<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/x/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1996
--------------
or
/ / 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 0-21602
--------
LCI INTERNATIONAL, INC.
------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3498232
- ------------------------------ ------------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8180 Greensboro Drive, Suite 800
McLean, Virginia 22102
- ------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
(703) 442-0220
---------------------------------------------------
(Registrant's telephone number, including area code)
-------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
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 July 31, 1996, there were 72,555,430 shares of LCI International, Inc.
Common Stock (par value $.01 per share) outstanding.
<PAGE> 2
LCI INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Statements of Operations--
For the Three and Six Months Ended June 30, 1996 and 1995 3
Unaudited Condensed Consolidated Balance Sheets--
As of June 30, 1996 and December 31, 1995 4 - 5
Unaudited Condensed Consolidated Statement of Shareowners' Equity--
For the Six Months Ended June 30, 1996 6
Unaudited Condensed Consolidated Statements of Cash Flows--
For the Six Months Ended June 30, 1996 and 1995 7
Notes to Interim Unaudited Condensed Consolidated Financial Statements 8 - 13
Report of Independent Public Accountants 14
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 15 - 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURE 27
EXHIBIT INDEX
EXHIBITS 28
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
LCI INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except for per share amounts)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------------- ---------------------------
1996 1995 1996 1995
-------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
REVENUES $ 269,419 $ 152,000 $ 519,978 $ 296,215
Cost of services 157,666 89,826 306,253 175,649
-------------- ------------- ------------ -------------
GROSS MARGIN 111,753 62,174 213,725 120,566
Selling, general and administrative expenses 61,557 33,674 118,222 65,126
Depreciation and amortization 15,515 10,245 29,657 19,949
-------------- ------------- ------------ -------------
OPERATING INCOME 34,681 18,255 65,846 35,491
Interest and other expense, net 7,513 3,660 15,162 7,127
-------------- ------------- ------------ -------------
INCOME BEFORE INCOME TAXES 27,168 14,595 50,684 28,364
Income tax expense 9,509 3,503 17,739 6,807
-------------- ------------- ------------ -------------
NET INCOME 17,659 11,092 32,945 21,557
Preferred dividends 902 1,437 2,295 2,874
-------------- ------------- ------------ -------------
INCOME ON COMMON STOCK $ 16,757 $ 9,655 $ 30,650 $ 18,683
============== ============= ============ ==============
PER SHARE DATA
--------------
Income Per Share $ 0.20 $ 0.14 $ 0.38 $ 0.27
============== ============= ============ ==============
Weighted Average Number of Common Shares 87,614 79,862 87,484 79,794
============== ============= ============ ==============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
LCI INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1996 1995
------ -------------- ----------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Trade accounts receivable, net $ 187,593 $ 161,640
Current deferred tax assets, net 22,201 23,121
Prepaids and other 11,041 10,120
Other accounts and notes receivable, net 9,651 9,451
-------------- ----------------
Total current assets 230,486 204,332
-------------- ----------------
PROPERTY, PLANT AND EQUIPMENT:
Fiber optic network 391,114 357,294
General office equipment and building lease 108,601 90,806
Less - Accumulated depreciation and amortization (192,076) (181,487)
-------------- ----------------
307,639 266,613
Plant under construction 42,830 35,334
-------------- ----------------
Total property, plant and equipment, net 350,469 301,947
-------------- ----------------
OTHER ASSETS:
Excess of cost over net assets acquired, net 341,524 245,600
Other, net 47,462 21,480
-------------- ----------------
Total other assets 388,986 267,080
-------------- ----------------
Total Assets $ 969,941 $ 773,359
============== ================
</TABLE>
(Continued on next page)
4
<PAGE> 5
LCI INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
LIABILITIES AND SHAREOWNERS' EQUITY 1996 1995
----------------------------------- -------------- --------------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 13,040 $ 39,168
Facility costs accrued and payable 101,475 66,688
Accrued expenses and other 56,199 21,997
-------------- --------------
Total current liabilities 170,714 127,853
-------------- --------------
LONG-TERM DEBT 380,400 260,700
-------------- --------------
CAPITAL LEASE OBLIGATIONS 13,543 14,160
-------------- --------------
OTHER LIABILITIES AND DEFERRED CREDITS 26,068 25,868
-------------- --------------
COMMITMENTS AND CONTINGENCIES
SHAREOWNERS' EQUITY:
Preferred stock - Authorized 15,000 shares,
Issued and Outstanding 1,723.3 shares at June 30, 1996 and 4,578.1
shares at December 31, 1995 43,082 114,453
Common stock - Authorized 300,000 shares,
Issued and Outstanding 72,302 shares at June 30, 1996
and Authorized 100,000 shares,
Issued and Outstanding 64,434 shares at December 31, 1995 723 644
Paid-in capital 374,009 298,929
Retained deficit (38,598) (69,248)
-------------- --------------
Total shareowners' equity 379,216 344,778
-------------- --------------
Total Liabilities and Shareowners' Equity $ 969,941 $ 773,359
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
LCI INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Preferred Common Paid- Retained
Stock Stock In Capital Deficit Total
--------- --------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 $ 114,453 $ 644 $ 298,929 $ (69,248) $ 344,778
Employee stock purchases -- 2 2,730 -- 2,732
Exercise of options/warrants
and related tax benefits -- 2 1,054 -- 1,056
Conversion of preferred stock (71,371) 75 71,296 -- --
Net Income -- -- -- 32,945 32,945
Preferred dividends -- -- -- (2,295) (2,295)
--------- --------- ------------ ----------- ----------
BALANCE AT JUNE 30, 1996 $ 43,082 $ 723 $ 374,009 $ (38,598) $ 379,216
========= ========= ============ =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
LCI INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
-------------------------------------
1996 1995
----------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net cash provided by operating activities $ 68,017 $ 9,889
----------------- --------------
INVESTING ACTIVITIES:
Capital expenditures (64,011) (37,761)
Payments for acquisitions and other (118,142) --
----------------- --------------
Net cash used in investing activities (182,153) (37,761)
----------------- --------------
FINANCING ACTIVITIES:
Net debt borrowings 112,643 29,035
Preferred dividend payments (2,295) (2,874)
Proceeds from employee stock plans and warrants 3,788 1,711
----------------- --------------
Net cash provided by financing activities 114,136 27,872
----------------- --------------
Net increase in cash and cash equivalents -- --
----------------- --------------
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE PERIOD -- --
----------------- --------------
CASH AND CASH EQUIVALENTS AT THE
END OF THE PERIOD $ -- $ --
================= ==============
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE> 8
LCI INTERNATIONAL, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
(1) GENERAL
The results of operations for the interim periods shown are not
necessarily indicative of results to be expected for the fiscal year. In the
opinion of management, the information contained herein reflects all
adjustments necessary to make the results of operations for the interim periods
a fair presentation for the three and six months ended June 30, 1996 and 1995.
All such adjustments are of a normal recurring nature.
(2) BUSINESS ORGANIZATION AND PURPOSE
The financial statements presented herein include the condensed
consolidated statements of operations of LCI International, Inc., a Delaware
corporation, and its subsidiaries, collectively referred to as "LCI" or "the
Company", for the three and six month periods ended June 30, 1996 and 1995, the
condensed consolidated balance sheets as of June 30, 1996 and December 31,
1995, the condensed consolidated statement of shareowners' equity for the six
months ended June 30, 1996, and the condensed consolidated statement of cash
flows for the six month periods ended June 30, 1996 and 1995.
LCI is a facilities-based long-distance telecommunications carrier
that provides a broad range of domestic and international voice and data
services to commercial, wholesale and residential/small business customers.
The Company serves its customers primarily through digital fiber optic
facilities which are both leased and owned.
(3) ACCOUNTING POLICIES
Reference should be made to the Notes to Consolidated Financial
Statements in LCI's 1995 Annual Report, specifically Note 2, for a summary of
the Company's significant accounting policies.
PRINCIPLES OF CONSOLIDATION. The accompanying Unaudited Condensed
Consolidated Financial Statements include the accounts of LCI and its
wholly-owned, direct and indirect, subsidiaries. All material intercompany
transactions and balances have been eliminated.
8
<PAGE> 9
WEIGHTED AVERAGE NUMBER OF COMMON SHARES. The weighted average number
of common shares used to calculate earnings per share includes common stock and
common stock equivalents, and the assumed conversion of 5% Cumulative
Convertible Exchangeable Preferred Stock (Preferred Stock) into shares of
common stock. For all periods presented the weighted average number of common
shares includes the actual common shares issued for Preferred Stock conversions
and the assumed conversion of the remaining Preferred Stock outstanding. The
treasury stock method was used to reflect the impact of outstanding stock
options and common stock warrants for all periods presented. All share and per
share amounts at June 30, 1995 have been adjusted to reflect a 2-for-1 stock
split effected in the form of a stock dividend in September 1995.
INCOME PER SHARE. For the three and six months ended June 30, 1996
and 1995, the income per share is calculated as net income before preferred
dividends divided by the weighted average number of common shares, as defined
above. Income per share for the three and six months ended June 30, 1996 and
1995, represents primary and fully diluted amounts, as the two calculations
yield the same results.
RECLASSIFICATIONS. Certain reclassifications have been made to the
consolidated financial statements for 1995 to conform with the 1996
presentation.
(4) ACQUISITIONS
In June 1996, the Company acquired the long-distance assets of
Pennsylvania Alternative Communications, Inc. (PACE). LCI acquired the
Greensburg, Pennsylvania-based company for approximately $8 million in cash
with an additional maximum payment of approximately $5 million contingent on
certain revenue performance over a seven-month period. The acquisition was
accounted for as a purchase and was not considered significant for financial
reporting purposes. The results of operations for PACE were included in the
consolidated statement of operations from June 1, 1996.
In January 1996, the Company purchased the long-distance
telecommunications businesses of Teledial America, Inc. (Teledial America),
which does business as U.S. Signal Corporation, and an affiliated company, ATS
Network Communications, Inc. (ATS). Headquartered in Grand Rapids, Michigan,
Teledial America provided long-distance services to commercial customers
located primarily in Michigan and throughout the Midwest. ATS is a regional
long-distance carrier that operated primarily in Tennessee, Mississippi and
Arkansas. The Company acquired both companies for approximately $99 million in
cash, with an additional maximum payment of $24 million contingent on certain
revenue performance and customer retention over an eighteen-month period
commencing at the closing date. The acquisitions were treated as purchases for
accounting purposes.
In September 1995, the Company acquired Corporate Telemanagement
Group, Inc. (CTG), a Greenville, South Carolina-based provider of long-distance
services to commercial customers throughout the U.S. Under the terms of the
agreement, the Company acquired all of the outstanding shares of CTG and shares
underlying certain outstanding warrants in exchange for $45 million in cash and
4.6 million shares of the Company's common stock valued at approximately
9
<PAGE> 10
$93.2 million, based on the market price of the shares on the date of the
acquisition. The acquisition was treated as a purchase for accounting purposes.
The following unaudited pro forma summary presents the net revenues,
net income and earnings per share from the combination of the operations of the
Company and its two significant acquisitions, CTG and Teledial America, as if
the acquisitions had occurred at the beginning of the 1995 fiscal year.
Information is not provided for 1996, as both acquisitions were included in the
results of operations from January 1, 1996. The pro forma information is
provided for information purposes only. It is based on historical information
and does not necessarily reflect the actual results that would have occurred
nor is it necessarily indicative of the future results of operations of the
combined enterprise:
<TABLE>
<CAPTION>
(in thousands, except per share amounts) Three Months Ended June Six Months Ended
30, 1995 June 30, 1995
----------------------- ----------------
<S> <C> <C>
Net revenues $ 193,937 $ 380,088
Net income 12,105 23,583
Earnings per share $ 0.14 $ 0.28
</TABLE>
(5) REVOLVING CREDIT FACILITY
In February 1996, the Company increased its existing Revolving Credit
Facility (Credit Facility) to $700 million. This Credit Facility amends the
$450 million Credit Facility commitment received by the Company in June 1995.
The Credit Facility, with a syndicate of banks, is subject to various principal
reductions depending on the outstanding balance, until maturity on March 31,
2001. This Credit Facility bears interest at a rate consisting of two
components: the base rate component is dependent upon a market indicator; the
second component varies from 0.625% to 1.5% depending on the Company's leverage
ratio. The weighted average interest rate on the outstanding borrowings under
the Credit Facility on June 30, 1996 was 6.46%.
The Credit Facility contains various financial covenants, the most
restrictive being the leverage ratio requirement. As of June 30, 1996, the
Company was in compliance with all Credit Facility covenants.
As of June 30, 1996, the Company has $380.4 million outstanding under
the Credit Facility. An additional $10.4 million of the Credit Facility is
reserved as of June 30, 1996, as a result of letters of credit issued for
various business matters.
The Company entered into an interest rate cap agreement with a
syndicate of commercial banks in February 1996 that limits the Company's base
interest rate exposure on its Credit Facility to 7.5% on a notional principal
balance of $130 million for a two-year period ending February 1998. In the
event of non-performance by the commercial banks, the Company would have
exposure to the extent of any increase in the base rate component above 7.5%.
The Company believes an event of non-performance by the banks would be remote.
10
<PAGE> 11
(6) COMMITMENTS AND CONTINGENCIES
VENDOR AGREEMENTS. The Company has agreements with certain
telecommunications interexchange carriers and third party vendors that require
the Company to maintain minimum monthly and/or annual billings based on usage.
The Company has a single contract which began in August 1995, with a minimum
annual usage requirement of approximately $48 million with an increasing
cumulative minimum until July 2000, and is subject to an underutilization
charge. The Company has exceeded the cumulative minimum usage set for 1996.
The Company's minimum monthly billing commitments under all other vendor
agreements are approximately $6 million through the end of 1996. The Company
has historically met all minimum billing requirements and believes that the
minimum usage commitments will be met.
LEGAL MATTERS. Thomas J. Byrnes and Richard C. Otto v. LCI
Communications Holdings Co. et al. was filed by two former members of the
Company's management on June 28, 1991 in Common Pleas Court, Franklin County,
Ohio, alleging age discrimination by the Company among other things, and
seeking $42.8 million in compensatory and punitive damages. During 1993, a jury
returned a verdict in favor of the Plaintiffs and the Common Pleas Court
awarded approximately $8.1 million in damages and attorney's fees.
Both the Plaintiffs and the Company appealed this matter to the
appropriate Court of Appeals in Ohio, which in a two-to-one decision, overruled
each of LCI's assignments of error and two of the Plaintiffs' claims, and
sustained the Plaintiffs' request for approximately $0.1 million in
pre-judgment interest, in addition to the previous award. The Company filed a
Notice of Appeal at the Supreme Court of Ohio (the Court) and the Court agreed
to review the decision by the Court of Appeals. Oral arguments took place in
May 1996. To date the Court has not rendered an opinion on the matter. The
appeal process has extended for several years and depending on the disposition
and the timing of the ultimate outcome, it is reasonably possible that between
$0 and $2.7 million of additional interest expense could be incurred.
The Company also has been named as a defendant in various other
litigation matters. Management intends to vigorously defend these outstanding
claims. The Company believes it has adequate accrued loss contingencies and
that current pending or threatened litigation matters will not have a material
adverse impact on the Company's results of operations or financial position.
(7) SHAREOWNERS' EQUITY
COMMON STOCK. The Company has stock option plans under which options
to purchase shares of common stock may be granted to directors and key
employees. During the six months ended June 30, 1996, the Company granted
options to purchase 1,968,000 shares of common stock. The option price for all
options granted was the fair market value of the shares on the date of grant.
The Company issued 144,442 shares of common stock during the six months ended
June 30, 1996 pursuant to exercises of options under all stock option plans.
The Company also has an Employee Stock Purchase Plan and maintains a defined
contribution plan for its employees. The Company issued 122,127 shares under
its Employee Stock Purchase Plan and 28,129 shares under the defined
contribution plan for the six months ended June 30, 1996.
11
<PAGE> 12
PREFERRED STOCK. The Company's 5% Cumulative Convertible Exchangeable
Preferred Stock (Preferred Stock) is convertible into shares of common stock
($.01 par value) at any time at the option of the holder, at a conversion rate
equal to the aggregate liquidation preference of the shares of Preferred Stock
surrendered for conversion, divided by the conversion price. The Preferred
Stock has a liquidation preference of $25.00 per share plus accrued and unpaid
dividends, and can be converted into shares of common stock based on a
conversion price of $9.50 per share. Shareholders converted 2,854,788 shares
of preferred stock into 7,512,340 shares of common stock during the six months
ended June 30, 1996.
On June 3, 1996 the Company announced its intention to redeem the
outstanding shares of Preferred Stock on September 3, 1996. The redemption
price will be $25.50 per share plus accrued and unpaid dividends through August
31, 1996. The Company believes that substantially all of the Preferred Stock
will be converted into shares of common stock as the value to be realized upon
conversion (based upon the current market value of the Company's common stock)
is significantly higher than the redemption price. Neither the conversion nor
the redemption of the Preferred Stock will have an impact on earnings per share
since the assumed conversion of the Preferred Stock is already considered in
the weighted average share calculation.
COMMON STOCK WARRANTS. In 1993 the Company issued warrants
exercisable for 5,408,900 shares of common stock at $2.83 per share that expire
ten years from the date of issue. During the six months ended June 30, 1996
warrant owners exercised 69,968 warrants for 61,923 shares of common stock.
(8) INCOME TAXES
The provision for income taxes for the three and six months ended June
30, 1996 and 1995, consisted of :
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------ -----------------------------
(in thousands) 1996 1995 1996 1995
-------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Current tax expense (benefit):
Federal $ 483 $ (934) $ 905 $ 566
State 245 311 407 748
-------------- ------------ ------------ -------------
Total current tax expense (benefit) 728 (623) 1,312 1,314
-------------- ------------ ------------ -------------
Deferred tax expense:
Increase in deferred tax liabilities 1,223 1,845 1,404 2,550
Decrease in deferred tax asset 8,929 4,877 17,591 8,045
Decrease in valuation allowance, net (1,371) (2,596) (2,568) (5,102)
-------------- ------------ ------------ -------------
Total deferred tax expense 8,781 4,126 16,427 5,493
-------------- ------------ ------------ -------------
Total income tax expense $9,509 $ 3,503 $17,739 $6,807
============== ============ ============ =============
</TABLE>
12
<PAGE> 13
The decrease in the valuation allowance for the three and six months
ended June 30, 1996 and 1995 resulted from the Company's expected realization
of a portion of its net operating loss (NOL) carryforwards in future years
based on the Company's growth in recurring operating income in 1996 and 1995,
and its expectation of future taxable income, net of a minor increase relating
to expected state tax credits.
The effective income tax rate varies from the Federal statutory rate
for the three and six months ended June 30, 1996 and 1995, as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- -----------------------
1996 1995 1996 1995
----------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Expected tax at Federal
Statutory income tax rate: 35.0% 35.0% 35.0% 35.0%
Effect of:
State income tax expense 5.0 4.6 5.0 3.9
Non-deductible expenses 1.5 (0.3) 1.5 1.1
Decrease in valuation allowance, net (5.0) (17.8) (5.1) (18.0)
Other, net (1.5) 2.5 (1.4) 2.0
----------- --------- ---------- -----------
35.0% 24.0% 35.0% 24.0%
=========== ========= ========== ===========
</TABLE>
The effective tax rate of 35% for the three and six months ended June
30, 1996 and 24% for the same periods in 1995 represents the Company's
estimated effective tax rate for the periods. This effective tax rate is
adjusted quarterly based on the Company's estimate of future taxable income,
use of NOLs and the related impact on the valuation allowance. The tax rate
reconciliation for the three and six months ended June 30, 1996, reflects the
expected financial reporting use of $4.3 million and $8.0 million,
respectively, of NOLs which resulted in a $1.7 million and $3.2 million
reduction of income tax expense, respectively. As of June 30, 1996 the Company
had available $13.0 million of NOLs for financial reporting purposes.
The Company has generated significant NOLs that may be used to offset
future taxable income. Each year's NOL has a maximum 15-year carryforward
period. The Company's ability to fully use its NOL carryforwards is dependent
upon future taxable income. As of June 30, 1996, the Company had total NOL
carryforwards for income tax purposes of $140 million subject to various
expiration dates beginning in 1998 and ending in 2010.
The Company's deferred income tax balances include $22.2 million in
current deferred tax assets and $3.9 million in other noncurrent liabilities as
of June 30, 1996. As of December 31, 1995 deferred income tax balances
included $23.1 million in current deferred tax assets, net and $8.8 million in
noncurrent other assets.
The Company has a valuation allowance remaining of $5.8 million as of
June 30, 1996 and $8.4 million as of December 31, 1995. The balance as of June
30, 1996 includes a reserve of $5.2 million against realization of NOLs and
$0.6 million reserve against the future realization of state tax credits.
13
<PAGE> 14
Report of Independent Public Accountants
To The Board of Directors and Shareowners of LCI International, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of LCI
International, Inc. (a Delaware corporation) and subsidiaries as of June 30,
1996, and the related condensed consolidated statements of operations for the
three-month and six-month periods ended June 30, 1996 and 1995, the condensed
consolidated statements of cash flows for the six-month periods ended June 30,
1996 and 1995, and the condensed consolidated statement of shareowners' equity
for the six-month period ended June 30, 1996. These financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of LCI International, Inc. and
subsidiaries as of December 31, 1995 (not presented herein), and, in our report
dated March 7, 1996, we expressed an unqualified opinion on that statement.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1995, is fairly stated, in all
material respects, in relation to the condensed consolidated balance sheet from
which it has been derived.
ARTHUR ANDERSEN LLP
Washington D.C.
July 24, 1996
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
INTRODUCTION - INDUSTRY ENVIRONMENT
The Company operates in the almost $80 billion long-distance
telecommunications industry. The current industry environment subjects the
Company to varying degrees of legislative and regulatory oversight on both the
national and state levels. The following potential changes in the legislative
and/or regulatory environment can impact the nature and degree of the Company's
competition.
LEGISLATIVE MATTERS
TELECOMMUNICATIONS ACT OF 1996. In February 1996, the
Telecommunications Act of 1996 (the Act) was passed by the United States
Congress and signed into law by President Clinton. This comprehensive
telecommunications legislation was designed to increase competition in the
long-distance and local telecommunications industries. The legislation will
allow the Regional Bell Operating Companies (RBOCs) to provide long-distance
service in exchange for opening their networks to local competition. Under the
legislation, the RBOCs can immediately provide interstate long-distance
services outside of their local service territories. However, an RBOC must
apply to the Federal Communications Commission (FCC) to provide long-distance
services within any of the states in which such RBOC currently operates. The
RBOCs must satisfy several pro-competition criteria before the FCC will approve
such a request. With the passage of the legislation, the Company can enter
local telephone markets by reselling service of local telephone companies or
building new facilities.
