<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the fiscal year ended March 28, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from _______________ to ________________
Commission file number 0-24334
AMERILINK CORPORATION
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(Exact name of registrant as specified in its charter)
Ohio 31-1409345
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1900 E. Dublin - Granville Road, Columbus, Ohio 43229
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (614) 895-1313
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Shares with no par value NASDAQ National Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act Of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( ).
Based upon the closing sale price reported on the NASDAQ National
Market on May 25, 1999, the aggregate market value of the Common Shares of the
Registrant held by non-affiliates (assuming, for this purpose, that only
executive officers are affiliates) on that date was $36,753,920
4,427,874 shares of common stock were outstanding on May 25, 1999
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AMERILINK CORPORATION
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
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<C> <S> <C>
PART I
1 Business----------------------------------------------------------------------------------------- 3
2 Properties--------------------------------------------------------------------------------------- 12
3 Legal Proceedings-------------------------------------------------------------------------------- 12
4 Submission of Matters to a Vote of Security Holders---------------------------------------------- 12
PART II
5 Market for Registrant's Common Equity and Related Stockholder Matters---------------------------- 12
6 Selected Financial Data-------------------------------------------------------------------------- 13
7 Management's Discussion and Analysis of Financial Condition and Results of Operations------------ 14
7A Quantitative and Qualitative Disclosures About Market Risk--------------------------------------- 22
8 Financial Statements and Supplementary Data------------------------------------------------------ 22
9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure------------- 38
PART III
10 Directors and Executive Officers of the Registrant----------------------------------------------- 38
11 Executive Compensation--------------------------------------------------------------------------- 40
12 Security Ownership of Certain Beneficial Owners and Management----------------------------------- 43
13 Certain Relationships and Related Transactions--------------------------------------------------- 44
PART IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K---------------------------------- 45
Signatures--------------------------------------------------------------------------------------- 47
</TABLE>
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PART I
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
This Annual Report on Form 10-K contains various forward-looking
statements (as such term is defined in the Private Securities Litigation Reform
Act of 1995). Such forward-looking statements may be identified by, among other
things, the use of forward-looking terminology such as "believes," "expects,"
"may," "will," "should," or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy that
involves risks and uncertainties. These forward-looking statements, such as
statements regarding anticipated future revenues, capital expenditures and other
statements regarding matters that are not historical facts, involve predictions.
These forward-looking statements are based on the Company's current expectations
and are subject to a number of risks and uncertainties that could cause actual
results in the future to differ significantly from results expressed or implied
in any forward-looking statements included herein. The Company's actual results,
performance or achievements could differ materially from the results expressed
in, or implied by, these forward-looking statements depending upon a variety of
important factors, including a continuation of the degree and timing of customer
utilization and rate of renewals of contracts with the Company at historic
levels, the Company's relationship with key customers, implementation of the
Company's growth strategy, seasonality, changing market conditions and customer
purchase authorizations, competitive and regulatory risks associated with the
telecommunications industry, new products and technological changes, disruptions
to the operations of the Company resulting from Year 2000 issues, and other
risks detailed in the Company's periodic report filings with the Securities and
Exchange Commission, including, but not limited to, the factors described under
the caption "Variability in Quarterly Results and Seasonality" on page 11.
ITEM 1. BUSINESS.
GENERAL
AmeriLink Corporation (referred to herein, together with its
subsidiaries, where the context requires, as the "Company") is a nationwide
provider to the telecommunications industry of cabling systems for the
transmission of video, voice, and data. The Company offers these services on a
national basis to providers of telecommunications services, including: major
cable television multiple system operators ("MSOs); traditional telephone
service providers, including local exchange carriers and long distance carriers
(collectively, "Telcos"); competitive local exchange carriers ("CLECs"); Direct
Broadcast Satellite ("DBS") providers; system integrators and users of local
area network ("LAN") and wide-area network ("WAN") systems; and other businesses
providing specific or bundled telecommunications services. The Company, which
conducts business under the trade name "NaCom" in addition to AmeriLink, is
headquartered in Columbus, Ohio, and provides its services predominately through
the use of independent contractors via its national network of field offices.
The Company designs, constructs, installs and maintains fiber optic,
coaxial and twisted-pair copper cabling systems for the transmission of video,
voice, and data. The Company believes there continue to be growing opportunities
in both residential and commercial markets to provide its services as
telecommunications service providers increase capital expenditures for their
infrastructures and implement plans to improve service in response to
competition. In order to eliminate the ongoing expense and effort required to
manage labor intensive, multi-office service organizations, the cable television
industry historically has sought to outsource a large portion of these services
on a unit cost basis with independent contractors, such as the Company. Telcos
and other telecommunications service providers are also beginning to seek new
outsourcing solutions in response to competitive price pressures. Independent
contractors, such as the Company, typically have lower cost structures than the
telecommunications providers do, primarily as a result of the contractor's lower
direct and overhead cost structures. Commercial LAN cabling services are also
typically performed by third party vendors who construct, install and maintain
LAN systems for businesses on a contract basis. The Company believes that
telecommunications providers are seeking comprehensive solutions to their
infrastructure needs by utilizing fewer qualified contractors to provide a full
range of telecommunications services, and that it will continue to gain
significant cabling opportunities in both residential and commercial markets as
new technologies, increased services and competition fuel the growing demand for
the delivery of video, voice and data into homes and businesses. In addition,
the Company believes that it will gain significant cabling opportunities to
provide services to DBS providers and distributors given the potential market
for video, audio, and data programming services via satellite.
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PROPOSED MERGER WITH TANDY CORPORATION
On May 21, 1999, AmeriLink Corporation and Tandy Corporation ("Tandy")
each announced their signing of a definitive merger agreement (the "Merger").
Under terms of the Merger, Tandy will acquire 100% of AmeriLink's common stock
at an exchange ratio designed to reflect $15.60 per share of AmeriLink's stock
in a tax-free exchange for Tandy stock. If the average closing price of Tandy's
common shares falls below a specified amount for a twenty-day trading period
ending just before the merger is completed, AmeriLink shareholders will receive
$14.50 cash for every AmeriLink common share they own instead of Tandy stock.
Following the merger, AmeriLink will continue its operations as a wholly owned
subsidiary of Tandy. The Merger has been approved by the Board of Directors of
each Company and is subject to usual and customary closing conditions, including
regulatory and shareholder approval. It is currently anticipated that the
transaction will close in late August 1999. More detailed information relating
to the terms and conditions of the Merger will be contained in a Registration
Statement on Form S-4 to be filed by Tandy on or around June 8, 1999, which will
include a prospectus and a proxy statement for a special shareholders meeting of
AmeriLink. If the merger is not consummated for any reason, the Company intends
to continue operating independently.
RECENT ACQUISITION
On February 2, 1999, the Company, through a wholly-owned subsidiary,
MCC Acquisition Corp. ("MAC"), acquired Midwest Computer Cable, Inc. ("MCCI"), a
commercial cabling installation firm headquartered in Des Moines, Iowa. Pursuant
to the Merger Agreement, MCCI was merged with and into MAC and the separate
corporate existence of MCCI ceased. Following the Merger, MAC changed its name
to "Midwest Computer Cable, Inc." and will continue to conduct business as a
wholly-owned subsidiary of the Company. The consideration delivered to the
shareholders of MCCI in connection with the acquisition consisted of $4.4
million in cash and 500,000 common shares (without par value) of the Company
valued at the time of the merger at $3,565,000. MCCI provides installation and
maintenance services for premise cabling systems through six offices located in
Iowa, Kansas, Ohio, and Texas. The Company believes that the additional offices,
management, and technicians which were gained from the MCCI acquisition will
accelerate the growth of its commercial cabling and installation business.
PRINCIPAL SERVICES
The Company's services include the drops and cable feeds to, and wiring
of, residences, multiple dwelling units ("MDUs") and commercial buildings
(collectively, "premises wiring services") and the construction and installation
of aerial and underground distribution plant ("outside plant construction
services").
Premises Wiring Services. Residential premises wiring services include
the installation and maintenance of both hardwire and wireless cable systems.
Installation services for hardwire cable systems include the installing of cable
drops which connect residences to the feeder cable carrying the operator's
signal, cabling the exterior and interior of MDUs and single family residences,
and installing converter units within the residence. Maintenance services for
hardwire cable systems include: (1) the replacement of damaged or obsolete
cable, (2) the reconnection and disconnection of subscriber services, (3)
day-to-day additions and changes to installed drops, (4) upgrade sales and
service changes, and (5) miscellaneous service calls.
