet to operate profitably is largely dependent on
utilizing transmission circuits at cost effective rates. Allnet has generally
avoided the large capital requirements of building its own network by entering
into low cost fixed price contracts for bulk transmission capacity. Allnet
transmits its nationwide long distance services through state-of-the-art
transmission equipment. Allnet has sufficient switching capacity, local access
circuits and long distance circuits to permit subscribers to obtain access to
its switching centers and its long distance circuits on a basis which the
Company believes exceeds industry standards regarding clarity, busy signals or
delays. The Company has end-to-end control of each long distance call through
surveillance equipment located at each switching center and major points of
presence.
The Allnet network utilizes fiber optic and digital microwave transmission
circuits to complete long distance calls. With the exception of twelve digital
microwave links located in California for which Allnet holds the FCC licenses,
such facilities are leased on a fixed price basis under both short and long term
contracts. In recent years abundant availability and declining prices have
dictated a strategy of generally obtaining new capacity for terms between six
months and one year. While the Company has several long term contracts, these
contracts have either annual "mark-to-market" clauses or, in one case, a "most
favored nation" clause. These provisions function to keep the price the Company
pays at or near current market rates. An important aspect of the Company's
operation is planning the mix of the types of circuits and transmission capacity
to be leased or used for each network switching center so that calls are
completed on a basis which is cost effective for the Company without
compromising prompt service and high quality to subscribers. Over 99% of the
Company's domestic traffic is carried on owned or leased facilities ("on-net").
In establishing a network switching center, the Company can select
equipment with varying capacities in order to meet the anticipated needs of the
service origination area or areas served by the center. The equipment used by
the Company is, for the most part, designed to permit expansion to its capacity
by the addition of standard components. If the maximum capacity of the equipment
in any center is reached, the Company replaces it with higher capacity switching
equipment and attempts to move the replaced unit to a network switching center
in a different service origination area. The Company is dependent upon the local
telephone company for installing local access circuits and providing related
service when establishing a network switching center. As of December 31, 1992,
the Company had 16 network switching centers which originate traffic in 190
Local Access Transport Areas ("LATAs"). International service is provided
through participation in the International Carrier Group ("ICG") with three
other second tier long distance companies. The ICG in turn contracts with other
long distance companies and foreign entities to provide high quality
international service at competitive rates.
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REGULATION
Generally, the current trend is toward lessened regulation for both Allnet
and its competitors. As a nondominant Interexchange Carrier ("IXC"), Allnet is
not required to maintain a certificate of public convenience and necessity with
the FCC other than with respect to international calls, although the FCC retains
general regulatory jurisdiction over the sale of interstate long distance
services by IXCs, including the requirement that calls be charged on a
nondiscriminatory, just and reasonable basis. Although the FCC has ruled that
nondominant carriers, such as Allnet, do not need to file tariffs for their
interstate service offerings, a recent Court of Appeals decision has vacated
that FCC decision. The Company believes that the potential impact of the Court
of Appeals decision on Allnet will be minimal and primarily administrative in
nature. Allnet has already taken any necessary steps to comply with that
decision, including filing an interstate tariff with the FCC. The Company
believes that it has operated and continues to operate in compliance with all
applicable tariffing and related requirements of the Communications Act of 1934,
as amended. Additionally, in a recent decision by the FCC implementing certain
provisions of the Telephone Operator Consumer Services Improvement Act
("TOCSIA"), Allnet was designated subject to the payment of charges by "private
payphone owners." Allnet presently is challenging that designation, as it does
not believe that it is engaged in the sort of activity intended to be regulated
under TOCSIA. Finally, by virtue of its ownership of interstate microwave
facilities located in California (as described in "Transmission Facilities"),
Allnet is subject to the FCC's common carrier radio service regulations.
In 1984, pursuant to the AT&T Divestiture Decree, AT&T divested its 22 Bell
Operating Companies ("BOCs"). In 1987, as part of the triennial review of the
AT&T Divestiture Decree, the U.S. District Court for the District of Columbia
denied the BOCs' petition to enter, among other things, the inter-LATA (local
access transport areas) long distance telecommunications market. The District
Court's ruling was appealed to the United States Court of Appeals for the
District of Columbia which, in 1990, affirmed the District Court's decision to
retain the inter-LATA prohibition for the BOCs. If the BOCs ultimately are
permitted to provide inter-LATA long distance telecommunications services,
existing IXCs, including Allnet, would likely face substantial additional
competition from local BOC monopolies.
Currently, Allnet and the IXCs with which it competes other than AT&T are
subject to less regulation and have greater pricing flexibility than AT&T.
However, the general trend of the FCC is to treat AT&T interexchange domestic
business services as competitive and lessen FCC review of the rates AT&T charges
for many of its business services. As regulatory changes in the nature of more
streamlined regulation are adopted, however, AT&T may more aggressively offer
and price its services, which, in turn, could affect the Company's rates and its
costs of doing business.
As part of the AT&T Divestiture Decree, the divested BOCs were required to
charge AT&T and all other carriers (including Allnet) equal per minute rates for
"local transport" service (the transmission of switched long distance traffic
between the BOCs' central offices and the IXCs' points of presence). BOC and
other local exchange company ("LEC") tariffs for local transport service have
been based upon these "equal per unit" rules since 1984, pursuant to the AT&T
Divestiture Decree and the FCC's waiver of its inconsistent local transport
pricing rules. Although the portion of the AT&T Divestiture Decree containing
this rule ceased to be effective by its terms on September 1, 1991, the FCC has
extended its effect until it concludes the rulemaking proceeding in which it is
considering whether to retain or modify the "equal per unit" local transport
pricing structure. On September 17, 1992, the FCC voted in a public meeting to
maintain the existing "equal per unit" pricing rules until late 1993. A two year
transition plan would then begin. In a press release issued on the date of the
FCC's vote, the FCC stated that it was taking a cautious approach by adopting an
interim rate structure and pricing plan that has minimal effects on medium and
small long-distance carriers. Local telephone companies estimate that the
interim plan would increase the switched access costs of small long-distance
carriers by less than 1.8%. This translates into a less than 1% increase in
total operating costs of these carriers. Based on the text of the FCC Decision
itself, both of which provide generic descriptions of how access rates should be
assessed, Allnet does not anticipate these decisions will have a material impact
during the next three years; however, with respect to 1994 and 1995, further
information, including the actual access rates that will be applied, would have
to be made available to more accurately assess any impact. The local exchange
carriers are not expected to file these rates until the second
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half of 1993. As an aid in reducing IXC costs, the FCC has ordered that charges
for reconfiguring a carrier's access services should be waived until May 1994,
to accommodate the change in access pricing structure.
The FCC has left open the access rate structure issue for the post 1995
period. The FCC issued a Further Notice of Proposed Rulemaking for consideration
of a permanent rate structure to take effect beginning no earlier than late
1995. The FCC also voted to seek comment on expanding competition for monopoly
local access. This could ultimately provide Allnet with alternatives to
purchasing all of its local access from the monopoly local exchange carriers.
On February 5, 1993, the FCC issued a public notice stating that it had
ruled that carriers, such as Allnet, were entitled to damages for overcharges
paid to a number of local exchange carriers during the 1985-1986 and 1987-1988
period. The exact amounts of the awards for Allnet are not known at this time
but could be significant. In addition Allnet has pending claims for overcharges
during the 1989-1990 period. At this time, Allnet is not aware of any pending
rulings on these additional claims.
The intrastate long distance telecommunications operations of Allnet are
also subject to various state laws and regulations, including certification
requirements. Generally, Allnet must obtain and maintain certificates of public
convenience and necessity as well as tariffs from regulatory authorities in most
states in which it offers intrastate long distance services, and in most of
these jurisdictions must also file and obtain prior regulatory approval of
tariffs for its intrastate offerings. At the present time, Allnet can provide
originating services to customers in 46 states and the District of Columbia.
Those services may terminate in any state in the United States, and may also
terminate to countries abroad. Of the states in which Allnet provides
originating service, only 29 have public utility commissions that actively
assert regulatory oversight over the services currently offered by Allnet. Like
the FCC, many of these regulating jurisdictions are relaxing the regulatory
restrictions currently imposed on telecommunication carriers for intrastate
service. In addition, some of these states restrict the offering of intra-LATA
long distance services by Allnet and other IXCs. However, the general trend is
toward opening up these markets to Allnet and other IXCs. Those states that do
permit the offering of intra-LATA services by IXCs generally require that end
users desiring to access these services dial special access codes which places
Allnet and other IXCs at a disadvantage as compared to LEC intra-LATA toll
service which generally requires no access code.
There can be no assurance that the regulatory authorities in one or more
states or the FCC will not take action having an adverse effect on the business
or financial condition of Allnet.
EMPLOYEES
As of December 31, 1992, Allnet had 1,568 employees, none of whom were
subject to any collective bargaining agreements.
PROPERTIES
On December 31, 1992, Allnet had under lease approximately 113,000 square
feet of office space in Bingham Farms, Michigan for executive and administrative
functions, approximately 43,000 square feet in Southfield, Michigan for customer
service, collections, and data processing. Allnet also leases approximately
311,000 square feet in the aggregate for sales and administrative offices,
network switching centers and unmanned operations sites in 90 other locations in
the continental United States.
Most of the leased premises are for an initial term of five-to-ten years
with, in many cases, options to renew. All properties presently being used for
operations of Allnet are suitable, well maintained and equipped for the purposes
for which they are used.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Board of Directors of ALC consists of seven positions: one elected by
the holders of Class A Preferred; two by the holders of Class B Preferred; one
by the holders of Class C Preferred; two by the holders of Common Stock (in each
case, voting as a separate class); and one elected by all stockholders voting
together as one class. Five of those positions are presently filled. If all of
the shares of Class B Preferred and/or Class C Preferred are converted into
Common Stock, ALC intends to take appropriate action whereby all provisions
relating to such class of stock in the Restated Certificate of Incorporation of
ALC (the "Certificate") would be eliminated. If this occurs, the positions to be
filled by vote of the holders of that class would then be filled by vote of all
stockholders voting together as one class. The directorship to be filled by the
Class A Preferred holders and one directorship to be filled by the Class B
Preferred holders remain vacant.
The following table sets forth the executive officers and directors of the
Company as of December 31, 1992. Executives are elected annually and serve at
the pleasure of the Board.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- ------------------------------------------------
<S> <C> <C>
Richard D. Irwin..................... 57 Chairman of the Board of Directors
John M. Zrno......................... 54 President, Chief Executive Officer and Director
Marvin C. Moses...................... 48 Executive Vice President, Chief Financial
Officer, Assistant Secretary and Director
William H. Oberlin................... 48 Chief Operating Officer, Executive Vice
President -- Sales and Marketing
Gregory M. Jones..................... 42 Senior Vice President
Dennis R. Banks...................... 49 Vice President -- Field Operations
Stephen G. Canton.................... 36 Vice President -- Sales
S. Danielle Conroyd.................. 45 Vice President -- Human Resources
Steven A. Fernald.................... 45 Vice President -- Engineering
Connie R. Gale....................... 46 Vice President, General Counsel and Secretary
Charles I. Gragg, III................ 34 Vice President -- Marketing
Marilyn M. Lesnau.................... 39 Controller (Chief Accounting Officer)
Thomas A. Marino..................... 50 Vice President -- Administrative and Technical
Services
David C. Patterson................... 47 Vice President -- Management Information Systems
David J. Thomas...................... 42 Vice President, Treasurer
Richard J. Uhl....................... 52 Director
Michael E. Faherty................... 57 Director
</TABLE>
RICHARD D. IRWIN has held the position of Chairman of the Board of
Directors since August 1988. He is the President of Grumman Hill Associates,
Inc. ("Grumman Hill"), a merchant banking firm, having held that position since
its formation in 1985. Prior to the formation of Grumman Hill, Mr. Irwin was a
Managing Director of Dillon, Read & Co. Inc. from 1983 through 1985. Mr. Irwin
is also a member of the Board of Directors of Mountain Medical Equipment, Inc.
and Pharm Chem Laboratories, Inc.
JOHN M. ZRNO has held the positions of President, Chief Executive Officer
and Director since August 1988. From December 1981 until joining Allnet, Mr.
Zrno held a number of executive positions with Cable & Wireless North America,
Inc., the most recent of which was President and Chief Executive Officer.
Between 1972 and 1981, Mr. Zrno first served as an officer of MCI, then as an
officer of American Satellite Corporation, a satellite common carrier, and
finally as an officer of F/S Communications Corporation, an independent
telephone interconnect company.
MARVIN C. MOSES has held the positions of Executive Vice President, Chief
Financial Officer and Assistant Secretary since October 1988. Mr. Moses was
elected as a Director in September 1989. From February 1982 through September
1988, Mr. Moses held a number of executive positions with Cable & Wireless North
America, Inc., the most recent of which was Chief Financial Officer and Senior
Vice
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<PAGE> 125
President. From 1980 through February 1982, Mr. Moses worked with Atlantic
Research Corporation, where he was involved in obtaining project financing for
an alternative energy product. From 1975 to 1980, Mr. Moses was Vice President
- -- Finance and Chief Financial Officer of GTE Telenet, a data communications
company now part of Sprint.
WILLIAM H. OBERLIN has held the position of Chief Operating Officer since
July 1990 and has held the position of Executive Vice President -- Sales and
Marketing since October 1988. From November 1983 through September 1988, Mr.
Oberlin held a number of executive positions with Cable & Wireless North
America, Inc., the most recent of which was Senior Vice President -- Sales and
Marketing. During 1983, Mr. Oberlin was founder and principal shareholder of
Electronic Express, Inc., a facsimile-based priority mail and delivery system.
From April 1982 through March 1983, Mr. Oberlin was Chief Executive Officer of
DHL Business Systems, Inc., a worldwide manufacturer and distributor of word
processing terminals. From 1974 through April 1982, Mr. Oberlin was employed by
Sprint. From September 1979 through April 1982, Mr. Oberlin was President of
Southern Pacific/Distributed Message Systems, Inc., distributors of facsimile
machines and electronic mail services.
GREGORY M. JONES has held the position of Senior Vice President since
December 1990 and had formerly served as Vice President -- Marketing since
January 1989. Mr. Jones was previously director of Sure Check and Retail
Services, Inc., a wholly owned subsidiary of Comp-U-Check, Inc. From July 1979
to June 1987 Mr. Jones held various positions with MCI including director of
marketing for MCI Midwest in Chicago, senior manager of telemarketing, and
senior manager of customer service.
DENNIS R. BANKS has held the position of Vice President -- Field Operations
since January 1992 and formerly served as director of Eastern region operations
since November 1982. Mr. Banks commenced his employment with the Company July
1982 as manager of transmission and switch engineering. From June 1978 through
June 1982 Mr. Banks was a manager of the Network Management Center for ITT. From
1973 through May 1978 Mr. Banks held various positions with MCI, the most recent
of which was field operations manager, Northeast Ohio.
STEPHEN G. CANTON has held the position of Vice President -- Sales since
May 1991 and formerly served as Regional Vice President -- East at the
Washington D.C. sales office since November 1989 and as regional sales director
since December 1988. Mr. Canton was a sales executive with Cable & Wireless
North America, Inc. from 1983 through 1986 and 1987 through 1988 as well as with
Bell Atlantic during the interim period between 1986 and 1987.
S. DANIELLE CONROYD has held the position of Vice President -- Human
Resources since April 1989. From October 1987 to April 1989 Ms. Conroyd was a
Senior Vice President, Human Resources for Mercy Hospitals of Detroit. From
March 1980 to September 1987 Ms. Conroyd was Vice President, Human Resources for
Mount Carmel Hospital in Detroit.
STEVEN A. FERNALD has held the position of Vice President -- Engineering
since May 1991 and formerly served as director of the Network Control Center
since January 1989 and manager of the Network Control Center since June 1986.
Mr. Fernald was a manager at Sprint from June 1975 to June 1986.
CONNIE R. GALE has held the position of Vice President since January 1991
and has held the positions of General Counsel and Secretary since October 1988,
commencing her employment with the Company in December 1986 as Associate General
Counsel and Assistant Secretary. Ms. Gale previously served as corporate counsel
for Chrysler Corporation from July 1973 to February 1980 and for American
Natural Resources, Inc. from February 1980 to March 1981. Ms. Gale was Associate
General Counsel at Federal-Mogul Corporation from April 1981 to November 1986.
CHARLES I. GRAGG, III has held the position of Vice President -- Marketing
since September 1992 and formerly served as director of marketing since
September 1991. Mr. Gragg was previously Vice President, Marketing for Phase II
Corporation, a telecommunications consulting firm specializing in overseas
cellular and paging systems, where he served in a number of positions since
November 1986. From November 1985 to November 1986, Mr. Gragg was Vice President
Marketing and a director of Kensington Communications, a
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<PAGE> 126
microcomputer accessories and software firm. Mr. Gragg has also held senior
management positions with Computer Sciences Corporation's Infonet division and
Western Union.