Under the Act, a telecommunications provider can request initiation of
interconnection/resale negotiations with a local exchange company (LEC). In
early March, the Company requested in writing to begin good faith negotiations
with the RBOCs and several other LECs. On June 27, 1996, the Company notified
the RBOCs, Cincinnati Bell, GTE and Sprint United that it was withdrawing from
formal negotiations for local service under the Act. LCI's action came as a
result of the Company's unsuccessful attempts to reach local service agreements
with each of the respective LECs. LCI withdrew from formal negotiations with
several of the LECs because they failed to provide the necessary technical and
pricing information fundamental to offering competitive local telephone
service. The Act provides that if the parties have not reached an agreement
between 135 to 160 days from the beginning of negotiations, the Company may
request arbitration from the appropriate state agency. The Company's
withdrawal, which occurred before the 160 day deadline, preserves LCI's rights
to arbitrate any unresolved issues. In the case of Ameritech, Bell South and
Sprint United, the parties mutually consented to withdraw from negotiations.
While LCI has formally withdrawn from local service negotiations, it
continues to have discussions with various LECs, competitive access providers
and other telecommunications service providers relative to providing local
service. The Company will continue to pursue its strategy of offering local
service and does not believe that its withdrawal from formal negotiations will
impede or significantly delay its entry into the local service market.
15
<PAGE> 16
REGULATORY MATTERS
LOCAL INTERCONNECTION AND RESALE. On August 1, 1996, the FCC adopted
an order to implement policies and rules regarding local service competition as
required under the Act. In preliminary form, the FCC has established a minimal
national framework for the purchase of unbundled local network elements, resale
discounts, and procedures by which agreements for the provision of local
service through LECs are to be arbitrated. The Company views the FCC's action
as an effective first step toward facilitating competition in local services.
The FCC has also initiated a number of other rulemaking proceedings to
comply with the Act. These rulemaking proceedings include addressing certain
tariff-related issues, the definition of universal service, accounting and
non-accounting safeguards relative to the RBOCs' provision of in-region long
distance service, and rate deaveraging. The Company is unable to predict what
action will be taken by the FCC or how such action will affect the Company's
financial position and results of operation.
LOCAL SERVICE. The Company is involved in state regulatory proceedings
in various states to secure approval to resell local service which would enable
the Company to provide combined local and long-distance services to existing
and prospective customers. The local service industry is estimated to be an
$80 billion market. The Company believes that it has significant opportunities
in this industry. The Company has received different levels of approval to
resell local service in Illinois, Texas, Florida, Connecticut, Michigan,
California, Maryland, Tennessee and New York and has applications for local
service authority pending in nineteen other states. The Company is unable to
predict when and the degree to which it will resell local services.
RBOC ENTRY INTO OUT-OF-REGION LONG DISTANCE. The Act granted the RBOCs
the authority to provide out-of-region long-distance services. In response, the
FCC granted the ability for an RBOCs that provides interstate interexchange
services through an affiliate to obtain non-dominant regulatory treatment on an
interim basis, if the affiliate complies with certain safeguards. The
safeguards require that the affiliate maintain separate books of accounts, does
not jointly own transmission or switching facilities with the RBOC, and obtain
any tariffed services from the affiliated RBOC at tariffed rates and
conditions.
RBOC MERGERS. In early 1996, SBC Communications Inc. and Pacific
Telesis Group, as well as Bell Atlantic Corp. and NYNEX Corp. (all are RBOCs)
announced plans to merge. The mergers are subject to review and approval by
various state and Federal agencies. The Company is unable to predict what
impact, if any, these potential mergers, if approved, might have on competition
in the telecommunications industry or on the Company.
16
<PAGE> 17
GENERAL - RESULTS OF OPERATIONS
The Company's switched revenues are a function of switched minutes of
use (MOUs) and rate structure (rates charged per MOU), which in turn are a
function of the Company's customer and service mix. Private line revenues are
a function of fixed rates that do not vary with usage. The Company's cost of
services consists primarily of expenses incurred for origination, termination
and transmission of calls through local exchange carriers and transmission
through other long-distance carriers. The Company provides service to its
customers through digital fiber optic facilities which are both leased and
owned. Collectively, these facilities constitute the Company's network (the
Network). These results of operations include the acquisition of Pennsylvania
Alternative Communications, Inc. (PACE) from June 1, 1996, and the acquisitions
of Teledial America, Inc. (Teledial America) and ATS Network Communications,
Inc. (ATS) from January 1, 1996.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996 AS
COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 30, 1995
REVENUES. Total revenues increased 77% to $269.4 million and 76% to
$520.0 million for the three months and six months ended June 30, 1996,
respectively, over the comparable periods in 1995. Internal growth from the
Company's base business was 42% in the quarter, with acquisitions representing
the remaining increase. The following table provides further information
regarding the Company's revenues:
<TABLE>
<CAPTION>
(in thousands, Three Months Six Months
except switched revenue per MOU) Ended June 30, Ended June 30,
------------------------------- --------------------------------
1996 1995 Change 1996 1995 Change
------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Revenues $ 269,419 $ 152,000 77% $ 519,978 $ 296,215 76%
MOUs 1,954,998 1,112,945 76% 3,764,655 2,180,903 73%
Switched Revenue per MOU(1) $ 0.1272 $ 0.1210 5% $ 0.1267 $ 0.1200 6%
</TABLE>
(1)Switched revenue divided by MOUs
Commercial revenues increased approximately 60% for three and six
months ended June 30, 1996 compared to the same periods in 1995 and continued
to represent more than half of the Company's total revenues. Residential/small
business service revenues increased approximately 170% and 180% for the three
and six months ended June 30, 1996, respectively, over the comparable periods
in the prior year. The residential/small business segment represented
approximately 30% of total revenues for the three and six months ended June 30,
1996 as compared to approximately 20% for the same periods in prior years. The
wholesale segment experienced higher growth rates of approximately 35% and 25%
for the three and six months ended June 30, 1996, respectively, as compared to
the same periods in 1995, as a result of the Company's continual evaluation of
the potential margin in this service line and the decision to take advantage of
profitable opportunities. The wholesale service line represented approximately
15% of total revenue during 1996 compared to 20% of total revenue during 1995.
17
<PAGE> 18
Growth in international service revenues across all business segments
continued in excess of 135% for both the three months and six months ended June
30, 1996 compared to the same periods in 1995 and resulted from the Company's
efforts to take full advantage of opportunities in the global
telecommunications market.
The Company experienced a 5% and 6% increase in revenue per MOU for
the three and six months ended June 30, 1996, respectively, as compared to the
same periods in 1995. This increase in revenue per MOU reflects several
factors. An increasing base of residential/small business and international
revenues with higher rate structures per MOU has favorably impacted revenue per
MOU, but this increase was partially offset by the higher level of sales
allowance required in 1996. Other factors placing a downward pressure on
revenue per MOU include competitive market conditions, a mix shift in
international service to countries with lower rate structures in 1996 compared
to 1995, expanded growth in dedicated access services and the Company's
commitment to grow in all market segments, including wholesale and national
accounts, all of which have a lower rate structure per MOU.
The Company uses a variety of sales channels to market its services.
In addition to its internal sales force, the Company uses a combination of
advertising, telemarketing and third-party sales agents. With respect to
third-party sales agents, compensation for sales is paid to agents in the form
of an ongoing commission based upon collected revenue while the billing and
customer service functions are performed by the Company. A nationwide network
of third-party sales agents managed by one vendor continued to be the most
successful of the Company's sales agents and is accounting for a significant
portion of the Company's residential/small business sales. In June 1996, the
Company extended the contract with this vendor through April 2011. In
consideration for the contract extension, and exclusivity and non-compete
provisions, the Company has committed to make three payments on designated
dates, which will be amortized over the life of the contract. A portion of the
payments is contingent on future performance of this vendor.
GROSS MARGIN. The Company's gross margin increased 80% to $111.8
million and 77% to $213.7 million for the three and six months ended June 30,
1996, respectively, as compared to the prior year. The $50.0 million and $93.2
million increases over the prior year are primarily a result of the continued
increase in revenues. During the three and six months ended June 30, 1996, the
gross margin percentage increased to 41.5% and 41.1%, respectively, from 40.9%
and 40.7%, respectively, for the same periods in 1995.
The growth in the Company's gross margin as well as the increase in
gross margin as a percentage of revenue, resulted from the net impact of
several items. The growth in residential/small business and international
traffic, which has a higher revenue per MOU compared to other service
offerings, had a favorable impact on gross margin. Even with the mix shift in
international service to countries with lower rates per MOU, management has
reduced the cost per MOU at a greater rate than the mix shift. The improvements
in Network efficiencies and lower access costs due to local exchange carrier
rate reductions provided cost savings which also favorably impacted gross
margin. During the second quarter of 1996 approximately 95% of the Company's
domestic traffic was carried on the Network compared to approximately 90% for
the comparable period in 1995. The Network efficiencies were a result of the
integration of acquisition traffic onto the Network and improved application of
Network optimization techniques.
18
<PAGE> 19
The favorable impact on gross margin was partially offset by
competitive pressures in the commercial market segment which reduced revenue
per MOU and related gross margins. The higher cost of traffic from acquisitions
which has not yet been integrated onto the Network has also reduced gross
margin as a percentage of revenue. The net impact of all of these factors
resulted in an overall improvement in the gross margin as a percentage of
revenue.
The Company continues to evaluate strategies to reduce its cost of
services. These strategies include a review of the Company's ability to
leverage its embedded fiber optic capacity, as well as gain access to fiber
optic and broadband capacity through contract negotiations or other
arrangements with carriers. In addition, the Company continues to identify
off-network traffic from acquisitions that can be cost effectively routed onto
the Network and therefore reduce costs. Through these strategies, LCI plans to
improve the reliability and efficiency of the Network as well as reduce its
cost of services per MOU.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 83% to $61.6 million and 82% to $118.2
million for the three and six months ended June 30, 1996, respectively, as
compared to the same periods in the prior year. The increases in selling,
general and administrative expenses resulted primarily from corresponding
increases in revenue for the same periods. As a percentage of revenues,
selling, general and administrative expenses were approximately 22.8% and 22.7%
for the three and six months ended June 30, 1996, respectively, which
represented an increase over the percentage of revenues of approximately 22.2%
and 22.0% for the same periods in 1995, respectively.
The increase in selling, general and administrative expenses reflects,
in part, the $10.0 million and $18.8 million increase in commission expense for
the three months and six months ended June 30, 1996, respectively, over the
comparable periods in 1995 due to the increases in sales and revenues. Billing
services expense increased $3.8 million and $7.2 million for the same periods
in 1996, respectively, over the comparable periods in 1995 due to the increase
in residential/small business service call volume. Both commission and billing
services expenses grew at a faster rate than revenues due to the shift in
customer mix toward residential/small business services which were growing
faster than their related costs. The Company expects the continued increase in
the residential/small business segments, with the corresponding shift in the
customer mix, will result in continued increases in these components of
selling, general and administrative expenses.
Payroll expenses increased $9.4 million and $17.8 million for the
three and six months ended June 30, 1996, respectively, due to an increase in
the number of employees resulting from the Company's expansion and
acquisitions. The growth in the payroll expense during 1996 over the comparable
periods in 1995 was less than the corresponding growth in revenues for the same
periods.
Another increase in selling, general and administrative expenses
during the three month and six months ended June 30, 1996 was caused by the
increase in bad debt expense. Bad debt expense increased as a result of the
growth in revenue during 1996, the increase in the customer mix toward the
residential/small business service segment, the geographic mix of the
residential/small business moving outside the midwest which historically has a
lower bad debt rate, as well as increased scrutiny of accounts receivable
resulting from the transition to a new accounts receivable system. The new
accounts receivable system provided management with the ability to better
19
<PAGE> 20
analyze and monitor the nature of customer receivable balances. The Company
evaluated the status of its accounts receivable and increased its provision for
bad debt expense to reflect credits and the write-off of uncollectible
accounts. As a result of all of the above, an increase in bad debt expense may
continue during the remainder of 1996, but as a percentage of revenues bad debt
expense increased slightly during the three and six months ended June 30, 1996
over the comparable periods in 1995.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense for the three and six months ended June 30, 1996 increased 51% and 49%,
respectively, over the same periods in 1995. The dollar increase is a result of
the increased capital expenditures required to support the growth in revenue
and MOU volumes, as well as additional goodwill amortization from the Company's
recent acquisitions. The growth in revenue exceeded the growth in depreciation
and amortization expense which caused depreciation and amortization expense as
a percentage of revenues to decrease to 6% for the three and six month periods
ended June 30, 1996, respectively, from 7% for the same periods in 1995. The
reduction in depreciation and amortization expense as a percentage of revenues
reflects the Company's ability to maximize the application of its facilities
and achieve economies of scale from its revenue growth.
OPERATING INCOME. Operating income increased 90% to $34.7 million and
86% to $65.9 million for the three and six months ended June 30, 1996,
respectively, compared to the same period in 1995 due to the factors discussed
above. As a percentage of revenues, operating income increased to 13% for the
three and six months ended June 30, 1996 compared to 12% for the same periods
in 1995, reflecting management of expenses during a period of significant
growth in revenues and MOUs.
INTEREST AND OTHER EXPENSE, NET. Interest and other expense, net of
capitalized interest, increased to $7.5 million and $15.2 million for the three
and six months ended June 30, 1996, respectively, from $3.7 million and $7.1
million for the same periods in 1995, respectively. The higher levels of
outstanding debt during 1996 compared to the same periods in 1995 resulted in
increased interest expense during these periods. The Company's acquisitions of
CTG, Teledial America, ATS and PACE increased outstanding debt approximately
$173 million for the three and six months ended June 30, 1996 over the
comparable periods in 1995. The Company had $393.9 million in outstanding debt
and capital leases as of June 30, 1996 as compared to $178.4 million as of June
30, 1995. The effective weighted average interest rate on all indebtedness
outstanding was 7.71% and 7.87% for the three and six months ended June 30,
1996, respectively, as compared to 8.16% and 8.29% for the same periods in
1995, respectively.
INCOME TAX EXPENSE. Income tax expense was $9.5 million and $ 17.7
million for the three and six months ended June 30, 1996, respectively, as
compared to $3.5 million and $6.8 million for the same periods in 1995,
respectively. The increase in income tax expense was a result of an increase in
the estimated effective tax rate to 35% in 1996 from 24% in 1995, as well as
the increase in income before income taxes for the periods in 1996 as compared
to 1995. The effective tax rate is lower than the statutory rate primarily due
to the Company's expectation that a portion of the available net operating
losses (NOLs) will be realized in future years as permitted by Statement of
Financial Accounting Standards No. 109 (See Note 8 to the Condensed
Consolidated Financial Statements.)
20
<PAGE> 21
PREFERRED DIVIDENDS. Preferred dividends were $0.9 million and $2.3
million for the three and six months ended June 30, 1996, respectively, as a
result of the dividend requirements on the 5% Cumulative Convertible
Exchangeable Preferred Stock (Preferred Stock), which was issued in August
1993. During the first three and six months of 1996 Preferred Stock conversions
of 578,400 and 2,854,788, respectively, decreased the amount of Preferred Stock
outstanding. As a result of the conversions the corresponding preferred
dividend payments decreased during 1996 as compared to 1995.
INCOME ON COMMON STOCK. The Company generated income on common stock
(after preferred dividends) of $16.8 million and $30.7 million for the three
and six months ended June 30, 1996, respectively, as compared to $9.7 million
and $18.7 million for the same periods in 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
LCI International, Inc. is a holding company and conducts operations
through its direct and indirect wholly-owned subsidiaries. There are no
restrictions on the movement of cash within the consolidated group and the
Company's discussion of its liquidity is based on the consolidated group. The
Company measures its liquidity based on cash flow as reported in its Condensed
Consolidated Statements of Cash Flow; however, the Company does use other
operational measures as outlined below to manage its operations.
CASH FLOWS - OPERATING ACTIVITIES. The Company provided $68.0 million
of cash from operations for the six months ended June 30, 1996 which is an
increase of $58.1 million from the same period in 1995. The increase is due to
stronger cash collections in 1996 when compared to 1995 and the significant
growth in revenues and net income for the same period.
CASH FLOWS - INVESTING ACTIVITIES. The Company has supported its
growth strategy with both capital additions and acquisitions. During the six
months ended June 30, 1996, the Company spent $64.0 million in capital
expenditures to acquire additional switching, transmission and distribution
capacity as well as to develop information systems support, representing an
increase of $26.3 million from the same period in 1995.
The Company's acquisitions of Teledial America and ATS in the first
quarter of 1996, as well as the acquisitions of PACE and other intangible
assets in the second quarter of 1996 resulted in the use of $118.1 million in
cash for the six months ended June 30, 1996. The Company had no acquisitions
during the same period in 1995.
CASH FLOWS - FINANCING ACTIVITIES. Financing activities provided a net
$114.1 million for the six months ended June 30, 1996, primarily from the
proceeds of the Company's Revolving Credit Facility (Credit Facility),
representing an increase of $86.3 million from the same period in 1995. The
cash provided was primarily used for the acquisitions and capital expenditures
discussed under the caption Cash Flow- Investing Activities.
21
<PAGE> 22
CAPITAL RESOURCES. In February 1996, the Company negotiated an
increase in the Credit Facility to $700 million for a five-year period. The
Credit Facility allows the Company to borrow on a daily basis. As a result,
the Company uses its available cash to reduce the balance of its Credit
Facility and maintains no cash on hand. The Company had $380.4 million
outstanding under the Credit Facility with $10.4 million reserved as a result
of issued letters of credit, resulting in $309.2 million available under the
Credit Facility as of June 30, 1996.
The banks' commitment under the Credit Facility is subject to various
principal reductions, depending on the outstanding balance, until maturity on
March 31, 2001. The Credit Facility contains certain balance sheet, operating
cash flow, capital expenditure and negative covenant requirements. As of June
30, 1996, the Company was in compliance with all covenants. The interest rate
on the Credit Facility outstanding balance is variable based on several indices
(See Note 5 to the Condensed Consolidated Financial Statements). The weighted
average interest rate on the debt outstanding under the Credit Facility was
6.46% and 7.06% at June 30, 1996 and 1995, respectively.
Although the Company believes it has sufficient operating cash flows
and available borrowing capacity to fund its current operations and anticipated
capital requirements, the Company continues to evaluate other sources of
financing. The Company has filed a shelf registration statement with the
Securities and Exchange Commission, which would allow the issuance of an
additional $300 million of debt and/or equity securities. The Company is also
investigating a securitization program of accounts receivable balances to
provide an additional source of capital. If completed, the funds from the
transaction would be used to reduce the balance on the Credit Facility. The
Company has not yet determined when or if any new capital financing will be
completed.
On June 3, 1996, the Company announced its intention to redeem the
outstanding shares of Preferred Stock on September 3, 1996. The redemption
price will be $25.50 per share plus accrued and unpaid dividends through August
31, 1996. The Company believes that substantially all of the Preferred Stock
will be converted into shares of common stock as the value to be realized upon
conversion (based upon the current market value of the Company's common stock)
is significantly higher than the redemption price. The Preferred Stock is
convertible into shares of common stock ($.01 par value) of the Company at the
option of the holder, at any time, at a conversion rate equal to the aggregate
liquidation preference of the shares, divided by the conversion price. The
Preferred Stock has a liquidation preference of $25.00 per share plus accrued
and unpaid dividends, and can be converted into shares of common stock based on
a conversion price of $9.50 per share. If all preferred stockholders do not
convert their shares to common stock, the Company will use funds from
operations or from its Credit Facility for the redemption. Neither the
conversion nor the redemption of the Preferred Stock will have an impact on
earnings per share as the assumed conversion of the Preferred Stock is
currently reflected in the weighted average share calculation. Upon conversion
or redemption of all of the Preferred Stock outstanding, the dividend payments
will no longer be required resulting in annual savings of $5.7 million, based
upon the original 4.6 million shares issued in August 1993.
22
<PAGE> 23
OPERATIONAL MEASURES. The Company uses earnings before interest,
income taxes, other expense, depreciation and amortization (EBITDA) and
borrowing capacity under its Credit Facility as operational measures of its
ability to fund growth and manage expansion. EBITDA should not be considered
(i) as an alternate to net income, (ii) as an indicator of operating
performance or cash flows generated by operating, investing or financing
activities or (iii) as a measure of liquidity.
EBITDA increased 76% to $50.2 million and 72% to $95.5 million for the
three and six months ended June 30, 1996, respectively, compared to the same
period for 1995. The following table provides a summary of EBITDA, cash
interest and preferred dividends coverage ratio and capital spending for
comparable periods in 1996 and 1995:
<TABLE>
<CAPTION>
Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------ --------------------------
(in thousands) 1996 1995 1996 1995
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
EBITDA $50,196 $28,500 $ 95,503 $55,440
Cash Interest and Preferred Dividends 7,544 5,762 16,466 9,784
Coverage Ratio (1) 6.65x 4.95x 5.80x 5.67x
Capital Expenditures and Acquisitions $53,178 $25,663 $182,153 $37,761
</TABLE>
(1) EBITDA divided by cash interest and preferred dividends.
The successful growth in operations, together with the capital changes
discussed above, have significantly improved EBITDA during the periods
presented.
CAPITAL REQUIREMENTS. In June 1996, the Company purchased the
long-distance assets of PACE for approximately $8 million in cash with a
maximum payment of an additional $5 million in cash contingent on certain
revenue performance over a seven-month period. In January 1996, the Company
purchased the long-distance telecommunications businesses of Teledial America,
Inc. and an affiliated company, ATS Network Communications, Inc. for
approximately $99 million in cash with a maximum payment of an additional $24
million in cash contingent on certain revenue performance criteria over an
eighteen-month period commencing on the closing date. (See Note 4 to the
Condensed Consolidated Financial Statements.)
The Company has relied upon strategic acquisitions as a means of
expanding its network, sales and service presence and revenues across the
country. The Company evaluates each potential acquisition to determine its
strategic fit within the Company's growth, operating margin and income
objectives. The Company expects to actively explore potential acquisitions and
may enter into discussions from time to time with potential acquisition
candidates, but there can be no assurance that the Company will be able to
enter into agreements in the future with respect to, or consummate,
acquisitions on acceptable terms.
23
<PAGE> 24
During May the Company extended an agreement with a distributor. A
similar arrangement with an affiliated party is expected to be finalized during
the next quarter. In consideration for the contract extension as well as
exclusivity and non-compete provisions, the Company will make payments on
various designated dates over several years in accordance with the two
agreements. These payments will be amortized over the respective contract
terms.
COMMITMENTS AND CONTINGENCIES. The Company has agreements with
certain interexchange carriers and third-party vendors to lease facilities for
originating, terminating and transport services. These agreements require the
Company to maintain minimum monthly and/or annual billings based on usage. The
Company currently has one significant contract with a third-party carrier,
however, the costs associated with the contract represent less than 10% of the
Company's revenue (See Note 6 to the Condensed Consolidated Financial
Statements). The Company manages its Network in order to maximize reliability
and redundancy and is managed to keep interruption of service to a minimum.
Although most service failures that the Company has experienced have been
corrected in a relatively short time period, a catastrophic service failure
could interrupt the provision of service by both the Company and its
competitors for a lengthy time period. The restoration period for a
catastrophic service failure cannot be reasonably determined. The Company has
not, however, experienced a catastrophic service failure in its history.
The Company has been named as a defendant in various litigation
matters. Management intends to vigorously defend these outstanding claims.