Wireless cabling services include both installation and maintenance
services for Direct Broadcast Satellite ("DBS") systems or wireless
multi-channel, multi-point distribution systems ("MMDS"), popularly known as
"wireless cable". DBS installation services consist of attaching a satellite
dish to the subscriber's property, hooking up the digital set-top converter box,
and installing the related cabling, grounding, and connective materials. DBS
maintenance services include the replacement of damaged cable, grounding and
connective materials, and satellite receiving equipment. MMDS cable system
installations consist of attaching a microwave receiving antenna to the
subscriber's property and installing the set-top converter and related cabling,
grounding, and connective materials. Maintenance services for MMDS are
essentially the same as maintenance services for DBS. The Company provides
digital satellite services for both residential subscribers (single family and
multi-family units) and commercial and other subscribers, such as hotels,
motels, bars, businesses, schools, and non-residential buildings which are not
easily accessible by hardwire cable systems.
Premises wiring services for the commercial market also include the
design and data cabling of LAN and WAN systems for commercial businesses,
governments, and educational communities. The Company's network cabling design
services begin with an on-location site survey to determine the most efficient
cable routing path and the location of end-user outlets. The Company may then
utilize a computer-assisted design system to finalize a
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cabling plan that meets network requirements and performance specifications.
Once approved by the customer, a blueprint or other working print is generated
which is used as a guide for the network installation. Upon completion of a
network installation, the Company generally delivers to the customer test
documentation and an as-built design layout.
In fiscal 1998 the Company also started providing commercial voice and
data installation and maintenance services to competitive local exchange
carriers (such as Teligent and Winstar) for connections to local-loop networks.
These services include both on-location site surveys to determine the most
efficient digital microwave antenna location, and the subsequent installation of
the antenna on the roof of the commercial building.
Outside Plant Construction Services. Outside plant construction
projects include the installation of fiber optic cable, coaxial cable and
twisted-pair copper wire for aerial and underground portions of cable systems.
These services include installation of all necessary electronic components,
including signal amplification and conversion devices and the performance of
diagnostic engineering tests at all levels of the infrastructure to determine
whether new and existing systems are within appropriate manufacturer or Federal
Communication Commission ("FCC") specifications. The Company uses heavy
machinery, specialized trucks and other construction equipment to perform its
outside plant construction services. The Company has implemented a strategy to
shift its outside plant construction services from providing services for both
retrofit construction projects (systems with active subscribers) and new
construction projects (systems without active subscribers) to exclusively
providing outside plant construction services for new construction projects.
Retrofit construction projects involve more uncertainties than new construction
projects because each phase of the retrofit construction project must be planned
and executed in a manner which disrupts service to the active subscribers as
little as possible. The Company believes that the competitive environment
associated with retrofit construction projects, along with uncertainty regarding
customer work commitments on these projects, make them less desirable for the
Company's current resources than new construction and premises wiring projects.
For the fiscal year ended March 28, 1999, outside plant construction services
accounted for approximately 8 % of the Company's total revenues.
MARKET OVERVIEW
The market for telecommunications services is undergoing rapid change
due to deregulation and the introduction of new technologies, both of which have
resulted in increased competition in the industry. In addition, growing customer
demand for enhanced video, voice and data telecommunications services has
increased bandwidth requirements and highlighted bandwidth limitations of
existing cabling in many markets. There is a convergence of different types of
technologies and of the services that have traditionally been provided using
these different technologies. This convergence allows for new services to be
provided over existing infrastructure, and new infrastructure to be developed
that provides combined services, including both content-based and common carrier
services. The practical effect of technological and market convergence is that
traditionally defined industry segments are less and less distinguishable. The
telephone industry and the television industry are entering each others markets
both at the technical and the service level: telephone operators can provide
broadcast type services and cable TV operators are introducing telephone
services. Both types of communication take place over wired and wireless media,
in both a one-to-one and one-to-many format. In the end, definitions of services
according to the nature of information transmitted (video, voice, and data) are
becoming irrelevant.
Cable television service traditionally has been provided primarily by
cable television system operators that have been awarded franchises from the
municipalities they serve. The cable television industry has been subject to
varying degrees of both national and local government regulation, most recently
The Telecommunications Act of 1996 and the 1992 Cable Reregulation Act, which
imposed extensive rate regulation on the cable television industry. The
Telecommunications Act of 1996 provides for a termination of existing FCC
regulation of cable rates on March 31, 1999. Currently, MSOs are facing
competition for video services from DBS providers and, in certain markets, from
Telcos and other telecommunications providers. In response to this competition,
MSOs have been increasing and expanding their service offerings. To date, a vast
majority of video networks have adopted a hybrid fiber coax ("HFC") network
architecture for video service delivery. Many telecommunications providers
envision the expansion of the role of HFC networks from a video-centric focus to
a key platform for the delivery of a variety of broadband services, including
high-speed Internet access via cable modems, video on demand, and HDTV.
Providers also envision the delivery of cable television signal programming data
and phone services on one drop cable. These services generally require increased
amounts of cabling and system bandwidth, which in turn require MSOs to upgrade
their existing cable plant. The construction, expansion, and upgrade of cable
systems require significant capital investment by cable operators. MSO's have
been significant borrowers from the credit and capital
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markets, and, accordingly, capital spending within the domestic cable television
industry has been cyclical, depending to a significant degree on the
availability of credit and capital. Due to the significant capital investment
required to construct, expand, and upgrade these networks and to finance the
market opportunities associated with new video, voice, and data services, there
has been much consolidation among providers within the telecommunications
industry. Companies appear to be following a belief that size and scale is the
best strategy for long-term, facilities based telecommunications competition. On
March 9, 1999 AT&T Corporation completed its acquisition of Tele-Communications,
Inc. ("TCI") the country's second largest MSO, and in May, 1999 announced that
they reached a definitive merger agreement to acquire MediaOne Group. AT&T
Corporation, the country's largest phone company, will also be the biggest cable
company. There have been other numerous consolidations among existing cable
MSOs, including Paul Allen's purchase of Charter Communications, Marcus Cable,
and his recently announced intent to acquire Falcon Cable TV and Fanch
Communications. Other planned mergers within the telecommunications industry
include SBC Communications Inc. and Ameritech Corp., Bell Atlantic Corp. and GTE
Corp., and US West Inc. and Global Crossing Ltd.
With regard to the commercial video, voice, and data cabling market,
the rapidly growing need to interconnect new and existing computer resources
over local and geographically dispersed areas continues to create an increased
demand for networking cabling. In the past decade, the commercial use of PCs has
become pervasive. The development of more powerful processors and easier to use
software has expanded applications from word processing, accounting and database
management to electronic mail and research. As the number of PCs in businesses
has grown, the need to share information among users has also grown, giving rise
to a large and rapidly expanding networking industry consisting of LANs, which
connect PCs to other PCs, file servers and other devices such as printers, and
WANs which connect LANs at one site to other sites and connect users working at
home or traveling to their LAN, third party information sources or the Internet.
Rapid technological advances in computers and software, including the use of
more powerful computers and distributed area processing, have created the need
for increasingly sophisticated LAN and WAN technologies. Such technologies
demand advanced high bandwidth data transmission cable that enables increased
volumes of data to be transmitted at faster speeds without diminishing data
integrity. This rapid rate of technological change has created demand both for
new LANs and for maintenance and upgrades of existing LAN systems which no
longer provide the necessary speed or quality of data transmission.
There is growing competition in the estimated $51 billion local
exchange market, which is currently one of the most profitable segments in the
communications industry. Local exchange services have historically been provided
by regional monopolies known as incumbent local exchange carriers or "ILECs".
ILECS have typically used older, existing copper wire-based networks. These
networks, faced with increasing demand from businesses for new services, such as
Internet access, have created a "last mile bottleneck" between the customer
location and the ILEC network. The potential revenue opportunity in the local
exchange market, coupled with changes in the regulatory environment designed to
enhance competition, have created opportunities for competitive local exchange
carriers, or CLECs. Facilities-based CLECs such as Teligent and Winstar offer
customers a variety of individual and bundled services, including local and long
distance voice services and high-speed data and Internet service in a growing
number of major markets throughout the United States.
PRINCIPAL CUSTOMER GROUPS
The Company provides cabling services on a national basis to providers
of telecommunications services, including: major cable television multiple
system operators ("MSOs); traditional telephone service providers, including
local exchange carriers and long distance carriers (collectively, "Telcos");
competitive local exchange carriers ("CLECs"); Direct Broadcast Satellite
("DBS") providers; system integrators and users of local area network ("LAN")
and wide-area network ("WAN") systems; and other businesses providing specific
or bundled telecommunications services. The effect of technological and market
convergence is that traditionally defined industry segments are less and less
distinguishable. Definitions of services and customers according to the nature
of information transmitted (video, voice, and data or "cable company" and
"telephone company") are becoming irrelevant.