MARILYN M. LESNAU has held the position of Controller since March 1988,
commencing her employment with the Company in September 1986 as director,
corporate accounting. From 1984 to March 1986 Ms. Lesnau served as director of
sales and director of finance for Dayton Hudson Corporation. Ms. Lesnau's
previous experience included seven years with Ernst & Young, a certified public
accounting firm.
THOMAS A. MARINO has held the position of Vice President -- Administrative
and Technical Services since April 1992 and formerly served as director of
network administration since January 1987, commencing his employment in June
1986 as director of programs and projects. From February 1974 to June 1986, Mr.
Marino held various operations and management positions with Sprint, the most
recent of which was Eastern area director -- network operations. From January
1964 to January 1974, Mr. Marino held various positions with Western Union
Telegraph Company, the most recent of which was technical services supervisor.
DAVID C. PATTERSON has held the position of Vice President -- Management
Information Systems since January 1991. Mr. Patterson had previously served as a
director of data processing since the commencement of his employment with the
Company in August 1989. From February 1972 through August 1989, Mr. Patterson
was a data processing manager for Electronic Data Systems, a subsidiary of
General Motors Corporation.
DAVID J. THOMAS has held the position of Vice President since January 1991
and has held the position of Treasurer since October 1989. Mr. Thomas served in
a variety of managerial capacities in the areas of network cost management,
revenue protection and credit and collections since the commencement of his
employment with the Company in January 1983. Mr. Thomas previously was employed
by Ford Motor Company as assistant to the Controller and by Abbott Laboratories
in several analytical capacities.
RICHARD J. UHL has held the position of Director since September 3, 1991.
Mr. Uhl is the President and a member of the Board of Directors of Chicago
Holdings, Inc. ("CHI"), having held those positions since 1985. CHI is a
privately owned company which manages several lease portfolios owned by it and
its subsidiaries and which invests in operating companies on a selective basis,
generally taking a controlling equity position. Since November 1990 he has also
been the Chief Executive Officer and a member of the Board of Directors of
Hurrah Stores, Inc. ("Hurrah"). Hurrah is a subsidiary of CHI, which through a
wholly-owned subsidiary operates approximately 125 junior women's clothing
stores, principally in the midwest. Mr. Uhl has also been President of Steiner
Financial Corporation, another subsidiary of CHI, since December 1987. Prior to
1991, Mr. Uhl served in a number of executive capacities as well as on the
Boards of Directors of certain finance organizations as well as a distributor of
personal computer equipment, and a manufacturer of automotive products.
MICHAEL E. FAHERTY has held the position of Director since June 23, 1992.
Mr. Faherty primarily works (since 1977) as a business consultant and in the
contract executive business, in connection with which Mr. Faherty currently
serves as the President and Chief Executive Officer of Shared Financial Systems,
Inc., having held those positions since January 1992. Shared Financial Systems,
Inc. is a worldwide provider of software and consulting services to data
processing market segments that utilize on-line transaction processing. As part
of his duties as a contract executive, he has worked for Digital Sound
Corporation, Systeme Corporation, Advanced Business Communications, Inc.,
BancTec, Inc. and Intec Corporation. Mr. Faherty is also a member of the Board
of Directors of BancTec, Inc., Biomagnetic Technologies, Inc. and Davox
Corporation.
The Board of Directors held twelve regularly scheduled and special meetings
in the aggregate during the fiscal year from January 1, 1992 through December
31, 1992.
Several important functions of the Board of Directors of ALC have been
performed by committees comprised of members of the Board of Directors. The
Amended and Restated Bylaws of ALC (the "Bylaws") prescribe the functions and
the standards for membership on the Audit Committee. Subject to those standards,
the Board of Directors acting as a body appoints the members of the Audit
Committee at the
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<PAGE> 127
meeting of the Board of Directors coincident with the annual meeting of
shareholders. However, the Board of Directors has the power at any time to
change the authority or responsibility delegated to the committee or the members
serving on the committee. Under the Bylaws, the Audit Committee performs the
following functions: (i) recommends to the Board of Directors annually a firm of
independent public accountants to act as auditors of the Company; (ii) reviews
with the auditors the scope of the annual audit; (iii) reviews accounting and
reporting principles, policies and practices; (iv) reviews with the auditors the
results of their audit and the adequacy of accounting, financial and operating
controls; and (v) performs such other duties as are delegated to it by the Board
of Directors. The members of the Audit Committee during the 1992 fiscal year
were, prior to July 24, 1992, Ralph J. Swett, Richard D. Irwin and Richard J.
Uhl; prior to August 17, 1992, Ralph J. Swett, Richard D. Irwin, Richard J. Uhl
and Michael E. Faherty; and, subsequent to August 17, 1992, Richard D. Irwin,
Richard J. Uhl and Michael E. Faherty. During 1992, the Audit Committee met four
times. Ralph J. Swett resigned from the Board of Directors and its committees
effective August 17, 1992.
The Board, pursuant to the Bylaws, also established a Compensation
Committee. The Compensation Committee has the authority to: (i) establish the
compensation (including salaries and bonuses) of the officers; (ii) establish
incentive compensation plans for the officers; (iii) administer the stock option
plans and grants of options under those plans; and (iv) perform such other
duties as are from time to time delegated to the Compensation Committee by the
Board of Directors. The members of the Compensation Committee during fiscal
1992, prior to July 24, 1992, were Ralph J. Swett, Richard D. Irwin and Richard
J. Uhl; prior to August 17, 1992, Ralph J. Swett, Richard D. Irwin, Richard J.
Uhl and Michael E. Faherty, and, subsequent to August 17, 1992, Richard D.
Irwin, Richard J. Uhl and Michael E. Faherty. During 1992, the Compensation
Committee met five times.
The Board of Directors does not have a standing committee responsible for
nominating individuals to become directors.
OFFICER AND DIRECTOR COMPENSATION
Director Compensation
From 1988 through 1991, the Company's practice was that directors who are
not employees of ALC would receive remuneration of up to $12,000 per year for
their services as Board members (one-half of the fee is dependent upon per
meeting attendance at the four regularly scheduled Board meetings). For 1992,
and to be continued for 1993, Richard J. Uhl and Michael E. Faherty will receive
remuneration of up to $20,000 per year for their services as Board members. Of
that fee, $8,000 is dependent upon per meeting attendance at the four regularly
scheduled Board meetings. Ralph J. Swett and Richard D. Irwin waived their right
to fees throughout their respective service on the Board. On September 3, 1991,
ALC granted Richard J. Uhl an option to purchase 40,000 shares of Common Stock
at $4.25 per share, the market price at date of grant. The option vests 25% on
each of January 1, 1992, June 1, 1992, January 1, 1993 and June 1, 1993 and
expires on the earlier of 60 days subsequent to Mr. Uhl's death, resignation or
removal as a director and September 3, 1998. On June 23, 1992, ALC granted
Michael E. Faherty an option to purchase 40,000 shares of Common Stock at $4.63
per share, the market price at date of grant. The option vests 25% on June 23,
1992, 50% on January 1, 1993 and 25% on June 1, 1993 and expires on the earlier
of 60 days subsequent to Mr. Faherty's death, resignation or removal as a
director and June 23, 1998. In addition, Grumman Hill, of which Richard D. Irwin
is President, entered into an Advisory Agreement with Stock Option (the
"Advisory Agreement") with the Company. Pursuant to the terms of the Advisory
Agreement, Grumman Hill performs certain advisory services with respect to the
management, operation and business development activities of the Company. In
exchange for such services, Grumman Hill will receive an annual fee of $100,000
and was initially granted a stock option to purchase at a price of $11.25 per
share 153,163 shares of Common Stock. In conjunction with the 1990 phase of the
Refinancing, this option was regranted at an exercise price of $3.50 per share.
The option was subsequently assigned to Grumman Hill Investments, L.P. ("Grumman
Hill, L.P.") (of which Mr. Irwin is the General Partner). Grumman Hill, L.P. is
entitled to exercise the option in full. The Company does not anticipate that
the Common Stock issuable upon the exercise of the option will be registered
under the Securities Act. The option will expire on September 7, 1998. Grumman
Hill received an
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<PAGE> 128
additional advisory fee of $150,000 due to its efforts in the 1990 phase of the
Refinancing, which then was reinvested in the Company as part of the 1990 phase
of the Refinancing. The Company paid Grumman Hill an advisory fee of $250,000 in
connection with its efforts in the 1992 phase of the Refinancing.
Executive Compensation
SUMMARY COMPENSATION TABLE
The following table summarizes the total compensation paid to the Chief
Executive Officer and the four most highly compensated executive officers at the
end of calendar year 1992 for each of the past three fiscal years during which
the named executive acted as an executive officer.
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------- -----------------------
AWARDS
OTHER -------
ANNUAL OPTION/ ALL OTHER
COMPENSATION SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) (#)(2) ($)(3)
- -------------------------------- ---- -------- -------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
John M. Zrno.................... 1992 $307,755 $175,000 284,983 $500
President, Chief Executive 1991 292,025 105,000 --
Officer, Director 1990 282,994 68,000 637,231
Marvin C. Moses................. 1992 $234,998 $135,000 217,398 $500
Executive Vice President, 1991 223,256 81,000 --
Chief Financial Officer, 1990 214,837 51,000 524,838
Assistant Secretary, Director
William H. Oberlin.............. 1992 $234,893 $135,000 217,398 $500
Chief Operating Officer, 1991 223,172 81,000 --
Executive Vice President-Sales 1990 215,288 38,000 524,838
and Marketing
Gregory M. Jones................ 1992 $135,090 $ 49,708 $ 860(4) 55,092 $500
Senior Vice President 1991 128,260 25,425 --
1990 118,250 19,965 71,102
Connie R. Gale.................. 1992 $130,250 $ 48,280 47,385 $500
Vice President, General 1991 122,000 28,750 10,000
Counsel and Secretary
</TABLE>
- -------------------------
(1) Total perquisites for each officer were less than either $50,000 or 10% of
total salary and bonus.
(2) Options granted in 1992 include options granted in 1990 and amended in 1992
(the exercise price was not changed).
(3) Consists of Company contributions to defined contribution plan during 1992
in the amount of $500 for each officer listed.
(4) Represents gross up for income taxes relating to a perquisite.
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<PAGE> 129
Stock Option Awards During Last Fiscal Year
The following table sets forth information about stock option awards
granted to the Chief Executive Officer and the four most highly compensated
executive officers during 1992.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
- ------------------------------------------------------------------------------------- ANNUAL RATES OF
% OF TOTAL STOCK PRICE
OPTIONS/SARS APPRECIATION FOR
GRANTED TO EXERCISE OR OPTION TERM*
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION --------------------
NAME GRANTED(#)(1) FISCAL YEAR ($/SH) DATE(6) 5%($) 10%($)
- -------------------------- ------------ ------------ ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
John M. Zrno.............. 137,214(2)(3) 8.60% $3.50 6/6/2000 $302,557 $763,596
52,657(4) 3.30% $4.50 5/14/2002 $149,283 $376,761
95,112(5) 5.96% $5.88 7/24/2002 $352,333 $889,221
Marvin C. Moses........... 114,236(2)(3) 7.16% $3.50 6/6/2000 $251,890 $635,723
36,762(4) 2.31% $4.50 5/14/2002 $104,220 $263,032
66,400(5) 4.16% $5.88 7/24/2002 $245,972 $620,787
William H. Oberlin........ 114,236(2)(3) 7.16% $3.50 6/6/2000 $251,890 $635,723
36,762(4) 2.31% $4.50 5/14/2002 $104,220 $263,032
66,400(5) 4.16% $5.88 7/24/2002 $245,972 $620,787
Gregory M. Jones.......... 15,102(2)(3) 0.95% $3.50 6/6/2000 $ 33,300 $ 84,043
15,000(4) 0.94% $4.50 5/14/2002 $ 42,525 $107,325
24,990(5) 1.57% $5.88 7/24/2002 $ 92,573 $233,637
Connie R. Gale............ 9,390(2)(3) 0.59% $3.50 6/6/2000 $ 20,705 $ 52,255
13,500(4) 0.85% $4.50 5/14/2002 $ 38,273 $ 96,593
24,495(5) 1.54% $5.88 7/24/2002 $ 90,739 $229,009
</TABLE>
- -------------------------
* These amounts represent assumed rates of appreciation which may not
necessarily be achieved. The actual gains, if any, are dependent on the market
value of the Company's stock at a future date as well as the option holder's
continued employment throughout the vesting period. Appreciation reported is
net of exercise price.
(1) All options were granted at market value on date of grant. The 1990 Stock
Option Plan allows the exercise price and tax withholding obligations to be
paid by delivery of already owned shares or with shares purchased pursuant
to the exercise, subject to certain conditions. Vesting may be accelerated
in the event of certain situations resulting in a change of ownership of
the Company. The Compensation Committee, as administrator of the Company's
stock option plans, has discretion to modify the terms of outstanding
options, subject to certain limitations set forth in the plans.
(2) The options become exercisable over a three year period, 50% on June 6,
1992, 25% on each of June 6, 1993 and June 6, 1994.
(3) Amendment of options granted in 1990 at the same exercise price, but which
were formerly exercisable only upon the occurrence of certain events as
provided in the option agreement.
(4) 25% of the options become exercisable each year over a four year period with
vesting beginning on May 14, 1993.
(5) 25% of the options become exercisable each year over a four year period with
vesting beginning on July 24, 1993.
(6) Unless earlier terminated due to such events as termination of employment or
death.
OPTION EXERCISES AND FISCAL YEAR END OPTION VALUES
Neither the Chief Executive Officer nor any of the four most highly
compensated executive officers exercised any options during 1992. The following
table shows the number of exercisable and unexercisable
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<PAGE> 130
options held at the end of 1992 by the named executive officers, and the
aggregate value of in-the-money, unexercised options held by each named officer.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS/SARS
OPTIONS/SARS AT FY END(#) AT FY END ($)(1)
------------------------------ -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John M. Zrno..................... 450,041 334,959 $4,725,431 $ 3,238,041
Marvin C. Moses.................. 359,694 268,306 3,776,787 2,622,419
William H. Oberlin............... 359,694 268,306 3,776,787 2,622,419
Gregory M. Jones................. 63,551 47,541 667,286 424,704
Connie R. Gale................... 49,695 42,690 512,798 376,447
</TABLE>
- -------------------------
(1) Values are calculated by determining the difference between the fair market
value of the Common Stock at December 31, 1992 and the exercise price of
the options.
EMPLOYMENT CONTRACTS AND TERMINATION OR CHANGE IN CONTROL ARRANGEMENTS
In late 1988, ALC entered into employment agreements with John M. Zrno,
Marvin C. Moses and William H. Oberlin. These arrangements have initial four
year terms, amended in 1991 to extend for an additional two years. One of the
provisions of each employment agreement is that, in the event the officer's
employment is terminated for any reason except death, disability, voluntary
resignation or cause, such officer will continue to receive his current salary
from twelve to twenty-four months. Should the officer be terminated without
cause, the stock options granted in the agreement would fully vest and remain
exercisable for the succeeding twelve months.
According to the employment agreements with Messrs. Zrno, Moses and
Oberlin, each officer may receive incentive compensation as determined by the
Board of Directors, based on the Board's determination of the officer's
individual achievements.
Effective February 1, 1990, officers below the level of Executive Vice
President entered into severance agreements wherein the Company agreed to
provide salary continuation and certain employee benefits for a period from
six-to-twelve months should an officer be terminated from employment prior to
January 31, 1991. These agreements were renewed in February 1991 and again in
August 1992. As amended, the agreements cover termination from employment prior
to December 31, 1993. Mr. Jones and Ms. Gale have entered into such agreements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Richard D. Irwin, Chairman of the Board of Directors since August 1988 and
a member of the Compensation Committee, is a former officer of the Company
because, prior to March 1991, the position of Chairman of the Board was an
officer position under the Company's Bylaws.
Grumman Hill, of which Richard D. Irwin is President, entered into the
Advisory Agreement with the Company in 1988. Pursuant to the terms of the
Advisory Agreement, Grumman Hill performs certain advisory services with respect
to the management, operation and business development activities of the Company.
In exchange for such services, Grumman Hill will receive an annual fee of
$100,000 and was initially granted a stock option to purchase 153,163 shares of
Common Stock at a price of $11.25 per share. In conjunction with the 1990 phase
of the Refinancing, this option was regranted at an exercise price of $3.50 per
share. The option was subsequently assigned to Grumman Hill, L.P. (of which Mr.
Irwin is the General Partner). Grumman Hill, L.P. is entitled to exercise the
option in full. It is not anticipated that the Common Stock issuable upon the
exercise of the option will be registered under the Securities Act. The option
will expire on September 7, 1998.