The Company believes that it has adequate accrued loss contingencies and that
current pending or threatened litigation matters will not have a material
adverse impact on the Company's results of operations or financial condition
(See Note 6 to the Condensed Consolidated Financial Statements.)
FEDERAL INCOME TAXES. The Company has generated significant NOLs in
prior years that are available to reduce current cash requirements for income
taxes. See Note 8 of the Condensed Consolidated Financial Statements for a
discussion of the availability and expected utilization of the existing NOLs.
IMPACT OF INFLATION AND SEASONALITY. The Company does not believe that the
relatively moderate levels of inflation which have been experienced in the
United States in recent years have had a significant effect on its net revenues
or earnings.
The Company's long-distance revenue is subject to seasonal variations
based on each business segment. Use of long-distance services by commercial
customers is typically lower on weekends throughout the year, and in the fourth
quarter due to holidays. As residential revenue increases as a proportion of
the Company's total revenues, the seasonal impact due to changes in commercial
calling patterns should be reduced. The Company is unable to predict the
impact of a shift to a larger residential customer base.
24
<PAGE> 25
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 - SAFE HARBOR
CAUTIONARY STATEMENT. Except for historical information provided in this
report, including, without limitation, statements in this report expressing the
beliefs and expectations of management regarding the Company's future results
and performance, are forward-looking statements based on current expectations
that involve a number of risks and uncertainties. The factors that could cause
actual results to differ materially from management expectations include the
following: general economic conditions; competition in the telecommunications
industry, including RBOC entry into the long distance industry and its impact
on pricing; the ability of the Company's direct sales force and alternative
channels of distribution to obtain new sales; the adoption and application of
rules and regulations implementing the Telecommunications Act of 1996; and
other risks described from time to time in the Company's Securities and
Exchange Commission filings.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Thomas J. Byrnes and Richard C. Otto v. LCI Communications Holdings
Co. et al. was filed by two former members of the Company's management on June
28, 1991 in Common Pleas Court, Franklin County, Ohio, alleging age
discrimination by the Company among other things. During 1993, a jury returned
a verdict in favor of the Plaintiffs and the Common Pleas Court awarded
approximately $8.1 million in damages and attorney's fees.
Both the Plaintiffs and the Company appealed this matter to the
appropriate Court of Appeals in Ohio, which in a two to one decision, overruled
each of LCI's assignments of error and two of the Plaintiffs' claims, and
sustained the Plaintiffs' request for approximately $0.1 million in
pre-judgment interest, in additional to the previous award. The Company filed
a Notice of Appeal at the Supreme Court of Ohio (the Court) and the Court
agreed to review the decision by the Court of Appeals. Oral arguments took
place in May 1996. To date the Court has not rendered an opinion on the
matter. The appeal process has extended for several years, and depending on the
disposition and the timing of the ultimate outcome, it is reasonably possible
that between $0 and $2.7 million of additional interest expense could be
incurred.
Vanus James v. LCI International, Inc. et al. and American
Communications Network, Inc. was commenced in late May 1995 in the Supreme
Court, Kings County, New York. The plaintiff purports to bring a class action
lawsuit against the Company, certain of its affiliates, and American
Communications Network, Inc. (ACN), one of the Company's sales agents. The
lawsuit alleges that, in an effort to induce prospective customers to sign up
for the Company's long distance services, the Company and ACN violated various
laws by disseminating false and misleading statements concerning the Company's
rates for calls to certain foreign countries. The lawsuit seeks, among other
things, compensatory damages of $10 million dollars and punitive damages of $30
million dollars. Based upon its overall assessment of the matter, management
is of the opinion that the final resolution of these proceedings will not have
a material adverse effect on the consolidated financial position or results of
operations of the Company.
The Company has also been named as a defendant in various other
litigation matters incident to the character of its business. The Company
believes it has adequate accrued loss contingencies with respect to all
litigation matters and that current pending or threatened litigation matters
will not have a material adverse effect on the consolidated financial position
or results of operations of the Company.
25
<PAGE> 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 7, 1996, the Company held its Annual Meeting of Stockholders.
There were 66,109,980 shares of Common Stock of the Company which could be
voted at the meeting and 80% or 53,050,559 shares of Common Stock were
represented at such meeting, in person or by proxy, which constituted a quorum.
The results were as follows:
1. Election of two directors to serve as Class II directors for three-year
terms until the 1999 Annual Meeting of Stockholders:
<TABLE>
<CAPTION>
FOR WITHHELD
--- --------
<S> <C> <C>
H. Brian Thompson 52,740,473 310,086
Douglas M. Karp 52,358,703 691,856
</TABLE>
James T. Bartlett, Stephen W. Fillo, George M. Perrin, John L. Vogelstein and
Thomas J. Wynne continue to serve as directors of the Company.
2. Approval of an amendment to the Company's Amended and Restated Certificate
of Incorporation to increase the number of authorized shares of Common Stock of
the Company from 100,000,000 to 300,000,000:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTE
--- ------- ------- ---------------
<S> <C> <C> <C>
45,952,740 6,222,915 153,442 721,462
</TABLE>
3. Approval of the 1996 Executive Incentive Compensation Plan:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTE
--- ------- ------- ---------------
<S> <C> <C> <C>
52,225,017 562,600 164,724 98,218
</TABLE>
4. Ratification of the selection by the Board of Directors of Arthur Andersen
LLP as the independent public accountants to audit the Company's consolidated
financial statements for 1996:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C>
52,907,024 33,550 109,933
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The exhibits filed as part of this report are set forth in the Index
of Exhibits on page 28 of this report.
(b) Reports on Form 8-K:
On June 3, 1996, the Company filed a report on Form 8-K to announce
that its Board of Directors had authorized the redemption of the
outstanding shares of the Company's 5% Cumulative Convertible
Exchangeable Preferred Stock on September 3, 1996.
26
<PAGE> 27
SIGNATURE
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.
LCI INTERNATIONAL, INC.
DATE: August 13, 1996 BY: /s/ Joseph A. Lawerence
--------------- -----------------------
Joseph A. Lawrence
Chief Financial Officer,
Senior Vice President Finance and
Corporate Development
(as duly authorized officer and
principal financial officer)
27
<PAGE> 28
EXHIBIT INDEX
The following Exhibits are included in this Quarterly Report on Form 10-Q:
<TABLE>
<CAPTION>
Exhibit Exhibit
Number Description
- ------------- -------------------------------------------------------------------------------------
<S> <C>
3(i)(a) Amended and Restated Certificate of Incorporation
3(ii) Amended and Restated By-laws(2)
10(l)(xx) Employment Agreement, dated as of March 19, 1996 between LCI International Management Services, Inc. and Roy Gamse
10(q)(iiii) Contractor Agreement dated May 1, 1996 between LCI International Telecom Corp. and American Communications Network,
Inc.(1)
11 Statement Regarding Computation of Per Share Earnings
15 Letter Regarding Unaudited Interim Financial Information
27 Financial Data Schedule
</TABLE>
(1) Confidential treatment has been requested for portions of this exhibit.
(2) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (No. 33-60558).
28
<PAGE> 1
EXHIBIT 3(i)(a)
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
LCI INTERNATIONAL, INC.
LCI INTERNATIONAL, INC. (formerly, LCI Communications Holdings Co.),
a corporation organized and existing under, and by virtue of, the General
Corporation Law of the State of Delaware, was incorporated by the filing of an
original Certificate of Incorporation with the Office of the Secretary of State
of Delaware on August 16, 1988, which certificate was amended and restated by
the filing of an Amended and Restated Certificate of Incorporation on June 4,
1992 and further amended by the filing of a Certificate of Amendment of Amended
and Restated Certificate of Incorporation on January 25, 1993, by the filing of
an Amended and Restated Certificate of Incorporation on April 1, 1993, and by
the filing of an Amended and Restated Certificate of Incorporation on May 12,
1993, as further amended by a Certificate of Amendment of Amended and Restated
Certificate of Incorporation on May 11, 1994 (collectively, the "Amended
Certificate of Incorporation").
This Amended and Restated Certificate of Incorporation restates,
integrates and amends the Amended Certificate of Incorporation and was duly
adopted pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware.
ARTICLE I
The name of the corporation (the "Corporation") is LCI International,
Inc.
ARTICLE II
The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County
of New Castle, Delaware 19801. The name of the registered agent at such
address is The Corporation Trust Company.
<PAGE> 2
ARTICLE III
The nature of the business or purposes to be conducted or promoted by
the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the State of
Delaware.
ARTICLE IV
1. The total number of shares of stock which the Corporation shall
have authority to issue is 315,000,000 shares consisting of 300,000,000 shares
of Common Stock, par value $.01 per share ("Common Stock") and 15,000,000
shares of Preferred Stock, par value $.01 per share ("Preferred Stock").
2. The Preferred Stock may be issued from time to time as herein
provided in one or more series. The designations, relative rights, preferences
and limitations of the Preferred Stock, and particularly of the shares of each
series thereof, may, to the extent permitted by law, be similar to or differ
from those of any other series. The Board of Directors of the Corporation is
hereby expressly granted authority, subject to the provisions of this Article
IV, to fix from time to time before issuance thereof the number of shares in
each series and all designations, relative rights, preferences and limitations
of the shares in each such series, including, but without limiting the
generality of the foregoing, the following:
(a) the designation of the series and the number of shares to
constitute each series;
(b) the dividend rate on the shares of each series, any
conditions on which and times at which dividends are payable, whether dividends
shall be cumulative, and the preference or relation (if any) with respect to
such dividends (including possible preferences over dividends on the Common
Stock or any other class or classes);
(c) whether the series will be redeemable (at the option of the
Corporation or the holders of such shares or both, or upon the happening of a
specified event) and, if so, the redemption prices and the conditions and times
upon which redemption may take place and whether for cash, property or rights,
including securities of the Corporation or another corporation;
-2-
<PAGE> 3
(d) the terms and amount of any sinking, retirement or purchase
fund;
(e) the conversion or exchange rights (at the option of the
Corporation or the holders of such shares or both, or upon the happening of a
specified event), if any, including the conversion or exchange price and other
terms of conversion or exchange;
(f) the voting rights, if any (other than any voting rights
that the Preferred Stock may have as a matter of law);
(g) any restrictions on the issue or reissue or sale of
additional Preferred Stock;
(h) the rights of the holders upon voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation
(including preferences over the Common Stock or other class or classes or
series of stock);
(i) the preemptive rights, if any, to subscribe to additional
issues of stock or securities of the Corporation; and
(j) such other special rights and privileges, if any, for the
benefit of the holders of the Preferred Stock, as shall not be inconsistent
with provisions of this Amended and Restated Certificate of Incorporation.
All shares of Preferred Stock of the same series shall be identical
in all respects, except that shares of any one series issued at different times
may differ as to dates, if any, from which dividends thereon may accumulate.
All shares of Preferred Stock of all series shall be of equal rank and shall be
identical in all respects except that any series may differ from any other
series with respect to any one or more of the designations, relative rights,
preferences and limitations described or referred to in subparagraphs 2(a) to
2(j) inclusive above.
3. Except as otherwise may be required by law, and except as
otherwise may be provided in this Amended and Restated Certificate of
Incorporation or in the resolution of the Board of Directors of the Corporation
creating any series of Preferred Stock, the Common Stock shall have the
exclusive right to vote for
-3-
<PAGE> 4
the election of directors and for all other purposes, each holder of the Common
Stock being entitled to one vote for each share thereof held.
ARTICLE V
The Corporation is to have perpetual existence.
ARTICLE VI
In furtherance and not in limitation of the powers conferred
by statute, the Board of Directors of the Corporation is expressly authorized
to make, alter, amend or repeal the by-laws of the Corporation.
ARTICLE VII
Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers
appointed for this Corporation under the provisions of Section 279 of Title 8
of the Delaware Code order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this Corporation, as the
case may be, to be summoned in such manner as the said court directs. If a
majority in number representing three-fourths in value of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
-4-
<PAGE> 5
ARTICLE VIII
1. The business and affairs of the Corporation shall be
managed by or under the direction of a Board of Directors consisting of such
number of directors as is determined from time to time by resolution adopted by
affirmative vote of a majority of the entire Board of Directors; provided,
however, that in no event shall the number of directors be less than three.
The directors shall be divided into three classes, designated Class I, Class II
and Class III. Each class shall consist, as nearly as may be possible, of
one-third of the total number of directors constituting the entire Board of
Directors. At each annual meeting of stockholders, successors to the class of
directors whose term expires at that annual meeting shall be elected for a
three-year term. If the number of directors is changed, any increase or
decrease shall be apportioned among the classes so as to maintain the number of
directors in each class as nearly equal as possible, and any additional
director of any class elected to fill a vacancy resulting from an increase in
such class shall hold office for a term that shall coincide with the remaining
term of that class, but in no case will a decrease in the number of directors
shorten the term of any incumbent director. A director shall hold office until
the annual meeting for the year in which his term expires and until his
successor shall be elected and shall qualify, subject, however, to prior death,
resignation, retirement, disqualification or removal from office. A majority
of total directors shall constitute a quorum for the transaction of business.
Except as otherwise required by law, any vacancy on the Board of Directors that
results from an increase in the number of directors shall be filled only by a
majority of the Board of Directors then in office, provided that a quorum is
present, and any other vacancy occurring in the Board of Directors shall be
filled by a majority of the directors then in office, even if less than a
quorum, or by a sole remaining director. Any director elected to fill a
vacancy not resulting from an increase in the number of directors shall have
the same remaining term as that of his predecessor.
Notwithstanding the foregoing, whenever the holders of any one or
more classes or series of stock issued by the Corporation shall have the right,
voting separately by class or series, to elect directors at an annual or
special meeting of stockholders, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
terms of this Certificate of Incorporation applicable thereto, such directors
so elected shall not be divided into classes pursuant to this Article VIII,
Section 1 and the number of such
-5-
<PAGE> 6
directors shall not be counted in determining the maximum number of directors
permitted under the foregoing provision of this Article VIII, Section 1, in
each case unless expressly provided by such terms.
2. Any director elected by the stockholders or by the Board of
Directors to fill a vacancy may be removed only for cause by the affirmative
vote of the holders of a majority of all the issued and outstanding stock of
the Corporation entitled to vote generally in the election of directors, given
at a duly called annual or special meeting of stockholders. Any officer
appointed by the Board of Directors may be removed at any time in such manner
as shall be provided in the by-laws of the Corporation.
3. Notwithstanding anything contained in this Amended and Restated
Certificate of Incorporation to the contrary, this ARTICLE VIII shall not be
altered, amended or repealed, and no provision inconsistent with this Article
VIII shall be adopted without the affirmative vote of the holders of at least
66-2/3% of all the issued and outstanding stock of the Corporation entitled to
vote generally in the election of directors, voting as a single class.
ARTICLE IX
Elections of directors need not be by written ballot.
ARTICLE X
1. A director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived
any improper personal benefit. If the Delaware General Corporation Law is
amended after approval by the stockholders of this Article to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended.
-6-
<PAGE> 7
2. (a) Each person who was or is made a party or is threatened to be
made a party to or is otherwise involved in any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (hereinafter a "proceeding") (including an action by or in the
right of the Corporation), by reason of the fact that he is or was serving as a
director or officer of the Corporation (or is or was serving at the request of
the Corporation in a similar capacity with another entity, including employee
benefit plans), shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the Delaware General Corporation Law. This
indemnification will cover all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and
settlement amounts) reasonably incurred by the director or officer in
connection with a proceeding. All such indemnification shall continue as to a
director or officer who has ceased to be a director or officer and shall
continue to the benefit of such director's or officer's heirs, executors and
administrators. Except as provided in paragraph (b) hereof with respect to
proceedings to enforce rights to indemnification, the Corporation shall
indemnify any such director or officer only if such proceeding was authorized
by the Board of Directors of the Corporation. The right to indemnification
conferred by this Section shall be a contract right and shall include the right
to be paid by the Corporation the expenses incurred in defending any such
proceeding in advance of its final disposition (hereinafter an "advancement of
expenses"). If the Delaware General Corporation Law requires, an advancement
of expenses incurred by a director in his capacity as a director or an officer
in his capacity as an officer shall be made only upon delivery to the
Corporation of an undertaking by such director or officer to repay all amounts
so advanced if it is ultimately determined by final judicial decision that such
director or officer is not entitled to be indemnified for such expenses under
this Section or otherwise (hereinafter an "undertaking").
(b) If a claim under paragraph (a) of this Section is not paid
in full by the Corporation within ninety days after receipt of a written claim,
the director or officer may bring suit against the Corporation to recover the
unpaid amount. (In the case of a claim for advancement of expenses, the
applicable period will be twenty days.) If successful in any such suit, the
director or officer will also be entitled to be paid the expense of prosecuting
such suit. In any suit brought by the director or officer to enforce a right
to indemnification hereunder (but not
-7-
<PAGE> 8
in a suit brought by the director or officer to enforce a right to an
advancement of expenses) it shall be a defense that the director or officer has
not met the applicable standard of conduct under the Delaware General
Corporation Law. In any suit by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, it shall be entitled to
recover such expenses upon a final adjudication that the director or officer
has not met the applicable standard of conduct set forth in the Delaware
General Corporation Law. Neither the failure of the Board of Directors of the
Corporation to determine prior to the commencement of such suit that the
director or officer has met the applicable standard of conduct for
indemnification set forth in the Delaware General Corporation Law, nor an
actual determination by the Board of Directors of the Corporation that the
director or officer has not met such applicable standard of conduct, shall
create a presumption that the director or officer has not met the applicable
standard of conduct or, in the case of such a suit brought by the director or
officer, be a defense to such suit. In any suit brought by the director or
officer to enforce a right hereunder, or by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden of
proving that the director or officer is not entitled to be indemnified or to
such advancement of expenses under this Section or otherwise shall be on the
Corporation.
(c) The rights to indemnification and to the advancement of
expenses conferred in this Section will not be exclusive of any other right
which any person may have or hereafter acquire under any statute, this Amended
and Restated Certificate of Incorporation, by-law, agreement, vote of
stockholders or disinterested directors or otherwise.
(d) The Corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Corporation
or other entity against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person under the Delaware
General Corporation Law.
(e) The Corporation may, if authorized by the Board of
Directors, grant rights to indemnification and to the advancement of expenses
to any employee or agent of the Corporation to the same extent as for directors
and officers of the Corporation.
-8-
<PAGE> 9
IN WITNESS WHEREOF, LCI INTERNATIONAL, INC. has caused this Amended
and Restated Certificate of Incorporation to be signed by H. Brian Thompson,
its Chief Executive Officer, and attested to by Lee M. Weiner, its Assistant
Secretary, this 8th day of May, 1996.
LCI INTERNATIONAL, INC.
By: /s/ H. BRIAN THOMPSON
-------------------------------
Attest:
By: /s/ LEE M. WEINER
----------------------------
-9-
<PAGE> 1
EXHIBIT 10(i)(xx)
EMPLOYMENT AGREEMENT
This Employment Agreement is entered into as of March 18, 1996, between LCI
International Management Services, Inc., a Delaware corporation (the
"Company"), and Roy Gamse ("Executive").
WHEREAS, Executive and the Company desire to embody in this Agreement the terms
and conditions under which Executive shall be employed by the Company.
NOW, THEREFORE, the parties hereby agree:
ARTICLE I: Employment, Duties and Responsibilities
1.01 Employment. The Company hereby employs Executive as Senior
Vice President of Marketing of the Company, effective as of
the date of this Agreement. Executive hereby accepts such
employment commencing on March 18, 1996.
1.02 Duties and Responsibilities. Executive shall have such duties
and responsibilities as are customarily associated with his
position.
1.03 Base of Operation. Executive's principal bases of operation
for the performance of his duties and responsibilities under
this Agreement shall be the offices of the Company in Dublin,
Ohio and McLean, Virginia; provided, however, that Executive
will perform such duties and responsibilities at such places
as shall from time to time be reasonably necessary to fulfill
his obligations hereunder.
ARTICLE II: Term
2.01 Term.
(a) The term of this Agreement (the "Term") shall
commence effective as of the date of this Agreement,
shall continue for an initial period of two years
(the "Initial Term") and shall continue for an
additional two-year period (the "Second Term") unless
the Company provides written notice of termination to
the Executive at least 12 months before the end of
the Initial Term. This Agreement may also be
terminated as provided in Article V.
(b) Executive represents and warrants to the Company
that, to the best of his knowledge, neither the
execution and delivery of this Agreement nor the
performance of his duties hereunder violates or will
violate the provisions of any other agreement to
which he is a party or by which he is bound.
ARTICLE III: Compensation and Expenses
3.01 Salary, Bonuses and Benefits. As compensation and consideration for
the performance by Executive of his obligations under this Agreement,
Executive shall be entitled to the following (subject, in each case,
to the provisions of Article V hereof):
<PAGE> 2
(a) The Company shall pay Executive a base salary during
the Term, payable in accordance with the normal
payment procedures of the Company and subject to such
withholdings and other normal employee deductions as
may be required by law, at the rate of One Hundred
Sixty Thousand Dollars ($160,000) per year; provided,
however, that Executive will work four (4) days per
week for the Company and one (1) day per week for
Earth Force, Inc. during a transition period that
will last no longer than April 30, 1996. During the
transition period, Executive will receive
compensation at the rate of One Hundred Twenty
Thousand Dollars ($120,000) per year. All other
benefits described in this Employment Agreement will
begin on March 18, 1996 and not be prorated during
the transition period. The Company agrees to review
such compensation not less frequently than annually
during the Term.
(b) Executive shall be eligible to participate during the
Term in such life insurance, health, disability and
major medical insurance benefits, and in such other
employee benefit plans and programs, other than
severance, for the benefit of the employees of the
Company, as may be maintained from time to time
during the Term, in each case to the extent and in
the manner available to other senior executives of
the Company and subject to the terms and provisions
of such plan or program.
(c) Executive shall be entitled to a four-week paid
vacation period (but not necessarily consecutive
vacation weeks) during the Term; provided, however,
that such four-week paid vacation period shall be
prorated for the duration of calendar year 1996.
(d) Executive shall participate during the Term in such
stock option, bonus and other executive compensation
plans of the Company as may be established from time
to time for similarly situated executives.
(e) Executive will participate in the Company's 1996
Corporate Incentive Compensation Plan ("1996
Incentive Plan"), a copy of which plan has been
previously provided to Executive. Executive will
have an individual incentive target bonus under the
1996 Incentive Plan of sixty-five percent (65%) of
Executive's base salary, subject to the terms and
conditions of the 1996 Incentive Plan and prorated
for the duration of calendar year 1996.
(f) The Company will issue Executive options to purchase
Fifty Thousand (50,000) shares of its Common Stock
pursuant to its 1995/1996 Stock Option Plan (the
"Initial Options"). The exercise price of these
options shall be the average of the high and low
trading price of the Company's common stock on the
day prior to the later of: (i) the effective date of
Executive's employment or (ii) the date the Stock
Option Committee of the Company's Board of Directors
approves the grant of such options to Executive.