Telcos. Prior to the Telecommunications Act of 1996, Local Exchange
Carriers ("LECs") were prohibited from offering video programming directly to
subscribers in their telephone service areas (except in limited circumstances in
rural areas). The Telecommunications Act provides LECs with options for
providing video programming directly to their local exchange area customers.
During the fiscal year that ended March 29, 1998 the Company provided premises
wiring services for competitive video systems to the following Telcos: GTE,
Ameritech, Pacific Bell, U.S. West, and BellSouth. In fiscal 1998, revenues from
Telcos for video communication
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systems increased 151% to approximately $25.9 million from approximately $10.3
million in the previous 1997 fiscal year. SBC Communications ("SBC") acquired
Pacific Bell in April 1997 and announced that it was scaling back its
investments in video services in its service areas. SBC discontinued its
broadband network video trials including a Pacific Bell project in San Jose,
California. This project produced approximately $1.1 million of revenues for the
Company in its fiscal 1998 first quarter. In late 1997 there was a reassessment
by Telcos with regard to their video strategies, primarily of pursuing less
costly DBS and MMDS wireless cable systems in lieu of the more costly hybrid
fiber-coaxial hardwire systems. In 1998 Bell Atlantic recorded pre-tax charges
of $23 million related to wireline and other nonsatellite video initiatives. In
conjunction with this charge, Bell Atlantic announced a strategic decision to
focus video efforts on satellite service being offered via DirecTV, and they are
currently providing video service exclusively in conjunction with arrangements
with DirecTV. The biggest impact to the Company regarding Telco competitive
video projects has been the decision by GTE (through GTE Media Ventures) to
scale back deployment of the hybrid fiber coax (HFC) video networks that it had
built in certain test markets, and not to proceed with HFC deployment in
previously announced additional markets. In 1996, GTE announced aggressive plans
to expand video services to 66 markets with a reach of some seven million homes
by 2004. AmeriLink was one of GTE's lead contractors in its initial two test
markets in Tampa Bay, Florida and Ventura County, California. In fiscal 1998
revenues from these two projects totaled approximately $14.7 million, and GTE
was the Company's largest customer, comprising approximately 17% of total
revenues. After completing a review of its operations in these two test markets,
GTE decided to scale back its video initiatives. In their 1998 fiscal year, GTE
recorded a pretax charge of approximately $161 million related to their video
networks, which had generated operating losses of approximately $86 million as
of December 31, 1998. Company revenues from GTE from these two projects in
fiscal 1999 declined $11.7 million to $3.0 million. The Company no longer
performs installation services for GTE in the Tampa Bay area, and revenues from
the Ventura County project for the most recent fourth quarter ended March 28,
1999 were only approximately $240,000. Revenues from Telcos for video services,
excluding DirecTV re-sale programs, have declined sequentially in the six
consecutive quarters that ended December of 1998, from approximately $8.3
million in the quarter ended June 1998 to approximately $2.5 million in the
third and fourth quarters of fiscal 1999.
The Company currently performs video installation services, excluding
DirecTV re-sale programs, for GTE, Ameritech, and BellSouth. During the 1999
fiscal year the Pacific Bell MMDS properties were sold to PrimeOne Tele-TV, for
which the Company continues to perform installation services. Revenues from
Telcos for the most recent fourth quarter ended March 28, 1999 were
approximately $2.5 million, of which $1.2 million related to video projects with
Ameritech. The amount of future capital allocated by Telcos to their video
programs is largely contingent upon the financial success of these programs,
possible new technical developments, and overall strategic decisions by the
companies regarding video services, including the current pending mergers. It is
unclear what impact that the current pending mergers between SBC Communications
Inc. and Ameritech Corp. and Bell Atlantic Corp. and GTE will have on the
respective company's video strategies.
CLECs. The Company provides premises wiring and outside plant
construction services to CLECs that are competing for residential and commercial
local-loop business. In fiscal 1999, the Company performed outside plant
construction services for MFS Network Technologies and Mcleod, Inc. and
residential voice and data installation services for MCI. In late fiscal 1998,
the Company also started performing commercial voice and data installation
services for Teligent, Inc., and Winstar, nationwide CLECs. Revenues derived
from cabling services from Teligent and Winstar for the fiscal year ended March
28, 1999 were approximately $0.9 million and $0.3 million, respectively.
MSOs. The Company provides both premises wiring and outside plant
construction services to MSOs. Historically, broadband video networks in the
United States were almost exclusively provided by cable television operators.
Accordingly, the Company had historically derived a large percentage of its
revenues from this customer base. Revenues derived for or on behalf of MSOs
(excluding PRIMESTAR, the DBS provider owned by certain MSOs) for fiscal 1999
were approximately $27.2 million, or 42% of total Company revenues, versus
approximately $26.1 million or 30% the previous fiscal year. Representative
customers of the Company include Time Warner Cable (approximately 12% of total
Company revenues in fiscal 1999), Tele-Communications, Inc. (approximately 11%
of total Company revenues in fiscal 1999), MediaOne Group, and Cox
Communications, Inc. AT&T Corporation acquired TCI in March, 1999 and also
recently announced that they reached an agreement to acquire MediaOne Group.
MSOs have historically contracted for cabling services through their
local and regional offices. As a result, the Company markets its services to
MSOs in a decentralized manner. The Company seeks to develop contacts and learn
of potential opportunities through attendance at trade shows and by membership
of its key managers and
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corporate personnel in the Society of Cable Television Engineers and local cable
associations. The Company's regional directors, regional managers and area
managers are responsible for developing and maintaining relationships with local
and regional cable operators. The Company believes that the development and
maintenance of customer relationships as well as the consistent performance of
quality services allows it to gain repeat business. The Company believes that
more and more MSOs are seeking comprehensive solutions to their infrastructure
needs by turning to fewer qualified contractors who have the size and financial
capability to meet their cabling needs. This trend should accelerate as industry
consolidations increase, and these entities begin to provide bundled services to
end-users. The Company believes that this trend will result in additional
cabling opportunities due to its national presence and cabling capabilities.
System Integrators and End Users of LAN and WAN Systems. The Company
provides network cabling services to both systems integrators of network systems
and directly to the end users of the network. Systems integrators such as
Unisys, IBM, and Lucent Technologies, Inc. submit competitive bids for network
systems to third party customers. The Company submits a competitive bid to the
systems integrator for the cabling portion of the overall proposal. If the
systems integrator is awarded the project, the Company will perform the required
cabling services if its bid is accepted and bill the systems integrator
directly. In other projects, the end users request bids directly from third
party suppliers for network related services. In this case, the Company submits
a proposal directly to the end user.
The Company provides network cabling services through its larger field
offices, which provides customers with a single source for large regional or
nationwide network installation projects. The Company employs a combined
corporate and regional approach to marketing its network cabling services. In
1992 the Company created a dedicated corporate sales and installation support
group to identify and establish relationships with systems integrators that can
provide an ongoing source of network cabling business in markets in which the
Company has regional offices. The Company augments this national sales effort
with network sales engineers who market multi-state sales territories from key
regional offices.
DBS Providers. DBS companies provide television services via
transmission from medium power and higher power communications DBS satellites.
Unlike cable television, DBS services do not require ground construction to
install, maintain, or upgrade cable distribution plant. These systems require
the subscriber to purchase or lease a satellite dish to receive signals and a
receiver system to process and descramble signals for television viewing.
Digital satellite television has been one of the fastest selling
consumer electronics products in U.S. history. As of December 31, 1998 the
installed base for digital satellite services ("DSS") consisted of approximately
8.7 million active subscribers nationwide, as compared to approximately 6.2
million, 4.4 million and 2.2 million subscribers at December 31, 1997, 1996 and
1995, respectively. PRIMESTAR, Inc. ("PRIMESTAR"), DirecTV, Inc. ("DirecTV"),
and EchoStar Communications Corporation ("EchoStar") are the primary providers
of DBS services in the United States. Historically, DirecTV distributed their
equipment primarily via nationwide retail outlets and utilized numerous
contractors to perform their installation services. Because of this, the Company
has been unable to obtain the necessary volume of work-orders from DirecTV
needed to operate in an acceptable profitable manner. PRIMESTAR also utilized
numerous contractors ("full-service providers" or "FSPs") to install their
satellite equipment. PRIMESTAR required that FSPs sign exclusivity agreements
with them to perform satellite installation services, which the Company elected
not to do. Thus, revenues received from PRIMESTAR related installations,
primarily through contracts with the FSPs, decreased to approximately $1.1
million in fiscal 1999 from approximately $4.5 million the previous year.
Revenues derived from all DSS providers including PRIMESTAR, EchoStar, and
DirecTV for the fiscal year ended March 28, 1999 were approximately $3.4
million, versus approximately $5.2 million in fiscal 1998.