Grumman Hill and Grumman Hill, L.P. participated in the cash financing as
part of the 1990 phase of the Refinancing. These entities held 1990 Notes in the
aggregate original principal amount of $650,000 and were issued 1990 Warrants to
purchase up to 428,090 shares in the aggregate of the Common Stock.
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<PAGE> 131
Grumman Hill received an additional advisory fee of $150,000 due to its efforts
in the 1990 phase of the Refinancing, which then was reinvested in the Company
(and was included in the aggregate principal amount of the $650,000 of 1990
Notes) as part of the 1990 phase of the Refinancing. The Company paid Grumman
Hill an advisory fee of $250,000 in connection with its efforts in the 1992
phase of the Refinancing. The Grumman Hill and Grumman Hill, L.P. 1990 Notes
were amended and replaced in August 1992. Such amended and restated 1990 Notes,
in the principal amounts of $167,516 and $558,386, respectively, were paid in
full as of December 1992.
Prior to the Note Exchange Offer, Grumman Hill, L.P., the Grumman Hill
Associates Pension Plan, Mr. Irwin and Mr. Irwin's Individual Retirement Account
held approximately $2.5 million, $75,000, $339,000 and $188,000, respectively,
in principal amount of Replacement Debentures (exclusive of PIK Debentures
issued or issuable in respect of certain interest payments on the Replacement
Debentures). As a consequence of the Note Exchange Offer, prior to January 28,
1993 Mr. Irwin and Grumman Hill L.P. and affiliates owned $4.1 million in
principal amount of 1992 Notes and owned 194,393 additional 1992 Warrants (as
defined in "The Refinancing"). Mr. Irwin subsequently purchased 40,000 shares of
Common Stock in the 1992 Equity Offering, which, together with other options and
warrants, give these entities the right to purchase in the aggregate up to
815,646 shares of Common Stock. On January 28, 1993, Grumman Hill L.P. sold $1.0
million in principal amount of 1992 Notes. Therefore, Mr. Irwin and Grumman Hill
L.P. and affiliates own $3.1 million in principal amount of 1992 Notes.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
BANKS AND CTI STOCK OWNERSHIP IN THE COMPANY
On June 20, 1988, ALC entered into a Securities Purchase Agreement with
CTI, pursuant to which CTI purchased 1,000,000 shares of Class B Preferred and
1,000,000 shares of Class C Preferred for an aggregate of $30.0 million. Each
share of Class B Preferred and Class C Preferred is convertible into shares of
Common Stock as described below. In addition, the holders of Class B Preferred
and Class C Preferred have the right to elect two and one directors of ALC,
respectively, thereby controlling election of three of the seven Board members.
CTI's purchases of the Class B Preferred and the Class C Preferred were financed
by advances under its credit arrangements with the Banks and Prudential. In
1989, CTI loaned $20.0 million to the Company.
In conjunction with the 1990 phase of the Refinancing, ALC issued 716,200
shares of newly created Class D Preferred Stock (the "Class D Preferred") to CTI
in exchange for certain financing and lease concessions and for a waiver by CTI
of certain anti-dilution rights under the Certificate relating to the shares of
Class B Preferred and Class C Preferred. All outstanding shares of the Class D
Preferred were subsequently converted into 14,324,000 shares of Common Stock.
In August 1992, CTI conveyed the Common Stock, Class B Preferred and Class
C Preferred owned by it to each of the Banks pro-rata in exchange for the
release of certain portions of CTI's obligations to each of the Banks. Thus, the
Banks, in the aggregate, acquired all of the Class B Preferred and Class C
Preferred of ALC, as well as 14,324,000 shares of Common Stock. In October 1992,
the Banks sold, in the aggregate, 3,000,000 shares of Common Stock in the 1992
Equity Offering.
Each share of Class B Preferred and Class C Preferred is convertible at the
option of the holder into 1.898 shares of Common Stock. As owners of 1,000,000
shares of Class B Preferred, 1,000,000 shares of Class C Preferred and
11,324,000 shares of Common Stock, the Banks are entitled to an aggregate of
15,120,000 votes, which represents 54.4% of the total voting power of ALC
capital stock (or 38.3% assuming the exercise of certain warrants and options).
Each of the Banks has advised the Company that the Banks presently have no
agreements, arrangements or understandings with respect to voting the shares of
ALC stock they own. The Banks have disclaimed participation as a "group" for
purposes of Section 13(d) of the Securities Exchange Act of 1934. Each Bank may,
however, be deemed to share the power to dispose of the shares of ALC stock with
the other Banks, since various agreements obligate them to act together with
respect to the disposition of their interests to unaffiliated third parties.
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<PAGE> 132
In August 1992, the Banks entered into a Stock Option Agreement (the "Stock
Option") and a Residual Stock Option Agreement (the "Residual Option" and,
together with the Stock Option, the "Options") with Prudential. By exercise of
the Options, Prudential has the ability to acquire all of the shares of Class B
Preferred, Class C Preferred and Common Stock owned by the Banks. The Options
may be transferred by Prudential to its affiliates or a third party transferee.
However, a third party transferee of the Residual Option may not exercise the
Residual Option prior to June 1, 1993. Each of the Options is exercisable in
full only, and will expire if not exercised on or before July 31, 1993.
The Stock Option covers 1,000,000 shares of Common Stock owned by the
Banks. The exercise price is $4.375 per share. The Stock Option prohibits the
Banks from selling the shares of Common Stock covered by the Stock Option. These
shares are included in this Offering, but can and will be sold hereunder only if
Prudential consents. This consent, if received, will be described in the
Prospectus Supplement.
The Residual Option covers all of the shares of Class B Preferred and Class
C Preferred, and all shares of Common Stock (other than the shares covered by
the Stock Option), owned by the Banks. The exercise price for the Residual
Option is an amount calculated by a formula that equals the amount of the debt
of CTI released by the Banks on August 18, 1992, as adjusted upward to reflect
costs incurred by the Banks in connection with the Banks' ownership of the
securities of ALC or otherwise arising as a result of the original loan to CTI
and to adjust for proceeds of dispositions which are shared with Prudential (as
described below), and downward to reflect proceeds realized after such date by
the Banks from the securities of ALC owned by them or otherwise received as a
result of components of the original loan to CTI, including net proceeds
received by the Banks from this Offering. The exercise price for the Residual
Option as of August 18, 1992 was $135.6 million, which, if all shares of Class B
Preferred and Class C Preferred were converted to shares of Common Stock, would
have been approximately $8.02 per share. After giving effect to the 1992 Equity
Offering and various fees and expenses incurred by the Banks since August 1992,
the exercise price as of December 31, 1992 was approximately $120.5 million, or
approximately $8.54 per share of Common Stock. On February 12, 1993, the Banks
gave Prudential notice of their intention to sell shares of Common Stock in this
Offering. Prudential's right to exercise the Residual Option will be suspended
after March 15, 1993. However, this suspension will lapse if the Banks do not
sell any shares of Common Stock by April 15, 1993. If the Banks sell any shares
of Common Stock before April 15, 1993, the Residual Option will no longer be of
any practical effect. If Prudential exercises either of the Options, it may sell
the shares acquired upon such exercise in this Offering.
Prudential has agreed with a group of CTGI's equipment lessors to allow
them to share in up to half of the shares of ALC stock acquired by Prudential
pursuant to the Residual Option under certain circumstances. Further, the Banks
have agreed under certain circumstances to transfer to Prudential 10% of the
shares subject to the Residual Option upon disposition of any shares of ALC
stock owned by them. In addition, after each Bank has received its pro rata
portion of an amount calculated by the formula used to determine the aggregate
exercise price for the Residual Option, plus interest thereon at 10% per annum
from August 6, 1992 to the date of determination, each Bank has agreed to pay
Prudential any additional proceeds received by it from the disposition of any
shares of the ALC stock owned by it as a result of the August 1992 transactions
and to give Prudential any remaining shares of such ALC stock. The Banks paid
Prudential 10% of their net proceeds from the 1992 Equity Offering.
In August 1992, Prudential entered into an agreement with ALC whereby
Prudential agreed that neither it nor its affiliates would sell shares of ALC
stock acquired pursuant to the Residual Option prior to the earlier to occur of
(i) June 1, 1993, or (ii) the Company experiencing a significant decrease in
results of operations from previous levels, or in the event of a bankruptcy
proceeding, except (a) in a public offering, (b) pursuant to Rule 144
promulgated by the Commission pursuant to the Securities Act of 1933, as amended
(the "Securities Act"), (c) pursuant to its agreement with CTGI's equipment
lessors, (d) to certain types of institutional buyers, so long as no one
institutional buyer (and its affiliates) purchases more than 10% of the shares
subject to the Residual Option and so long as the institutional buyers do not
act in concert, or (e) to any affiliates of Prudential, provided that such
affiliates agree to the foregoing sales restrictions. In addition, the Banks
have agreed with ALC that the Banks will not sell any shares of ALC stock owned
by them prior to July 31, 1993 except (a) for the 3,000,000 shares of Common
Stock sold in the 1992 Equity Offering,
35
<PAGE> 133
(b) pursuant to exercise of the Options, (c) in a public offering or (d) if the
Company experiences a significant decrease in results of operations from
previous levels or in the event of a bankruptcy proceeding. ALC has agreed with
the Banks that it will not issue in excess of 8,000,000 shares of Common Stock
prior to the earlier of (a) August 6, 1994 or (b) the date on which the Banks
collectively hold less than 8,000,000 shares of Common Stock or Common Stock
equivalents. ALC has agreed with Prudential that it will not issue in excess of
8,000,000 shares of Common Stock prior to the earlier of (a) March 31, 1994, or
(b) the expiration of the Residual Option. ALC has agreed with Prudential and
the Banks that any proceeds of Common Stock sales prior to the dates indicated,
in the two prior sentences, respectively, will not be used by ALC to acquire any
business except one which is related to the business conducted by Allnet.
Pursuant to a Registration Rights Agreement dated June 4, 1990, the Banks,
Prudential, General Electric and Grumman Hill (and their transferees of
securities covered by such agreement) each have the right to require ALC to
register the 1990 Warrants, shares of Common Stock issuable upon exercise of the
1990 Warrants, shares of Common Stock issuable upon conversion of the Class B
Preferred and Class C Preferred, and the 11,324,000 shares of Common Stock now
held by the Banks, in each case held by such party, to permit a public sale of
such shares under the Securities Act of 1933 and applicable state securities
laws. The parties may demand, in the aggregate, six such registrations, and may
join in an unlimited number of ALC initiated registrations. Pursuant to an
Assignment of Rights Agreement dated August 6, 1992 among the Banks and ALC (the
"Assignment of Rights"), ALC agreed to register the 1992 Equity Offering and to
prepare and file the registration statement of which this Prospectus is a part
and applicable state securities laws within 90 days after the consummation of
the 1992 Equity Offering, to permit a public sale by the Banks from time to time
of the shares of Common Stock held by the Banks after the 1992 Equity Offering
or issuable to them upon conversion of the Class B Preferred and Class C
Preferred, subject to certain lock-up restrictions discussed in "Risk Factors --
Future Sales of Common Stock" and "Shares Eligible For Future Sale." Also in the
Assignment of Rights, ALC has given the Banks the right to participate on a
preemptive basis in certain future private issuances of Common Stock by ALC.
Pursuant to the Registration Rights Agreement, both Prudential and General
Electric have included in the registration statement of which this Prospectus is
a part shares of Common Stock which may be sold by them upon exercise of their
1990 Warrants.
CTI TRANSACTIONS
Allnet leases a significant portion of its digital service transmission
capacity from CTGI pursuant to a Digital Service Agreement dated February 10,
1989. The Digital Service Agreement provided for a minimum monthly payment of
$1.5 million through November, 1992 and $1.2 million through the ten year term
of the Digital Service Agreement. As part of the 1990 phase of the Refinancing,
Allnet and CTGI entered into an Amendment which amended the digital phase of the
Service Agreement to (a) provide for a credit to reduce the service cost payable
by Allnet to CTGI by $500,000 per month for the period from May 1, 1990 to
December 31, 1990 and by $700,000 per month thereafter; (b) if necessary,
commencing in June 1991, adjust the credit further to reflect the market rate at
the time of such adjustment, provided that the credit shall not be less than
$700,000 per month; (c) give Allnet the right to relocate its circuits out of
available inventory on the CTGI owned system; and (d) terminate the Digital
Service Agreement on June 1, 1999. A further favorable market rate adjustment of
$114,000 has been applied to the monthly credit, effective June 1991 through May
1993.
On August 10, 1989, ALC executed a note with CTI for financing of $5.0
million. On September 29, 1989 ALC renewed the existing note and executed a
second note for an additional $15.0 million. The notes were to expire the
earlier of September 25, 1990 or the date on which ALC secured additional
financing or consummated a private debt placement. As part of the 1990 phase of
the Refinancing, the notes were restructured into the Restructured Promissory
Note (as defined in "The Refinancing"), a single promissory note from Allnet in
the amount of $20.0 million. During the third quarter of 1991, the Restructured
Promissory Note owed to CTI was sold to the Banks. In June and August 1992,
Allnet and the Banks extended the due date on the Restructured Promissory Note,
and certain defaults and covenants were waived to permit Allnet and ALC to make
the Note Exchange Offer. See "The Refinancing."
In June 1992, Allnet bought certain assets from CTI for $2.0 million, which
CTI then paid to the Banks to be applied against debt owed by CTI to the Banks.
In this purchase, Allnet purchased from CTI the
36
<PAGE> 134
"Founder's Refund" for $1.2 million and a promissory note with a balance of
approximately $0.8 million in principal and interest payable from Melvyn
Goodman, secured by 53,777 shares of Class A Preferred. The "Founder's Refund"
is the right set forth in that certain lease agreement between MSM Associates
(as successor to Mutual Signal Corporation by assignment), and Allnet (as
successor to Lexitel Corporation by merger), dated December 5, 1985, that
provides that Allnet shall receive an annual payment based upon the net cash
flow and revenue from the fiber optic system of MSM Associates, subject, however
to MSM Associates having sufficient cash or cash equivalents on hand at April 30
of the following year, the date when such annual payment is due. Allnet in turn
assigned the Founder's Refund to CTGI for $1.2 million in prepaid transmission
services. The promissory note and related interest payable was paid in full upon
closing of the 1992 Equity Offering.
In December 1985, a predecessor to Allnet entered into a fiber optic lease
agreement with Mutual Signal Corporation for an initial term of twelve years for
capacity over a fiber optic system linking major metropolitan centers in
Michigan. In 1989, CTI acquired all of the outstanding stock of Mutual Signal
Corporation and subsequently had the fiber optic lease agreement assigned to MSM
Associates of which Mutual Signal Corporation is a 50.0% owner and general
partner. In 1991 and 1992, Allnet paid approximately $3.7 million and $2.3
million, respectively, for services under that lease. As part of the 1992 phase
of the Refinancing, MSM Associates and Allnet entered into an amendment to the
lease to provide Allnet certain credits reducing the service cost payable by
Allnet thereunder and to provide MSM Associates with a 120-day option to further
amend the lease to (a) give Allnet the right to request reconfiguration of its
circuits thereunder; (b) provide that Allnet will be paid commissions and act as
consultant under certain circumstances; and (c) provide an option to extend the
lease. This option to amend was exercised by MSM Associates effective November
1992. Also as part of a 1992 restructuring of CTI, CTI transferred its interest
in Mutual Signal Corporation to TIFD VII, Inc., a wholly owned indirect
subsidiary of General Electric Capital Corporation.
TRANSACTIONS WITH GENERAL ELECTRIC AND PRUDENTIAL
General Electric and Prudential participated in the cash financing as part
of the 1990 phase of the Refinancing. As a result, General Electric held a 1990
Note in the original principal amount of $3.5 million and was issued 1990
Warrants to purchase up to 2,305,105 shares of the Common Stock. In addition,
prior to the Note Exchange Offer, through subsequent purchases, General Electric
held $23.8 million in principal amount of the outstanding Original and
Replacement Debentures (as defined in "The Refinancing") (exclusive of PIK
Debentures issued or issuable in respect of certain interest payments due on
certain Debentures), which constituted 43% of the total outstanding amount of
those Debentures. As a consequence of the Note Exchange Offer, General Electric
owns 1,494,845 additional 1992 Warrants (as defined in "The Refinancing"),
which, when added to the 1990 Warrants, give General Electric the right to
purchase up to a total of 3,799,950 shares of Common Stock. General Electric
subsequently purchased 500,000 shares of Common Stock in the 1992 Equity
Offering. Also as a consequence of the Note Exchange Offer, General Electric
owned $31.8 million in principal amount of 1992 Notes (which the Company has
been informed have subsequently been sold by General Electric).
Prudential was the holder of a 1990 Note in the original principal amount
of $3.0 million which was paid in full as of August 1992. Prudential retained
the right to purchase up to 1,975,804 shares of the Common Stock pursuant to
warrants for same.