These options are contingent upon the approval of the
grant by the Stock Option Committee and are subject
to the following vesting: (i) 20% will vest and
become exercisable on the first anniversary of the
date of grant of the options, and (ii) the balance
will vest and become exercisable at the rate of 1.66%
per month on the last day of each month thereafter.
Notwithstanding the foregoing vesting schedule, all
unvested Initial Options originally granted will vest
and become immediately exercisable upon the
occurrence of a Change of Control (as hereinafter
defined).
2
<PAGE> 3
For the purpose of this Agreement, a "Change in
Control" will be considered to have occurred on (i)
the date of the acquisition by any person, entity or
group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934),
other than E.M. Warburg, Pincus & Co., Inc. (or any
entity controlling, controlled by or under common
control with, directly or indirectly, E.M. Warburg,
Pincus & Co., Inc.) of more than 50% of the then
outstanding voting securities of the Company entitled
to vote generally in the election of directors or
(ii) the date the shareholders of the Company approve
a merger or sale of all or substantially all of the
assets of the Company.
(g) Executive shall be entitled to an annual executive
perquisite allowance equal to 5% of Executive's base
salary during the Term, such amount to be prorated
for the duration of calendar year 1996.
(h) Executive shall be entitled to an automobile
allowance equal to Three Hundred Thirty Dollars
($330) each bi-weekly pay period during the Term.
3.02 Expenses. The Company will reimburse Executive for reasonable
business-related expenses incurred by him in connection with the
performance of his duties hereunder during the Term, subject,
however, to the Company's policies relating to business-related
expenses as in effect from time to time during the Term.
ARTICLE IV: Exclusivity, Etc.
4.01 Exclusivity. Executive agrees to perform his duties,
responsibilities and obligations hereunder efficiently and to
the best of his ability. Executive agrees that he will devote
his entire working time, care and attention and best efforts to
such duties, responsibilities and obligations throughout the
Term. Executive also agrees that he will not engage in any
other business activities, pursued for gain, profit or other
pecuniary advantage, that are competitive with the activities of
the Company, except as provided in Section 4.02 hereof.
Executive agrees that all of his activities as an employee of
the Company shall be in conformity with all present and future
policies, rules and regulations and directions of the Company
not inconsistent with this Agreement.
4.02 Other Business Ventures. Executive agrees that, so long as he
is employed by the Company, he will not own, directly or
indirectly, any controlling or substantial stock or other
beneficial interest in any business enterprise which is engaged
in, or competitive with, any business engaged in by the Company.
Notwithstanding the foregoing, Executive may own, directly or
indirectly, up to 5% of the outstanding capital stock of any
business having a class of capital stock which is traded on any
national stock exchange or in the over-the-counter market.
3
<PAGE> 4
4.03 Business Secrets; Confidentiality; Non-Interference.
(a) All right, title and interest of every kind and
nature whatsoever, in and to inventions, patents,
trademarks, copyrights and properties furnished to
the Company with which Executive is in any way
connected in the performance of his duties and
obligations hereunder, whether the same were
invented, created, written, developed, furnished,
produced or disclosed by Executive or by any other
party during the Term, shall, as between the parties
hereto, be, become and remain the sole exclusive
property of the Company for any and all purposes and
uses whatsoever, and Executive shall have no right,
title or interest of any kind or nature therein.
(b) Executive agrees that he will not, at any time during
or after the Term, make use of or divulge to any
other person, firm or corporation any trade or
business secret, process, method or means, or any
other confidential information concerning the
business or policies of the Company which he may have
learned in connection with his employment hereunder.
For purposes of this Agreement, a "trade or business
secret, process, method or means, or any other
confidential information" shall mean and include
written information treated as confidential or as a
trade secret by the Company. Executive's obligation
under this Section 4.03(b) shall not apply to any
information which (i) is known publicly; (ii) is in
the public domain or hereafter enters the public
domain without the fault of Executive; (iii) is known
to Executive prior to his receipt of such information
from the Company, as evidenced by written records of
Executive; (iv) is hereafter disclosed to Executive
by a third party not under an obligation of
confidence to the Company; or (v) Executive is
required to disclose upon legal compulsion.
Executive agrees not to remove from the premises of
the Company, except as an employee of the Company in
pursuit of the business of the Company or except as
specifically permitted in writing by the Company, any
document or other object containing or reflecting any
such confidential information. Executive recognizes
that all such documents and objects, whether
developed by him or by someone else, will be the sole
exclusive property of the Company. Upon termination
of his employment hereunder, Executive shall promptly
deliver to the Company all such confidential
information, including without limitation, all lists
of customers, employees, and vendors, correspondence,
accounts, records and any other documents or property
made or held by him or under his control in relation
to the business or affairs of the Company or its
subsidiaries or affiliates, and no copy of any such
confidential information shall be retained by him.
(c) Executive shall not, without prior written permission
of the Company, for a period of one year after the
termination of his employment hereunder, either alone
or on behalf of any person or entity, (i) solicit or
induce, or in any manner attempt to solicit or
induce, any person employed by, or as agent of, the
Company to terminate such person's employment or
agency, as the case may be, with the Company or with
any such subsidiary or (ii) divert, or attempt to
divert, any person, concern, or entity from doing
business with the Company, nor will he attempt to
induce any such person, concern or entity to cease
being a customer or supplier of the Company.
4
<PAGE> 5
(d) Executive agrees that, at any time and from time to
time during and after the Term, he will execute any
and all documents which the Company may deem
reasonably necessary or appropriate to effectuate the
provisions of this Section 4.03. It is also agreed
that the provisions of this Section 4.03 shall
survive the termination for any reasons of this
Agreement or Executive's employment.
ARTICLE V: Termination
5.01 Termination by the Company. The Company shall have the right to
terminate the Executive's employment at any time for "Cause".
For purposes of this Agreement, "Cause" shall mean (i)
substantial and continued failure by the Executive to perform
his duties hereunder after being provided written notice and
thirty (30) days to cure such failure; (ii) conduct grossly
insubordinate or disloyal to the Company; or (iii) the
conviction for the commission of a felony.
5.02 Death. In the event Executive dies during the Term, this
Agreement shall automatically terminate, such termination to be
effective on the date of Executive's death.
5.03 Disability. In the event that Executive shall suffer a
disability which shall have prevented him from performing
satisfactorily his obligations hereunder for a period of at
least six consecutive months, or nine months in any 12-month
period, the Company shall have the right to terminate this
Agreement, such termination to be effective upon the giving of
notice thereof to Executive in accordance with Section 6.03
hereof.
5.04 Effect of Termination.
(a) In the event of termination of this Agreement by
either party for any reason, or by reason of the
Executive's death or disability, the Company shall
pay to Executive (or his beneficiary in the event of
his death) any base salary or other compensation
earned but not paid to Executive prior to the
effective date of such termination.
(b) Subject to Section 5.04(c), in the event of
termination of this Agreement by the Company other
than for Cause or Executive's death, the Company
shall (i) pay Executive a severance payment in an
amount equal to the annual base salary of Executive,
payable within thirty (30) days after termination;
(ii) continue to pay Executive his base salary for a
period of twelve (12) months following such
termination; and (iii) during such twelve (12) month
period following termination, reimburse Executive for
COBRA (Consolidated Omnibus Budget Reconciliation Act
of 1985) payments actually made by Executive in order
to sustain Executive's then existing scope of medical
coverage in effect at the time of termination.
(c) In the event any payment or benefit received or to be
received by Executive pursuant to this Agreement in
connection with a Change in Control ("Change in
Control Payments") would not be deductible in whole
or in part for federal income tax purposes by reason
of Section 280G of the Internal Revenue Code of 1986,
as amended (the "Code"), such Change in Control
Payments shall be reduced by the minimum amount
necessary to preserve deductibility of such Change in
Control Payments. For purposes of this limitation,
(i) no portion of the Change in Control Payments
shall be taken into account which, in the opinion of
tax counsel selected by the Company and reasonably
acceptable to the Executive, does not constitute an
excess parachute payment within the meaning of
Section 280G(b)(2) of the
5
<PAGE> 6
Code; (ii) the Change in Control Payments are not
subject to disallowance of deductions, in the opinion
of the tax counsel referred to in clause (i); and
(iii) the value of any non-cash benefit or any
deferred payment or benefit included in the Change in
Control Payments shall be determined by the Company's
independent auditors in accordance with the
principles of Section 280G(b)(3) and (4) of the Code
and the regulations thereunder.
ARTICLE VI: Miscellaneous
6.01 Life Insurance. Executive agrees that the Company or any of its
subsidiaries or affiliates may apply for and secure and own
insurance on Executive's life (in amounts determined by the
Company). Executive agrees to cooperate fully in the
application for and securing of such insurance, including the
submission by Executive to such physical and other examinations,
and the answering of such questions and furnishing of such
information by Executive, as may be required by the carrier(s)
of such insurance. Notwithstanding anything to the contrary
contained herein, neither the Company nor any of its
subsidiaries or affiliates shall be required to obtain any
insurance for or on behalf of Executive, except as provided in
Section 3.01(b) hereof.
6.02 Benefit of Agreement; Assignment; Beneficiary.
(a) This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and
assigns, including, without limitation, any
corporation or person which may acquire all or
substantially all of the Company's assets or
business, or with or into which the Company may be
consolidated or merged. This Agreement shall also
inure to the benefit of, and be enforceable by, the
Executive and his personal or legal representatives,
executors, administrators, successors, heirs,
distributees, devisees and legatees. If the
Executive should die while any amount would still be
payable to the Executive hereunder if he had
continued to live, all such amounts shall be paid in
accordance with the terms of this Agreement to the
Executive's beneficiary, devisee, legatee or other
designee, or if there is no such designee, to the
Executive's estate.
(b) The Company shall require any successor (whether
direct or indirect, by operation of law, by purchase,
merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of
the Company to expressly assume and agree to perform
this Agreement in the same manner and to the same
extent that the Company would be required to perform
it if no such succession had taken place.
6.03 Notices. Any notice required or permitted hereunder shall be in
writing and shall be sufficiently given if personally delivered
or if sent by registered or certified mail, postage prepaid,
with return receipt requested, or by overnight courier
addressed: (a) in the case of the Company, to LCI
International, Inc., 8180 Greensboro Drive, Suite 800, McLean,
Virginia 22102, Attention: Chief Executive Officer, or to such
other address and/or to the attention of such other person as
the Company shall designate by written notice to Executive; and
(b) in the case of Executive, to Roy Gamse, 3615 North
Kenilworth Street, Arlington, Virginia 22207 or such other
address as Executive shall designate by written notice to the
Company. Any notice given hereunder shall be deemed to have
been given at the time of receipt thereof by the person to whom
such notice is given.
6
<PAGE> 7
6.04 Entire Agreement; Amendment. Subject to Section 6.10, this
Agreement contains the entire agreement of the parties hereto
with respect to the terms and conditions of Executive's
employment during the Term and supersedes any and all prior
agreements and understandings, whether written or verbal,
between the parties hereto with respect to this matter. This
Agreement may not be changed or modified except by an instrument
in writing signed by both of the parties hereto. In the event
of any inconsistency between this Agreement and any Offer Letter
executed by Executive, the terms and conditions of this
Agreement shall govern.
6.05 Waiver. The waiver by either party of a breach of any provision
of this Agreement shall not operate or be construed as a
continuing waiver or as a consent to or waiver of any subsequent
breach hereof.
6.06 Headings. The Article and Section headings herein are for
convenience of reference only, do not constitute a part of this
Agreement and shall not be deemed to limit or affect any of the
provisions hereof.
6.07 Enforcement. If any action at law or in equity is brought by
either party hereto to enforce or interpret any of the terms of
this Agreement, the prevailing party shall be entitled to
reimbursement by the other party of the reasonable costs and
expenses incurred in connection with such action (including
reasonable attorney's fees), in additional to any other relief
to which such party may be entitled. Executive shall have no
right to enforce any of his rights hereunder by seeking or
obtaining injunctive or other equitable relief and acknowledges
that damages are an adequate remedy for any breach by the
Company of this Agreement.
6.08 Governing Law. This Agreement shall be governed by, and
construed and interpreted in accordance with, the internal
laws of the State of Delaware without reference to the
principles of conflict of laws.
6.09 Agreement to Take Actions. Each party hereto shall execute
and deliver such documents, certificates, agreements and other
instruments, and shall take such other actions, as may be
reasonably necessary or desirable in order to perform her or
its obligations under this Agreement or to effectuate the
purposes hereof.
6.10 Arbitration. Except for disputes with respect to Article IV
hereof, any dispute between the parties hereto respecting the
meaning and intent of this Agreement or any of its terms and
provisions shall be submitted to arbitration in Washington,
D.C., in accordance with the Commercial Rules of the American
Arbitration Association there in effect, and the arbitration
determination resulting from any such submission shall be
final and binding upon the parties hereto. Judgment upon any
arbitration award may be entered in any court of competent
jurisdiction.
6.11 Survivorship. The respective rights and obligations of the
parties hereunder shall survive any termination of this
Agreement to the extent necessary to the intended preservation
of such rights and obligations.
6.12 Validity. The invalidity or unforceability of any provision
or provisions of this Agreement shall not affect the validity
or enforceability of any other provision or provisions of this
Agreement, which shall remain in full force and effect.
7
<PAGE> 8
6.13 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original
but all of which together will constitute one and the same
instrument.
IN WITNESS WHEREOF, each of the parties hereto has duly executed this Agreement
with the intent that it take effect as of the date first above written.
<TABLE>
<S> <C>
LCI INTERNATIONAL MANAGEMENT
SERVICES, INC.
By: /s/ THOMAS WYNNE 3/18/96 By: /s/ ROY GAMSE 3/18/96
----------------------------- --------- ---------------------------- ---------
Thomas Wynne Date Roy Gamse Date
President & Chief Operating OFFICER
</TABLE>
8
<PAGE> 1
EXHIBIT 10(q)(iiii)
REPRESENTATIVE AGREEMENT
THIS AGREEMENT is entered into as of May 1, 1996 (the "Effective
Date") by and between LCI INTERNATIONAL TELECOM CORP. ("LCI") with offices at
8180 Greensboro Drive, Ste. 800, McLean, VA 22102 and AMERICAN COMMUNICATIONS
NETWORK, INC. ("ACN" or "Representative"), with principal offices at 100 West
Big Beaver, Suite 400, Troy, Michigan 48084.
WHEREAS, LCI is a provider of long distance and other
telecommunications services;
WHEREAS, in consideration of the promises, covenants, and agreements
set forth herein, the receipt and sufficiency of which are hereby
acknowledged by the parties hereto, Representative desires to
represent LCI in selling LCI Services (as defined herein and as may be
mutually amended from time to time); and
WHEREAS, this Agreement shall supersede (a) the Distributor Program
Agreement, dated June 10, 1993, as amended by Amendment dated
September 29, 1993 and Addendum #2 dated September 1, 1994 and (b) the
Contractor Agreement, dated January 18, 1993, as amended by Addendum
dated January 18, 1993 and Amendment No. 1 dated August 10, 1994.
NOW, THEREFORE, the parties hereto intending to be legally bound agree
as follows:
1. Conditions.
a. Definitions: "Representative" or "ACN" shall mean American
Communications Network, Inc. and its employees, agents,
parent, subsidiaries, or Affiliates. "Representative
Independent Contractors" are defined as those individuals or
entities selling for or on behalf of Representative, including
but not limited to subcontractors, distributors, and sales
agents. "Change in Control" means the events or transactions
described in Sections 5(a) and 5(d) of this Agreement [
*************************** *****] defined in Section 6(a) and
described in Sections 6, 7 and Exhibit "C" ("Change in
Control" shall not include any event or transactions described
in Sections 5(b) and 5(c) herein).
b. Representative hereby agrees to promote the sale and
solicitation of orders of the LCI Services described in
Exhibit A, attached hereto and incorporated by reference
hereof, as may be amended from time to time upon the mutual
written consent of both parties (hereinafter referred to as
"LCI Services").
c. Representative agrees that it shall operate as an independent
contractor, and neither Representative nor the Representative
independent contractors, shall be deemed to be, or treated as,
employees, agents, or franchisees of LCI. Nothing in this
Agreement or in the activities contemplated by the parties
pursuant to this Agreement shall be deemed to create a general
agency, partnership, employment, or joint venture relationship
between the parties. Each party shall be deemed to be acting
solely on its own behalf and, except as expressly stated, has
no authority to pledge the credit, incur obligation, or
perform any acts, or make any statement on behalf of the other
party. Neither party shall represent to any person or permit
any person to act upon the belief that it has any such
authority from the other party. Representative further agrees
that its employees and Representative Independent Contractors
shall not be treated as employees of LCI for purposes of the
1
CONFIDENTIAL
<PAGE> 2
Federal Insurance Contributions Act, Social Security Act, the
Federal Unemployment Tax Act, Income Tax Withholding, or any
laws covering employees.
d. No materials may be used in the advertising or promotion of
LCI Services, unless they have been provided by LCI or have
been approved, in writing, by LCI. At least fifteen (15) days
prior to any publication, Representative shall submit to LCI
for approval, all materials to be used in advertising or
promoting LCI Services. In the event that LCI does not
respond in writing within such fifteen (15) day period,
Representative shall confirm in writing its intent to use such
advertising and/or promotional materials. The notice shall be
provided in accordance with Section 33 below, and
Representative shall have the right to use such material two
(2) business days after LCI's receipt of the second notice of
intent to use such materials.
e. REPRESENTATIVE SHALL MAKE NO REPRESENTATIONS OR WARRANTIES
RELATING TO THE LCI SERVICES EXCEPT AS SET FORTH IN SALES
LITERATURE APPROVED IN WRITING BY LCI OR AS SET FORTH IN THE
FORM OR FORMS OF ORDERS PROVIDED TO REPRESENTATIVE BY LCI, OR
AS OTHERWISE EXPRESSLY PERMITTED BY LCI. REPRESENTATIVE SHALL
INCLUDE THE REQUIREMENTS OF THIS SECTION 1(e) IN ITS STANDARD
AGREEMENT WITH ALL OF THE REPRESENTATIVE INDEPENDENT
CONTRACTORS AND STRICTLY ENFORCE THE REQUIREMENTS INCLUDING,
WITHOUT LIMITATION, PROVIDING WRITTEN NOTICE TO REPRESENTATIVE
INDEPENDENT CONTRACTORS: (A) BY COMMISSION CHECKS AND
NOTIFICATION IN FULFILLMENT ORDERS OF REPRESENTATIVE
INDIVIDUAL CONTRACTORS AND (B) REVISING THE STANDARD AGREEMENT
FOR ALL REPRESENTATIVE INDEPENDENT CONTRACTORS TO CONTAIN THE
REQUIREMENTS OF THIS SECTION 1(e).
f. In recognition that LCI may be selling and marketing its "All
America Plan" Affinity Program to a variety of organizations,
Representative agrees to identify in writing in advance to LCI
all organizations it solicits or will solicit pursuant to this
Agreement and agrees, upon written notification from LCI, not
to sell and/or market any similar affinity program to
organizations who have a relationship with LCI or to
organizations who have received verbal or written proposals
from LCI regarding its "All American Plan" Affinity Program.
g. Without liability or obligation to Representative, LCI shall
have the sole right to accept or reject all orders for LCI
Services, to fix the prices of LCI Services, establish the
terms and conditions of offering LCI Services and to
discontinue offering or selling any service.
h. Representative acknowledges and agrees that any and all
telecommunications customers solicited by Representative on
LCI's behalf shall be deemed customers of LCI and not of any
other company or entity including, without limitation,
Representative or any of its Affiliates. Accordingly, those
customers will be billed and serviced by LCI.
i. The parties have mutually agreed upon the principles and
requirements under which each party shall perform certain of
its obligations hereunder, and both parties agree that, within
thirty (30) days of the execution of this Agreement by both
parties, such
2
CONFIDENTIAL
<PAGE> 3
principles and requirements shall be finalized in writing and
incorporated into this Agreement, as amended Exhibit "H"
(hereinafter referred to as "Performance Specifications") The
Performance Specifications shall be in addition to each
party's other obligations hereunder.
2. Term.
The Agreement shall be effective as of May 1, 1996 when executed by
both parties and approved by their respective Boards of Directors and
shall extend until April 30, 2011, unless terminated in connection
with a Change in Control or terminated pursuant to this Agreement. In
the event of a Change in Control, the Term will terminate upon the end
of the Stay Period (as defined herein) which may extend beyond April
30, 2011.
3. Commissions.
a. With the exception of revenue obtained by Representative's
acquisition of another entity that sells or solicits LCI
Services or assignment of such other entity's revenue, LCI
shall pay to Representative the following commission on
"Collected Revenue" (as defined below) for LCI Services sold
or commissionable under this Agreement:
(i) From the Effective Date of this Agreement until
December 31, 1996, LCI shall pay to Representative
the specified commission rate set forth in Exhibit
"G" for the particular LCI Services; provided,
however, that in the event of a Change in Control
prior to or on December 31, 1996, as of the legally
completed Change in Control date, all levels of
commissions for Collected Revenue will be adjusted to
[********************] The Change in Control
Commission Adjustments referenced in Section 6 and
Section 7 will not be applicable.
(ii) On or after January 1, 1997, LCI shall pay to
Representative [***************************]
commission on all Collected Revenue as provided in
Exhibit "J"; provided, however, that in the event of
Change in Control on or after January 1, 1997, the
Change in Control Commission Adjustments referenced
in Section 6 and Section 7 will be applied.
(iii) In addition, if, after April 30, 1998, Representative
has generated average monthly Collected Revenue of [
**************************] based on the average
monthly Collected Revenue for February 1998, March
1998, and April 1998, Representative
[**********************************************]
which such increase will be applied prospectively to
all Collected Revenue as of May 1, 1998.
b. All commission payments shall be made to Representative within
forty-five (45) days following the end of each month (the
"Payment Date") based upon monthly Collected Revenue. In the
event that any such commission payment is made more than sixty
(60) days following the end of a month, LCI will pay one
percent (1%) per month interest accruing from the Payment Date
until payment is made by LCI to Representative. In the event
that Representative acquires an entity currently or formerly
selling or soliciting LCI Services or is an assignee of LCI
revenues generated by another LCI sales agent or distributor,
Representative shall be paid a commission rate on LCI Services
in
3
CONFIDENTIAL
<PAGE> 4
accordance with the agreement between LCI and the acquired
entity that was in effect on the day prior to the acquisition
by Representative ("Acquired Commission").
c. Collected Revenue: "Collected Revenue" shall be defined
herein as charges billed by LCI for LCI Services (as set forth
in Exhibit "A") actually sold by Representative at the time
such Commissions are owed, excluding LCI Services subsequently
sold to Existing Customers or ACN-Sold Customers by LCI or any
other third party, and excluding any promotional (or other)
credits granted by LCI, taxes, installation charges,
surcharges (with the exception of the per minute surcharge for
LCI 800 Geographic Routine Service, non-revenue based per call
surcharges associated with the use of LCI credit cards, and
similar surcharges), subscription fees paid to third parties
or passed-through from third parties, local loops, or sales to
"Existing Customers" (as defined herein in Section 13(a)) for
same or similar type of service (collectively referred to as
the "Adjustments"). Collected Revenue shall include Collected
Revenue from the National Exchange Carrier Association
("NECA") and the United States Independent Telephone Company
Organization ("USINTELCO") regions only to the extent that
Collected Revenue therefrom does not exceed [ **********] of
the total Collected Revenue per month. Representative will
not be paid commissions on any NECA and USINTELCO revenue
exceeding [ ****************]. Collected Revenue will also
include the revenue from ACN-Sold Customers signed up for LCI
Services initially and exclusively by Representative or
Representative Independent Contractors but subsequently
converted by LCI to another LCI Service listed in Exhibit "A".