On April 28, 1999 DirecTV, a subsidiary of Hughes Corporation and
General Motors Corporation, completed its acquisition of PRIMESTAR. At that
time, DirecTV indicated that it will operate the PRIMESTAR medium-power business
for approximately 24 months, during which time it will transition PRIMESTAR
subscribers to DirecTV high-power service. The Company believes that the
acquisition of PRIMESTAR by DirecTV, along with other developments within the
DSS industry, will provide significant cabling opportunities and increased
demand for its services. DBS providers have historically been at a disadvantage
in competing with MSOs due to the fact that they cannot generally offer local
programming. However, on April 27, 1999 the U.S. House of Representatives passed
the "Satellite Copyright Competition and Consumer Protection Act of 1999" which:
(1) allows satellite TV companies to continue the delivery of out-of-market
broadcast network signals to eligible subscribers, as well as deliver local
channels into local markets, (2) reduces the copyright fees satellite TV
carriers
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pay for broadcast signals, and (3) eliminates the 90-day waiting period for
former cable subscribers to subscribe to distant network signals via satellite.
The U.S. Senate recently approved similar legislation, and any differences
between the two bills will have to be reconciled before the legislation can
become law. Upon passage of the legislation by the House of Representatives,
DirecTV announced plans for delivering local broadcast network channels by
satellite to approximately 50 million homes in major metropolitan markets across
the United States. DirecTV, with its acquisition of PRIMESTAR, currently
provides service to more than 7 million subscribers.
The Company believes that DirecTV, along with other providers of DSS
services, are seeking larger, national contractors to provide their installation
and maintenance needs. The conversion of PRIMESTAR subscribers to DirecTV
satellite dishes will require numerous new installations. PRIMESTAR currently
has approximately 2.3 million satellite subscribers. Bell Atlantic Corp., SBC
Communications Inc., and GTE Corporation have also entered into a multi-year
marketing and distribution agreement with DirecTV to sell satellite-television
services to their telephone customers, and the Company currently performs
satellite installations for Bell Atlantic in California. In order to increase
the Company's DSS installation capability, it is in the process of implementing
a national installation network and customer call center. This installation
network will feature centralized work order processing that will process work
orders and disseminate them throughout the United States. The customer call
center and support function will handle both customer and end subscriber calls
along with work order status and monitoring procedures. The Company is in the
process of partnering with other smaller contractors to provide installation
coverage in those areas that are currently not practical or cost efficient to
service. The installation network will ultimately provide complete service
coverage for the continental United States.
Other Telecommunications Providers. As a result of the opportunities
presented by the passage of The Telecommunications Act of 1996 (the "Act"), the
overall growing customer demand for enhanced video, voice and data
telecommunications services which have increased bandwidth requirements, and the
continued industry trend toward the outsourcing of cabling services, the Company
believes it can capture new customers in industries in which it currently
competes, and can expand into new industries and customers requiring cabling
services. For example, the Act allows public utility companies to provide local
and long distance telecommunications facilities to third parties. Many utilities
have already announced plans to enter businesses or form joint ventures offering
services such as local and long distance telephone services, cable television
services and Internet access to their markets. The Company also markets its
cabling services to other providers offering individual or bundled video, voice,
and data services such as RCN Corp., a competitive carrier offering bundled
phone, video, and Internet services in several Northeast cities. For the fiscal
year ended March 28, 1999 the Company performed approximately $400,000 of
cabling services to RCN Corp., primarily in the Boston area.
CONTRACTS
Many telecommunication providers require cabling service contractors,
such as the Company, to first enter into a master contract which establishes
certain requirements to be met before actual work orders are issued. However,
master contracts do not bind these companies to use any one cabling service
contractor in any given locality or for any given project. Rather, they
negotiate with individual cabling service contractors on a project by project
basis. Therefore, the Company has no extended commitment from any single
provider and bids on individual projects along with its competitors. The Company
is typically compensated on these projects on a per unit basis for actual
services performed. The Company's commercial network cabling and outside plant
construction services are generally nonrecurring in nature and are contracted on
a project-by-project basis. Since the Company's services are generally provided
on a project-by-project basis, the amount of work being performed at any given
time for any particular customer and the general mix of customers for which work
is being performed can vary significantly.
OPERATIONS
Amerilink's projects are managed under the direct supervision of over
40 project managers who generally report to area or regional managers or, in
certain cases, directly to one of the Company's four regional directors. The
regional directors are all under the supervision of the Company's Senior Vice
President - Operations. The Company's marketing and operations functions are
decentralized, giving regional directors, regional managers and area managers
greater flexibility in their regions to maintain and develop relationships with
existing customers and to pursue new opportunities. The Company provides its
services predominately through the use of independent contractors via its
national network of regional and satellite field offices. Each regional office
is headed by a
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<PAGE> 10
regional manager or area manager whose primary duties consist of new business
development and contract oversight. Regional managers and area managers employ
the project managers who are responsible for locating and qualifying independent
contractor production personnel, maintaining and deploying vehicles and
equipment, and supporting the regional managers and area managers in maintaining
customer relationships. The smaller satellite offices report to and are
supervised by the larger regional offices. Regional offices are "full service"
premises wiring providers offering both residential and commercial premises
wiring services and in certain markets outside plant construction services. MCCI
projects are managed in a similar manner, with the six field offices headed by a
branch manager who reports directly to the MCCI Vice President of Operations.
MCCI provides its commercial cabling services through the use of hourly paid
employee technicians. The Company's operating profitability and capacity to
increase revenues is largely dependent upon its ability to locate and attract
qualified regional directors, regional managers, area managers, project
managers, and production personnel.
The Company's corporate headquarters in Columbus, Ohio, provides
national marketing support, strategic planning, administrative services and
operations support for the Company's field offices. The corporate office
develops and maintains customer relationships with national companies and
provides support for field offices performing work for these customers in local
markets. In addition, the corporate office assists regional directors and area
managers in responding to all bid requests by providing engineering support,
performing cost analyses to determine pricing, and preparing proposal response
documentation. All purchasing and accounting functions are managed at the
corporate level.
MATERIALS
The Company provides both consignment and material turnkey services. In
the majority of non-network cabling contracts, the Company's customers supply
most or all of the materials required for the project. The majority of the
Company's network and construction contracts are turnkey contracts in which the
Company provides both the labor and materials necessary for the network
installation. The Company purchases cabling materials directly from independent
third party suppliers, and does not manufacture any materials for resale to
customers. The Company is not dependent upon any one supplier for network
cabling materials and has not experienced, nor does it anticipate experiencing,
difficulties in obtaining network cabling materials.
PERSONNEL
As of March 28, 1999, the Company had 501 employees. Fifty-two (52) are
employees at the Corporate Office in Columbus, Ohio and 449 are employed in
field offices, including 88 employees of Midwest Computer Cable, Inc. The
Company believes that its relationship with its employees is good.
AmeriLink provides most of its cabling services through the use of
independent contractors who are either sole proprietorships or small business
entities. Independent contractors are engaged and compensated on a
project-by-project basis to perform local work. They generally provide their own
vehicles, tools and insurance coverage. Independent contractors are paid in
accordance with a schedule of unit rates for the performance of specific
services. MCCI utilizes hourly paid employee technicians to perform its
commercial cabling services. The Company's success is dependent upon its ability
to attract and retain the services of qualified employees and independent
contractors. From time to time, state and federal authorities have asserted that
these contractors should be deemed to be employees of the Company for purposes
of taxation and coverage under wage and hour, workers' compensation and
unemployment compensation laws and regulations. None of these asserted claims
has had a material adverse effect on the Company's results of operations or
financial condition. However, if, in the future, additional assertions by state
or Federal authorities are upheld, the Company could incur significant
litigation costs and liabilities and, if the Company were required to treat
individual installers as employees rather than independent contractors, the
Company's operating expenses could increase significantly with potential adverse
effects on its results of operations and financial condition.
COMPETITION
The Company competes both with the in-house service organizations of
telecommunication providers and with independent third parties in most of the
markets in which it operates. Historically, the cabling service industry has
been highly fragmented, and most service providers are small, privately-held
companies. The Company believes
-10-
<PAGE> 11
that while it may be considered a major competitor in many of the markets in
which it provides cabling services, there are few barriers to entry into the
cabling service business and, as a result, any business that has access to
persons who possess technical expertise may become a competitor of the Company.