Pursuant to the 1990 Note Agreement between ALC and General Electric, as
amended in August 1992, General Electric also has the right to nominate one
person for election to the Board of Directors of ALC. There was no such nominee
proposed by General Electric for election at the most recent Annual Meeting of
Shareholders. The General Electric 1990 Note was amended and replaced in August
1992. Such amended and restated 1990 Note in the principal amount of $3,908,700
was paid in full as of December 1992. General Electric continues to have the
right to nominate one person for election to the ALC Board of Directors based on
the terms of the 1990 Note Agreement, as amended in August 1992, due to its
equity ownership.
37
<PAGE> 135
FINANCIAL SERVICES
Richard D. Irwin has been a director of CTI since June 1986 and is
President of Grumman Hill. See "Compensation Committee Interlocks and Insider
Participation."
CLASS A EXCHANGE
In an Exchange Agreement dated September 8, 1992 (the "Class A Exchange
Agreement"), the members of the Class A Preferred Group agreed to exchange all
or any portion of the shares of Class A Preferred held by them (2,144,044
shares) (with accrued and unpaid dividends thereon) for shares of Common Stock,
according to a formula based on the $5.50 offering price for the shares of
Common Stock being sold in the 1992 Equity Offering and the then present
redemption value for the Class A Preferred being exchanged at a 40% discount.
Pursuant to the Class A Exchange Agreement, ALC was allowed to choose the amount
of shares of Class A Preferred to be exchanged by the Class A Preferred Group,
which were exchanged for shares of Common Stock.
As part of the 1992 Equity Offering, ALC exchanged 2,144,044 shares of
Class A Preferred for the 6,399,227 shares of Common Stock the Class A Preferred
Group sold in the 1992 Equity Offering.
38
<PAGE> 136
THE REFINANCING
In 1990, the Company began an overall refinancing of substantially all of
its funded debt. The 1990 phase provided for a two year period (until June 1992)
during which the Company could attempt to improve operations without the near
term demands on cash flow associated with most elements of its funded debt. As a
result of the 1990 phase, approximately $78 million of debt was due to be paid
between June and December 1992. Although it was the Company's expectation that a
subsequent renegotiation of these obligations in or before June 1992 would be
required, no specific arrangements or agreements were made to that end as part
of the 1990 phase. In October 1992, the Company completed the second phase (the
1992 phase) of the Refinancing. The concluding actions taken in the 1992 phase,
which were taken in conjunction with an overall restructuring of CTI, have
allowed the Company to substantially defer or reduce its debt service
obligations.
ACTIONS TAKEN IN THE 1990 PHASE:
A renewal of the $30.0 million accounts receivable Revolving Credit
Facility (the "Revolving Credit Facility") with Foothill Capital
Corporation until June 3, 1992 and the assignment of a 40% participation
interest in the Revolving Credit Facility to Prudential.
The issuance to DSC, a major switch vendor, of its Participating
Warrants in exchange for concessions with respect to lease payments for
switching equipment.
The purchase of $7.2 million of notes of the Company (the "1990
Notes") pursuant to Note and Warrant Purchase Agreements (the "1990 Note
Agreements") by Prudential, General Electric, Grumman Hill and Grumman
Hill, L.P. (collectively, the "1990 Investors"), and the issuance to the
1990 Investors of Warrants (the "1990 Warrants") to purchase up to
4,708,999 shares of the Common Stock at $3.00 per share.
The execution of an Additional Financing Agreement with the 1990
Investors, whereby the Company could seek, and the 1990 Investors had the
option of providing, up to $5.0 million of additional financing on
substantially the same terms as those contained in the 1990 Note
Agreements.
The extension until June 4, 1992 of the $20.0 million loan (the
"Restructured Promissory Note") from CTI to Allnet, coupled with the
forgiveness of certain interest payments and fees thereon and a lower
interest rate effective January 1, 1991. The Restructured Promissory Note
was subsequently sold by CTI to the Banks.
The modification of a significant transmission contract between Allnet
and CTGI, then a wholly owned subsidiary of CTI.
The issuance to CTI of 716,200 shares of the new Class D Preferred of
ALC (which was subsequently converted to 14,324,000 shares of Common Stock)
in exchange for concessions described above and the one-time waiver by CTI
of certain anti-dilution rights associated with its shares of Class B
Preferred and Class C Preferred.
The agreement by the holders of approximately 96% of the outstanding
Original Debentures (as defined below) to reschedule interest and principal
payment requirements and to waive certain defaults.
The agreement with three holders of the Class A Preferred, who held
approximately 86% of the then outstanding Class A Preferred, providing for,
under certain circumstances, the redemption of shares of Class A Preferred
below the otherwise applicable mandatory redemption price, and the
modification of the mandatory redemption schedule for all Class A
Preferred.
ACTIONS TAKEN IN THE 1992 PHASE:
The extension to June 30, 1993 of the Revolving Credit Facility with
the borrowing rates reduced, the termination of Prudential's participation
interest in the Revolving Credit Facility, and the sale of a participation
interest to Star Bank, N.A.
39
<PAGE> 137
Further amendment of lease agreements with a major switch vendor,
pursuant to which the vendor agreed to amortize the $9.9 million balance
due June 1, 1992 under existing equipment leases over the subsequent
twenty-four months with no change in the current interest rate of 14.0%.
The reduction of the exercise price on the 1990 Warrants to $2.00 per
share. The due date of approximately $4.6 million (including accrued and
unpaid interest through March 31, 1991 added to principal) in principal
amount of the 1990 Notes issued to the 1990 Investors other than Prudential
was extended to June 30, 1993 and the interest rate on such 1990 Notes was
reduced from 15% to 13% per annum, all effective as of August 7, 1992.
Prudential was paid in full on its 1990 Note but continues to hold the 1990
Warrants.
The termination of the Additional Financing Agreement, which had not
been utilized.
The amendment and restatement of the Loan Agreement which governs the
Restructured Promissory Note and the extension of the Restructured
Promissory Note to June 30, 1995 with quarterly principal payments
commencing on September 15, 1992 and additional annual payments if the
Company meets certain excess cash tests and a $5.0 million principal
prepayment made in August 1992.
The payment of $2.0 million for the purchase of an $0.8 million note
from a member of the Class A Preferred Group, which note was secured by
53,777 shares of the Class A Preferred, as well as for the purchase of a
certain Founders Refund right, which right was used to acquire $1.2 million
of prepaid transmission capacity from CTGI.
The transfer to the Banks of the 14,324,000 shares of Common Stock,
1,000,000 shares of Class B Preferred, and 1,000,000 shares of Class C
Preferred held by CTI in exchange for the release of certain portions of
CTI's obligations to each of the Banks. The Class B Preferred and Class C
Preferred are convertible into 3,796,000 shares of Common Stock.
The completion of an exchange offer (the "Note Exchange Offer")
pursuant to which approximately 99% of the Original Debentures, the 11 7/8%
Senior Subordinated Debentures of ALC due December 31, 1995 (the
"Replacement Debentures") and the PIK Debentures (the Original Debentures,
the Replacement Debentures and the PIK Debentures are collectively, the
"Debentures" and the holders of the Debentures are collectively referred to
as "Debentureholders") were exchanged for 11 7/8% Subordinated Notes due
June 30, 1999 (the "1992 Notes") and warrants (the "1992 Warrants") to
purchase shares of Common Stock at an exercise price of $5.00 per share of
Common Stock. The 1992 Notes have a redemption schedule which provides for
the mandatory equal quarterly redemption of 6.25% of principal beginning on
September 30, 1995 through June 30, 1999 and, under certain circumstances,
must be redeemed earlier.
The Class A Exchange. See "Certain Relationships and Related
Transactions -- Class A Exchange."
ACTIONS IN FURTHERANCE OF THE REFINANCING:
In October 1992, an equity offer (the "1992 Equity Offering") was
completed pursuant to which the Banks, the Class A Preferred Group and
Kansas City Southern Industries, Inc. sold an aggregate of 9,863,600 shares
of Common Stock at $5.50 per share. ALC did not receive any of the proceeds
from the sale of the shares of Common Stock in the 1992 Equity Offering.
In October 1992, the $0.8 million note due to the Company by a member
of the Class A Preferred Group was paid in full.
In December 1992, General Electric, Grumman Hill and Grumman Hill,
L.P. were paid in full on their 1990 Notes as amended and replaced in
August 1992, but continue to hold the 1990 Warrants.
40
<PAGE> 138
SELLING STOCKHOLDERS
The Selling Stockholders consist of NationsBank of Texas, N.A., The First
National Bank of Chicago, National Westminster Bank USA, CoreStates Bank, N.A.,
and First Union National Bank of North Carolina (the "Banks"), General Electric,
Prudential and DSC.
The following chart sets forth the number of shares of Common Stock, Class
B Preferred and Class C Preferred held by each of the Selling Stockholders
indicated below as of the date of this Prospectus and the approximate maximum
number of shares of Common Stock to be offered in the Offering by each of the
parties indicated below. See also "Principal Stockholders."
<TABLE>
<CAPTION>
SHARES OF
SHARES OF COMMON STOCK
COMMON STOCK TO BE OFFERED IN PERCENTAGE OF
HELD PRIOR SHARES OF SHARES OF THE OFFERING OUTSTANDING
TO CLASS B CLASS C (SUBJECT TO COMMON STOCK
SELLING STOCKHOLDER THE OFFERING PREFERRED(1) PREFERRED(2) ADJUSTMENT)(1)(2) OWNED AFTER OFFERING
- --------------------------- ------------ ------------ ------------ ------------------- ---------------------
<S> <C> <C> <C> <C> <C>
NationsBank of Texas,
N.A...................... 3,893,866 343,860 343,860 5,199,159 0%
The First National Bank of
Chicago.................. 2,781,333 245,614 245,614 3,713,684 0
CoreStates Bank, N.A....... 1,827,735 161,403 161,403 2,440,421 0
National Westminster Bank
USA...................... 1,589,333 140,351 140,351 2,122,105 0
First Union National Bank
of North Carolina........ 1,231,733 108,772 108,772 1,644,631 0
Trustees of General
Electric Pension Trust... 4,419,950 -- -- 2,305,105 6.6(3)
The Prudential Insurance
Company of America....... 1,975,804(4) -- -- 1,975,804(4) 0
DSC Communications
Corporation.............. 100,000 -- -- 100,000 0
------------ ------------ ------------ ------------------- ---
Total.................... 17,819,754 1,000,000 1,000,000 19,500,909 6.6%
------------ ------------ ------------ ------------------- ---
------------ ------------ ------------ ------------------- ---
</TABLE>
(1) Each Share of Class B Preferred is convertible into 1.898 shares of Common
Stock, subject to adjustment under certain circumstances.
(2) Each share of Class C Preferred is convertible into 1.898 shares of Common
Stock, subject to adjustment under certain circumstances.
(3) Includes 1,494,845 shares of Common Stock to be issued upon the exercise of
1992 Warrants. See "Certain Relationships and Related Transactions --
Transactions with General Electric and Prudential."
(4) Represents shares which Prudential has the right to acquire by exercise of
1990 Warrants. In addition, Prudential has the right to acquire, and may
offer in this Offering, up to all shares held by the Banks pursuant to the
Stock Option and Residual Option.
In addition to holding a majority of the Common Stock in the aggregate and
all of the Class B Preferred and Class C Preferred, the Banks hold the
Restructured Promissory Note. See "The Refinancing." The holding by each Bank of
Common Stock, Class B Preferred and Class C Preferred is not to be construed as
a recommendation by any Bank of the investment quality of the Common Stock and
does not imply that any Bank will assist in meeting any future financial
requirements of the Company.
The shares of Common Stock being sold by the Banks have been included in
this Prospectus pursuant to certain registration rights assigned to the Banks as
part of the CTI restructuring in August 1992. See "Certain Relationships and
Related Transactions -- Banks and CTI Stock Ownership in the Company." The
shares of Common Stock to be issued to Prudential and General Electric upon the
exercise of the Participating Warrants and which are to be registered hereunder
have been included in this Prospectus pursuant to the Registration Rights
Agreement among Prudential, General and ALC (and certain other parties) dated
June 4, 1990. The shares of Common Stock to be issued to DSC upon the exercise
of the Participating Warrants and which are to be registered hereunder have been
included in this Prospectus pursuant to the Registration Rights Agreement
between DSC and ALC dated June 1, 1990.
41
<PAGE> 139
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership
of the stock of ALC as of February 15, 1993 by each person known by ALC to be
the beneficial owner of more than 5.0% of any class of stock, each director of
ALC and all executive officers and directors of ALC as a group. The figures
presented are based upon information available to ALC.
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF NUMBER OF NUMBER OF NUMBER OF PERCENTAGE
SHARES OF SHARES OF SHARES OF SHARES OF OF
COMMON STOCK CLASS A CLASS B CLASS C VOTING POWER
NAME AND ADDRESS OF (% OF PREFERRED PREFERRED PREFERRED OF ALL
BENEFICIAL OWNER CLASS)* (% OF CLASS)* (% OF CLASS)* (% OF CLASS)* STOCK*
- ------------------------------------------ ------------ ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Trustees of General Electric Pension
Trust................................... 4,419,950(1) -- -- -- 14.0%
c/o G.E. Investments Corp. (15.9%)
3003 Summer Street
Stamford, CT 06904
The Prudential Insurance Company
of America.............................. 13,299,804(2)(3) -- 1,000,000(3) 1,000,000(3) 57.5%
Prudential Plaza (51.4%) (100%) (100%)
751 Broad Street
Newark, NJ 07102
NationsBank of Texas, N.A.(4)............. 3,893,866(4) -- 343,860(4) 343,860(4) 18.7%
1201 Main St., 12th Floor (16.3%) (34.4%) (34.4%)
Dallas, TX 75202
The First National Bank of Chicago(4)..... 2,781,333(4) -- 245,614(4) 245,614(4) 13.4%
One First National Plaza (11.6%) (24.6%) (24.6%)
Suite 0321, 19th Floor
Chicago, IL 60670
National Westminster Bank USA(4).......... 1,589,333(4) -- 140,351(4) 140,351(4) 7.6%
175 Water Street, 27th Floor (6.6%) (14.0%) (14.0%)
New York, NY 10038
CoreStates Bank, N.A.(4).................. 1,827,735(4) -- 161,403(4) 161,403(4) 8.8%
1500 Market Street (7.6%) (16.1%) (16.1%)
Center Square West, 15th Floor
Philadelphia, PA 19102
First Union National Bank of
North Carolina(4)....................... 1,231,733(4) -- 108,772(4) 108,772(4) 5.9%
301 South College Street (5.1%) (10.9%) (10.9%)
Charlotte, NC 28288
Richard D. Irwin.......................... 815,646(5) 5,000 -- -- 2.9%
15 Ketchum Street (3.3%) (1.4%)
Westport, CT 06880
Grumman Hill Investments, L.P............. 639,155(6) -- -- -- 2.2%
15 Ketchum Street (2.6%)
Westport, CT 06880
Grumman Hill Associates, Inc.............. 103,490( *)(7) -- -- -- **
15 Ketchum Street
Westport, CT 06880
Saulene M. Richer......................... 30,166(**) 115,432 **
300 Walnut, No. 183 (32.4%)
Des Moines, IA 50309
David Gale(8)............................. -- 35,386(9) -- -- **
167 Dune Road (9.9%)
Bridgehampton, N.Y. 11932
Delta Dividend Group, Inc.(8)............. -- 31,472 -- -- **
167 Dune Road (8.8%)
Bridgehampton, N.Y. 11932
FMR Corp.(10)............................. 1,965,700( )(12) -- -- -- 7.1%
82 Devonshire Street (8.2%)
Boston, MA 02109
Edward C. Johnson 3d(10).................. 1,965,700( )(12) -- -- -- 7.1%
82 Devonshire Street (8.2%)
Boston, MA 02109
</TABLE>
42
<PAGE> 140
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF NUMBER OF NUMBER OF NUMBER OF PERCENTAGE
SHARES OF SHARES OF SHARES OF SHARES OF OF
COMMON STOCK CLASS A CLASS B CLASS C VOTING POWER
NAME AND ADDRESS OF (% OF PREFERRED PREFERRED PREFERRED OF ALL
BENEFICIAL OWNER CLASS)* (% OF CLASS)* (% OF CLASS)* (% OF CLASS)* STOCK*
- ------------------------------------------ ------------ ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Fidelity Management & Research
Company(10)............................. 1,727,200(13) -- -- -- 6.2%
82 Devonshire Street (7.2%)
Boston, MA 02109
John M. Zrno.............................. 402,246(14) 1,667(**) -- -- 1.4%
Suite 350 (1.7%)
30300 Telegraph Road
Bingham Farms, MI 48025
Marvin C. Moses........................... 386,700(15) 1,667(**) -- -- 1.4%
Suite 350 (1.6%)
30300 Telegraph Road
Bingham Farms, MI 48025
Richard J. Uhl............................ 30,200( )(16) -- -- -- **
One Thousand RIDC Plaza
Pittsburgh, PA 15238
Michael E. Faherty........................ 30,000( )(17) -- -- -- **
15301 Dallas Parkway, Suite 600
Dallas, TX 75248
William H. Oberlin........................ 392,700(18) 1,666(**) -- -- 1.4%
Suite 350 (1.6%)
30300 Telegraph Road
Bingham Farms, MI 48025
Gregory M. Jones.......................... 44,493( )(19) -- -- -- **
Suite 350
30300 Telegraph Road
Bingham Farms, MI 48025
Connie R. Gale............................ 53,302( )(20) -- -- -- **
Suite 350
30300 Telegraph Road
Bingham Farms, MI 48025
All current executive officers and
directors as group (17 persons)......... 2,450,342(21) 10,000 -- -- 8.1%
(9.3%) (2.8%)
</TABLE>
- -------------------------
* Percentage calculation based on 23,918,780 shares of Common Stock, 355,956
shares of Class A Preferred, 1,000,000 shares of Class B Preferred, and
1,000,000 shares of Class C Preferred, issued and outstanding on February
15, 1993, plus shares of Common Stock which may be acquired pursuant to
warrants and options exercisable within sixty days by such individual or
group listed.