In the event that an ACN-Sold Customer is converted to a
service, offering or promotion not identified on Exhibit "A"
or subscribes to any additional service, offering, or
promotion, the parties shall mutually agree in writing on the
commission rate, if any, for the new LCI offering or promotion
and Exhibit "G" or "J" (depending on the date) shall be
amended accordingly. LCI may pay commissions based on billed
revenue less the Adjustments and allowance for Bad Debt (as
defined below). If LCI elects this method, the limitations
stated above with respect to NECA and USINTELCO shall apply,
and the revenue for converted LCI accounts originally and
exclusively sold by Representative shall also be included.
"Bad Debt" is defined as four percent (4%) of billed revenue
as of the effective date of this Agreement and, once
determinable by LCI, the actual ACN uncollectables and local
exchange carrier (LEC) holdbacks based on a representative
sampling of a majority of the ANIs submitted by
Representative. Any adjustment to the Bad Debt percentage
based on an updated calculation shall only be applied
prospectively and, [ ************** ], will be adjusted by
LCI [*****************]. The LCI commission payments required
pursuant to this Agreement are in consideration and
anticipation of the continuing sale of LCI services and
support of LCI customer relationships by Representative, and
its Representative Independent Contractors, with the exception
of the expiration or termination of the Agreement by LCI
(excluding termination of the Agreement by LCI for
Representative's breach of the exclusivity and
non-interference provisions contained in Sections 12 and 13 of
this Agreement), and Representative termination of the
Agreement for Change in Management pursuant to Section 14.
d. After expiration of the Agreement, written mutual termination
of this Agreement, Representative's termination of the
Agreement for cause, or LCI's termination of the Agreement
without cause, LCI will continue to pay commissions to
Representative at the applicable Service commission level in
effect as of such expiration or termination date.
4
CONFIDENTIAL
<PAGE> 5
The continuing commission payments will be based upon
Collected Revenue for current LCI customers signed up by
Representative [************************* ************
*****************]. Upon termination of this Agreement by LCI
for cause prior to the expiration of the Term, LCI shall pay
Representative Actual Downstream Commissions as defined by
Section 18 (excluding termination of the Agreement by LCI for
breach of the exclusivity and non-interference provisions
contained in Sections 12 and 13 of this Agreement). If
Representative terminates the Agreement without cause, LCI
shall have no obligation to pay Actual Downstream Commissions
or any applicable commission in effect at the time of such
termination.
4. Signing Bonus.
In consideration of the Term, exclusivity requirements, and
non-interference commitments contained in this Agreement, LCI will pay
a total payment, payable in two installments, of [**************]
(referred to as the "Initial Signing Bonus" and an "Incremental
Signing Bonus" (defined below) in Section 4(b)) as follows:
a. Initial Signing Bonus.
(i) LCI shall make the first payment of
[*****************************] plus interest at the
rate of one percent (1%) per month from the Effective
Date to the "Signing Bonus Payment Date" (defined as
five (5) business days from the later of (i) full
execution of this Agreement by both parties or the
(ii) approval of this Agreement by the LCI Board of
Directors, which determination shall be made no later
than thirty (30) days from when the Agreement is
signed by LCI), and
(ii) On January 1, 1997, LCI shall make to Representative
a second (2nd) payment of [ ****************] Dollars
with interest of one percent (1%) per month from the
Effective Date of the Agreement until January 1,
1997.
b. Incremental Signing Bonus. On or after May 1, 1998, provided
no LCI Change in Control has occurred and the Agreement has
not been terminated by either party or breached by
Representative, Representative shall receive the following
payments set forth in subsections (i) and (ii) below, subject
to the conditions of this Section 4(b) (defined as the
"Incremental Signing Bonus"):
(i) The [ *********************] of Representative's
Collected Revenue ("Actual Amount") less
[********************************************
*************] (the "Target Amount") calculated in
accordance with Exhibit "B". In the event that the
Actual Amount is greater than the Target Amount, LCI
shall pay to Representative the difference between
the Actual Amount and the Target Amount plus interest
of one percent (1%) per month from the Effective Date
of the Agreement to the "Incremental Signing Bonus
Payout Date" (defined below), in accordance with
Exhibit "B". In the alternative, if Representative's
Actual Amount is less than the Target Amount,
Representative shall pay to LCI the difference plus
interest between the Actual Amount and the Target
Amount plus interest of one percent (1%) from the
Effective Date of the Agreement to the "Incremental
Signing Bonus Payout Date. The "Incremental Signing
Bonus Payout Date" is defined as June 15, 1998.
5
CONFIDENTIAL
<PAGE> 6
(ii) In addition, if, after April 30, 1998, Representative
has generated average monthly Collected Revenue of
[*******************]based on the average monthly
Collected Revenue for February 1998, March 1998, and
April 1998, Representative will receive
[**********************] paid to Representative no
later than the Incremental Signing Bonus Payout Date.
5. Change in Control.
a. In the event that (i) LCI International, Inc. ("LCII") sells
or otherwise transfers for value all or substantially all of
its assets to any Person or Group, other than to (a) one or
more members of LCII's Control Group, or (b) Warburg Pincus &
Company ("Warburg") or an Affiliate of Warburg; or (ii) LCII
is purchased by or merges or consolidates with or into any
Person or Persons, other than (a) one or more members of
LCII's Control Group, or (b) Warburg or an Affiliate of
Warburg, and immediately after giving effect to such purchase,
merger or consolidation the stockholders of LCII immediately
prior to such purchase, merger or consolidation do not
beneficially own immediately after such purchase, merger or
consolidation at least 50% of the total number of Equity
Securities of the successor in such purchase, merger or
consolidation, then, in any such event, Representative shall
[**********************] as described in Section 6
[************************************] or Section 7 for a
[************************************************************]
this Section 5(a) shall be [*********************************
*******************] Section 5(d) herein.
b. In the event that (i) LCII or any member of LCII's Control
Group sells or otherwise transfers for value in a single
transaction or a series of transactions more than 50% of the
Equity Securities of any member of LCII's Control Group to any
Person or Group, other than (a) one or more members of LCII's
Control Group, or (b) Warburg or an Affiliate of Warburg; or
(ii) any member of LCII's Control Group sells or otherwise
transfers for value in a single transaction or a series of
transactions all or substantially all of its assets to any
Person or Group, other than to (a) one or more members of
LCII's Control Group, or (b) Warburg or an Affiliate of
Warburg; or (iii) any member of the LCII Control Group is
purchased by or merges or consolidates with or into any Person
or Persons, other than (a) one or more members of LCII's
Control Group, or (b) Warburg or an Affiliate of Warburg, and
immediately after giving effect to such purchase, merger or
consolidation LCII and/or one or more members of the LCII
Control Group do not beneficially own in the aggregate at
least 50% of the Equity Securities of the successor in such
purchase, merger or consolidation, (hereinafter referred to as
"Partial Divestiture Event") then, in such event,
Representative [***********************************
************************** ] prior to the occurrence of
the Partial Divestiture Event from the ACN-Sold Customers of
the member of LCII's Control Group referenced in this Section
5(b) [*******************************************************
***************].The intent of this Section 5(b) is to
[**************************** *************************** ] in
the event that LCII or any member of LCII's Control Group
effects a Partial Divestiture Event described in any of the
foregoing clauses (i), (ii) or (iii), such as, for example,
(1) a transaction in which LCII or one of its subsidiaries (or
any subsidiary or a subsidiary of LCII) sells or otherwise
transfers for value more than 50% of the Equity Securities of
one of its subsidiaries or (2) a
6
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<PAGE> 7
transaction in which a subsidiary of LCII (or any subsidiary
or a subsidiary of LCII) sells or otherwise transfers for
value all or substantially all of its assets or merges or
consolidates with or into any Person or Persons, other than to
or with Warburg or an Affiliate of Warburg or another
subsidiary (or a subsidiary of another subsidiary) of LCII.
If a Partial Divestiture Event occurs, Representative shall be
released from the exclusivity requirement, as set forth in
Section 12, for the specific LCI Services (included in the
Collected Revenue) in the specific geographic area(s) used by
the ACN-Sold Customers of the member of LCII's Control Group
sold or transferred for value in accordance with the Partial
Divestiture Event. Further, [ **************************
******************************** ] this Section 5(b),
[*************************************************************
***************************************************************
**************************************************** *****].
Subject to the sentence immediately hereafter, the parties
acknowledge and agree that [********************
*************************************** ]. Any
[************************************************************
*********************************************************** ]
this Section 5(b[********************************************
***************************************************************
**************************************************** ******].
In addition, the revenue from the ACN-Sold Customers of the
member of LCII's Control Group sold or transferred for value
in the Partial Divestiture Event shall be excluded from
Collected Revenue (as defined in Section 3(c)) and the payment
of commissions hereunder.
c. In the event that LCII or any member of LCII's Control Group
sells or otherwise transfers for value in a single transaction
or a series of transactions to a Person or Group, other than
to one or more members of LCII's Control Group, any of the
ACN-Sold Customers (hereinafter referred to as an "Asset
Divestiture Event") then Representative shall
[**************************************************************
*** ********************] prior to the occurrence of the Asset
Divestiture Event for such specific ACN-Sold Customers
involved in such sale or transaction [***********************
****************************************].
The[*********************************************************
***************************************************]. If an
Asset Divestiture Event occurs, Representative shall be
released from the exclusivity requirement, as set forth in
Section 12, for the specific LCI Services (included in the
Collected Revenue) in the specific geographic area(s) used by
the ACN-Sold Customers involved in such Asset Divestiture
Event. Further, even if an [***************************] this
Agreement[*****************************************************
******** * *************************************]. Subject to
the sentence immediately hereafter, the parties acknowledge
and agree that [******************** ******************]. Any
[*****************************************] this Section 5(c)
[***********************************************************].
In addition, the revenue from the ACN-Sold Customers sold or
transferred for value in an Asset Divestiture Event shall be
excluded from Collected Revenue (as defined in Section 3(c))
and the payment of commissions hereunder.
d. In the event of a stock repurchase or buyback program by LCII
resulting in any Person or Group being the beneficial owner in
the aggregate of at least 50% of the Equity Securities of LCII
for a period of more than ninety (90) days, then, in such
event, Representative
[**********************************************************
***************************************************************
**********************************]. This provision shall
not apply to (a) one (1) or more
7
CONFIDENTIAL
<PAGE> 8
members of LCII's Control Group or (b) Warburg or an Affiliate
of Warburg. Any [***
***************************************************************
****************************************************
**********************].
e. For purposes of this Section 5, the following terms shall be
defined as set forth below:
(i) "Affiliate" of any Person means any other Person
controlling, controlled by or under common control
with such Person, where control is defined as the
power to influence the management and conduct the
affairs of such Person;
(ii) "Equity Securities" means (a) in the case of a
corporation, the shares of capital stock entitled to
vote generally in the election of directors; (b) in
the case of a limited liability company, membership
interests therein entitled to profits or losses or
distributions upon the dissolution and liquidation of
such limited liability company that are not fixed in
amount or percentage (other than by reference to the
percentage interest of a member of such limited
liability company); and (c) in the case of a
partnership, joint venture, association, trust or
other entity, the equity interests therein entitled
to profits or losses or distributions upon the
dissolution and liquidation of the entity that are
not fixed in amount or percentage (other than by
reference to the percentage interest of a partner,
member, beneficiary of or other participant in such
entity);
(iii) "Group" means any two or more Persons acting together
for the purposes of effecting any transaction
referred to in this Section 5;
(iv) "LCII's Control Group" means any corporation, limited
liability company, partnership, joint venture or
other entity in which LCII (a) directly owns at least
50% of the Equity Securities, or (b) indirectly,
through one or more other Persons, owns at least 50%
of the Equity Securities of such entity;
(v) "Person" means any individual, partnership, joint
venture, association, limited liability company,
trust, corporation or other entity.
6.
[**********************************************************************
*******************************].
a. In the event of [*****************] (as defined herein)
[**************] Representative
[**********************************************************
****] which will
[*****************************************************] for
the [********************************************************
**************************************************************
***************************************************************
**************************************************************
***************************************************************
**************************************************************
***************************************************************
**************************************************************
***************************************************************
**************************************************************
************************************************* ]. Further,
Representative will [ ****************************************
***************************************************************
**************************************************************
*************************************]. Upon the beginning
8
CONFIDENTIAL
<PAGE> 9
of the Stay Period (defined above), Representative's various
commission levels will be reduced ("Change in Control
Commission Adjustments") by [********
******************************] on Collected Revenue. For
example:
Commission rate for Collected Revenue prior to
[*******************] for certain LCI Services: [****]
Change in Control Commissions Adjustment: [********]
New Commission Rate as of the beginning of the Stay Period:
[*******************]
b. LCI may
[*************************************************************
********************].
7.
[**********************************************************************
***** **************************************]
In the event of [*************] (as defined above in Paragraph 5)
[********************] Representative [****************************
********************************************************] pursuant to
Paragraph 4 (b)(ii) above) [*****************************************
*********************************************************************
******* ] (as defined herein) [*************************************
*********************************************************************
**************************].The [************************************
*********************************************************************
*********************************************************************
*********************************************************************
*********************************************************************
*********************************************************************
**************************************] or, in the alternative,
[****** *********************] if [**********************************
*****] after [**********************************] as provided in
Paragraph 3(a)(iii)above. [******************************************
*********************************************************************
*******************************************] provided in Section 6
above.
9
CONFIDENTIAL
<PAGE> 10
8. Letters of Authorization.
a. Representative shall only submit to LCI primary interexchange
carrier (PIC) letters of authorization ("LOAs") that are
compliant in all respects with applicable FCC regulations.
Further, Representative shall only use LOAs that have been
approved and authorized for current use by LCI. In the event
a local exchange carrier (LEC) or any regulatory or judicial
entity assesses or levies against LCI or any LCI Affiliate
(defined herein as LCII, any entity controlled by LCII or its
direct or indirect subsidiaries and any entity under common
control with LCII or its direct or indirect subsidiaries) any
charges, fines, or forfeitures for improper or invalid PIC
authorizations relating to any LCI Services ordered through or
by Representative (collectively referred to as "Fines"),
Representative shall promptly reimburse LCI or LCI Affiliate
for all Fines plus an LCI management fee not to exceed
[********************] per customer telephone number
ordered through or by Representative that is deemed to lack
proper PIC authorization and/or is not compliant with 47 CFR
64.1150 of the FCC rules or such amended rules that might be
issued by the FCC or other regulatory agency in the future
(defined herein as "Fees"). LCI will make best efforts to
provide Representative with a copy of such amended rules
relating to PIC authorizations and LOAs. The payment for any
such Fees and Fines may be withheld by LCI from otherwise
payable commissions as follows: LCI shall have the right to
offset all Fees and Fines against payable commissions up to
[***********************] of such Fine or Fee per occurrence.
Any Fees and Fines above the
[**********************************] threshold shall be offset
against Representative's payable commissions by fifty percent
(50%) and the fifty percent (50%) remaining balance will be
paid (not offset against Representative's payable commissions)
by Representative to LCI within thirty (30) days of written
notification from LCI. Upon the request of LCI,
Representative shall promptly and in good faith provide to
LCI, LCI Affiliate, or the LEC, at Representative's expense,
any documentation required by the LEC or regulatory agency
regarding PIC selections or authorizations for customers sold
hereunder. In addition, Representative shall completely and
in good faith cooperate with LCI and all LEC's and regulatory
and enforcement agencies in attempting to resolve all PIC
selection and authorization and related disputes including,
but not limited to, promptly responding to inquiries or
complaints from governmental bodies or private individuals or
entities and providing original LOAs and order forms
containing customer signatures. Further LCI, in its sole
discretion and without obligation or liability for possible or
actual reduction of commission payments to Representative, may
suspend the acceptance of orders by Representative in any
state where there is any actual or threatened investigation or
litigation involving the sales practices or marketing
activities of Representative or any Representative Independent
Contractor. The obligations under this Section are in
addition to Representative's obligations under Section 10
below.
b. In the event of a dispute between the parties regarding
liability under this Section, the parties shall attempt to
resolve such dispute prior to initiating Arbitration.
9. Trademarks and Tradenames.
Representative shall sell the LCI Services under the trademarks and
tradenames of LCI or LCI Affiliate only as approved in writing in
advance by LCI. Representative, its Affiliates (defined herein as
Representative's parent company, any entity in which Representative
directly or
10
CONFIDENTIAL
<PAGE> 11
indirectly owns an equity or partnership interest, or any entity under
common control with Representative, its parent company, or its direct
or indirect subsidiaries) and Representative Independent Contractors
shall not use, in its business, trade or corporate name the name
"LCI", any name of a service provided by LCI or any LCI Affiliate, the
LCI trademark or service mark of LCI or LCI Affiliate, or any LCI or
LCI Affiliate's symbol, registered mark, or other intellectual
property without the prior, express written consent of LCI.
Representative shall actively and promptly enforce the requirements of
this Section 9 against any misuse or infringement by Representative,
its Affiliates, and/or Representative Independent Contractors
including, without limitation, taking prompt disciplinary action
against such person or entity, terminating the distributorship or
Representative Independent Contractor relationship, and/or withholding
such person's or entity's commissions. In addition, upon request from
LCI, Representative shall promptly cooperate with LCI in connection
with having any third party discontinue any unauthorized use of LCI's
or LCI Affiliate's trademarks or tradenames including, without
limitation, unauthorized use of any LCI registered mark on the
Internet.
10. Warranties and Representations.
Representative hereby warrants and covenants that, during the Term
hereof, it, and all of its employees and agents, shall abide by the
following terms and conditions:
a. Representative shall notify LCI in writing within five (5)
business days if it becomes aware of any actual or threatened
investigation or litigation of Representative's or any
Representative Independent Contractor's sales or marketing
activities by any federal, state, or local governmental body
or agency or Representative becomes subject to or enters into
any consent decree, judgment, injunction, restraining order,
settlement agreement, or agreement or order relating to the
conduct of its business;
b. Representative is now in compliance with and will, for the
duration of the Term, comply in all material respects with all
foreign and domestic laws, statutes, ordinances, rules,
regulations, and orders applicable and material to this
Agreement and performance of its obligations hereunder
including, without limitation, FCC rules and regulations
pertaining to presubscription of customers and LOAs;
c. Representative and its Representative Independent Contractors
shall sell LCI Services only to those potential customers who
meet all eligibility requirements as set forth in LCI's
applicable state and federal tariffs (the "Tariff"). Further,
throughout the Term hereof, Representative shall use best
efforts to ensure that the LCI Services sold by Representative
and its Representative Independent Contractors are offered in
accordance with the rates, terms and conditions set forth in
the Tariff and all sales representations and activities remain
in full compliance with all applicable laws, regulations, and
orders of any court or regulatory agency. Representative
shall actively and continuously provide formal training and
updated information to its employees and Representative
Independent Contractors in order to ensure compliance with
this commitment;
d. Representative and its Representative Independent Contractors
agree to use only those means of marketing and selling of LCI
Services that are acceptable to LCI. Representative
specifically acknowledges that solicitation by direct mail,
telemarketing, barter arrangement, sweepstakes, contests, or
drawings are not permitted by
11
CONFIDENTIAL
<PAGE> 12
Representative or its Representative Independent Contractors,
without prior written approval of LCI;
e. Representative is and will continue to be duly organized,
validly existing and in good standing under the laws of
Michigan and is and will continue to be authorized to do
business in the jurisdictions in which the ownership of its
properties or assets or conduct of its business legally so
requires;
f. Representative agrees that the consummation of this Agreement
is not in conflict in any respect with, and will not
constitute a default under, any other agreements or judicial
or administrative orders to which Representative is a party or
by which it may be bound; and
g. Representative is not in default or otherwise in
non-compliance in any material respect with any contract,
agreement or other arrangement for goods, services or
technology, the termination of which might reasonably be
expected to have a material adverse effect on Representative's
ability to perform any of its obligations hereunder.
11. LCI Customers.
Representative agrees that LCI has the right to market all of its
products and services to Existing Customers (as defined below) and
customers sold or solicited by Representative. No consent is needed
from Representative in order for LCI to contact these customers
directly as these are LCI customers, and LCI shall remain responsible
for all aspects of the customer relationship.
12. Exclusivity and Non-Competition.
a. Representative and its Representative Independent Contractors
shall, throughout the Term and subject to Sections 12(c) and
12(d) below, continuously and actively market and sell LCI
local and long distance services, regardless of the
facilities used, (including, without limitation, inbound and
outbound, switched and dedicated, interLATA, intraLATA, and
interexchange services) on an exclusive basis. In
consideration of the payments and commitments made by LCI to
Representative, Representative and its Representative
Independent Contractor shall not, directly or indirectly, sell
to or solicit local and/or long distance services, regardless
of the facilities used, (including, without limitation,
inbound and outbound, switched and dedicated, interLATA,
intraLATA, and interexchange services or related services) on
behalf of itself or any other carrier, entity or individual
including, but not limited to, any future or existing
Affiliate and shall not compete, directly or indirectly,
against LCI or any LCI Affiliate in any manner during the Term
within the Restricted Territory, defined as everywhere within
the United States (collectively the "Forbidden Activities");
provided, however, that, if LCI terminates this Agreement as a
result of a breach by Representative, Representative shall not
engage in any of the Forbidden Activities within the
Restricted Territory for a period of eighteen (18) months from
the effective date of the termination.
b. Representative shall, as a material term of this Agreement,
require its executives and any future employees with duties
similar to those of the executives (identified in Exhibit "D")
(the "Executives), to sign a Non-Compete and Non-Solicitation
Agreement with
12
CONFIDENTIAL
<PAGE> 13
Representative (as provided in Exhibit "E" ) within thirty
(30) days of the execution of this Agreement by both parties
or prior to the hiring of the Executives and shall provide a
fully executed copy of the Non-Compete and Non-Solicitation
Agreements to LCI within ten (10) days of their execution.