Smaller regional and local competitors may be able to offer lower prices because
of lower overhead expenses. Because of the highly competitive bidding
environment in recent years for cable service contracts, the price of the cable
service contractor's bid has often been the deciding factor in determining
whether such contractor was awarded a contract for a cabling project. In
response to the current deregulated operating environment, there has been an
increase in business combinations among the smaller private firms, which the
Company believes will continue. As the demand for cabling services has
increased, the Company believes that contracts are increasingly being awarded
based on the combination of a contractor's price, its track record for
completing projects, its ability to dedicate management and production personnel
to the project, and its financial and operational resources to complete the
contract. The markets in which the Company provides network cabling services are
highly competitive and many of the competitors in those markets include national
competitors with greater financial resources than the Company.
VARIABILITY IN QUARTERLY RESULTS AND SEASONALITY
The Company's quarterly revenues and associated operating results have
in the past, and may in the future, vary depending upon a number of factors. The
Company has no long-term contractual commitments to provide its services. The
contractual commitments which do exist generally can be terminated on 30 days'
notice. These contractual commitments do not involve a firm backlog of committed
work because the nature of the Company's contracts with MSOs, Telcos, CLECs, DBS
providers, and other telecommunication providers produce daily work orders only
on a project-by-project basis which must be funded by an approved purchase
order. In addition, network cabling services are generally nonrecurring in
nature and are contracted on a project-by-project basis. Therefore, the amount
of work performed at any given time and the general mix of customers for which
work is being performed can vary significantly. Consolidation within the
telecommunications industry may also delay or depress capital spending, as
companies assess their new business plans and strategies and focus on
administrative and operational issues associated with their acquisitions or
alliances. The Company's operations historically have also been influenced by
the budget cycles of the Company's customers. Many of the Company's MSO
customers utilize a calendar year budget cycle, funded with quarterly purchase
authorizations, which in certain fiscal years has resulted in a lack of
availability of funds in the Company's third fiscal quarter and has delayed work
authorizations in the early part of the calendar year (the Company's fourth and
first fiscal quarters.) Telecommunications providers are also subject to actual
and potential local, state, and federal regulations that influence the
availability of work for which the Company may compete. Weather may affect
operating results due to the fact that construction cabling services are
performed outdoors. Weather can also impact the Company's premises wiring
cabling services due to the limited and lost production associated with poor
driving conditions, and soft ground which may prevent underground premises
installations, the burying of cable drops, and increased restoration costs.
Operating results may also be affected by the capital spending patterns of the
Company's customers and by the success of various technologies and business
strategies employed by them. In fiscal 1998, the Company recorded approximately
$25.9 million (or 30.2% of total revenues for the year) in revenues from Telcos
that are building or expanding video systems. Of the total $25.9 million of
revenues from Telcos, approximately $14.7 million (or 17% of total Company
revenues) was generated from work orders issued under contracts with GTE Media
Ventures, a part of GTE Corporation. In late 1997 there was a reassessment by
Telcos with regard to their video strategies, primarily of pursuing less costly
DBS and MMDS wireless cable systems in lieu of the more costly hybrid
fiber-coaxial hardwire systems. Revenues from Telcos for video services,
excluding DirecTV re-sale programs, have declined sequentially in the six
consecutive quarters that ended December of 1998, from approximately $8.3
million in the quarter ended June 1998 to approximately $2.5 million in the
third and fourth quarters of fiscal 1999. Company revenues from GTE in fiscal
1999 declined $11.7 million to $3.0 million. The amount of future capital
allocated by these companies to their video programs is largely contingent upon
the financial success of these programs, possible new technical developments,
and overall strategic decisions by the companies regarding video services. The
Company's operating profitability and capacity to increase revenues is also
largely dependent upon its ability to locate and attract qualified field
managers, project managers, and technical production personnel. Other factors
that may affect the Company's operating results include the size and timing of
significant projects, and the gain or loss of a significant contract or
customer.
-11-
<PAGE> 12
ITEM 2. PROPERTIES.
The Company does not own any real property. The Company's corporate
headquarters are located in Columbus, Ohio. The Company's regional field offices
service the following metropolitan areas: Atlanta, Baltimore, Charleston, West
Va., Cedar Rapids, Chicago, Cincinnati, Cleveland, Columbus, Dallas, Davenport,
Des Moines, Detroit, Houston, Indianapolis, Kansas City, Los Angeles,
Louisville, New Orleans, Omaha, Phoenix, Richmond, San Antonio, San Francisco,
Seattle/Tacoma, St. Louis, and Tampa Bay. A typical regional office consists of
an office with an attached warehouse for the storage of materials, tools and
equipment and an adjacent secure outside storage area. The Company leases its
corporate headquarters and all of its regional and satellite offices from
unaffiliated lessors. The lease terms, including options exercisable by the
Company, range from one month to five years. Subsequent to fiscal 1999, the
Company executed a new ten-year non-cancelable lease agreement for a new
corporate office facility that is in addition to leases that were in effect as
of March 28, 1999. The agreement will require future minimal rental commitments
of $230,000 per year effective upon the targeted occupation and commencement
date, which is currently estimated to be April 1, 2000.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in various legal proceedings, most of which
arise in the ordinary course of business and many of which are covered by
insurance. In the opinion of the Company's management, none of the claims
relating to such proceedings will have a material adverse effect on the
financial condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is traded on the NASDAQ National Market,
under the symbol "ALNK". The following table sets forth for the periods
indicated the high and low last sales price for the common shares, as reported
by the NASDAQ National Market.
<TABLE>
<CAPTION>
Sales Prices
------------
High Low
---- ---
<S> <C> <C>
FISCAL YEAR 1998
Quarter Ended June 29, 1997 $ 9.500 $ 6.000
Quarter Ended September 28, 1997 $ 33.875 $ 9.406
Quarter Ended December 28, 1997 $ 36.250 $ 21.500
Quarter Ended March 29, 1998 $ 33.563 $ 21.500
FISCAL YEAR 1999
Quarter Ended June 28, 1998 $ 25.000 $ 11.875
Quarter Ended September 27, 1998 $ 16.250 $ 5.875
Quarter Ended December 27, 1998 $ 9.250 $ 7.000
Quarter Ended March 28, 1999 $ 9.250 $ 6.750
</TABLE>
The Company has never paid cash dividends, other than S Corporation
distributions, on its common stock. The Company currently intends to retain all
of its net earnings to finance future growth and therefore does not anticipate
paying any cash dividends in the foreseeable future.
As of May 25, 1999, there were approximately 3,457 holders of the Company's
stock.
-12-
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data included in the following table should be
read in conjunction with the Company's Financial Statements and related notes
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing on pages 14 through 22 of this Annual Report on Form 10-K.
On February 2, 1999, the Company acquired Midwest Computer Cable, Inc. The
acquisition has been accounted for as a purchase, and the results of operations
of MCCI have been included in the consolidated results of the Company from the
date of acquisition.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------------------
APRIL 2, MARCH 31, MARCH 30, MARCH 29, MARCH 28,
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(in thousands, except per share data)
STATEMENT OF INCOME DATA:
<S> <C> <C> <C> <C> <C>
Revenues $ 47,541 $ 56,055 $ 63,036 $ 85,646 $ 65,211
Income from operations 2,780 1,170 3,301 7,846 1,636
Income before income taxes (a) 2,487 686 2,691 7,659 2,100
Net income (a) 1,492 457 1,568 4,586 1,223
Earnings per share (a):
Basic $ 0.47 $ 0.13 $ 0.45 $ 1.20 $ 0.29
Diluted $ 0.45 $ 0.13 $ 0.44 $ 1.15 $ 0.28
Weighted average shares:
Basic 3,156 3,479 3,479 3,806 4,245
Diluted 3,351 3,626 3,589 4,002 4,334
BALANCE SHEET DATA:
Total assets $ 17,133 $ 20,554 $ 26,211 $ 38,528 $ 40,350
Total debt 4,009 6,563 9,069 ---- ----
Shareholders' equity 8,754 9,211 10,802 31,321 33,751
</TABLE>
- ----------
(a) On a pro forma basis for the fiscal year ended April 2, 1995.
NOTE: The Company made S Corporation distributions to its shareholders Larry R.
Linhart, E. Len Gibson and Robert L. Powelson of $3.2 million in fiscal 1995,
$2.7 million of which was made in conjunction with the Company's initial public
offering in August 1994 and $500,000 was paid in April 1994. No dividends have
been paid since the Company's initial public offering on August 12, 1994.