** Less than one percent.
(1) Includes 3,799,950 shares of Common Stock which may be acquired pursuant
to the exercise of outstanding warrants.
(2) Includes 1,975,804 shares of Common Stock which may be acquired pursuant
to the exercise of outstanding warrants.
(3) The holdings of Prudential include all shares held by the Banks which may
be acquired pursuant to the exercise of outstanding stock options, as
follows: (a) 1,000,000 shares of Common Stock pursuant to the Stock
Option; and (b) 10,324,000 shares of Common Stock, 1,000,000 shares of
Class B Preferred and 1,000,000 shares of Class C Preferred pursuant to
the Residual Option.
(4) Shares received on August 18, 1992 pursuant to a conveyance from CTI.
(5) Includes 153,163 shares of Common Stock which may be acquired pursuant to
the exercise of outstanding stock options held by Grumman Hill, L.P. and
622,483 shares of Common Stock which may be acquired pursuant to the
exercise of outstanding warrants held individually and by Grumman Hill and
Grumman Hill, L.P. These Grumman Hill and Grumman Hill, L.P. shares are
deemed to be beneficially owned by Mr. Irwin, as President and Director of
Grumman Hill and as General Partner of Grumman Hill, L.P.
(6) Includes 485,992 shares of Common Stock which may be acquired pursuant to
the exercise of outstanding warrants and 153,163 shares of Common Stock
which may be acquired pursuant to the exercise of outstanding stock
options.
(7) These shares of Common Stock may be acquired pursuant to the exercise of
outstanding warrants.
(8) Based on information set forth in Amendment No. 2 to Statement on Schedule
13D, dated February 11, 1993, filed with the Securities and Exchange
Commission.
(9) Includes 31,472 shares of Class A Preferred held by Delta Dividend Group,
Inc., which are deemed to be beneficially owned by Mr. Gale, its sole
executive officer, the sole director and the controlling stockholder.
(10) Based on information set forth in a Schedule 13G, dated February 14, 1993,
filed with the Securities and Exchange Commission.
43
<PAGE> 141
(11) Includes all shares held by Fidelity Management & Research Company and by
Fidelity Management Trust Company, which are wholly-owned subsidiaries of
FMR Corp. Mr. Johnson is the Chairman of the Board and a member of a
controlling group with respect to FMR Corp.
(12) Fidelity Management Trust Company beneficially owns 238,500 shares as a
result of its serving as investment manager of several institutional
accounts.
(13) Shares held by Fidelity Management & Research Company are beneficially
owned as a result of its acting as investment adviser to several
investment companies registered under Section 8 of the Investment Company
Act of 1940.
(14) Includes 399,806 shares of Common Stock which Mr. Zrno has the right to
acquire pursuant to the exercise of outstanding stock options, and 800
shares of Common Stock which Mr. Zrno's wife and mother-in-law own jointly
(Mr. Zrno disclaims beneficial interest as to these shares).
(15) Includes 377,700 shares of Common Stock which Mr. Moses has the right to
acquire pursuant to the exercise of outstanding stock options, 3,000
shares of Common Stock which Mr. Moses owns as custodian for his children
under UGMA and 1,000 shares of Common Stock which Mr. Moses' daughter owns
(Mr. Moses disclaims beneficial interest as to the latter 1,000 shares).
(16) Includes 30,000 shares of Common Stock which Mr. Uhl has the right to
acquire pursuant to the exercise of outstanding stock options.
(17) Shares of Common Stock which Mr. Faherty has the right to acquire pursuant
to the exercise of outstanding stock options.
(18) Includes 377,700 shares of Common Stock which Mr. Oberlin has the right to
acquire pursuant to the exercise of outstanding stock options, 2,000
shares of Common Stock which Mr. Oberlin owns as custodian for his
daughter under UGMA and 2,000 shares of Common Stock which Mr. Oberlin's
daughter owns (Mr. Oberlin disclaims beneficial interest as to the latter
2,000 shares).
(19) Includes 43,551 shares of Common Stock which Mr. Jones has the right to
acquire pursuant to the exercise of outstanding stock options.
(20) Includes 49,695 shares of Common Stock which Ms. Gale has the right to
acquire pursuant to the exercise of outstanding stock options.
(21) Includes 1,744,647 shares of Common Stock which executive officers and
directors of ALC have the right to acquire pursuant to the exercise of
outstanding stock options and 622,483 shares of Common Stock which Mr.
Irwin has the right to acquire or is deemed to have the right to acquire
pursuant to the exercise of outstanding stock warrants held individually
and by Grumman Hill and Grumman Hill, L.P.
44
<PAGE> 142
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of ALC consists of 200,000,000 shares of
Common Stock, par value $0.01, of which 23,918,780 shares are issued and
outstanding; 2,500,000 shares of Class A Preferred, $0.01 par value, of which
355,956 shares are issued and outstanding; 1,000,000 shares of Class B
Preferred, $0.01 par value, of which 1,000,000 shares are issued and
outstanding; 1,000,000 shares of Class C Preferred, $0.01 par value, of which
1,000,000 shares are issued and outstanding; and 14,783,800 shares of Preferred
Stock (the "Preferred Stock"), $0.01 par value, of which no shares are issued
and outstanding.
COMMON STOCK. The holders of Common Stock (i) are entitled to vote with one
share per vote; (ii) have equal ratable rights to dividends from funds legally
available thereof if, as and when declared by the Board of Directors; (iii) are
entitled to share ratably in any distribution to holders of Common Stock upon
liquidation of ALC; and (iv) do not have preemptive rights (except for certain
pre-emptive rights granted by contract to the Banks). Common Stock is not
convertible or redeemable. Dividends may not be paid on Common Stock if (i) any
dividends are due on, or ALC has any past-due obligation to redeem, Preferred
Stock, Class A Preferred, Class B Preferred or Class C Preferred; or (ii) a
dividend is not permissible under the terms of the Indenture Agreement governing
the 1992 Notes. ALC is also restricted from paying dividends by other agreements
entered into in connection with the Refinancing. Since its inception, ALC has
not declared or paid dividends on the Common Stock. The Board of Directors is
authorized to issue additional shares of the authorized Common Stock without
stockholder approval. Accordingly, holders of Common Stock may be subject to
potential future dilution of the value of the Common Stock they own or have the
right to acquire. Pursuant to the terms of the Certificate, ALC will exchange
3,796,000 shares of Common Stock, subject to adjustment, for the Class B
Preferred and Class C Preferred owned by the Banks, and ALC is registering
2,305,105 shares of Common Stock to be issued upon the exercise of 1990 Warrants
owned by General Electric, 1,975,804 shares of Common Stock to be issued upon
the exercise of 1990 Warrants owned by Prudential and 100,000 shares of Common
Stock to be issued upon the exercise of Participating Warrants owned by DSC. See
"Selling Stockholders."
CLASS A PREFERRED. The Class A Preferred was entitled to quarterly,
cumulative (without interest) dividends of $0.40 per share commencing with the
quarter ended September 30, 1987 through the quarter ended December 31, 1991.
Thereafter, dividends on the Class A Preferred are calculated according to a
formula set forth in the Certificate using an adjusted prime rate of interest
based on the prime rate published in the Wall Street Journal on the first
business day of a given quarterly dividend period. Under the Delaware General
Corporation Law, ALC may pay dividends only out of surplus or net profits for
the fiscal year in which the dividends are declared and/or the preceding fiscal
year. ALC paid $1.5 million in cash dividends to the Class A Preferred holders
in 1988 in connection with the purchase by CTI of the Class B Preferred and
Class C Preferred. The Certificate provides that ALC must redeem the shares of
Class A Preferred at $20.00 per share plus accrued dividends. If ALC does not
make a scheduled redemption, the Class A Preferred holders can elect to convert
the amount of Class A Preferred which should have been redeemed (plus accrued
and unpaid dividends thereon) to Common Stock. As of December 31, 1992,
dividends accrued on the Class A Preferred were $2.9 million. Future redemption
obligations relating to the Class A Preferred consist of one scheduled payment
of approximately $7.1 million (plus accrued and unpaid dividends on the shares
then being redeemed) at December 31, 1996. As of February 15, 1993, the
remaining shares of Class A Preferred were held by 1,787 stockholders. Holders
of the Class A Preferred are entitled to a number of votes equal to .166 of one
vote per share of Class A Preferred.
CLASS B PREFERRED. Each share of Class B Preferred is convertible at any
time at the option of the holder into 1.898 shares of Common Stock. The
conversion of all or any part of the Class B Preferred could dilute the value of
the Common Stock. The holders of the Class B Preferred are entitled to a
preference in liquidation over holders of any other class of capital stock in
amounts ranging from $19.50 during the period from July 1, 1991 to June 30, 1992
to $22.50 after June 30, 1993. No dividends are payable on the Class B
Preferred. Holders of Class B Preferred are entitled to a number of votes equal
to the number of shares of Common Stock into which their shares are convertible.
Pursuant to the Certificate, ALC will exchange 1,898,000 shares
45
<PAGE> 143
of Common Stock, subject to adjustment under certain circumstances, for the
Class B Preferred owned by the Banks if requested to do so by the Banks; the
Banks hold all of the outstanding Class B Preferred. See "Selling Stockholders."
CLASS C PREFERRED. Each share of Class C Preferred is convertible at any
time at the option of the holder into 1.898 shares of Common Stock. The
conversion of all or any part of the Class C Preferred could dilute the value of
the Common Stock. The holders of the Class C Preferred are entitled to a
preference in liquidation over holders of any other class of capital stock in
amounts ranging from $19.50 during the period from July 1, 1991 to June 30, 1992
to $22.50 after June 30, 1993. No dividends are payable on the Class C
Preferred. Holders of Class C Preferred are entitled to a number of votes equal
to the number of shares of Common Stock into which their shares are convertible.
Pursuant to the Certificate, ALC will exchange 1,898,000 shares of Common Stock,
subject to adjustment under certain circumstances, for the Class C Preferred
owned by the Banks if requested to do so by the Banks; the Banks hold all of the
outstanding Class C Preferred. See "Selling Stockholders."
PREFERRED. The Board of Directors is entitled to issue up to 14,783,800
shares of Preferred Stock without stockholder approval. Preferred Stock can be
issued from time to time in one or more classes containing one or more series.
The Board of Directors has full authority to determine the features of such
stock, including the dividend rate, whether such stock will be redeemable (and,
if so, the price and terms for redemption), any preferential amount payable to
holders in the event of liquidation, whether such stock will be convertible
(and, if so, the terms and conditions of such conversion), and whether and to
what extent voting rights will attach to such stock. Such Preferred Stock may be
issued with extraordinary voting or other rights which could have an
anti-takeover effect or could be issued in an attempt to discourage or prevent a
takeover bid. Accordingly, holders of Common Stock may be subject to possible
future dilution of the value or other adverse effects which might result from
the issuance of additional Preferred Stock.
CLASSIFICATION OF THE BOARD
The Board of Directors of ALC consists of seven director positions. The
Class A Preferred holders are entitled to elect one member of the Board; the
Class B Preferred holders are entitled to elect two members of the Board; the
Class C Preferred holders are entitled to elect one member of the Board; the
Common Stock holders are entitled to elect two members of the Board; and all of
the stockholders as a class are entitled to elect one member of the Board. If
all of the shares of Class B Preferred and/or Class C Preferred are exchanged
for Common Stock for sale in this Offering, ALC intends to take appropriate
action whereby all provisions in the Certificate relating to such class of stock
will be eliminated. If this occurs, the directorships to be filled by vote of
the holders of each such class would then be filled by vote of all stockholders
voting as one class. Until that happens, if the Banks were to act in concert,
the Banks would have the power to elect six directors to the Board. Further,
Prudential has the right to acquire all shares of ALC stock owned by the Banks,
and thus to acquire control of ALC. See "Risk Factors -- Control." Since the
Certificate gives the holders of preferred stock the collective power to elect a
majority of the Board, such holders could collectively prevent any change of
control or other extraordinary corporate transaction (such as by way of a
merger, reorganization, tender offer, sale or transfer of substantially all the
assets, or liquidation) with respect to ALC.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, ALC will have outstanding 32,095,689
shares of Common Stock, without taking into account shares of Common Stock
issuable upon exercise of outstanding options and warrants or issuable upon
conversion of any preferred stock. All of these outstanding shares are freely
tradable without registration or further registration under the Securities Act,
except for any shares held by "affiliates" of ALC within the meaning of the
Securities Act, which shares will be subject to the resale limitations of Rule
144 promulgated under the Securities Act ("Rule 144"). In addition, if ALC fails
to redeem shares of Class A Preferred according to the mandatory redemption
schedule, the Class A Preferred holders may elect to convert the shares which
should have been redeemed, plus accrued and unpaid dividends thereon, to Common
Stock. See "Description of Capital Stock."
46
<PAGE> 144
ALC and its directors and officers, the Selling Stockholders in the 1992
Equity Offering (other than Michael P. Richer), General Electric, Grumman Hill
and Grumman Hill L.P. have agreed not to offer, sell or otherwise dispose of any
shares of Common Stock except in certain limited circumstances for a period of
180 days (or, in the case of the Banks, with respect to an underwritten public
offering as to which a registration statement has become effective, 120 days)
after October 16, 1992, the date of the prospectus relating to the 1992 Equity
Offering without the prior written consent of Paine Webber Incorporated and
Wheat, First Securities, Inc., acting as representatives of the underwriters who
participated in the 1992 Equity Offering. Any underwriter who participates in a
sale pursuant to this Prospectus may require additional agreements not to
dispose of shares of Common Stock. Any such agreements will be described in a
Prospectus Supplement.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including persons deemed to be affiliates, whose
restricted securities have been fully paid for and held for at least two years
from the later of the date of issuance by ALC or acquisition from an affiliate,
may sell such securities in brokers' transactions or directly to market makers,
provided that the number of shares sold in any three-month period may not exceed
the greater of 1.0% of the then outstanding shares of Common Stock
(approximately 320,957 shares immediately after the Offering) or the average
weekly trading volume of the Common Stock on the American Stock Exchange during
the four calendar weeks preceding the sale. Sales under Rule 144 are also
subject to certain notice requirements and the availability of certain public
information about the Company. After three years have elapsed from the later of
the issuance or restricted securities by ALC or their acquisition from an
affiliate, such securities may be sold without limitation by persons who are not
affiliates under the rule.
Sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices and impair the Company's ability to
raise capital at such times through the sale of its equity securities. See "Risk
Factors -- Future Sales of Common Stock."
PLAN OF DISTRIBUTION
The Selling Stockholders may sell shares of Common Stock to or through
underwriters or dealers, and also may sell shares of Common Stock directly to
other purchasers or through agents. Each Prospectus Supplement will describe the
method of distribution of the shares of Common Stock.
The distribution of the shares of Common Stock may be effected from time to
time in one or more transactions at a fixed price or prices, which may be
changed, or at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices.
In connection with the sale of shares of Common Stock, underwriters may
receive compensation from the Selling Stockholders or from purchasers of shares
of Common Stock for whom they may act as agents in the form of discounts,
concessions or commissions. Underwriters may sell shares of Common Stock to or
through dealers, and such dealers may receive compensation in the form of
discounts, concessions or commissions from the underwriters and/or commissions
from the purchasers for whom they may act as agents. Underwriters, dealers and
agents that participate in the distribution of shares of Common Stock may be
deemed to be underwriters, and any discounts or commissions received by them
from the Selling Stockholders and any profit on the resale of shares of Common
Stock by them may be deemed to be underwriting discounts and commissions, under
the Securities Act. Any such underwriter or agent will be identified, and any
such compensation received from the Selling Stockholders will be described, in
the Prospectus Supplement.