Representative agrees that LCI and LCI Affiliates shall be
deemed third party beneficiaries of each such executed
Non-Compete and Non-Solicitation Agreement. Representative
shall promptly and strictly enforce the terms and conditions
of all Non-Compete and Non-Solicitation Agreements entered
into with any of the Executives and shall take no action which
may limit, restrict or preclude the full and complete
enforcement of any such Non-Compete and Non-Solicitation
Agreement.
c. The parties acknowledge that the services specifically
identified in Exhibit "F" are expressly excluded from the
exclusivity requirements of this Section 12 (a) above
("Non-Exclusive Services"). Within thirty (30) days after
receipt of a written request by Representative to add to the
Non-Exclusive Services list, Representative and LCI agree to
negotiate in good faith to determine whether to grant
Representative's request. If the parties cannot reach
agreement to determine whether Representative's request will
result in a breach of Section 12(a) above, the parties shall
have the issue decided through arbitration (as set forth in
Section 22) and Representative shall not actively market any
requested new service or product pending the final resolution
of any such arbitration.
d. The parties also agree that Representative's
[****************************** *****************] of this
Section 12 until LCI [*************************
***************************************************************
******** *********] In the event that Representative
[*************************************************************
***************************************************************
**************************************************************
***************************************************************
**************************************************************
***************************************************************
**************************************************************
***************************************************************
**************************************************************
***************************************************************
************************] In order to [***********************
***************************************************************
**************************************************************
***************************************************************
**********************************************].
e. In consideration of the payments by LCI to Representative
hereunder, LCI shall have a Right of First Refusal to acquire
Representative's cellular and/or paging customer base in
accordance with the procedures of Section 15. In the event
that LCI elects to purchase Representative's cellular and/or
paging customer base, paging and cellular services will be
deleted from Exhibit "F" and the exclusivity requirement
contained herein shall apply to such services. Under no
circumstances shall the cellular and/or paging services
revenue purchased by LCI be included in the definition of
Collected Revenue.
13
CONFIDENTIAL
<PAGE> 14
13. Non-Interference.
a. During this Agreement, Representative shall not sell any
telecommunications services similar to LCI Services in type or
manner to any existing LCI customers not originally sold by
Representative ("Existing Customers"). LCI shall have no
obligation to pay commission for any sale in breach of
Representative's obligations under this Section and shall have
the right to "chargeback" Representative the amount of
commissions that may have been paid for any sales in breach of
Representative's obligations under this Section.
b. In the event this Agreement is terminated for cause by LCI for
the grounds set forth in Section 17 below, expires, or a
Change in Control (as defined herein) occurs, Representative
further covenants and agrees that, for a period of two (2)
years from the effective date of the termination, expiration,
or Change in Control, it shall not, directly or indirectly,
divert, entice, knowingly call upon or actually sell or
solicit, or take away Existing Customers or any ACN-Sold
Customers (defined as LCI customers whose usage of LCI
Services is included in the calculation of Collected Revenue)
(such activities are collectively referred to herein as
"Solicitation"). Throughout the Term, Representative shall,
both through Representative's policies and procedures and in
the Representative Individual Contractor agreements with
Representative, retain in full force and effect and strictly
and uniformly enforce the covenant of no Solicitation and the
protection of competitively sensitive information pertaining
to ACN-Sold Customers and Existing Customers. Within thirty
(30) days of the execution of this Agreement, Representative
shall revise its policies and procedures to comply with the
covenants and obligations of this Section 13(b).
Subsequently, Representative shall promptly and in good faith
submit such policies and procedures to LCI for review and
comment.
c. Further, Representative and LCI acknowledge and agree that LCI
shall be a third party beneficiary pertaining to the
enforcement of the covenant of no Solicitation and the
protection of such ACN Proprietary and Confidential
Information and LCI Proprietary and Confidential Information
as set forth in Exhibit "I". LCI, as such third party
beneficiary, shall be conferred with the rights in its sole
discretion, to take any action or pursue any remedy that it
deems necessary in order to enforce the provisions hereof as
to which it would be entitled to if it were a party executing
the Representative Individual Contractor agreements.
d. Upon the expiration or termination of this Agreement, the
parties acknowledge and agree that the provisions of Sections
13(a) and 13(b) shall not apply to conversion of any active
Representative Independent Contractors who is also a customer
at the time of such expiration or termination of LCI to an LCI
competitor.
14. Change in Management.
a. At Representative's discretion, if a Change in Management
occurs (as defined below): (i) this Agreement will be
terminated and (ii) the exclusivity and non-competition
requirement of Section 12 shall terminate upon the legally
completed Change in Management Date (defined below). In the
event that Representative elects to terminate this Agreement
because of a Change in Management of LCI, the Commissions for
all Collected Revenue paid to Representative as of the Change
in Management Date will be reduced by [ ****************]
(For example, commissions paid by LCI of [*******
14
CONFIDENTIAL
<PAGE> 15
********************] on certain LCI Services will be reduced
to [***************]
b. "Change in Management" is defined as a transaction or series
of transactions or events which result in (i) a person or
entity beneficially owning (as defined in Rule 13(d)(2)(B)
under Section 13 of the Securities and Exchange Act of 1934)
twenty percent (20%) or more of the outstanding voting
securities of LCI entitled to vote in the election of
Directors ("Voting Securities") (other than Warburg or Warburg
Affiliates), and (ii) if, within a six (6) month period, of
such transaction or transactions described herein, all three
(3) of the following LCI officers employed as of the Change of
Management Date cease to be employed with LCI in the following
capacities or capacities similar thereto for any reason other
than death, disability, or retirement after age 62: Chairman,
President, and Chief Financial Officer.
c. "Change in Management Date" is defined as the date that
Representative provides LCI with written notice of its
election to terminate this Agreement because of the Change in
Management (as defined in Section 14(b) above); provided such
notice must be received by LCI within six (6) months of the
Change in Management.
15. Right of First Refusal.
During the Term of this Agreement, in the event Representative desires
to sell its cellular and/or paging customer base (the "Transaction")
upon receipt of a bone fide third party offer that Representative is
prepared to accept for the Transaction, Representative shall provide
LCI written notice setting forth all material terms and conditions of
the offer for the Transaction ("the Offer"). LCI shall have a right
of first refusal to purchase or accept the Offer, as the case may be,
upon the terms and conditions specified in the Offer, or upon
economically equivalent terms and conditions. LCI must give
Representative written notice of its election to exercise its right of
first refusal no later than thirty (30) days following its receipt of
Representative's notice provided that, in the event the Offer received
by Representative is conditioned upon a response of less than thirty
(30) days, LCI shall be required to provide written notification to
Representative of its exercise of the right of first refusal by such
lesser time period as specified by the Offer but, in no event, shall
LCI have less than fifteen (15) business days. In the event that LCI
either fails to give timely notice, or gives notice that it declines
to exercise its right, Representative may thereafter proceed with the
Transaction, as applicable, with the proposed buyer, but only on
terms which do not materially vary from those presented to LCI. If
the terms and conditions of the Transaction changes with the proposed
buyer, LCI will receive a renewed Right of First Refusal from
Representative.
In the event that Representative determines to proceed with a
Transaction but has not received any bona fide Offer, Representative
shall notify LCI of its desire to seek a buyer at least sixty (60)
days prior to making a Transaction available to any third party. In
the event that a Letter of Intent and other written agreement is not
executed by Representative and/or LCI within such sixty (60) day
period after each of the parties has negotiated in good faith to
consummate the Transaction, thereafter, Representative may enter into
negotiations with a third party in which event, the right of first
refusal described above shall not apply. If the Transaction offered
to a third party, however, is not materially similar to that made
available to LCI, LCI shall have an opportunity to re-bid.
Representative shall not accept an offer that has materially similar
or less favorable terms without giving LCI an opportunity to re-bid.
15
CONFIDENTIAL
<PAGE> 16
16. Non-Hiring Notice of or Solicitation of Employees.
During the Term hereof and for a period of two (2) years after
termination or expiration of this Agreement, neither party shall
solicit or offer employment to any employee of the party without prior
written notification to the other party.
17. Termination.
A. Termination Without a Cure Period
1. Either party may terminate this Agreement immediately at any
time by written notice if any of the following occurs:
a. The other party ceases to do business as a going concern other
than following a merger, consolidation or other similar
transaction with an entity controlled by or under common
control with such party;
b. The other party makes a general assignment for the benefit of
creditors;
c. The other party is unable, or admits in writing to its
inability, to pay its debts as they become due;
d. The other party is adjudicated to be insolvent, bankrupt, or
is in receivership;
e. The other party authorizes, applies for, or consents to the
appointment of a trustee or liquidator for the sale, transfer,
or assignment of all or a substantial portion of its assets,
or has proceedings seeking such appointment commenced against
it which are not terminated within sixty (60) days of such
commencement;
f. The other party files a voluntary petition under any
bankruptcy or insolvency law or files a voluntary petition
under the reorganization or arrangement provisions of the laws
of the United States pertaining to bankruptcy or any similar
law of any jurisdiction or has proceedings under any such law
instituted against it which are not terminated within sixty
(60) days of such commencement;
g. The other party has any substantial part of its property
subjected to any levy, seizure, assignment or sale for or by
any creditor or governmental agency without such levy,
seizure, assignment or sale being released, lifted, reversed
or satisfied within ten (10) days;
2. LCI may terminate this Agreement immediately at any time by
written notice if any of the following occurs:
a. Representative intentionally fails (except in limited
instances where Representative has withheld commission
payments from Representative Independent Contractors due to a
good faith dispute or a violation of Representative's policies
and/or procedures) or is unable to pay or is knowingly more
than forty-five (45) days late in paying its Representative
Independent Contractors the required percentage and amount of
16
CONFIDENTIAL
<PAGE> 17
commissions in accordance with its contractual obligations to
such individuals and/or entities. This provision does not
apply to commission payments owed to its Representative
Independent Contractors during the first ninety (90) days of
their affiliation with Representative; or
b. Any willful or intentional action by Representative which
adversely affects LCI's reputation in the marketplace and is
in any way related to the sale or marketing of LCI service; or
c. Three (3) of the five (5) Executives ("Key Persons") cease to
be actively employed on a full-time basis by Representative
within any six (6) month period. The Key Persons are:
[**************************************************************
******************************************]
If a court of competent jurisdiction determines, under applicable bankruptcy
laws, that this Agreement may not be terminated by LCI pursuant to this Section
17, Representative agrees that, upon such ruling, LCI shall only be obligated
to pay the Actual Paid Downstream Commissions in accordance with Section 18
during the remainder of the Term.
B. Termination With A Thirty (30) Day Cure Period.
1. Termination By Either Party With A Thirty (30) Day Cure Period.
Either party may terminate this Agreement if the other party is in
material breach and/or negligently or intentionally fails to perform
the mutually agreed upon Performance Specifications provided in
Exhibit "H" herein, as may be amended by the parties in writing, and
the defaulting party fails to cure such breach and/or non-performance
within thirty (30) days after receiving written notice from the
non-defaulting party.
2. Termination By LCI With A Thirty (30) Day Cure Period.
Representative shall not engage in any transaction or act that,
directly or indirectly, shall result in a breach of any of the
Individual Non-Competition and Solicitation Agreements set forth in
Exhibit "E", Section 12 and/or 13, and Representative fails to cure
such breach within thirty (30) days of receiving written notice from
LCI.
18. Remedies.
(a) (i) Except for LCI's termination of this Agreement for
breach of the exclusivity and/or non-interference
requirements set forth in Sections 12, 13, and/or
17(B)(2), respectively, LCI's obligation to pay Actual
Paid Downstream Commissions is subject to and
contingent upon Representative's full compliance with
Section 17(2)(a) above. With the exception of the
termination of this Agreement by LCI because of
Representative's breach of the exclusivity and/or
non-interference obligations contained in Sections 12,
13, and 17(B)(2) of this Agreement, in the event that
LCI terminates the Agreement with cause, LCI will
continue to pay the Actual Paid Downstream
Commissions, and LCI will be entitled to seek all
remedies available to it, at law or equity including,
without limitation, injunctive relief without posting
a bond or other security (such
17
CONFIDENTIAL
<PAGE> 18
remedies will also be available to LCI for any breach of
Section 12, 13, and 17(B)(2)). "Actual Paid Downstream
Commissions" are defined herein as that portion of Collected
Revenue (resulting from the actual use of LCI Services by
customers signed up exclusively by Representative) that is
actually being paid by Representative to its Representative
Independent Contractors, based on the methodology and criteria
in place twelve (12) months prior to such termination
("Calculation Date") and documented as set forth in Section
18(a)(ii) below; provided, however, in the event that
Representative changes its methodology and/or criteria used to
calculate the Actual Paid Downstream Commissions and such
changes result in a reduction of the Actual Paid Downstream
Commissions actually paid by Representative during any of the
twelve (12) months prior to such termination, then LCI shall
only be obligated to pay the reduced Actual Paid Downstream
Commissions. In no event shall LCI's obligations under this
Section 18 be applied or construed to require that LCI pay
more than the applicable commission level in effect for each
LCI Service at the time of LCI's obligation to pay such Actual
Paid Downstream Commissions. Such Actual Paid Downstream
Commissions shall be paid to Representative in consideration
of the continuing support of LCI customer relationships, and
LCI will reasonably cooperate to assist Representative in
fulfilling this continuing obligation. Such payment shall not
include any commission payments or other revenue that would
ordinarily and/or actually be retained by Representative, its
employees, executives and/or Affiliates and shall supersede
commission payments currently being paid to Representative.
Representative shall advise LCI promptly in writing of any and
all changes to the methodology and criteria used to calculate
Actual Paid Downstream Commissions during the Term.
Representative acknowledges and agrees that no third-party
beneficiary obligation will be created between LCI and
Representative's Representative Independent Contractors or any
other third party as the result of any LCI obligation to pay
the Actual Paid Downstream Commissions to Representative or
any provision of this Agreement and Representative shall
remain solely responsible for paying the Actual Paid
Downstream Commissions to Representative Independent
Contractors along with addressing any claims or disputes that
might arise as a result of its obligations to make such
payments.
(ii) Within thirty (30) days of the execution of this Agreement,
Representative shall submit to LCI in writing the following:
1. All documentation which establishes the basis for the
current methodology used for determining, calculating,
applying, and actually paying and distributing the
Actual Paid Downstream Commissions; and
2. All documentation reflecting an actual example of the
Actual Paid Downstream Commissions paid at each level
of Representative's Multi-Level Marketing Plan for the
three (3) month period prior to the Effective Date
shall be provided to an independent third party
engaged by LCI, and shall be held by such third party
under seal until LCI is obligated to pay Actual Paid
Downstream Commissions hereunder. In addition, at any
time during the Term of this Agreement and
notwithstanding anything to the contrary contained in
Section 21 of this
18
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<PAGE> 19
Agreement, LCI shall have the right to audit the
commission payments made to Representative Independent
Contractors as well as the right to review the written
agreement(s) between Representative and the individual
Representative Independent Contractor(s).
Representative shall cooperate fully in any LCI audit,
providing access to any books, records, and other
documents necessary to determine the Actual Paid
Downstream Commissions. The audit will be conducted
in accordance with Section 21 of this Agreement.
b. If Representative fails to pay any of its Representative
Independent Contractors or other third party in connection
with the performance of services related to this Agreement,
LCI shall have the right, after written notice to
Representative and Representative's failure to cure such
non-payment within thirty (30) days of such notice, in its
discretion, to withhold payment to Representative (final or
otherwise) such sums as are reasonably necessary or
appropriate to protect LCI and to enable LCI to assume payment
of such claims, provided that such withholding shall be
permitted only against claims that are not a subject of a
continuing bona fide dispute between Representative and such
third party. Any such withheld amount shall be applied by
LCI, after the above notice provision has been provided and
Representative has failed to cure the non-payment, in such
manner as LCI may reasonably deem proper to secure protection
or satisfy such claims. All sums so applied shall be deducted
from LCI's payments to Representative. LCI's failure to
withhold payment, final or otherwise, of a sum for any of the
above contingencies, even though such contingency has occurred
at the time of such payment, shall not be construed as a
waiver by LCI of its rights with respect to such contingency.
Neither the above-stated rights of LCI to withhold and apply
monies nor any exercise or attempted exercise of, or omission
to exercise, such rights by LCI shall create any obligation of
any kind on the part of LCI to Representative Independent
Contractors or any third party. Until actual payment is made
to Representative, its right to any amount to be paid
hereunder (even though such amount has already been certified
as due) shall be subordinated to the rights of LCI under this
Section.
c. In addition to all other remedies available to LCI in law or
equity and as set forth in this Agreement, in the event of a
breach of Section 13(b) by Representative, its Representative
Independent Contractors, or any Representative Affiliate,
Representative shall pay to LCI the following amounts within
ten (10) days of when either party becomes aware of such
breach: [****************************************************
***************************************************************
***************************************************************
***************************************************************
***************************************************************
***************************************************************
***************************************************************
***************************************************************
*************************************************************
****************]
19. Indemnification.
a. Each party shall indemnify, defend and hold the other party,
its officers, directors, employees, and Affiliates thereof,
harmless from and against any and all claims,
19
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<PAGE> 20
demands, actions, losses, damages, assessments, charges,
liabilities, costs and expenses including, without limitation,
interest, penalties, and attorney's fees and disbursements,
which may at any time be suffered or incurred by, or be
asserted against, any or all of them, directly or indirectly,
on account of or in connection with:
(i) The other party's default under any material
provision herein, breach of any warranty or
representation herein, or failure in any way to
perform any material obligation hereunder; or
(ii) Bodily injury (including death) or damage to real or
tangible personal property of any person including,
without limitation, any employee of either party
and/or any third person, and any damage to or loss of
use of any tangible, real, or personal property.
b. Representative shall hold harmless and indemnify LCI from and
against any claim, demand, cause of action, loss, damage,
assessment, charge, cost, judgment, liability or expense
relating to or arising out of the negligent or intentional
acts/omissions of Representative or any Representative
Independent Contractor including, but not limited to,
misrepresentations to customers about LCI Services or the
terms under which the LCI Services are made available by LCI.
c. Any dispute regarding the indemnity obligations contained
herein will be resolved by arbitration in accordance with
Section 22.
d. Representative shall immediately notify LCI of any claims and
actions or proceedings brought against it that are related in
any way to the performance of this Agreement and shall
cooperate with LCI to facilitate the settlement or defense of
any such claim or action. LCI shall have the right to control
any litigation or claim, including, without limitation, the
right to defend and/or settle any lawsuits related to
Representative's indemnification obligations at
Representative's sole cost and expense, including attorney's
fees, and conduct any settlement negotiations on behalf of
itself and Representative. Selection of counsel shall be
mutually agreed upon by the parties, which such approval shall
not be unreasonably withheld or denied.
20. Liability.
a. With the exception of Sections 12, 13, and 18 above, neither
Representative nor LCI shall have any liability under this
Agreement for special, consequential, indirect or punitive
damages, including, without limitation, loss of profits, even
if advised of the possibility of such damages. With the
exception of willful or intentional acts by LCI and any
commissions and payments that may be due and owed by LCI
pursuant to Sections 3, 4, 6, 7, 14, and 18 above, in no event
shall LCI's total liability hereunder exceed one (1) month's
average commission paid to Representative (as calculated by
the commissions paid to Representative for the past ninety
(90) days prior to such event giving rise to LCI's liability).
b. LCI will have no liability to Representative for commissions
that might have been earned hereunder but for the inability,
delay, or failure of LCI to provide LCI Services to
20
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<PAGE> 21
any person or entity solicited by Representative or in the
event of discontinuation or modification of LCI Services.
21. Audit.
LCI shall provide residential ACN-Sold Customer reports to
Representative as follows:
a. [************************************************************
***********************************************************]
b. [**************************************]
c.
[**************************************************************
****************************************************
*********************]
d. [***************************]
The parties shall mutually agree in writing on any additional reports
or information regarding residential and business ACN-Sold Customers
reasonably requested by Representative.
Not more than once annually, with the exception of Section 18 above,
and upon not less than fifteen (15) days' written notice to the other
party, LCI or Representative shall have the right to engage a
certified public accounting firm or such other assistance, other than
the assistance of a direct competitor, as it deems desirable to
conduct an audit of all books and records of the other party directly
related to the calculation and/or payment of commissions hereunder by
either party, but excluding the call detail of LCI customers and LCI
switch tapes. Either party may require any person or firm retained
for this purpose to execute a non-disclosure agreement in favor of the
other party. Such audit shall be conducted during regular business
hours at the offices of the audited party where such books and records
are regularly maintained and shall be paid for by the requesting
party. Upon the discovery of any overpayments or underpayments of
commissions by LCI or Representative, LCI will have the right to
offset Representative commissions against any commissions due or owed
and Representative shall promptly reimburse LCI, when applicable. If
Representative has been underpaid, LCI shall promptly reimburse
Representative for any such underpayment.
22. Arbitration.
Except for the right of either party to apply to a court of competent
jurisdiction for a temporary restraining order, a preliminary
injunction, or other equitable relief, any claim or controversy
arising out of or related to this Agreement, shall be settled by
binding arbitration before a single arbitrator administered by the
American Arbitration Association, in accordance with the Complex
Commercial Rules of the American Arbitration Association under its
Commercial Arbitration Rules and Supplementary Procedures for Large,
Complex Disputes, with the matter to be heard in Washington, D.C..
The arbitration shall be conducted in accordance with the United
States Arbitration Act (Title 9, U.S. Code) notwithstanding any choice
of law provision in this Agreement. The parties agree that, except
for misapplication of the law, judgment upon the award rendered in
such arbitration may be entered in and enforced by any court of
competent jurisdiction. Each party shall bear the cost of preparing
and presenting its case. The cost of the
21
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<PAGE> 22
arbitration, including the fees and expenses of the arbitrator(s),
will be shared equally by the parties unless the award otherwise
provides.
23. Confidentiality.
The parties hereby agree to abide by the terms and conditions of the
mutual Non-Disclosure Agreement attached hereto as Exhibit "I".
24. Insurance.
Representative shall secure and maintain Worker's Compensation,
General Comprehensive liability insurance and automobile insurance in
sufficient amounts to comply with all applicable laws and to cover its
respective obligations under this Agreement, including claims for
bodily and personal injury, death, property damage, and all other harm
caused by or occurring in connection with Representative's performance
under this Agreement. Further, certificates of insurance shall be
submitted to LCI naming LCI an ADDITIONAL INSURED on such policies as
appropriate, prior to the execution of this Agreement. These
certificates shall certify that no material alteration, modification
or termination of such coverage shall be effective without at least
thirty (30) days advance notice to LCI. Upon request, Representative
shall furnish insurance certificates as evidence of such coverage.
At a minimum, Representative agrees to maintain the following
insurance coverage's.
a. Comprehensive or Commercial General Liability Insurance:
$1,000,000 per occurrence combined single limit/$2,000,000
general aggregate and will include coverage for the use of
independent contractors, products, and completed operations.
b. Business Automobile Liability Insurance
Business Automobile Liability Insurance including coverage for
owned, hired, leased, rented and non-owned vehicles as
follows:
$1 Million combined single limit per accident
c. Worker's Compensation and Employer's Liability Insurance:
Worker's Compensation in the statutory amounts and with
benefits required by the laws of the state in which the LCI
Services are sold and the states (in which employees and/or
Representative Independent Contractors are hired, if the
states(s) are other than that in which the LCI Services are
sold).
THE REQUIRED MINIMUM LIMITS OF COVERAGE SHOWN ABOVE WILL NOT IN ANY
WAY RESTRICT OF DIMINISH REPRESENTATIVE'S LIABILITY UNDER THIS
AGREEMENT.
25. No Waiver.
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<PAGE> 23
The failure of either party to insist on the strict performance of any
terms, covenants and conditions of this Agreement at any time, or in
any one or more instances, or its failure to take advantage of any of
its rights shall not be construed as a waiver or relinquishment of any
such rights or conditions at any time and shall in no way affect the
continuance in full force and effect of all the provisions and
conditions of this Agreement.