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<PAGE> 14
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
This Annual Report on Form 10-K, including Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains various
forward-looking statements (as such term is defined in the Private Securities
Litigation Reform Act of 1995). Such forward-looking statements may be
identified by, among other things, the use of forward-looking terminology such
as "believes," "expects," "may," "will," "should," or "anticipates" or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy that involves risks and uncertainties. These
forward-looking statements, such as statements regarding anticipated future
revenues, capital expenditures and other statements regarding matters that are
not historical facts, involve predictions. These forward-looking statements are
based on the Company's current expectations and are subject to a number of risks
and uncertainties that could cause actual results in the future to differ
significantly from results expressed or implied in any forward-looking
statements included herein. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements depending upon a variety of important
factors, including a continuation of the degree and timing of customer
utilization and rate of renewals of contracts with the Company at historic
levels, the Company's relationship with key customers, implementation of the
Company's growth strategy, seasonality, changing market conditions and customer
purchase authorizations, competitive and regulatory risks associated with the
telecommunications industry, new products and technological changes, disruptions
to the operations of the Company resulting from Year 2000 issues, and other
risks detailed in the Company's periodic report filings with the Securities and
Exchange Commission, including, but not limited to, the factors described under
the caption "Variability in Quarterly Results and Seasonality" below.
PROPOSED MERGER WITH TANDY CORPORATION
On May 21, 1999, AmeriLink Corporation and Tandy Corporation ("Tandy")
each announced their signing of a definitive merger agreement (the "Merger").
Under terms of the Merger, Tandy will acquire 100% of AmeriLink's common stock
at an exchange ratio designed to reflect $15.60 per share of AmeriLink's stock
in a tax-free exchange for Tandy stock. If the average closing price of Tandy's
common shares falls below a specified amount for a twenty-day trading period
ending just before the merger is completed, AmeriLink shareholders will receive
$14.50 cash for every AmeriLink common share they own instead of Tandy stock.
Following the merger, AmeriLink will continue its operations as a wholly owned
subsidiary of Tandy. The Merger has been approved by the Board of Directors of
each Company and is subject to usual and customary closing conditions, including
regulatory and shareholder approval. It is currently anticipated that the
transaction will close in late August 1999. More detailed information relating
to the terms and conditions of the Merger will be contained in a Registration
Statement on Form S-4 to be filed by Tandy on or around June 8, 1999, which will
include a prospectus and a proxy statement for a special shareholders meeting of
AmeriLink. If the merger is not consummated for any reason, the Company intends
to continue operating independently.
RECENT ACQUISITION
On February 2, 1999, the Company, through a wholly-owned subsidiary,
MCC Acquisition Corp. ("MAC"), acquired Midwest Computer Cable, Inc. ("MCCI"), a
commercial cabling installation firm headquartered in Des Moines, Iowa. Pursuant
to the Merger Agreement, MCCI was merged with and into MAC and the separate
corporate existence of MCCI ceased. Following the Merger, MAC changed its name
to "Midwest Computer Cable, Inc." and will continue to conduct business as a
wholly-owned subsidiary of the Company. The consideration delivered to the
shareholders of MCCI in connection with the acquisition consisted of $4.4
million in cash and 500,000 common shares (without par value) of the Company
valued at the time of the merger at $3,565,000. MCCI provides installation and
maintenance services for premise cabling systems through six offices located in
Iowa, Kansas, Ohio, and Texas. The Company believes that the additional offices,
management, and technicians which were gained from the MCCI acquisition will
accelerate the growth of its commercial cabling and installation business.
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<PAGE> 15
OVERVIEW
The Company reported record revenues and earnings for its 1998 fiscal
year which ended March 29, 1998. In comparison to the previous fiscal 1997 year,
revenues increased 36% to approximately $85.6 million, operating income more
than doubled to $7.8 million, and diluted earnings per share increased 161% to
$1.15. Revenues and operating results for the most recent fiscal 1999 year,
however, decreased substantially from fiscal 1998. Revenues decreased 24% to
approximately $65.2 million, and operating income decreased to approximately
$1.6 million. Diluted earnings per share for the most recent fiscal year
decreased 76% to $0.28. The Company's decreased operating profitability is
primarily the result of its reduced revenue levels, which were negatively
impacted primarily by a reduction in revenues from telephone companies building
or expanding competitive video systems.
The following table sets forth for fiscal years 1997, 1998 and 1999,
and the dollar change from fiscal 1997 to 1998 and from fiscal 1998 to 1999: (1)
approximate Company revenues from premises wiring services (segregated by
residential premises wiring services and commercial premises wiring services)
and (2) approximate premises wiring residential revenues by principal customer
group or service. Fiscal 1999 revenues include approximately $1.9 million of
commercial network cabling revenues from MCCI .
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
- --------------------- FISCAL YEAR CHANGE IN DOLLARS
1997 1998 1999 1997 / 1998 1998 / 1999
---- ---- ---- ----------- -----------
PREMISES WIRING
RESIDENTIAL:
<S> <C> <C> <C> <C> <C>
MSOs $ 22.5 $ 26.1 $ 27.2 $ 3.6 $ 1.1
Telco video 10.3 25.9 11.2 15.6 (14.7)
DBS providers 6.8 5.2 3.4 (1.6) (1.8)
Other -- 3.7 1.2 3.7 (2.5)
-------- ------- ------- -------- ---------
TOTAL RESIDENTIAL 39.6 60.9 43.0 21.3 (17.9)
COMMERCIAL: 13.8 16.1 16.7 2.3 0.6
-------- ------- ------- -------- ---------
TOTAL $ 53.4 $ 77.0 $ 59.7 $ 23.6 $ (17.3)
======== ======== ======== ======== =========
</TABLE>
After deliberation for several years, the Telecommunications Act of
1996 ("the Act") was signed into law in February 1996. Key provisions of the Act
were designed to enhance competition within the telecommunications industry.
These provisions include: (1) allowing Telcos to sell video services, and in
certain cases, to buy local cable television companies, (2) deregulating cable
companies (such as allowing them to charge what they wish for many channels)
once there is effective competition or after three years, (3) permitting RBOCs
and other LECs to enter the long distance market once certain conditions are met
in the local phone market, and (4) allowing long distance providers to enter the
local phone business. During the fiscal year that ended March 29, 1998 the
Company provided premises wiring services for competitive video systems to the
following Telcos: GTE, Ameritech, Pacific Bell, U.S. West, and BellSouth. In
fiscal 1998, revenues from Telcos for video communication systems increased 151%
to approximately $25.9 million from approximately $10.3 million in the previous
1997 fiscal year. SBC Communications ("SBC") acquired Pacific Bell in April 1997
and announced that it was scaling back its investments in video services in its
service areas. SBC discontinued its broadband network video trials including a
Pacific Bell project in San Jose, California. This project produced
approximately $1.1 million of revenues for the Company in its fiscal 1998 first
quarter. In late 1997 there was a reassessment by Telcos with regard to their
video strategies, primarily of pursuing less costly DBS and MMDS wireless cable
systems in lieu of the more costly hybrid fiber-coaxial hardwire systems. In
1998 Bell Atlantic recorded pre-tax charges of $23 million related to wireline
and other nonsatellite video initiatives. In conjunction with this charge, Bell
Atlantic announced a strategic decision to focus video efforts on satellite
service being offered via DirecTV, and they are currently providing video
service exclusively in conjunction with arrangements with DirecTV. The biggest
impact to the Company regarding Telco competitive video projects has been the
decision by GTE (through GTE Media Ventures) to scale back deployment of the
hybrid fiber coax (HFC) video networks that it had built in certain test
markets, and not to proceed with HFC deployment in previously announced
additional markets. In 1996, GTE announced aggressive plans to expand video
services to 66 markets with a reach of some seven million homes by 2004.
AmeriLink was one of GTE's lead contractors in its initial two test markets in
Tampa Bay, Florida and Ventura County, California. In fiscal 1998 revenues from
these two projects totaled approximately $14.7 million, and GTE was the
Company's
-15-
<PAGE> 16
largest customer, comprising approximately 17% of total revenues. After
completing a review of its operations in these two test markets, GTE decided to
scale back its video initiatives. In their 1998 fiscal year, GTE recorded a
pretax charge of approximately $161 million related to their video networks,
which had generated operating losses of approximately $86 million as of December
31, 1998. Company revenues from GTE from these two projects in fiscal 1999
declined $11.7 million to $3.0 million. The Company no longer performs
installation services for GTE in the Tampa Bay area, and revenues from the
Ventura County project for the most recent fourth quarter ended March 28, 1999
were only approximately $240,000. Revenues from Telcos for video services,
excluding DirecTV re-sale programs, have declined sequentially in the six
consecutive quarters that ended December of 1998, from approximately $8.3
million in the quarter ended June 1998 to approximately $2.5 million in the
third and fourth quarters of fiscal 1999.
In response to this decrease in revenues from Telephone companies, the
Company has initiated or is initiating strategies designed to rebuild its
revenue streams and to improve its operating results, including: (1) focusing
marketing activities on positive developments within its core cable television
customer base, primarily with Tele-Communications, Inc. ("TCI"), (2)
aggressively seeking acquisitions or alliances to augment its existing premises
wiring capabilities (3) pursuing cabling opportunities with DirecTV and other
DSS providers given the potential market for video, audio, and data programming
services via satellite, along with recent favorable regulatory and market
developments within the DSS industry, and (4) continuing to diversify its
customer base and market its cabling services to new and additional
telecommunication providers.