Underwriters and agents who participate in the distribution of shares of
Common Stock may be entitled under agreements which may be entered into by the
Company to indemnification by the Company against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
The legality of the securities offered hereby has been passed upon for ALC
by Jaffe, Raitt, Heuer & Weiss, Professional Corporation, Detroit, Michigan.
47
<PAGE> 145
EXPERTS
The consolidated financial statements of ALC Communications Corporation and
consolidated subsidiary at December 31, 1992 and 1991, and each of the three
years in the period ending December 31, 1992, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young, independent auditors,
as set forth in their report thereon appearing elsewhere herein, and in the
Registration Statement, and are included in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
48
<PAGE> 146
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT AUDITORS......................................................... F-2
CONSOLIDATED BALANCE SHEETS as of December 31, 1992 and 1991........................... F-3
CONSOLIDATED STATEMENTS OF OPERATIONS for the years ended
December 31, 1992, 1991 and 1990..................................................... F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended
December 31, 1992, 1991 and 1990..................................................... F-5
CONSOLIDATED STATEMENTS OF CLASS A PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT for the years ended December 31, 1992, 1991 and 1990........... F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended
December 31, 1992, 1991 and 1990..................................................... F-7
</TABLE>
F-1
<PAGE> 147
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
ALC Communications Corporation
We have audited the accompanying consolidated balance sheets of ALC
Communications Corporation and consolidated subsidiary as of December 31, 1992
and 1991, and the related consolidated statements of operations, cash flows, and
preferred stock and stockholders' deficit for each of the three years in the
period ended December 31, 1992. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ALC Communications
Corporation and consolidated subsidiary at December 31, 1992 and 1991, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1992, in conformity with generally
accepted accounting principles.
ERNST & YOUNG
January 25, 1993
F-2
<PAGE> 148
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1992 1991
------------ ------------
<S> <C> <C>
(IN THOUSANDS)
ASSETS
Current Assets:
Cash.................................................................. $ 112 $ 223
Accounts receivable, less allowance for doubtful accounts of
$3,334,000 and
$3,676,000 (Note C)................................................. 45,327 42,979
Other current assets.................................................. 3,000 1,875
------------ ------------
Total Current Assets........................................... $ 48,439 $ 45,077
Fixed Assets: (Notes A, C & E)
Communication systems................................................. $ 74,002 $ 70,384
Other equipment and leasehold improvements............................ 28,371 27,695
Construction in progress.............................................. 3,443 1,349
------------ ------------
$105,816 $ 99,428
Less accumulated depreciation and amortization........................ 63,872 57,761
------------ ------------
Total Fixed Assets............................................. $ 41,944 $ 41,667
Cost in excess of net assets acquired less accumulated amortization of
$10,673,000 and $9,149,000 (Note A)................................... 50,317 51,841
Other assets............................................................ 2,566 2,261
------------ ------------
Total Assets................................................... $143,266 $ 140,846
------------ ------------
------------ ------------
LIABILITIES, CLASS A PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable and accrued liabilities.............................. $ 15,403 $ 10,218
Accrued network costs................................................. 28,676 34,716
Taxes other than income............................................... 9,889 10,181
Revolving Credit Facility (Notes B & C)............................... 14,802 9,402
Notes payable, capitalized leases and other long-term debt
(Notes B, C, E, & G)................................................ 11,417 42,616
Senior Subordinated Debentures (Notes B & C).......................... 29,640
Class A Preferred Stock (Notes B & D)................................. 1,018
------------ ------------
Total Current Liabilities...................................... $ 80,187 $ 137,791
Notes payable, capitalized leases and other long-term debt (Notes B, C,
E, & G)............................................................... 12,308 3,261
Subordinated Notes (Notes B & C)........................................ 61,983
Senior Subordinated Debentures (Notes B & C)............................ 39,660
Class A Preferred Stock, $0.01 par value; authorized -- 2,500,000
shares; issued and outstanding -- 356,000 and 2,500,000 shares,
aggregate redemption value of $7,119,000 and $48,928,000 less discount
of $364,000 and $2,994,000 plus accrued but undeclared dividends of
$2,904,000 and $16,500,000 (Notes B & D).............................. 9,659 62,434
Stockholders' Deficit:
Class B Preferred Stock, $0.01 par value; authorized, issued and
outstanding -- 1,000,000 shares (Notes F & G)....................... 10 10
Class C Preferred Stock, $0.01 par value; authorized, issued and
outstanding -- 1,000,000 shares (Notes F & G)....................... 10 10
Preferred Stock, $0.01 par value; authorized -- 14,784,000 shares;
issued and outstanding -- none......................................
Common Stock, par value $0.01; authorized -- 200,000,000 shares;
issued and outstanding -- 23,794,000 and 17,221,000 shares (Notes B,
C & F).............................................................. 238 172
Capital in excess of par value........................................ 110,146 57,718
Paid-in capital -- Warrants (Notes C & E)............................. 17,022 8,913
Accumulated deficit................................................... (148,297) (169,123)
------------ ------------
Total Stockholders' Deficit.................................... $(20,871) $ (102,300)
------------ ------------
Total Liabilities, Class A Preferred Stock and Stockholders'
Deficit........................................................... $143,266 $ 140,846
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 149
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1992 1991 1990
-------- -------- --------
<S> <C> <C> <C>
(IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
Revenue................................................ $376,064 $346,873 $326,004
Operating Expenses:
Cost of communication services, including amounts
with related parties of $16,004,000, $18,000,000
and
$22,553,000 (Note G).............................. $216,889 $212,716 $209,612
Sales, general and administrative.................... 107,294 97,964 102,838
Depreciation and amortization........................ 11,197 12,343 13,320
Financial restructuring.............................. 2,987
-------- -------- --------
Total Operating Expenses........................ $335,380 $323,023 $328,757
-------- -------- --------
Operating Income (Loss)......................... $ 40,684 $ 23,850 $ (2,753)
Interest expense including amounts with related parties
of $5,000,000, $4,640,000 and $2,887,000 (net of
interest and other income (expense) of ($369,000),
$278,000, and $675,000).............................. 17,158 18,128 21,250
Gain on sale of subsidiary............................. 4,360
-------- -------- --------
Income (Loss) before Income Taxes and Extraordinary
Item................................................. $ 23,526 $ 5,722 $(19,643)
Income taxes (Note H).................................. 9,700 3,005
-------- -------- --------
Income (loss) before Extraordinary Item................ $ 13,826 $ 2,717 $(19,643)
Extraordinary item -- utilization of operating loss
carryforwards (Note H)............................... 7,000 2,630
-------- -------- --------
Net Income (Loss)............................... $ 20,826 $ 5,347 $(19,643)
-------- -------- --------
-------- -------- --------
Income (loss) per common and common equivalent share
before extraordinary item (Note F)................... $ 0.43 $ (0.17) $ (2.29)
-------- -------- --------
-------- -------- --------
Net income (loss) per common and common equivalent
share (Note F)....................................... $ 0.74 $ (0.02) $ (2.29)
-------- -------- --------
-------- -------- --------
Weighted average common and common equivalent shares... 22,141 17,216 11,074
-------- -------- --------
-------- -------- --------
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 150
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1992 1991 1990
-------- -------- --------
<S> <C> <C> <C>
(IN THOUSANDS)
Operating Activities
Net income (loss)............................................ $ 20,826 $ 5,347 $(19,643)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Gain from sale of subsidiary.............................. (4,360)
Non-cash restructuring expense............................ 716
Depreciation expense...................................... 9,372 10,508 11,435
Amortization of intangible assets and bond discount....... 4,415 3,520 4,637
Accrued interest converted to debentures.................. 7,998 4,246
Loss on sale of assets.................................... 722 95
Gain on debenture retirement.............................. (59)
(Increase) decrease in accounts receivable and other
current assets.......................................... (3,371) 2,558 (4,485)
Increase (decrease) in current liabilities................ (1,523) (2,774) 2,172
-------- -------- --------
Net Cash Provided by (Used in) Operating Activities..... $ 30,382 $ 27,252 $ (5,282)
Financing Activities
Proceeds from (payments on) Revolving Credit Facility
(Notes B & C)............................................. $ 5,400 $ (9,896) $ 3,317
Proceeds from long-term debt................................. 1,321 7,707
Payments on long-term debt................................... (22,818) (12,562) (13,142)
Proceeds from issuance of stock (Note F)..................... 607 109 738
Contract payment to the Class A Preferred Group (Note D)..... (1,286)
Payment of stock issuance costs.............................. (620)
Retirement of debentures (Note C)............................ (947)
-------- -------- --------
Net Cash Used in Financing Activities..................... $(19,664) $(21,028) $ (1,380)
Investing Activities
Expenditures for fixed assets................................ $(10,254) $ (6,401) $ (5,108)
Transfer lease security deposit to current................... 5,599
Change in other non-current assets........................... (596) (67) 686
Proceeds from sale of fixed assets........................... 21 125 353
Proceeds from sale of subsidiary............................. 5,234
-------- -------- --------
Net Cash Provided by (Used in) Investing Activities....... $(10,829) $ (6,343) $ 6,764
-------- -------- --------
Increase (Decrease) in Cash During Year................... $ (111) $ (119) $ 102
Cash at beginning of year...................................... 223 342 240
-------- -------- --------
Cash at end of year............................................ $ 112 $ 223 $ 342
-------- -------- --------
-------- -------- --------
Interest paid.................................................. $ 15,572 $ 9,945 $ 9,541
-------- -------- --------
-------- -------- --------
Income taxes paid.............................................. $ 1,862 $ 225 $ 0
-------- -------- --------
-------- -------- --------
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 151
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CLASS A PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
<TABLE>
<CAPTION>
STOCKHOLDERS' DEFICIT
------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS D COMMON
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK STOCK
---------------- --------------- --------------- --------------- ------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
------ ------- ------ ------ ------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1989..................... 2,500 $52,007 1,000 $ 10 1,000 $ 10 2,747
Accretion of discount on Class A Preferred
Stock........................................ 1,384
Employee stock purchases (Note F).............. 70
Accrued undeclared dividends on Class A
Preferred Stock (Note D)..................... 4,000
Accretion of contract payment to the Class A
Preferred Group.............................. 375
Issuance of Class D Preferred Stock (Note F)... 716 $7
Issuance of warrants (Note C)..................
Conversion of Class D Preferred Stock to Common
Stock (Note F)............................... (716) (7) 14,324
Net loss for the year ended December 31,
1990.........................................
------ ------- ------ ------ ------ ------ ------ -- ------
Balance, December 31, 1990..................... 2,500 $57,766 1,000 $ 10 1,000 $ 10 0 $0 17,141
Accretion of discount on Class A Preferred
Stock........................................ 1,043
Employee stock purchases (Note F).............. 71
Accrued undeclared dividends on Class A
Preferred Stock (Note D)..................... 4,000
Accretion of contract payment to the Class A
Preferred Group.............................. 643
Exercise of Stock Options (Note F)............. 9
Net income for the year ended December 31,
1991.........................................
------ ------- ------ ------ ------ ------ ------ -- ------
Balance, December 31, 1991..................... 2,500 $63,452 1,000 $ 10 1,000 $ 10 0 $0 17,221
Accretion of discount on Class A Preferred
Stock........................................ 860
Accrued undeclared dividends on Class A
Preferred Stock (Note D)..................... 3,254
Accretion of contract payment to the Class A
Preferred Group.............................. 268
Contract payment to the Class A Preferred
Group........................................ (1,286)
Exercise of Stock Options (Note F)............. 174
Issuance of warrants (Notes B & C).............
Repricing of warrants (Notes B & C)............
Conversion of Class A Preferred Stock to Common
Stock (Notes B & D).......................... (2,144) (56,889)
Issuance of Common Stock
(Notes B & D)................................ 6,399
Stock Issuance costs...........................
Net income for the year ended December 31,
1992.........................................
------ ------- ------ ------ ------ ------ ------ -- ------
Balance, December 31, 1992..................... 356 $ 9,659 1,000 $ 10 1,000 $ 10 0 $0 23,794
------ ------- ------ ------ ------ ------ ------ -- ------
------ ------- ------ ------ ------ ------ ------ -- ------
<CAPTION>
PAID-IN CAPITAL
-- WARRANTS CAPITAL IN ACCUM-
---------------- EXCESS ULATED
AMOUNT SHARES AMOUNT PAR VALUE DEFICIT TOTAL
------ ------ ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1989..................... $ 27 660 $ 8,484 $ 68,174 $ (154,827) $ (78,122)
Accretion of discount on Class A Preferred
Stock........................................ (1,384) (1,384)
Employee stock purchases (Note F).............. 1 308 309
Accrued undeclared dividends on Class A
Preferred Stock (Note D)..................... (4,000) (4,000)
Accretion of contract payment to the Class A
Preferred Group.............................. (375) (375)
Issuance of Class D Preferred Stock (Note F)... 709 716
Issuance of warrants (Note C).................. 4,809 429 429
Conversion of Class D Preferred Stock to Common
Stock (Note F)............................... 143 (136) 0
Net loss for the year ended December 31,
1990......................................... (19,643) (19,643)
------ ------ ------- ---------- ---------- ----------
Balance, December 31, 1990..................... $171 5,469 $ 8,913 $ 63,296 $ (174,470) $ (102,070)
Accretion of discount on Class A Preferred
Stock........................................ (1,043) (1,043)
Employee stock purchases (Note F).............. 1 79 80
Accrued undeclared dividends on Class A
Preferred Stock (Note D)..................... (4,000) (4,000)
Accretion of contract payment to the Class A
Preferred Group.............................. (643) (643)
Exercise of Stock Options (Note F)............. 29 29
Net income for the year ended December 31,
1991......................................... 5,347 5,347
------ ------ ------- ---------- ---------- ----------
Balance, December 31, 1991..................... $172 5,469 $ 8,913 $ 57,718 $ (169,123) $ (102,300)
Accretion of discount on Class A Preferred
Stock........................................ (860) (860)
Accrued undeclared dividends on Class A
Preferred Stock (Note D)..................... (3,254) (3,254)
Accretion of contract payment to the Class A
Preferred Group.............................. (268) (268)
Contract payment to the Class A Preferred
Group........................................
Exercise of Stock Options (Note F)............. 2 605 607
Issuance of warrants (Notes B & C)............. 3,400 3,400 3,400
Repricing of warrants (Notes B & C)............ 4,709 4,709
Conversion of Class A Preferred Stock to Common
Stock (Notes B & D).......................... 56,825 56,825
Issuance of Common Stock
(Notes B & D)................................ 64 64
Stock Issuance costs........................... (620) (620)
Net income for the year ended December 31,
1992......................................... 20,826 20,826
------ ------ ------- ---------- ---------- ----------
Balance, December 31, 1992..................... $238 8,869 $17,022 $110,146 $ (148,297) $ (20,871)
------ ------ ------- ---------- ---------- ----------
------ ------ ------- ---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE> 152
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Corporate Structure
ALC Communications Corporation ("ALC") was incorporated in 1985 in order to
accomplish the combination of Allnet Communication Services, Inc. and Lexitel
Corporation ("Lexitel"). From August 1988 through August 1992, ALC was a
majority owned subsidiary of Communications Transmission, Inc. ("CTI") (see
Notes B & G). ALC and Allnet Communication Services Inc. are collectively
referred to herein as the "Company" or "Allnet".
In February 1988 the Company acquired all of the outstanding common stock
of Clark Telecommunications, Inc. of South Bend, Indiana for $2.8 million in
cash and notes. This company was operated as a wholly-owned subsidiary of Allnet
under the name CTI Telecommunications, Inc. On January 30, 1990, Allnet sold CTI
Telecommunications, Inc. in a cash transaction and recorded a gain of $4.4
million.
Description of Business
Allnet, the operating subsidiary of ALC, is a communications common carrier
licensed by the Federal Communications Commission to offer long distance
telephone and other communication services to both commercial and residential
subscribers. Allnet provides twenty-four hour long distance telephone services
terminating worldwide, utilizing a variety of transmission methods, primarily
fiber optic facilities and digital microwave.
Basis of Consolidation
The consolidated financial statements include the accounts of ALC and its
wholly-owned subsidiary, Allnet Communication Services, Inc. Significant
intercompany transactions have been eliminated.
Fixed Assets
Fixed assets are stated at cost. Depreciation is provided on the
straight-line method over the estimated useful lives or lease terms of the
assets. Maintenance and repairs are charged to operations as incurred.
Intangible Assets
The cost in excess of net assets acquired of $61.0 million, resulting from
the acquisition of Lexitel is being amortized on a straight line basis over 40
years. Amortization expense, including amortization of cost in excess of net
assets acquired and cost associated with the issuance of debentures, was $1.8
million, $1.8 million and $1.9 million for the years ended December 31, 1992,
1991 and 1990, respectively.