26. Successors and Assigns.
This Agreement shall be binding upon and inure to the benefit of the
successors and permitted assigns of the parties hereto. Neither this
Agreement nor any rights or obligations of Representative shall be
transferable or assignable by Representative under any circumstances
including but not limited to, an assignment by operation of law, an
assignment in connection with a change in control of Representative,
or any other type of acquisition, without LCI's prior written consent.
Any attempted transfer or assignment hereof by Representative not in
accordance herewith shall be null and void. Further, the terms and
conditions of this Agreement shall have no effect on, or supersede or
amend the terms and conditions of, third-party agreements with other
LCI representatives.
27. Contingency.
This Agreement is subject to the timely approval by the Board of
Directors of LCI. If such approval is not obtained within 30 days
from the date this Agreement is executed by LCI, this Agreement shall
be null and void ab initio.
28. Survivability.
Notwithstanding any termination or expiration of this Agreement,
Sections 12, 13, and 18(c), and the Non-Compete and Non-Solicitation
Agreements (as provided in Exhibit "E), and any other provision
hereof, which, by its context, is intended to survive the termination
or expiration hereof, shall so survive.
29. Severability.
If any term or provision of this Agreement, or any exhibit is found to
be invalid or unenforceable in any situation or jurisdiction, such
determination shall not affect the validity or enforceability of the
remaining terms and provisions hereof or the validity or
enforceability of the offending term or provision in any other
situation or in any other jurisdiction, and the remaining provisions
of this Agreement and all exhibits shall remain in full force and
effect.
30. Force Majeure.
Neither LCI nor Representative will be liable for loss or damage or
deemed to be in breach of this Agreement if its failure to perform its
obligations results from (a) compliance with any law, ruling, order,
regulation, requirement of any federal, state or municipal government
or department or agency thereof or court of competent jurisdiction;
(b) acts of God; (c) acts or omissions of the other party; (d) fires,
strikes, war, insurrection or riot; (e) or any other cause beyond its
reasonable control. Any delay resulting therefrom will extend
performance accordingly or excuse performance, in whole or in part, as
may be reasonable.
23
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<PAGE> 24
31. Right to Renegotiate.
If, during the Term of this Agreement, the dynamics of the
telecommunication industry change in such a manner that telephone
calls are no longer measured, charged, or characterized as principally
local, long distance, and/or toll in nature, the parties shall
promptly negotiate in good faith to amend this Agreement to uphold the
intent and spirit of Representative's commitment to sell LCI's
telecommunications services on an exclusive and primary basis as set
forth in Section 12 above.
32. Entire Agreement.
This Agreement, its Exhibits and Attachments, contain the sole and
entire agreement between the parties hereto with respect to the
transactions contemplated herein and supersedes all prior written and
verbal discussions, promises, and agreements between the parties with
respect to the matters contained herein. No modifications or
amendments may be made to this Agreement except by written instrument
executed by both parties.
33. Notices.
All notices under this Agreement, whether addressed to LCI or
Representative, must be in writing and shall be sent by overnight
carrier service, return receipt requested, to the parties at the below
addresses:
If to LCI: LCI International
8180 Greensboro Drive, Suite 800
McLean, VA 22102
Attn: President
With An Additional
Copy to: LCI International
8180 Greensboro Drive, Suite 800
McLean, VA 22102
Attn: General Counsel
If to Representative: American Communications Network, Inc.
100 West Big Beaver, Suite 400
Troy, MI 48084
Attn: President
With An Additional
Copy to: David Steinberg, Esq.
Hertz, Schram & Saretsky
1760 South Telegraph Road, Suite 300
Bloomfield Hills, Michigan 48302
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<PAGE> 25
34. Interpretation.
The parties have participated jointly in the negotiations and drafting
of this Agreement. In the event an ambiguity or question of intent or
interpretation arises, this Agreement shall be construed as if drafted
jointly by the parties and no presumption or burden of proof shall
arise favoring or disfavoring any party by virtue of the authorship of
any of the provisions of this Agreement.
35. Jurisdiction.
The parties hereto agree that this Agreement shall be construed in
accordance with and governed in all respects by the laws of the State
of New York.
36. Counterparts.
This Agreement may be signed in multiple counterparts, all of which
shall constitute an original.
IN WITNESS WHEREOF, the parties have executed this Agreement to become
effective as of the date first written above.
<TABLE>
<S> <C>
LCI INTERNATIONAL TELECOM CORP. AMERICAN COMMUNICATIONS NETWORK, INC.
("LCI") ("Representative")
By: /s/ THOMAS WYNNE 6/7/96 By:/s/ GREGORY PROVENZANO 6/7/96
-------------------------- ------- ----------------------------- -------
Thomas Wynne Date Gregory Provenzano Date
President President
</TABLE>
25
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<PAGE> 26
EXHIBIT "A"
LCI Services
All America Plan
Home 800
Extend Your Reach
WorldCard
LCI Alternative
Simply Business
Simply Guaranteed
Integrity
Audio Teleconferencing
Point-to-Point Products
WAL
Campus Talk
Cellular Lightcall
Lightcall Plus
LCI Services Not Currently Sold but Commissionable
MLM
S.F.I.
26
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<PAGE> 27
EXHIBIT "B"
1) CALCULATION OF INCREMENTAL SIGNING BONUS PAYMENT
The Incremental Signing Bonus Payment is equal to the total net present value
of [***********] of each month's Actual Collected Revenue ("Monthly Amount")
from the Effective Date of the Agreement through April 30, 1998 [
*************** ********************************] ("Target Amount"). On July
1, 1998, each Monthly Amount will be discounted back to its net present value
as of the Effective Date of the Agreement at one (1%) percent per month
("Monthly Present Value"). The aggregated total of the Monthly Present Values
from May 1996 through April 1998 ("Actual Amount") less Target Amount shall
equal the Incremental Signing Bonus Payment.
A. Monthly Amount = [ **********] x actual monthly Collected Revenue
B. The Monthly Present Value calculation will be as follows:
Monthly Present Value = Monthly Amount [ *******************]
where "n" equals the number of months from the Effective Date
of the Agreement
Example:
The Monthly Present Value Calculation for month four (4) is as
follows:
<TABLE>
<S> <C>
Monthly Collected Revenue [***************]
Periods (n) = 4
[ ****] of Monthly Revenue ("Monthly Amount") [***************]
Monthly Present Value =[*******************] [***************]
</TABLE>
C. The formula for calculating the Incremental Signing Bonus Payment shall be
as follows:
Actual Amount less Target Amount
D. For illustrative purposes, if the Agreement is effective as of May 1, 1996,
the Monthly Present Values and resultant Incremental Signing Bonus
Payment would be calculated as follows (the figures relied on below
are estimates only; Actual Collected Revenue will be used in computing
the calculation):
<TABLE>
<CAPTION>
[********]
Monthly of Revenue Monthly
Collected ("Monthly Present
Month Revenue Periods Amount") Value
------ ------- ------- -------- -----
<S> <C> <C> <C> <C>
May-96 [************] 1 [***********] [**************]
Jun-96 [************] 2 [***********] [**************]
Jul-96 [************] 3 [***********] [**************]
Aug-96 [************] 4 [***********] [**************]
Sep-96 [************] 5 [***********] [**************]
Oct-96 [************] 6 [***********] [**************]
Nov-96 [************] 7 [***********] [**************]
Dec-96 [************] 8 [***********] [**************]
Jan-97 [************] 9 [***********] [**************]
Feb-97 [************] 10 [***********] [**************]
Mar-97 [************] 11 [***********] [**************]
Apr-97 [************] 12 [***********] [**************]
May-97 [************] 13 [***********] [**************]
Jun-97 [************] 14 [***********] [**************]
</TABLE>
27
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<PAGE> 28
<TABLE>
<S> <C> <C> <C> <C>
Jul-97 [************] 15 [***********] [**************]
Aug-97 [************] 16 [***********] [**************]
Sep-97 [************] 17 [***********] [**************]
Oct-97 [************] 18 [***********] [**************]
Nov-97 [************] 19 [***********] [**************]
Dec-97 [************] 20 [***********] [**************]
Jan-98 [************] 21 [***********] [**************]
Feb-98 [************] 22 [***********] [**************]
Mar-98 [************] 23 [***********] [**************]
Apr-98 [************] 24 [***********] [**************]
("ACTUAL AMOUNT") [**************]
INCREMENTAL SIGNING BONUS PAYMENT = [***************************************]
</TABLE>
2. PAYOUT OF INCREMENTAL SIGNING BONUS
1. Example 1:
If the Actual Amount is greater than the Target Amount,
based on the application of the foregoing formula for
calculating the Incremental Signing Bonus Payment, LCI
shall pay to Representative the difference, plus interest
at the rate of one percent (1%) per month accruing back
to the Effective Date of the Agreement on June 15, 1998
("Incremental Signing Bonus Payout Date"):
EXAMPLE:
Assuming:
<TABLE>
<S> <C>
Actual Amount [***************]
Target Amount [***************]
Effective Date of the Agreement = May 1, 1996
Incremental Signing Bonus Payout Date = June 15, 1998
Number of months = 25.5
LCI owes Representative:
[**********************************************]
</TABLE>
2. Example 2
If the Actual Amount is less the Target Amount based on
the application of the foregoing formula for calculating
the Incremental Signing Bonus Payment, Representative
shall pay to LCI the difference, plus interest at the rate
of one percent (1%) per month accruing back to the
Effective Date of the Agreement on Incremental Signing
Bonus Payout Date.
EXAMPLE:
<TABLE>
<S> <C>
Assuming:
Actual Amount [***************]
Target Amount [***************]
Effective Date of the Agreement = May 1, 1996
Incremental Signing Bonus Payout Date = June 15, 1998
Number of months = 25.5
Representative owes LCI:
[***********************************************]
</TABLE>
28
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<PAGE> 29
EXHIBIT "C"
CALCULATION OF [********************]
A. Definitions:
1. [***********] The first three (3) full calendar months beginning on the
first day of the first full calendar month after the date of the
[*******************]
2. Monthly Revenue Average: The average per month of Collected Revenue
during the Transition Period.
3. Monthly Revenue Average With Attrition: The Monthly Revenue Average
adjusted by an Attrition Percentage (defined as (a) two and four tenths
percent (2.4%) per month during the Stay Period if LCI's successor is an
entity other than a facilities-based interexchange carrier;
(b)[******************* ] during the [**********************************
**************************************************************************
*****************************] or (c) [***********************************
********************************************************************]
4. [*******************************************************************] which
is comprised of the [******************************************************
*****************************]
5. [************] Seventy-Five (75) days from the beginning of the
[*********************]
6. Initial [***********************] One-half of the
[*****************************************] to Representative on the Payout
Date.
7. [************] The twenty-one (21) months beginning the fourth (4th) full
month after [*****************************************************]
8. [***********************************] The estimated one-half of
[************************************************************************
******************************************]
9. [*************************************************************************
**] subject to [******] (as provided in Section C below of this Exhibit C)
plus interest at the rate of one percent (1%) per month from
[********************************************************]
10. [********************] Seventy-Five (75) days after the end of
the[*******************]
11. Monthly Adjustment: The percentage of monthly Collected Revenue above
the Monthly Revenue Average divided by the number of months in
[***********], or the percentage of monthly Collected Revenue below the
Monthly Revenue Average with Attrition divided by the number of months
[*************] whichever is applicable. The Monthly Adjustment will be
calculated for each month of [******************]
12. Total Adjustment Factor: Total of Monthly Adjustments over[***********]
13. Adjusted [********************************************] adjusted by the
Total Adjustment factor but not including any interest.
B. Calculation of [****************]
EXAMPLE: Assume that [***********************************************
******************* ] would be the three full calendar months of
February, 1999, March, 1999, and April, 1999.
<TABLE>
<CAPTION>
[***************] Monthly Collected Revenue During [****************]
----------------------------------------------------
<S> <C>
February, 1999 [**********]
March, 1999 [**********]
April, 1999 [**********]
------------
Total Collected Revenue during [*************] [**********]
</TABLE>
29
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<PAGE> 30
Monthly Revenue Average = $90,000,000 / 3 = $30,000,000
[***********************************************]
C) Calculation of Monthly Revenue Average [***************]
Each month following the first month of [************************************
**] will be calculated as follows:
(previous month's Monthly Revenue Average [**********] x (1- [****************
*********] (%))
Example
[***************] begins May 1, 1999
[***********************] per month [*************************************]
<TABLE>
<CAPTION>
Monthly
Revenue
Month Average
----- [*********]
<S> <C>
May-99 [************]
Jun-99 [************]
Jul-99 [************]
Aug-99 [************]
Sep-99 [************]
Oct-99 [************]
Nov-99 [************]
Dec-99 [************]
Jan-00 [************]
Feb-00 [************]
Mar-00 [************]
Apr-00 [************]
May-00 [************]
Jun-00 [************]
Jul-00 [************]
Aug-00 [************]
Sep-00 [************]
Oct-00 [************]
Nov-00 [************]
Dec-00 [************]
Jan-01 [************]
</TABLE>
D) Calculation of [*******************]
1. The [ ***********************************************
******************************] in accordance with an [**************] to
be mutually agreed to in writing by both parties prior to [******] In
consideration of Representative being entitled to receive interest at the
rate of one percent (1%) per month for the [*********************
*********************] LCI shall be entitled to
[********************************************** *********** *************]
The[****************************************** ] Two (2) months after the
end of the [******** *************************************] will be subject
to a [******] prior to [ ******************************
*********************************************** **********************] will
be calculated as follows:
For each month during the [*****************] a Monthly Adjustment
will be calculated.
If any month's Monthly Collected Revenue during [**************]
is greater than the Monthly Revenue Average, the month's Monthly
Adjustment amount will equal:
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CONFIDENTIAL
<PAGE> 31
((Monthly Collected Revenue - Monthly Revenue Average)/(Monthly
Revenue Average)) x (1/21)
If any month's Monthly Collected Revenue during the [**********] is less
than the Monthly Revenue Average, but greater than the month's Monthly
Revenue Average [*************] the month's Monthly Adjustment will
equal zero (0).
If any month's Monthly Collected Revenue during [ ************** ] is less
than the Monthly Revenue Average with [*********** ] the month's Monthly
Adjustment amount will equal:
((Monthly Collected Revenue - Monthly Revenue Average
[***********]/ (Monthly Revenue Average [****************] x
(1/21)
The Total Adjustment Factor will equal the total of the all Monthly
Adjustment Factors
EXAMPLE:
<TABLE>
<CAPTION>
Percentage
Percentage Below
Monthly Above Monthly
Monthly Monthly Revenue Monthly Revenue Monthly
Collected Revenue Average Revenue Average Adjustment
Month Revenue Average [*********] Average [******] Factor
------ ------- ------- ----------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
May-99 [*********] [**********] [**********] [**********] [*********] [**********]
Jun-99 [*********] [**********] [**********] [**********] [*********] [**********]
Jul-99 [*********] [**********] [**********] [**********] [*********] [**********]
Aug-99 [*********] [**********] [**********] [**********] [*********] [**********]
Sep-99 [*********] [**********] [**********] [**********] [*********] [**********]
Oct-99 [*********] [**********] [**********] [**********] [*********] [**********]
Nov-99 [*********] [**********] [**********] [**********] [*********] [**********]
Dec-99 [*********] [**********] [**********] [**********] [*********] [**********]
Jan-00 [*********] [**********] [**********] [**********] [*********] [**********]
Feb-00 [*********] [**********] [**********] [**********] [*********] [**********]
Mar-00 [*********] [**********] [**********] [**********] [*********] [**********]
Apr-00 [*********] [**********] [**********] [**********] [*********] [**********]
May-00 [*********] [**********] [**********] [**********] [*********] [**********]
Jun-00 [*********] [**********] [**********] [**********] [*********] [**********]
Jul-00 [*********] [**********] [**********] [**********] [*********] [**********]
Aug-00 [*********] [**********] [**********] [**********] [*********] [**********]
Sep-00 [*********] [**********] [**********] [**********] [*********] [**********]
Oct-00 [*********] [**********] [**********] [**********] [*********] [**********]
Nov-00 [*********] [**********] [**********] [**********] [*********] [**********]
Dec-00 [*********] [**********] [**********] [**********] [*********] [**********]
Jan-01 [*********] [**********] [**********] [**********] [*********] [**********]
TOTAL ADJUSTMENT FACTOR [*****]
</TABLE>
2. The Total Adjustment Factor will be applied to the [**********************]
in order to determine the Adjusted [****************************].
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<PAGE> 32
EXAMPLE (WHEN TOTAL ADJUSTMENT FACTOR IS GREATER THEN -50%)
ASSUMING:
[*******************************] [***************]
Total Adjustment factor [***************]
Initial [*************************] [***************]
Number of Months back to [*****************] [***************]
Adjusted [******************************************************]
[***************************************************************]
[*******************************************************]
The [**********************************]
EXAMPLE (WHEN TOTAL ADJUSTMENT FACTOR IS LESS THAN -50.00%):
ASSUMING:
[*******************************] [***************]
Total Adjustment factor [***************]
Initial [*************************] [***************]
Number of Months back to[*********] [***************]
Adjusted [*********************************************************]
[******************************************************************]
[********************************************************************]
The [*******************************************]
32
CONFIDENTIAL
<PAGE> 33
EXHIBIT "D"
"EXECUTIVES"
- - [****************]
- - [****************]
- - [****************]
- - [****************]
- - [****************]
- - Any employee in a position equivalent to a corporate officer of
Representative
33
CONFIDENTIAL
<PAGE> 34
EXHIBIT "E"
NON-COMPETITION AND SOLICITATION AGREEMENT
THIS NON-COMPETE AND SOLICITATION AGREEMENT ("Non-Compete Agreement") dated this
_____ day of ____________, 1996, is between American Communications Network,
Inc. ("ACN") and ___________________, an individual ("Executive").
WHEREAS, ACN is a party to the Representative Agreement dated
____________________ (the "Agreement") between ACN and LCI International Telecom
Corp. ("LCI") pursuant to which ACN agrees to sell LCI Services on an exclusive
basis and abide by certain non-solicitation covenants for a specified time
period.
WHEREAS, capitalized terms and names used in this Non-Compete Agreement and not
otherwise defined herein shall have the meaning assigned to them in the
Agreement;
WHEREAS, as a material condition of the Agreement, ACN agreed and covenanted
that certain Executives shall not a) compete with LCI or any LCI Affiliates,
either directly or indirectly, in the sale or provisioning of local and/or long
distance services, regardless of the facilities used; or b) engage, directly or
indirectly, in any Solicitation;
WHEREAS, in consideration of Executive's continued employment with ACN and the
benefits that Executive has and will receive by virtue of ACN's arrangement with
LCI and to protect ACN from the potential breach of the Agreement, ACN desires
to restrict Executive in the use of his or her specialized knowledge and
experience from competing with LCI in the sale of local and long distance
services;
WHEREAS, to induce LCI to enter into the Agreement with ACN and make substantial
payments to ACN, ACN agreed that certain Executives will enter into this
Non-Compete Agreement with LCI on the terms and conditions set forth below and
Executive is aware of this ACN commitment and has agreed to it as part of
his/her employment with ACN;
NOW, THEREFORE, in consideration of the promises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound, hereby agree as follows:
I. COVENANT NOT TO COMPETE OR SOLICIT
1. Restrictions. Executive shall not Compete and/or Solicit in
the Restricted Territory (as defined below) for the applicable
Restricted Period (as defined below) as provided herein:
(a) Non-Compete Restriction:
(i) Executive agrees that, throughout the applicable
"Non-Compete Restricted Period" (as defined below),
Executive shall not in any way, directly or
indirectly, as an agent, employee, officer, director,
shareholder, partner or otherwise of any corporation,
partnership, entity or other enterprise or venture
compete with LCI or its Affiliates in the sale or
provisioning of local (subject to Section 12(d) of the
Agreement if Executive is actively employed with ACN)
or long distance telecommunications services or any
services related thereto, regardless of the facilities
used, within the applicable Restricted Territory (such
activity defined as "Compete").
(ii) "Non-Compete Restricted Period" is defined as
follows:
(a) If Representative Is Actively Employed
with ACN: During the Term of the Agreement
for a period of eighteen (18) months from
termination of the Agreement by LCI for
cause, or ACN without cause (if no Change in
Control or Change in Management has
occurred), Executive shall not Compete in
the Restricted Territory (as defined below);
provided, however, in the event of a Change
in Control or Change in Management,
Executive may Compete two (2) years from the
legally completed Change in Control date or
immediately after the Change in Management
Date, as long as Executive is actively
employed with ACN at the time of such
legally completed Change in Control or
Change in Management.
34
CONFIDENTIAL
<PAGE> 35
(b) If Representative Is Not Actively
Employed with ACN: For a period of two (2)
years from the last date of Executive's
employment with ACN or any ACN Affiliate,
irrespective of the reason for such
termination or cessation of employment,
Executive shall not Compete in the
Restricted Territory, regardless of the
occurrence of a Change in Control or Change
in Management after such termination or
cessation of employment.
(b) Non-Solicit Restriction:
(i) Executive further agrees that, throughout the
applicable "Non-Solicit Restricted Period" (as defined
below), Executive shall not, directly or indirectly,
divert, solicit, entice or take away any Existing
Customers or ACN-Sold Customers in the Restricted
Territory during the Non-Solicit Restricted Period
(such activity defined as "Solicit).
(ii) "Non-Solicit Restricted Period" is defined as
follows:
(a) If Representative Is Actively Employed
with ACN: During the Term of the Agreement
and for a period of eighteen (18) months
from the expiration of the Term or
termination of the Agreement, with or
without cause (if no Change in Control or
Change in Management has occurred) by LCI or
ACN, Executive shall not Solicit in the
Restricted Territory (as defined below);
provided, however, in the event of a Change
in Control or Change in Management,
Executive shall not Solicit for eighteen
(18) months from the legally completed
Change in Control date or immediately after
the Change in Management Date.
(b) If Representative Is Not Actively
Employed with ACN: For a period of two (2)
years from the last date of Executive's
employment with ACN or any ACN Affiliate,
irrespective of the reason for such
termination or cessation of employment,
Executive shall not Solicit in the
Restricted Territory, regardless of the
occurrence of a Change in Control or Change
in Management after such termination or
cessation of employment.
2. Restricted Territory. Executive hereby acknowledges the
global nature of the telecommunications industry and the global
market for the telecommunications services provided by LCI.
Accordingly, this Non-Compete Agreement shall be applicable
everywhere within the United States and every other state,
territory and possession of the United States of America.
3. Remedies. Executive agrees that ACN will not have an
adequate remedy at law in the event of any breach or
threatened breach by Executive hereunder and that ACN will
suffer irreparable damage and injury if Executive breaches or
threatens to breach any of the provisions of this Non-Compete
Agreement. Therefore, Executive agrees that ACN shall be
entitled to obtain a temporary or permanent injunction or
other equitable relief without the necessity of proving
damages or that such damages would not constitute an adequate
remedy. Such equitable relief shall be in addition to, not in
lieu of, any rights or remedies to which ACN may otherwise be
entitled.