The Company has historically provided cabling services to TCI, who
comprised approximately 15% of total Company revenues for its 1994 fiscal year.
However, the Company focused on broadening its customer base in order to reduce
its dependency on cable television companies, due to the highly volatile nature
of capital spending within the cable television industry. As a result of project
opportunities from Telcos that were building or expanding competitive video
systems, the Company deployed its resources on Telco projects due to their
perceived short term and long term economic potential. Revenues derived from TCI
projects for the 1998 fiscal year comprised only 4% of total Company sales. In
June 1998 AT&T Corporation announced its intent to acquire TCI and announced a
$4 billion four-year upgrade and maintenance program of TCI's cable networks.
The Company aggressively pursued TCI projects and opened new regional offices in
Dallas, Baltimore, and the Seattle / Tacoma area, primarily to service new TCI
contracts. Revenues from TCI for the 1999 fiscal year increased $3.8 million to
approximately $6.9 million, and comprised approximately 11% of total Company
revenues.
The Company believes that its strong financial resources allow it to
supplement internal growth and sales development efforts with acquisitions and
strategic alliances. On February 2, 1999, the Company, through a wholly-owned
subsidiary, acquired Midwest Computer Cable, Inc., a commercial cabling
installation firm that provides installation and maintenance services for
premise cabling systems through six offices located in Iowa, Kansas, Ohio, and
Texas. The Company believes that the additional offices, management, and
technicians which were gained from the acquisition will accelerate the growth of
its commercial cabling and installation business.
On April 28, 1999 DirecTV, a subsidiary of Hughes Corporation and
General Motors Corporation, completed its acquisition of PRIMESTAR. At that
time, DirecTV indicated that it will operate the PRIMESTAR medium-power business
for approximately 24 months, during which time it will transition PRIMESTAR
subscribers to DirecTV high-power service. The Company believes that the
acquisition of PRIMESTAR by DirecTV, along with other developments within the
DSS industry, will provide significant cabling opportunities and increased
demand for its services. DBS providers have historically been at a disadvantage
in competing with MSOs due to the fact that they cannot generally offer local
programming. However, on April 27, 1999 the U.S. House of Representatives passed
the "Satellite Copyright Competition and Consumer Protection Act of 1999" which:
(1) allows satellite TV companies to continue the delivery of out-of-market
broadcast network signals to eligible subscribers, as well as deliver local
channels into local markets, (2) reduces the copyright fees satellite TV
carriers pay for broadcast signals, and (3) eliminates the 90-day waiting period
for former cable subscribers to subscribe to distant network signals via
satellite. The U.S. Senate recently approved similar legislation, and any
differences between the two bills will have to be reconciled before the
legislation can become law. Upon passage of the legislation by the House of
Representatives, DirecTV announced plans for delivering local broadcast network
channels by satellite to approximately 50 million homes in major metropolitan
markets across the United States. DirecTV, with its acquisition of PRIMESTAR,
currently provides service to more than 7 million subscribers.
The Company believes that DirecTV, along with other providers of DSS
services, are seeking larger, national contractors to provide their installation
and maintenance needs. The conversion of PRIMESTAR subscribers to DirecTV
satellite dishes will require numerous new installations. PRIMESTAR currently
has
-16-
<PAGE> 17
approximately 2.3 million satellite subscribers. Bell Atlantic Corp., SBC
Communications Inc. and GTE Corporation have also entered into a multi-year
marketing and distribution agreement with DirecTV to sell satellite-television
services to their telephone customers, and the Company currently performs
satellite installations for Bell Atlantic in California. In order to increase
the Company's DSS installation capability, it is in the process of implementing
a national installation network and customer call center. This installation
network will feature centralized work order processing that will process work
orders and disseminate them throughout the United States. The customer call
center and support function will handle both customer and end subscriber calls
along with work order status and monitoring procedures. The Company is in the
process of partnering with other smaller contractors to provide installation
coverage in those areas that are currently not practical or cost efficient to
service. The installation network will ultimately provide complete service
coverage for the continental United States.
Finally, the Company has continued to market its cabling services to
new customers and markets beyond the traditional cable television industry. In
late fiscal 1998, the Company started performing commercial voice and data
installation services for Teligent, Inc., and Winstar, facilities-based
nationwide CLECs that offer customers a variety of individual and bundled
services, including local and long distance voice services and high-speed data
and Internet service in a growing number of major markets throughout the United
States. Revenues derived from cabling services from Teligent and Winstar for the
fiscal year ended March 28, 1999 were approximately $0.9 million and $0.3
million, respectively.
RESULTS OF OPERATIONS
Revenue is generated from cabling projects performed via work orders
issued under master contracts. Contract costs may vary depending upon the
contract volume, the level of productivity, competitive factors in the local
market, and other items. Cost of sales includes subcontractor production costs,
materials not supplied by the customer, vehicle and machinery expenses, and
business insurance related costs. Selling, general and administrative expenses
consist primarily of field employee wages and payroll costs.
FISCAL 1999 COMPARED TO FISCAL 1998
REVENUES
Total revenues for fiscal 1999 were $65,211,040 compared to $85,645,991
for fiscal 1998, a decrease of 24%.
Revenues derived from residential and commercial premises wiring
activities decreased by 22% to $59.7 million in fiscal 1999, versus
approximately $77.0 million in the prior year period. Premises wiring revenues
from telephone companies for video communication services decreased to
approximately $11.2 million (17% of total Company revenues) in fiscal 1999 from
$25.9 million (30% of total Company revenues) in fiscal 1998. Revenues from
these services have declined sequentially in the six consecutive quarters that
ended December of 1998, from approximately $8.3 million in the quarter ended
June 1998 to approximately $2.5 million in the third and fourth quarters of
fiscal 1999. Revenues from GTE Media Ventures derived from classic hardwire
cable system projects for fiscal 1999 declined to $3.0 million, versus
approximately $14.7 million in fiscal 1998. GTE was the Company's largest
customer in fiscal 1998 and comprised approximately 17% of total Company
revenues. The amount of future capital allocated by Telcos to their video
programs is largely contingent upon the financial success of these programs,
possible new technical developments, and overall strategic decisions by the
companies regarding video services. It is unclear what impact that the current
pending mergers between SBC Communications Inc. and Ameritech Corp. and Bell
Atlantic Corp. and GTE will have on the respective company's video strategies.
Premises wiring revenues for fiscal 1998 also included approximately
$2.6 million in revenues from a contract to provide voice and data cabling for
U.S. West in Phoenix, AZ. Work under this contract was substantially completed
in June 1998 and contributed approximately $0.5 million of revenues in fiscal
1999. Commercial network cabling revenues in fiscal 1999 were negatively
impacted by funding delays on a number of large contracts for cabling
educational facilities. These projects , which were anticipated to commence in
May 1999, were expected to generate approximately $5.0 million of revenues in
fiscal 1999. Cabling on some of these projects began in late fiscal 1999 and
contributed approximately $0.2 million in revenues. Revenues for fiscal 1999
include approximately $1.9 million of commercial network cabling revenues from
Midwest Computer Cable, Inc., a commercial cabling installation firm acquired by
the Company on February 2, 1999. Revenues and operations were adversely impacted
-17-
<PAGE> 18
by weather in the fourth fiscal quarter ended March 28, 1999. In addition,
revenues during the fourth quarter of fiscal 1998 were negatively impacted by
weather and by delays in customer purchase and work authorizations in several
market areas.
GROSS PROFIT
Gross profit for fiscal 1999 was $25.7 million, or 39.4% of revenues,
as compared to $33.0 million, or 38.6% of revenues in 1998.
The increase in gross margin is due primarily to a decrease in
subcontractor production costs, which decreased as a percent of labor cabling
revenues in fiscal 1999 compared to the corresponding period last year. Contract
and project subcontractor costs are dependent upon a number of factors,
including pricing for the Company's services, the level of productivity,
competitive factors in the local market and other items.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for fiscal 1999 were $24.1
million, or 37.0% of revenues, as compared to $25.2 million, or 29.4%, of
revenues for fiscal 1998.
The Company's selling, general and administrative cost structure is
maintained at levels necessary to adequately support both anticipated near term
revenues and projected longer term revenues. These anticipated revenue levels
and associated cost structures may vary among the Company's regional field
offices and geographic market areas. The Company is reluctant to significantly
reduce its cost structure during periods of reduced revenues and spending by its
customers and believes a certain expense level is necessary to adequately
support longer term revenue growth and quality customer service. The decrease in
selling, general and administrative expenses for fiscal 1999 is primarily a
result of a decrease in employee wage expense and employee benefits. The
increase in selling, general and administrative expenses as a percentage of
revenues is a result of a decline in revenues in fiscal 1999, which decreased
approximately 24% from fiscal 1998.