Revenue Recognition
Customers are billed as of monthly cycle dates. Revenue is recognized as
service is provided and unbilled usage is accrued.
Accrued Facility Costs
In the normal course of business, the Company estimates its accrual for
facility costs. Subsequently, the accrual is adjusted based on invoices received
from local exchange carriers.
Income Taxes
Income taxes are presently accounted for in accordance with Accounting
Principles Board Opinion No. 11. In February 1992, the Financial Accounting
Standards Board issued Statement of Financial
F-7
<PAGE> 153
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounting Standards No. 109 "Accounting for Income Taxes." The Company will
adopt this Statement as of January 1, 1993, the required implementation date.
Application of the new rules as of January 1, 1993, will result in the recording
of a net deferred tax asset of approximately $13.5 million related primarily to
the future tax benefits which are expected to be realized upon utilization of a
portion of the Company's net operating loss carryforwards ("NOLs"). Any
subsequent realization of NOLs will be reflected in the income tax provision in
the year realized and not as an extraordinary item. The Company has determined
it will not apply the Statement retroactively and thus will not restate prior
year financial statements to reflect adoption of the new rules.
Reclassifications
Certain prior year amounts have been reclassified to conform to current
year presentation.
NOTE B -- REFINANCING EVENTS
During 1992, the Company completed a comprehensive refinancing plan
("Refinancing") which included the rescheduling of substantially all debt and
resulted in significantly reduced or deferred debt service obligations. The
Refinancing provided a revised redemption and maturity schedule that will enable
the Company to meet these obligations from expected cash flow from operations.
The principal components of the 1992 phase of the Refinancing are outlined
in the following paragraphs.
- A "Note Exchange Offer" was completed as of August 6, 1992 whereby
the Company's Original Debentures, Replacement Debentures, PIK
Debentures, and accrued interest on the nonconsenting Debentures
totalling $73.3 million were replaced by 11 7/8% Subordinated Notes
of Allnet ("1992 Notes"). The Note Exchange Offer was agreed to by
98.8% of the then existing Debentureholders. The revised redemption
schedule of the 1992 Notes effectively reschedule the earliest
redemption from June 30, 1992 to September 30, 1995. As part of the
Note Exchange Offer, 3,400,000 Common Stock warrants ("1992
Warrants") were issued representing 10.2% of the fully-diluted
equity of ALC at an exercise price of $5.00 per share of Common
Stock.
- The Revolving Credit Facility was extended to June 30, 1993 and
modifications included a new participant and a reduction in the
borrowing rates.
- The Restructured Promissory Note was restated and extended to June
30, 1995 and a $5.0 million principal prepayment was made. The
amended terms provide for continuation of the 12% interest rate and
quarterly principal payments of $1.3 million commencing on September
15, 1992.
- The 1990 Note Agreements with a principal balance of approximately
$8.0 million were paid down and extended in conjunction with the
Refinancing and subsequently paid in full in December 1992.
- The 4,708,999 1990 Warrants held by General Electric Pension Trust,
Grumman Hill Investments Inc., Grumman Hill L.P. and Prudential
Insurance Company of America were amended to reduce the exercise
price from $3.00 to $2.00 per share in consideration for
participating in the Refinancing.
- Equipment leases with a major switch vendor were renegotiated to be
repaid over 24 months with no change in the interest rate of 14%.
- The Company paid $2.0 million on June 4, 1992 to CTI and received an
$0.8 million note from a major holder of Class A Preferred (which
note was subsequently paid in full) and $1.2 million of prepaid
transmission capacity from Communications Transmission Group, Inc.
("CTGI"), an affiliate of CTI, to be utilized over a period of 37
months.
F-8
<PAGE> 154
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- On August 18, 1992, the 14,324,000 shares of Common Stock, 1,000,000
shares of Class B Preferred, and 1,000,000 shares of Class C
Preferred held by CTI were transferred to a group of five banks
("Banks") in exchange for the release of certain portions of CTI's
obligations to each of the Banks. The Class B Preferred and Class C
Preferred are convertible into 3,796,000 shares of Common Stock.
- Effective October 16, 1992, the Company commenced a stock offering
("1992 Equity Offering") for 9,863,600 shares of Common Stock at
$5.50 per share. A portion of the 1992 Equity Offering relating to
3,464,373 shares was to facilitate the sale of shares for existing
major holders including 3,000,000 shares held by the Banks.
- The remaining 6,399,227 shares that were part of the 1992 Equity
Offering were issued in conjunction with an Exchange Agreement
("Class A Exchange") with the major holders of the Class A Preferred
("Class A Preferred Group"). The members of the Class A Preferred
Group agreed to exchange the 2,144,044 Class A Preferred shares they
held with an aggregate redemption value of $58.7 million, including
all accrued and unpaid dividends, for shares of Common Stock at an
effective 40% discount.
On January 19, 1993 the Company filed a shelf registration with the
Securities and Exchange Commission for 19,500,909 shares held by certain
stockholders, or issuable upon exercise of certain outstanding warrants or
conversion of outstanding Class B Preferred and Class C Preferred. Several
factors, such as market conditions, will determine when and how many of these
shares will be sold. Any such offering of shares will provide for a broader
public ownership of the Company's Common Stock. None of the proceeds from these
stock sales will accrue to the Company other than through exercise of warrants
in connection with the shelf registration.
NOTE C -- LONG-TERM DEBT AND OTHER FINANCING
Long-term debt, including the amount due within one year, consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1992 1991
------- --------
(IN THOUSANDS)
<S> <C> <C>
Restructured Promissory Note.......................................... $12,566 $ 20,698
1990 Note Agreements.................................................. 7,961
11 7/8% Senior Subordinated Debentures due 1995 -- face value of
$55,000,000 less discount of $4,091,000............................. 50,909
Accrued interest on Debentures........................................ 18,391
11 7/8% Subordinated Notes due 1999 -- face value of $72,380,000 less
discount of $10,397,000............................................. 61,983
Capitalized lease obligations (see Note E)............................ 8,851 15,373
Other long-term debt.................................................. 2,308 1,845
------- --------
$85,708 $115,177
Due within one year................................................... 11,417 72,256
------- --------
$74,291 $ 42,921
------- --------
------- --------
</TABLE>
Revolving Credit Facility
The Revolving Credit Facility is a $30.0 million facility which expires on
June 30, 1993. The agreement allows for inclusion of up to 80% of billed and 45%
of unbilled receivables in eligible receivables under the line. Advances and
guarantees secured by billed receivables bear interest of 3.0% per annum in
excess of the reference rate (6.0% as of December 31, 1992); however, advances
secured by unbilled receivables bear
F-9
<PAGE> 155
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest of 3.75% per annum in excess of the reference rate. In addition, a 1/2%
per annum charge is made on the unused portion of the line.
As of December 31, 1992, the amount of credit available under the line was
$30.0 million and was reduced by the Company's borrowings of $14.8 million. The
unused portion of the line was $15.2 million.
Restructured Promissory Note
In the third quarter of 1989, the Company executed a $5.0 million note and
a $15.0 million note with CTI for bridge financing, both of which were due on
September 25, 1990. Terms of the notes required interest to be accrued at 18%,
payable quarterly commencing November 30, 1989. The Company failed to make the
interest payments due under those notes on February 26 and May 29, 1990. In June
1990, these notes were restructured into a note in the amount of $20.0 million
due on June 4, 1992. The agreement provided that interest payments from December
1, 1989 through December 31, 1990 and certain loan fees due to CTI were forgiven
(in the aggregate, approximately $4.2 million). Effective January 1, 1991, the
interest rate was lowered to 12% per annum, and interest became payable
quarterly beginning on March 31, 1991. The note is secured by a security
interest in substantially all of the assets of Allnet (generally, second in
priority behind the Company's Revolving Credit Facility).
During the third quarter of 1991, the note ("Restructured Promissory Note")
was sold to the Banks. In August 1992, the Restructured Promissory Note was
restated and extended to June 30, 1995 and a $5.0 million principal payment was
made. The amended terms provide for quarterly principal payments of $1.3 million
commencing on September 15, 1992. The interest rate remains at 12% per annum.
1990 Note Agreements
In June 1990, Allnet issued, pursuant to the 1990 Note Agreements, $7.2
million face amount of notes due June 4, 1992 ("1990 Notes") and warrants ("1990
Warrants"), valued at $0.4 million, to purchase up to 4,708,999 shares of its
Common Stock for total cash consideration of $7.2 million. In June 1992, the
1990 Note Agreements were extended to August 15, 1992 and the interest rate was
modified from 15% to 13%. In August 1992, the Company made a principal payment
of $3.4 million and the term for the remainder of the 1990 Notes was extended to
June 30, 1993. In December 1992, the 1990 Notes were paid in full.
In August 1992, in consideration for participating in the Refinancing, the
exercise price of the 1990 Warrants was modified from $3.00 per share to $2.00
per share. The 1990 Warrants expire on June 4, 2005. The purchase price and
number of shares purchasable are subject to adjustment in certain events
involving the Company's securities. One of the holders of the 1990 Warrants is
entitled to nominate a representative for election to the Board of Directors.
11 7/8% Senior Subordinated Debentures of ALC
Various terms and conditions under the Company's 11 7/8% Senior
Subordinated Debentures ("Original Debentures") were amended as of June 1, 1990
and agreed upon by approximately 96% of the Debentureholders. The amendment
("Replacement Debentures") included modifications to interest payments to the
consenting Debentureholders, including the acceptance of additional Debentures
("PIK Debentures") in lieu of cash as payment for certain interest payments. The
amendment also included modification of the mandatory redemption schedule for
the Original Debentures, Replacement Debentures and PIK Debentures (collectively
the "Debentures") held by the consenting Debentureholders. The Debentures held
by the nonconsenting Debentureholders were to be redeemed according to the
original schedule. At December 31, 1991, the book value of Debentures held by
nonconsenting Debentureholders maturing within one year of $1.4 million, and
accrued interest of $0.7 million on the nonconsenting Debentures were recorded
as current liabilities.
F-10
<PAGE> 156
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Original Debentures had been issued with detachable warrants
(exercisable until December 1995) to purchase 660,000 Common Shares at a price
of $63.75 per share, subject to adjustment in certain events. The cost
associated with the issuance of the Debentures, approximately $2.9 million is
included in other assets and is being amortized over 10 years.
In August 1992, the "Note Exchange Offer" was completed whereby the
Company's existing Debentures of $54.9 million face value, PIK Debentures of
$18.4 million face value and accrued interest on the nonconsenting Debentures
were replaced by 11 7/8% Subordinated Notes of Allnet. The Debentureholders who
did not agree to the Note Exchange Offer were paid in September 1992 the full
amount of their principal, the related PIK Debentures and accrued interest all
totalling approximately $0.9 million.
11 7/8% Subordinated Notes of Allnet
On August 6, 1992, Allnet issued the 1992 Notes with a face value of $72.4
million in exchange for the Company's Debentures (including PIK Debentures) and
accrued interest thereon. The 1992 Notes bear interest at 11 7/8% per annum
payable quarterly. The 1992 Notes have a redemption schedule which provides for
the mandatory equal quarterly redemption of 6.25% of principal beginning on
September 30, 1995 through June 30, 1999. The 1992 Notes are guaranteed by ALC
and are secured by a subordinated security interest in substantially all of the
assets of Allnet. The payment of dividends as well as stock repurchases are
restricted by terms of the Indenture. Since ALC conducts no other business than
as a holding company for Allnet, the guarantee of ALC will not provide the
Noteholders with any significant additional security.
The Indenture provides for a limitation on indebtedness of Senior
Indebtedness not to exceed $50.0 million, excluding capitalized leases, the
Revolving Credit Facility, Restructured Promissory Note and the 1992 Notes.
Indebtedness is subject to further tests which limit aggregate indebtedness,
excluding the Revolving Credit Facility to $106.0 million at December 31, 1992.
At December 31, 1992, the Company was limited to additional aggregate
indebtedness of $20.3 million. The Indenture also places restrictions on ALC or
Allnet from making any dividend, redemption or other payments with respect to
its equity securities.
The 1992 Notes were issued with 3,400,000 1992 Warrants exercisable at
$5.00 per share. The 1992 Warrants expire on June 30, 1997.
The difference of $3.4 million between the exercise price of the 1992
Warrants and the fair value of the Company's Common Stock at the time of
issuance has been recorded as a discount on the 1992 Notes and credited to
paid-in capital -- warrants. This portion of the 1992 Note discount is being
amortized over the life of the 1992 Warrants. The reduction in exercise price of
the 1990 Warrants of $4.7 million was recorded as a discount on the 1992 Notes
and an increase to paid-in capital -- warrants. The 1992 Note discount related
to the 1990 Warrants is being amortized over the life of the 1992 Notes.
Other Long-Term Debt
Other long-term debt includes notes payable of $0.2 million secured by
switches, leasehold improvements, office furniture and equipment. The carrying
value of the assets securing these notes is $0.2 million and $0.3 million at
December 31, 1992 and 1991. The average interest rate for this debt is 7%. The
remaining $2.1 million of other long term debt represents deferred liabilities
relating to certain operating leases.
F-11
<PAGE> 157
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Principal Requirements
The principal requirements of long-term debt at December 31, 1992 are as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Year Ended December 31:
1993.............................................................. $ 11,417
1994.............................................................. 8,593
1995.............................................................. 12,158
1996.............................................................. 18,258
1997.............................................................. 18,309
1998 and thereafter............................................... 27,370
--------------
$ 96,105
Less discount on 1992 Notes....................................... 10,397
--------------
$ 85,708
--------------
--------------
</TABLE>
NOTE D -- REDEEMABLE PREFERRED STOCK
As of December 31, 1992, the Company has 355,956 shares of Class A
Preferred outstanding with a redemption value of $7.1 million. Holders of Class
A Preferred are entitled to a number of votes equal to .166 of one vote per
share of Class A Preferred. These shares began accruing dividends at the rate of
$1.60 per annum in July 1987. As of December 31, 1992 and 1991, there were $2.9
million and $16.5 million in cumulative dividends in arrears, or $8.16 per share
and $6.60 per share, respectively on Class A Preferred. Under the General
Corporation Law of Delaware, the Company's state of incorporation, the Company
does not currently have adequate surplus to enable it to pay any dividends.
As of December 31, 1991, the Company had 2,500,000 shares of Class A
Preferred outstanding with a redemption value of $48.9 million plus accrued
dividends. In October 1992, pursuant to the Class A Exchange with the Class A
Preferred Group the Company exchanged 2,144,044 shares of Class A Preferred for
6,399,227 shares of Common Stock at an effective 40% discount.
As a result of the 1992 Equity Offering, the Company's mandatory redemption
obligation has been reduced to one scheduled payment of approximately $7.1
million (plus accrued and unpaid dividends) at December 31, 1996.
In accordance with the Restated Certificate of Incorporation of ALC
("Certificate") affecting Class A Preferred, the amount of the dividend which
shall accrue is equivalent to interest, on $20 per share, at a rate calculated
as the weighted average of 1% plus prime rate. Certain additional dividends will
accrue if the Company fails to pay the "Minimum Dividend" as described in the
Certificate.
In September 1992, ALC paid an aggregate amount of approximately $1.3
million to certain members of the Class A Preferred Group in connection with a
concession agreement with the Class A Preferred Group entered into in June 1990.
F-12
<PAGE> 158
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E -- LEASE TRANSACTIONS
Future minimum rental payments under capital leases and noncancellable
operating leases with initial or remaining terms of one or more years at
December 31, 1992 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
<S> <C> <C>
Year Ended December 31:
1993............................................................ $ 7,172 $ 33,417
1994............................................................ 2,613 27,114
1995............................................................ 63 23,902
1996............................................................ 24 20,401
1997............................................................ 15,064
1998 and thereafter............................................. 28,674
------- ---------
Minimum Lease Payments.......................................... $ 9,872 $ 148,572
---------
---------
Less amount representing interest............................... 1,021
-------
Present Value of Future Lease Payments.......................... $ 8,851
-------
-------
</TABLE>
Lease arrangements frequently include renewal options and/or bargain
purchase or fair market value purchase options, and for leases relating to
office space, rent increases based on the Consumer Price Index or similar
indices.
Non-cancellable operating leases relate primarily to building and office
space, office equipment, and intercity transmission facilities. Rental expense
was $52.3 million, $56.9 million and $63.0 million for the years ended December
31, 1992, 1991 and 1990, respectively.