4. Acknowledgment of Existence of Third Party Beneficiary of
this Non-Compete Agreement. LCI, ACN and Executive
acknowledge and agree that each contemplates and intends that
(a) this Non-Compete Agreement and its specific provisions are
intended directly and primarily to benefit LCI and LCI is
intended to be, and shall be the third party beneficiary of
this Non-Compete Agreement; (b) Executive, in executing this
Non-Compete Agreement, shall assume a direct obligation to LCI,
as such third party beneficiary, to perform Executive's
obligations hereunder; and (c) LCI, as such third party
beneficiary, shall be conferred with the rights in its sole
discretion, to take any action or pursue any remedy that it
deems necessary in order to enforce the provisions hereof and
to which it would be entitled as a party executing this
Non-Compete Agreement.
5. Confirmation. Executive hereby expressly
confirms and acknowledges to ACN that the foregoing obligations
will not impede Executive's ability to earn a livelihood given
Executive's skills and abilities, and that Executive has
received and will receive sufficient consideration and other
benefits pursuant to its employment with ACN, such benefits and
consideration clearly justify such obligations that Executive
is agreeing to in this Non-Compete Agreement.
35
CONFIDENTIAL
<PAGE> 36
II . MISCELLANEOUS
1. Entire Agreement; Amendment. This Non-Compete Agreement
contains the entire agreement between the parties with respect
to the subject matter hereof. This Non-Compete Agreement may
not be amended, waived, changed, modified or discharged except
by explicit reference hereto in an instrument in writing
executed by the parties hereto. No waiver of any provision of
this Non-Compete Agreement, including any action or inaction on
the part of LCI, shall be deemed or shall constitute a waiver
of any other provision, whether or not similar, nor shall any
waiver constitute a continuing waiver.
2. Governing Law; Consent to Jurisdiction;. This Non-Compete
Agreement shall be governed by, and construed and enforced in
accordance with, the laws of the State of Michigan applicable
to contracts made and to be entirely performed therein.
3. Notices. All notices and demands of any kind which either
party hereto may be required or desire to serve upon the other
party under the terms of this Non-Compete Agreement shall be in
writing and shall be served upon such other party: (a) by
personal service upon such other party at such other party's
address set forth on the signature page of this Non-Compete
Agreement; or (b) by mailing a copy thereof by certified or
registered mail, postage prepaid, with return receipt
requested, addressed to such other party at the address of such
other party set forth on the signature pages of this
Non-Compete Agreement; or (c) by sending a copy thereof by
overnight courier service, addressed to such party at the
address of such other party set forth on the signature pages of
this Non-Compete Agreement. In case of service by overnight
courier service or by personal service, such service shall be
deemed complete upon receipt. In the case of service by mail,
such service shall be deemed complete upon reasonable proof of
receipt. The addresses and persons to whose attention notices
and demands shall be delivered or sent may be changed from time
to time by written notice served, as hereinabove provided, by
any party upon the other party.
4. Headings. The headings of the several sections of this
Non-Compete Agreement are inserted for convenience of reference
only and shall not affect the meaning or interpretation of this
Non-Compete Agreement.
5. Counterparts. This Non-Compete Agreement may be executed in
several counterparts and by the different parties hereto on
separate counterparts, and when so executed, each such
counterpart shall be deemed to be an original and all of said
counterparts together shall constitute one and the same
instrument.
6. Binding Nature. This Non-Compete Agreement shall be binding
upon and inure to the benefit of the parties hereto and their
respective successors, assigns, heirs, personal
representatives, and respective legatees.
7. Severability. Any term or provision of this Non-Compete
Agreement that is invalid or unenforceable in any situation in
any jurisdiction shall not affect the validity or
enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or
provision in any other situation or in any other jurisdiction.
If the final judgment of a court of competent jurisdiction
declares that any term or provision hereof is invalid or
unenforceable, the parties hereto agree that the court making
the determination of invalidity or unenforceability shall have
the power to, and is hereby directed to, reduce the scope,
duration or area of the term or provision, to delete specific
words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and
enforceable and that comes closest to expressing the intention
of the invalid and unenforceable term or provision, and this
Non-Compete Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be
appealed.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this
Non-Compete Agreement to be effective as of the day and year first above
written.
<TABLE>
<S> <C> <C>
AMERICAN COMMUNICATIONS NETWORK, INC. EXECUTIVE
By: By:
--------------------------------------- ----------------- ---------------------------------- -------
Name: Greg Provenzano Date Signature Date
Title:
--------------------------------------------- ------------------------------------------
American Communications Network, Inc. Print Name
100 West Big Beaver, Suite 400
Troy, Michigan 48084 ------------------------------------------
Print Street Address
------------------------------------------
Print City, State and Zip Code
</TABLE>
36
CONFIDENTIAL
<PAGE> 37
EXHIBIT "F"
"NON-EXCLUSIVE SERVICES"
Internet Content
Paging
Mobile Cellular or Mobile Cellular-equivalent services
(excluding Personal Communication Services-based services
that fall within the scope of the Forbidden Activities
described in Section 12(a))
Operator Services at telephones that charge a Property
Imposed Fee (PIF)
Fax Broadcast
37
CONFIDENTIAL
<PAGE> 38
EXHIBIT "G" - ACN COMMISSION RATES UNTIL DECEMBER 31, 1996
[******]
- --------
- - All American Plan (AAP) ($.19 Day/$.14 Evening/$.12 Night/Weekend
per minute rates)
- - MLM Month to Month (Domestic)
- - MLM Term - (Domestic)
- - WorldCard
- - WorldCard Plus
- - Extend Your Reach Europe
- - Standard Business Products
- Alternative
- Simply Business
- Simply Guaranteed
- Integrity
- Campus Talk
[******]
- --------
- - Home 800
- - Extend Your Reach
- - MLM Month to Month (International)
- - MLM Term (International)
[******]
- --------
- - Lightcall
- - Lightcall Plus
- - Cellular Lightcall
- - Personal Option 800
- - Personal Perks
- - Simple, Fair & Inexpensive
- - Simple, Fair & Inexpensive IDDD Extend Your Reach
- - LDS Plan
- - Unicom WAL
- - Calls in NECA territories
- - Calls in USINTELCO territories
38
CONFIDENTIAL
<PAGE> 39
EXHIBIT "H"
A. ACN PERFORMANCE REQUIREMENTS
1) LOA download file error rate
- __% or less of error rate for LOAs submitted (monthly measure)
[********]
2) Percentage of returned mail
- __% or less of mail returned for incorrect data (monthly
measure)[********]
3) CARE rejects
- __% or less of LOAs rejected due to improper name and address
(monthly measure) [*******]
4) PIC dispute resolution
- Procedures:
- ACN sends actual LOA within 3 days of
notification by LCI
- LCI will contact customer
- ACN will be notified of all alleged slams
- ACN has 30 days to investigate and notify
of remedy
- Independent Contractor terminated on first
offense - unless LCI and ACN mutually
agree on an alternative course of action
- Independent Contractor terminated on
second offense - irrespective of
circumstances
5) Spot verification
- Procedures:
- __% (Goal of 20%) of all new Independent
Contractors' first __ (Goal of 50) orders
verified by ACN. Verification will be
done by telephone. Records of all
verification call results will be retained
for two years.
- If an Independent Contractor sends in more
than __ (Goal of 10) orders in a 7 day
period, __% (Goal of 20%) of all such
orders shall be verified
6) Sales materials review - Covers all material with any mention of LCI name
or logo including video tapes, printed material, voice mails, internet websites,
LOAs, enrollment forms, etc.
- Procedures:
- All material sent to [****************]
(or person(s) designated by LCI)
- Within 10 business days, LCI will respond
with necessary changes (if any)
- Continue review process until no changes
are necessary
- LCI will supply ACN will signed approval
- Any materials used in the field that have
not been approved shall be considered
unauthorized and promptly withdrawn upon
LCI's request
- Disciplinary action taken against agent(s)
using unapproved material
7) ACN's training materials and Policies and Procedures shall be revised to
include LCI's Policies and Procedures Regarding Slamming Prevention (as may be
amended).
8) ACN reps shall not sign any customer names to any LOAs, service orders, or
enrollment forms (i.e. customer must sign themselves). Immediate termination
of any ACN Independent Contractor or agent who signs a customer's name to any
document.
39
CONFIDENTIAL
<PAGE> 40
B. LCI RESIDENTIAL PERFORMANCE GOALS
1) The goal is to provide timely reports to Representative (as described
in Section 21) within fifteen (15) days after the close of each month and
weekly reports within seven (7) days after LCI receives the necessary
information from the Local Exchange Carrier ("LEC").
2) The goal is to provide some additional sales support to assist
Representative in closing ACN-Sold Customer accounts for prospective
business customers.
3) The goal is to improve the timeliness of the investigation of new orders
rejected by LCI by having all rejected orders investigated and either
resolved or communicated to Representative within two (2) weeks of the
download of the new ACN-Sold Customer orders by Representative.
4) The goal is to improve the timeliness of the investigation by LCI of
ACN-Sold Customer orders rejected by the LEC by having all rejected orders
investigated and resolved by LCI, if possible, within two (2) weeks of
notification that such order was rejected by the LEC.
5) The goal is to ensure the Collected Revenue is properly credited to
Representative when an area code is split by attempting to achieve revenue
reporting errors of less than two percent (2%) of the total Collected
Revenue for the ACN-Sold Customers in the respective area codes, and all
corrections made and Collected Revenue retroactively credited to
Representative within thirty (30) days of the awareness of such error.
6) The goal is for LCI and Representative to develop efficient procedures to
ensure that ACN-Sold Customers are installed in a timely manner on the
requested service and to ensure that Representative is properly credited for
the Collected Revenue resulting from the installation of such ACN-Sold
Customers.
40
CONFIDENTIAL
<PAGE> 41
EXHIBIT "I"
NON-DISCLOSURE AGREEMENT
THIS NON-DISCLOSURE AGREEMENT (the "Agreement") is made and entered into as of
this 1st day of May 1996 (the "Effective Date"), by and between American
Communications Network, Inc. ("ACN"), with offices located at 100 West Big
Beaver, Suite 400, Troy, Michigan 48084 and LCI International Telecom Corp.
("LCI"), with offices located at 8180 Greensboro Drive, Suite 800, McLean,
Virginia 22102. For purposes of this Agreement ACN and LCI are sometimes
collectively referred to as "the Parties" and individually referred to as "a
Party". As used herein, "Receiving Party" shall mean the party which has been
given "Confidential Information" (as hereinafter defined) or "Trade Secrets" (as
hereinafter defined) by and of the other Party.
A. The Parties are discussing and from time to time, following the
Effective Date hereof, will have discussions in connection with potential
arrangements for the provision of networking and other related services,
including, without limitation, the disclosure of certain Confidential
Information and/or Trade Secrets (each such discussion is hereinafter referred
to individually as a "Discussion").
B. In order to protect the Parties' substantial investment in their
Confidential Information and Trade Secrets and to protect the goodwill
associated with their customer, client and contractor relationships, the Parties
have agreed to abide by the terms and conditions of this Agreement.
For and in consideration of the above premises and other good and valuable
consideration, the receipt, adequacy and sufficiency of which are hereby
acknowledged, the Parties, intending to be legally bound, hereby agree as
follows:
1. Definitions. The following terms shall have the following meanings
when used in this Agreement:
(a) "Confidential Information" shall mean the proprietary and confidential
data or information of a Party, other than "Trade Secrets" (as defined below),
which is of tangible or intangible value to that Party and is not public
information or is not generally known or available to that Party's competitors
but is known only to that Party and those of its employees, independent
contractors, consultants, customers or agents to whom it must be confided in
order to apply it to the uses intended, including, without limitation,
information regarding that Party's customers or prospective customers; marketing
methods; existing, new, or envisioned products and services and their
development; business and technical plans; product information; pricing; and
costs gained by the other Party as a result of the other Party's participation
in a Discussion. In addition, the definition of "Confidential Information"
shall include those items specifically identified as "Trade Secrets" in
Paragraph 1(c), if it is judicially determined that any such items are not trade
secrets, as defined by applicable law, and such items otherwise meet the
definition of "Confidential Information" as contained in this Section 1(a).
Confidential Information shall not include information which: (i) at the time of
disclosure to Receiving Party is in the public domain through no act or omission
of Receiving Party; (ii) as shown by written records, is already known by
Receiving Party; or (iii) is revealed to Receiving Party by a third party who
does not thereby breach any obligation of confidentiality and who discloses such
information in good faith.
(b) "Entity" shall mean any person, partnership, joint venture, agency,
governmental subdivision, association, firm, corporation or entity.
(c) "Trade Secrets" shall mean that portion of Confidential Information
which constitutes trade secrets, as defined by applicable law and including,
without limitation, confidential computer programs, software, designs,
processes, procedures, formulas, improvements, on-line terminal designs and
software applications, whether copyrightable or not.
2. Consideration. The consideration for the covenants and agreements of
each Party contained in this Agreement shall be that Party's right to
participate in a Discussion, which the Parties acknowledge and agree shall
constitute sufficient and adequate consideration.
3. Nondisclosure; Ownership of Proprietary Property.
(a) Each Party hereby acknowledges that it is in the best business
interests of the other Party to insist on the strict confidentiality of any of
its Trade Secrets and Confidential Information that may be disclosed as a result
of a Discussion.
(b) In recognition of the Parties' need to protect their legitimate
business interests, each Party hereby covenants and agrees that it shall regard
and treat each item of information or data constituting a Trade Secret or
Confidential Information of the other Party as strictly confidential and wholly
owned by the other Party and that it will not, for any reason or in any manner,
either directly or indirectly, use, sell, lend, lease, distribute, license,
give, transfer, assign, show, disclose, disseminate, reproduce, copy,
appropriate or otherwise communicate any such item of information or data to any
person or Entity for any purpose other than strictly in accordance with the
express terms of this Agreement or any other written agreement between the
Parties. With regard to each item of information or data constituting a Trade
Secret, the covenant in the immediately preceding sentence shall apply at all
times during a Discussion and for as long after the cessation of a Discussion as
such item continues to constitute a trade secret under applicable law; and with
regard to any Confidential Information, the covenant in the immediately
preceding sentence shall apply at all times during a Discussion and for three
(3) years after the termination of a Discussion.
41
CONFIDENTIAL
<PAGE> 42
(c) Each Party shall exercise its best efforts to ensure the continued
confidentiality of all Trade Secrets and Confidential Information known by,
disclosed or made available to that party or that Party's employees or personnel
during a Discussion. Each Party shall immediately notify the other Party of any
intended or unintended, unauthorized disclosure or use of any Trade Secrets or
Confidential Information by that Party or any other person of which that party
becomes aware. Each Party shall assist the other Party, to the extent
necessary, in the procurement or any protection of the other Party's rights to
or in any of the Trade Secrets or Confidential Information.
(d) Upon termination of a Discussion, or anytime at the specific request of
the other Party, or upon the execution of any agreement resulting from a
Discussion containing provisions that expressly supersede the provisions of this
Agreement, each Party shall return to the other Party all written or descriptive
materials of any kind that contain or discuss any Confidential Information or
Trade Secrets, and the confidentiality obligations of this Agreement shall
continue until their expiration under the terms of this Agreement.
4. Remedies: Damages, Injunctions and Specific Performance. The Parties
expressly understand and agree that the covenants and agreements to be rendered
and performed by the Parties pursuant to Paragraph 3 are special, unique, and of
an extraordinary character, and in the event of any default, breach or
threatened breach by either Party of Paragraph 3, the other Party shall be
entitled to such relief as may be available to it pursuant hereto, at law or in
equity, including, without limiting the generality of the foregoing, any
proceedings to: (i) obtain damages for any breach of this Agreement; (ii) order
the specific performance thereof; or (iii) enjoin the breach of such provisions.
5. Binding Effect and Assignability. The rights and obligations of each
Party under this Agreement shall inure to the benefit of and shall be binding
upon any subsidiary, affiliate, successor or permitted assign of or to the
business of such Party, to the extent provided below. Neither this Agreement
nor any rights or obligations of either Party under this Agreement shall be
transferable or assignable by that Party without the prior written consent of
the other Party, and any attempted transfer or assignment of this Agreement by
either Party not in accordance herewith shall be null and void.
6. Severability. All paragraphs and subparagraphs of this Agreement are
severable, and the unenforceability or invalidity of any of the paragraphs or
subparagraphs of this Agreement shall not affect the validity or enforceability
of the remaining paragraphs or subparagraphs of this Agreement, but such
remaining paragraphs or subparagraphs shall be interpreted and construed in such
a manner as to carry out fully the intention of the parties.
7. Waiver. The waiver by either Party of a default or breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent default or breach of the same or of a different provision by that
Party. No waiver or modification of this Agreement or of any covenant,
condition, or limitation contained in this Agreement shall be valid unless in
writing and duly executed by the Party or Parties to be charged therewith.
8. Miscellaneous. This Agreement contains the complete agreement
concerning the arrangement between ACN and LCI regarding its subject matter, as
of the date hereof, and supersedes all other similar agreements or
understandings between the parties, whether oral or written, consistent or
inconsistent, with this Agreement. This Agreement may not be amended by the
Parties except by a writing executed by both Parties. Any Exhibit to this
Agreement is to be deemed a part of this Agreement and the contents of any such
Exhibit are hereby incorporated by this reference into this Agreement.
IN WITNESS WHEREOF, the Parties have duly executed and delivered this Agreement,
as of the Effective Date.
AMERICAN COMMUNICATIONS NETWORK, INC. LCI INTERNATIONAL TELECOM CORP.
By: /s/ GREG PROVENZANO By: /s/ THOMAS J. WYNNE
------------------------------- -------------------------------
Name: Greg Provenzano Name: T. J. Wynne
----------------------------- -----------------------------
Title: President Title: President
---------------------------- ----------------------------
Date: 6-7-96 Date: 6-7-96
----------------------------- -----------------------------
42
CONFIDENTIAL
<PAGE> 43
EXHIBIT "J" - ACN COMMISSION RATES AFTER JANUARY 1, 1997 (PROVIDED NO CHANGE
IN CONTROL OCCURS PRIOR TO OR ON DECEMBER 31, 1996)
[****]
- - All American Plan (AAP) ($.19 Day/$.14 Evening/$.12 Night/Weekend
per minute rates)
- - MLM Month to Month (Domestic)
- - MLM Term - (Domestic)
- - WorldCard
- - WorldCard Plus
- - Extend Your Reach Europe
- - Standard Business Products
- Alternative
- Simply Business
- Simply Guaranteed
- Integrity
- Campus Talk
- - Home 800
- - Extend Your Reach
- - MLM Month to Month (International)
- - MLM Term (International)
- - Lightcall
- - Lightcall Plus
- - Cellular Lightcall
- - Personal Option 800
- - Personal Perks
- - Simple, Fair & Inexpensive
- - Simple, Fair & Inexpensive IDDD Extend Your Reach
- - LDS Plan
- - Unicom WAL
- - Calls in NECA territories
- - Calls in USINTELCO territories
43
CONFIDENTIAL
<PAGE> 1
Exhibit 11
Primary
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------------------------- ---------------------------------------
1996 1995 1996 1995
----------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C>
INCOME ON COMMON STOCK
===================================
NET INCOME $ 17,659 $ 11,092 $ 32,945 $ 21,557
SHARES OUTSTANDING
===================================
Weighted Average Number of 69,962 59,506 67,504 59,476
Common Shares Outstanding
Common Shares Issuable Upon
the Assumed Exercise of Stock 14,405 12,496 14,405 12,312
Options and Stock Warrants
Common Shares Repurchased
Through Treasury Stock Method
Upon the Assumed Exercise of Stock
Options and Stock Warrants (3,941) (4,762) (4,334) (5,002)
Assumed Conversion of
Convertible Preferred Stock 6,812 12,104 9,169 12,104
----------------------------------------- ---------------------------------------
Weighted Average Number of
Common Shares Outstanding 87,238 79,344 86,744 78,890
========================================= =======================================
EARNINGS PER SHARE
===================================
NET INCOME PER COMMON SHARE $ 0.20 $ 0.14 $ 0.38 $ 0.27
========================================= =======================================
</TABLE>
<PAGE> 2
Exhibit 11
Fully Diluted
<TABLE>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------------------- --------------------------------------
1996 1995 1996 1995
------------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
INCOME ON COMMON STOCK
===============================
NET INCOME $ 17,659 $ 11,092 $ 32,945 $ 21,557
SHARES OUTSTANDING
===============================
Weighted Average Number of 69,962 59,506 67,504 59,476
Common Shares Outstanding
Common Shares Issuable Upon
the Assumed Exercise of Stock 14,405 12,496 14,405 12,356
Options and Stock Warrants
Common Shares Repurchased
Through Treasury Stock Method
Upon the Assumed Exercise of Stock
Options and Stock Warrants (3,565) (4,244) (3,594) (4,142)
Assumed Conversion of
Convertible Preferred Stock 6,812 12,104 9,169 12,104
------------------------------------- --------------------------------------
Weighted Average Number of
Common Shares Outstanding 87,614 79,862 87,484 79,794
===================================== ======================================
EARNINGS PER SHARE
===============================
NET INCOME PER COMMON SHARE $ 0.20 $ 0.14 $ 0.38 $ 0.27
===================================== ======================================
</TABLE>
<PAGE> 1
EXHIBIT 15
LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION
LCI International, Inc.:
We are aware that LCI International, Inc. has incorporated by reference in its
Form S-8 Registration Statements File No. 33-64838, No. 33-74246, No. 33-94120
and No. 333-2580 and in its Form S-3 Registration Statement No. 33-96186, its
Form 10-Q for the quarter ended June 30, 1996, which includes our report dated
July 24, 1996, covering the unaudited interim financial information contained
therein. Pursuant to Regulation C of the Securities Act of 1933, that report
is not considered a part of the Registration Statement prepared or certified by
our Firm or a report prepared or certified by our Firm within the meaning of
Sections 7 and 11 of the Act.
Washington, D.C.
August 8, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q
as of June 30, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> APR-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 187,593<F1> 187,593<F1>
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 230,486 230,486
<PP&E> 542,545 542,545
<DEPRECIATION> 192,076 192,076
<TOTAL-ASSETS> 969,941 969,941
<CURRENT-LIABILITIES> 170,714 170,714
<BONDS> 0 0
0 0
43,082 43,082
<COMMON> 723 723
<OTHER-SE> 335,411 335,411
<TOTAL-LIABILITY-AND-EQUITY> 969,941 969,941
<SALES> 0 0
<TOTAL-REVENUES> 269,419 519,978
<CGS> 0 0
<TOTAL-COSTS> 157,666 306,253
<OTHER-EXPENSES> 77,072 147,879
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 7,513 15,162
<INCOME-PRETAX> 27,168 50,684
<INCOME-TAX> 9,509 17,739
<INCOME-CONTINUING> 17,659 32,945
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 17,659 32,945
<EPS-PRIMARY> 0.20 0.38
<EPS-DILUTED> 0.20 0.38
<FN>
<F1>Trade accounts receivable; less allowance for doubtful accounts
</FN>
</TABLE>