The amounts included in fixed assets financed by capital leases are:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1992 1991
------- -------
<S> <C> <C>
(IN THOUSANDS)
Communications systems.......................................... $19,878 $22,587
Other equipment and leasehold improvements...................... 912 1,088
------- -------
$20,790 $23,675
Accumulated depreciation........................................ 9,427 8,476
------- -------
$11,363 $15,199
------- -------
------- -------
</TABLE>
In June 1990, in connection with the Company's 1990 phase of its
Refinancing, the terms of a major capital lease agreement were revised to reduce
monthly payments with the difference deferred until the June 1992 termination
date. In consideration for the deferral of lease payments, the Company issued
warrants to purchase 100,000 Common Shares at a price of $3.00 per share to a
major lessor. In June 1992, the lease was renegotiated resulting in a lease
extension until May 1994. The interest rate was unchanged.
NOTE F -- EARNINGS PER SHARE AND STOCKHOLDERS' DEFICIT
Earnings per share
Earnings per share are computed using weighted average shares outstanding
and Common Stock equivalents. To arrive at income available for Common
Stockholders, the Company's net income or loss is adjusted by amounts relating
to the accretion of discount on Class A Preferred, the accretion of a contract
payment to certain members of the Class A Preferred Group and dividends on Class
A Preferred accrued but
F-13
<PAGE> 159
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not declared. Anti-dilutive securities include warrants and options and for 1991
and 1990 also include Class B and Class C Preferred Stock. Earnings per share
for the third and fourth quarters of 1992 include the impact of the exercise of
outstanding stock options and warrants utilizing the Treasury Stock Method. The
impact of the 1992 Equity Offering on earnings per share was not material.
Common Stock
On September 3, 1991, the Company effected a one-for-five reverse stock
split of all authorized and outstanding shares of the Company's Common Stock.
The number of authorized shares remained at 200,000,000. The par value of a
share of stock was unchanged. All share amounts used in the accompanying
financial statements and notes thereto have been adjusted to reflect the reverse
stock split.
Effective October 16, 1992, the Company commenced the 1992 Equity Offering
for 9,863,600 shares of Common Stock at $5.50 per share. A portion of the 1992
Equity Offering relating to 3,464,373 shares was to facilitate the sale of
shares for existing major stockholders. The remainder of 6,399,227 shares that
were part of the 1992 Equity Offering were issued in conjunction with the Class
A Exchange. ALC did not receive any proceeds from the sale of the shares.
Class B Preferred and Class C Preferred
In 1988, CTI purchased, for an aggregate purchase price of $30.0 million,
all the shares of the Company's Class B Preferred and Class C Preferred. On
August 18, 1992, all of the Class B Preferred and the Class C Preferred were
transferred to the Banks. Each share of Class B Preferred or Class C Preferred
may be converted, at the option of the holder, into 1.898 shares or a total of
3,796,000 common shares, subject to adjustment, for the outstanding Class B
Preferred and Class C Preferred. The holder of each share of Class B Preferred
or Class C Preferred is entitled to a preference in liquidation over holders of
any other class of capital stock in amounts ranging from $21.00 during the
period from July 1, 1992 to June 30, 1993 to $22.50 after June 30, 1993.
No dividends shall accrue or be payable on the Class B Preferred or Class C
Preferred. Holders of Class B Preferred and Class C Preferred are entitled to a
number of votes equal to the number of shares of Common Stock into which their
shares are convertible.
Conversion of Class D Preferred
In June 1990, ALC issued 716,200 shares of Class D Preferred to CTI in
exchange for the concessions relating to the Allnet contract with CTGI for
transmission capacity, concessions relating to the Restructured Promissory Note,
and for a waiver by CTI of certain anti-dilution rights under the Company's
Certificate relating to the shares of Class B Preferred and Class C Preferred
which would otherwise have resulted from the Refinancing. Effective October 12,
1990, upon the amendment of the Certificate to increase the number of authorized
shares of Common Stock to 200,000,000, each share of outstanding Class D
Preferred was converted into 20 shares of Common Stock. During 1992, the
authorized shares of Class D Preferred were retired by the Company.
Employee Stock Purchase Plan
In October 1988, the Board adopted and the stockholders approved an
Employee Stock Purchase Plan, which became effective January 1, 1989. During
1991 and 1990, 71,171, and 70,362 shares were issued under the plan,
respectively. The Plan was terminated as of employee contributions through
December 31, 1990 because total shares projected to be issued in the subsequent
six month period would have exceeded the shares authorized under the Plan. Final
shares were issued in January 1991.
F-14
<PAGE> 160
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employee Stock Options
In October 1988, the Board adopted and the stockholders approved an
increase in the number of shares issuable under the ALC 1986 Option Plan. In
September 1990, the Stockholders approved the 1990 Stock Option Plan. The
maximum number of shares for which options may be granted under both plans is
4,000,000 (adjusted for certain events such as a recapitalization). The plans
provide for the granting of stock options and stock appreciation rights to key
employees.
Shares under option are summarized below:
<TABLE>
<CAPTION>
OPTION PRICE
NUMBER ---------------------------------
OF PER
SHARES SHARE TOTAL
--------- ---------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Shares under option December 31, 1989.......... 870,476 $10.00 - $48.75 $ 12,415
Options cancelled.............................. (815,677) $ 5.00 - $21.25 (8,072)
Options regranted.............................. 815,677 $ 3.50 2,855
Options granted................................ 2,234,725 $ 3.50 - $ 5.00 8,001
Options terminated............................. (105,848) $ 3.50 - $48.75 (1,744)
--------- ---------------- --------------
Shares under option December 31, 1990.......... 2,999,353 $ 3.50 - $48.75 $ 13,455
Options terminated............................. (294,799) $ 3.50 - $48.75 (3,986)
Options granted................................ 106,000 $ 3.50 - $ 4.40 448
Options exercised.............................. (8,838) $ 3.50 (31)
--------- ---------------- --------------
Shares under option December 31, 1991.......... 2,801,716 $ 3.50 - $ 4.40 $ 9,886
Options cancelled.............................. (554,000) $ 3.50 (1,939)
Options regranted.............................. 554,000 $ 3.50 1,939
Options terminated............................. (65,119) $ 3.50 - $ 5.88 (271)
Options granted................................ 1,055,876 $ 4.38 - $ 5.88 5,604
Options exercised.............................. (173,345) $ 3.50 (607)
--------- ---------------- --------------
Shares under option December 31, 1992.......... 3,619,128 $ 3.50 - $ 5.88 $ 14,612
--------- ---------------- --------------
--------- ---------------- --------------
Options exercisable, December 31, 1990......... 622,662 $ 3.50 - $48.75 $ 5,120
--------- ---------------- --------------
--------- ---------------- --------------
Options exercisable, December 31, 1991......... 1,009,002 $ 3.50 $ 3,532
--------- ---------------- --------------
--------- ---------------- --------------
Options exercisable, December 31, 1992......... 2,012,566 $ 3.50 - $ 4.68 $ 7,131
--------- ---------------- --------------
--------- ---------------- --------------
</TABLE>
NOTE G -- TRANSACTIONS WITH RELATED PARTIES
The Company leases transmission capacity, multiplexing and various other
technical equipment through both capital and operating leases from CTGI, an
affiliate of a major stockholder through August 1992. Amounts paid under the
leases were $17.7 million, $19.7 million and $24.4 million for the years ended
December 31, 1992, 1991 and 1990, respectively.
In June 1992, the Company paid $2.0 million to CTI for the purchase of
certain assets including an $0.8 million note from a major holder of Class A
Preferred which was paid in full upon closing of the 1992 Equity Offering.
Consideration for the transaction also includes $1.2 million of prepaid
transmission capacity from CTGI to be utilized over a 37 month period.
During August 1992, CTI conveyed 14,324,000 shares of Common Stock,
1,000,000 shares of Class B Preferred and 1,000,000 shares of Class C Preferred
to the Banks in exchange for the release of certain obligations of CTI. This
exchange effected a transfer of controlling interest in the Company from CTI to
the Banks. Pursuant to this transfer, Prudential Insurance Company of America
("Prudential") became a related
F-15
<PAGE> 161
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
party through beneficial ownership of options on the stock held by the Banks.
During 1992, Prudential held $3.4 million of 1990 Notes which were paid in full
in August 1992. As of December 31, 1992, Prudential owned 1990 Warrants to
purchase 1,975,804 shares of Common Stock. Prudential was also a major
participant in the Revolving Credit Facility through August 1992 which entitled
them to a share of the interest on the line of credit.
The transfer of stock from CTI to the Banks gave NationsBank of Texas, N.A.
("NationsBank") and The First National Bank of Chicago ("First National")
related party status through their ownership of Common, Class B Preferred and
Class C Preferred. Additionally, each of these banks is a major participant in
the Restructured Promissory Note. As of December 31, 1992, NationsBank owned
3,893,866 shares of Common Stock and 343,860 shares of Class B Preferred and
343,860 shares of Class C Preferred and held a portion of the Restructured
Promissory Note with principal balance of $4.3 million. As of December 31, 1992,
First National owned 2,781,333 shares of Common Stock and 245,614 shares of
Class B Preferred and 245,614 shares of Class C Preferred as well as a portion
of the Restructured Promissory Note totalling $3.1 million.
General Electric Pension Trust ("GEPT") holds warrants entitling them to
2,305,105 shares of Common Stock at $2.00 and 1,494,845 shares of Common Stock
at $5.00 per share. Other holdings included 1990 Notes of $3.9 million which
were paid in full in December 1992. During 1991, GEPT purchased $31.8 million
Debentures which were exchanged and subsequently sold in September 1992. GEPT
also purchased 500,000 shares of Common Stock in the 1992 Equity Offering. GEPT
may be deemed beneficial owner of an additional 120,000 shares of Common Stock.
Grumman Hill Associates, Inc. and Grumman Hill Investments L.P., of which
Richard D. Irwin (the Chairman of the Board of Directors of the Company) is the
General Partner, held 1990 Notes in the aggregate principal amount of $0.7
million which were paid off during 1992. As of December 31, 1992, these entities
held $4.1 million of 1992 Notes, 194,393 of the 1992 Warrants and 428,090 of the
1990 Warrants to purchase shares of the Company's Common Stock. Additionally,
during 1988, Grumman Hill Associates, Inc. was granted options to purchase
approximately 153,000 of Common Stock. These options were subsequently assigned
to Grumman Hill Investments, L.P.
The Company has paid consulting and investment banking advisory fees
amounting to approximately $0.4 million, $0.1 million and $0.3 million for the
years ended December 31, 1992, 1991 and 1990, respectively, to firms whose
directors and principals are or were directors of ALC.
NOTE H -- TAXES ON INCOME
The 1992 and 1991 provisions for income taxes include a charge to
operations for income taxes that would have been payable except for the
availability of net operating loss carryforwards ("NOLs"). The tax benefits of
the loss carryforwards utilized were reported as an extraordinary item in the
1992 and 1991 Consolidated Statements of Operations. These provisions were
determined based on the statutory tax rates applied to pre-tax income adjusted
for permanent differences related primarily to the amortization of the cost in
excess of net assets acquired. Due to the operating loss sustained for the year
ended December 31, 1990, no provision for income taxes was necessary.
F-16
<PAGE> 162
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense and the extraordinary item as shown in the Consolidated
Statements of Operations are composed of the following:
<TABLE>
<CAPTION>
1992 1991
---------- ----------
<S> <C> <C>
Federal
Income tax expense................................ $8,075,000 $2,240,000
Extraordinary item................................ 6,445,000 2,095,000
State
Income tax expense................................ 1,625,000 765,000
Extraordinary item................................ 555,000 535,000
</TABLE>
Due to the change of ownership which occurred in August 1992 and the
resulting limitation on the utilization of NOLs, the Company is now subject to
regular tax resulting in federal taxes currently payable of $1.6 million for
1992. In 1991, the Company was subject to alternative minimum tax which was
imposed at a 20% rate on the Company's alternative minimum taxable income. Net
operating losses were used to offset 90% of this tax. Federal taxes currently
payable were $0.1 million in 1991.
The 1992 and 1991 provisions for state and local income taxes reflect the
effect of filing separate Company state income tax returns for members of the
consolidated group. This amount is reduced, where appropriate, by the state
portion of operating loss carryforwards. State income taxes currently payable
were $1.1 million in 1992 and $0.2 million in 1991.
A reconciliation between the statutory federal and the effective income tax
rates follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
PRE-TAX
INCOME
-------------
1992 1991
----- ----
<S> <C> <C>
Income tax at statutory rate........................................... 34.0% 34.0%
Goodwill amortization.................................................. 2.2 9.1
State tax expense (net of federal benefit)............................. 4.6 8.9
Other.................................................................. .4 .5
----- ----
Income tax provision................................................... 41.2% 52.5%
----- ----
----- ----
</TABLE>
The Company has tax net operating loss, alternative tax net operating loss
and investment tax credit ("ITC") carryforwards which expire on December 31 of
the following years:
<TABLE>
<CAPTION>
ALTERNATIVE
TAX NET TAX NET INVESTMENT
OPERATING LOSS OPERATING LOSS TAX CREDIT
-------------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
1998........................................ $ 16,938 $ 16,885
1999........................................ 15,090 15,090 $2,841
2000........................................ 18,290 18,290 774
2001........................................ 18,073 18,073
2002........................................ 18,959 18,959
2003........................................ 26,896 26,875
2004........................................ 19,173 19,150
2005........................................ 14,411 14,445
-------------- -------------- ----------
$147,830 $147,767 $3,615
-------------- -------------- ----------
-------------- -------------- ----------
</TABLE>
F-17
<PAGE> 163
ALC COMMUNICATIONS CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amount of carryforwards which can be utilized annually to offset future
taxable income is, however, limited because of the Internal Revenue Code Section
382 "ownership changes" which occurred in 1989 and 1992. Under provisions of
Section 382, the utilization of these NOLs is presently limited to approximately
$10.0 million per year. This annual limitation, along with the 15 year
carryforward limitation, results in a maximum cumulative NOL and ITC
carryforward which may be utilized of approximately $130.0 million as of
December 31, 1992.
NOTE I -- STATEMENTS OF CASH FLOWS
The following non-cash investing and financing transactions are not
reflected in the Consolidated Statements of Cash Flows but are shown as
supplemental information:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1992 1991 1990
---- ---- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Capitalized lease obligations incurred in connection with
acquisitions of fixed assets............................... $187 $640 $1,518
</TABLE>
NOTE J -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1992 1992 1992 1992
--------- -------- ------------- ------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue...................................... $92,043 $ 92,659 $95,673 $ 95,689
Gross profit................................. $35,993 $ 37,423 $42,943 $ 42,816
Income before extraordinary item............. $ 1,941 $ 2,712 $ 4,190 $ 4,983
Net income................................... $ 3,267 $ 4,434 $ 5,882 $ 7,243
Income per common and common equivalent
share before extraordinary item............ $ 0.03 $ 0.07 $ 0.15 $ 0.16
Net income per common and common
equivalent share........................... $ 0.09 $ 0.15 $ 0.20 $ 0.23
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1991 1991 1991 1991
--------- -------- ------------- ------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue...................................... $85,914 $ 86,541 $88,168 $ 86,250
Gross profit................................. $32,829 $ 33,283 $34,448 $ 33,597
Income (loss) before extraordinary item...... $ 757 $ 909 $ 1,133 $ (82)
Net income................................... $ 1,307 $ 1,534 $ 1,888 $ 618
Loss per common and common equivalent
share before extraordinary item............ $ (0.04) $ (0.02) $ (0.01) $ (0.09)
Net income (loss) per common and common
equivalent share........................... $ (0.01) $ 0.01 $ 0.02 $ (0.05)
</TABLE>
F-18
<PAGE> 164
- ------------------------------------ ------------------------------------
- ------------------------------------ ------------------------------------
NO PERSON HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATIONS IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE 19,500,909 SHARES
CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER
INFORMATION AND REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY [ALLNET LOGO]
SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER [LOGO] COMMUNICATIONS
TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER
THAN THE REGISTERED SECURITIES TO CORPORATION
WHICH IT RELATES. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES
IN WHICH SUCH OFFER OR SOLICITATION
IS UNLAWFUL. COMMON STOCK
--------------
PROSPECTUS
TABLE OF CONTENTS ---------------
PAGE
----
<TABLE>
<S> <C>
Available Information.................. 2
Prospectus Summary..................... 3
Risk Factors........................... 6
Use of Proceeds........................ 9
Price Range of Common Stock............ 9
Dividend Policy........................ 9
The Company............................ 10
Capitalization......................... 12
Selected Financial Data................ 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 14
Business............................... 21
Management............................. 27
Certain Relationships and Related
Transactions......................... 34
The Refinancing........................ 39
Selling Stockholders................... 41
Principal Stockholders................. 42
Description of Capital Stock........... 45
Shares Eligible for Future Sale........ 46
Plan of Distribution................... 47 MARCH 18, 1993
Legal Matters.......................... 47
Experts................................ 48
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
- ------------------------------------ ----------------------------
- ------------------------------------ ----------------------------