INTEREST INCOME AND EXPENSE
Interest income was $464,174, or 0.7% of revenues, for fiscal 1999 as
compared to net interest expense of $187,633, or 0.2% of revenues, for fiscal
1998. In October 1997 the Company used part of the proceeds received from a
public stock offering to pay in full its outstanding bank debt of approximately
$6.8 million. The balance of the proceeds are being invested in short-term
investment grade securities (see "Liquidity and Capital Resources").
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 41.8% for fiscal 1999 versus 40.1%
for fiscal 1998. This increase is the result of Goodwill amortization and other
permanent differences which, combined, represented 4.4% of income before income
taxes versus 0.9% in fiscal 1998.
FISCAL 1998 COMPARED TO FISCAL 1997
REVENUES
Total revenues for fiscal 1998 were $85,645,991 compared to $63,035,814
for fiscal 1997, an increase of 35.9%.
Revenues derived from residential and commercial premises wiring
activities increased by 44.2% to a record $77.0 million in fiscal 1998, versus
approximately $53.4 million in the prior year period. Such revenues accounted
for 90.0% of the Company's total revenues for fiscal 1998 versus 84.7% a year
earlier, consistent with the Company's announced strategy to focus efforts on
premises wiring activities.
Premises wiring revenues derived from Telcos building or expanding
video systems increased to approximately $25.9 million (30.2% of total Company
revenues) in fiscal 1998 compared to approximately $10.3 million (16.4% of total
Company revenues) in fiscal 1997. Of the total $25.9 million of revenues from
Telcos, approximately $14.7 million, or 17% of total Company revenues, was
generated from work orders issued under
-18-
<PAGE> 19
contracts with GTE Media Ventures, a division of GTE. Revenues from Telcos for
video systems declined sequentially in each quarter of fiscal 1998, from
approximately $8.3 million in the first quarter to approximately $4.2 million in
the fourth quarter, which ended March 29, 1998.
Premises wiring sales from cable television multiple system operators
in fiscal 1998 increased approximately $3.6 million to $26.1 million, and
commercial network revenues increased $2.3 million, or 17%, to approximately
$16.1 million. Revenues during the fourth quarter of fiscal 1998 were negatively
impacted by weather-related problems and delays in customer purchase and work
authorizations in several market areas.
In May 1998, the Company elected to terminate a contract in Phoenix,
Arizona, with a Telco due to profitability concerns. Individual project work
orders related to this contract generated approximately $2.6 million in revenues
in fiscal 1998, including approximately $1.3 million in the fourth fiscal
quarter ended March 29, 1998. Work under this contract was substantially
completed in June 1998.
GROSS PROFIT
Gross profit for fiscal 1998 was $33.0 million, or 38.6% of revenues,
as compared to $21.7 million, or 34.5% of revenues in 1997. The increase in
gross margin is due primarily to a decrease in cabling materials expense
(included in cost of sales) as a percent of total Company revenues. The majority
of the Company's commercial network cabling contracts are turnkey contracts, in
which the Company provides both the labor and materials necessary for the
network installation. These cabling materials, which are billed at near cost,
comprised approximately 9% of total Company revenues in fiscal 1998 versus
approximately 14% in fiscal 1997. The percentage decline in cabling materials is
primarily due to strong fiscal 1998 labor only revenues derived from Telcos. The
increase in gross margin is also a result of subcontractor production costs,
which decreased as a percent of labor cabling revenues in fiscal 1998. Contract
and project subcontractor costs are dependent upon a number of factors,
including pricing for the Company's services, the level of productivity,
competitive factors in the local market, and other items.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for fiscal 1998 were $25.2
million, or 29.4% of revenues, as compared to $18.4 million, or 29.2%, of
revenues for fiscal 1997.
The Company's selling, general and administrative cost structure is
maintained at levels necessary to adequately support both anticipated near term
revenues and projected longer-term revenues. These anticipated revenue levels
and associated cost structures may vary among the Company's regional field
offices and geographic market areas. The dollar increase in selling, general,
and administrative expenses for fiscal 1998 is primarily due to increased
employee wages and associated costs incurred to support both current period
revenues and anticipated future revenues.
INTEREST EXPENSE
Interest expense was $343,726, or 0.4% of revenues, for fiscal 1998 as
compared to $617,004, or 1.0% of revenues, for fiscal 1997. In October 1997 the
Company used part of the proceeds received from a public stock offering to pay
in full its outstanding bank debt of approximately $6.8 million. The balance of
the proceeds are being invested in short-term investment grade securities.
Interest income generated from these investments totaled $156,093 for the period
ended March 29, 1998 (see "Liquidity and Capital Resources").
LIQUIDITY AND CAPITAL RESOURCES
General. Historically, the Company's principal sources of liquidity
have come from operating cash flow and credit arrangements. The Company's
primary requirements for working capital are to finance accounts receivable,
work-in-process and capital expenditures. Pursuant to a typical construction,
MDU, or LAN cabling contract, work performed by the Company is generally not
billed to a customer until various stages in a project are complete or until the
entire project is complete. Because the Company pays its suppliers and
subcontractors on a current basis, to the extent that trade payables exceed
customer accounts paid at any given time, the Company would draw on its
revolving credit note to finance its work-in-process until project work is
billed to and paid by the customer.
-19-
<PAGE> 20
In October 1997, the Company completed a public offering in which it
issued 600,000 new shares of common stock. Net proceeds from the offering were
$14,175,000 before deducting related expenses of $279,443. The Company paid in
full the outstanding balance of its revolving credit note of approximately $6.8
million and is using the balance of the proceeds for general corporate purposes,
including working capital, expansion of sales and marketing activities, openings
of new field offices and possible acquisitions of businesses, services or
technology complimentary to the Company's business. Pending such uses, the
proceeds are being invested in short-term investment grade securities. As of
March 28, 1999 the Company had approximately $6.0 million in cash and cash
equivalents.
On September 4, 1998 the Company's Board of Directors authorized the
repurchase of up to 400,000 common shares of the Company's stock in the open
market or in privately negotiated transactions depending upon market conditions
and other factors. The Company used current cash reserves to finance the share
repurchase program. A total of 333,570 shares were repurchased as of March 28,
1999 at an aggregate purchase price of approximately $2.5 million. Subsequent to
March 28, 1999 through April 13, 1999, the Company repurchased an additional
21,900 shares for an additional $159,000. Due to the proposed merger with Tandy
Corporation, the Company does not anticipate repurchasing any additional shares.
On February 2, 1999, the Company acquired Midwest Computer Cable, Inc.
The consideration delivered to the shareholders of MCCI in connection with the
Merger consisted of $4.4 million in cash and 500,000 shares of the Company's no
par common stock, of which 249,000 were shares previously held in treasury.
Combined accounts receivable and work-in-process at March 28, 1999
totaled $17.4 million compared to $19.6 million at March 29, 1998, a decrease of
$2.2 million or 11%. This decrease was primarily due to lower revenue levels
recorded in fiscal 1999. Revenues for fiscal 1999 were $65.2 million, a decrease
of $20.4 million, or 24%, from the $85.6 million recorded in fiscal 1998.
Revenues for the fourth quarter of fiscal 1999 decreased 12% to $17.1 million
compared with $19.5 million for the fourth quarter of fiscal 1998. Combined
accounts receivable and work-in-process for MCCI was approximately $1.1 million
at March 28, 1999. The Company anticipates that it will continue to receive
collections of its accounts receivable in the ordinary course of business.
However, there is no assurance that the Company will be able to collect all or
substantially all of its accounts receivable outstanding at any time, although
the Company believes it has adequately provided for potential losses through its
allowance for doubtful accounts. The Company's failure to collect substantially
all of its accounts receivable and work-in-process would have an adverse impact
on its working capital and could adversely affect its results of operations.
Capital requirements are dependent upon a number of factors, including
the Company's revenues, level of operations, and the type of contracts and work
that the Company performs. Due to the fact that the Company generally has no
extended commitments from its customers, it is difficult to forecast longer-term
revenues and associated capital expenditure and operating cash requirements.
Management believes that current cash reserves, cash flow from operations, and
possible credit from its commercial bank should provide sufficient capital to
meet the reasonably foreseeable business needs of the Company.
Current Credit Arrangements. On March 9, 1999, the Company received a
commitment from a commercial bank for a two-year $10.0 million unsecured
revolving credit note. The formal loan agreement was executed on April 5, 1999
and provides for borrowing under the note at a rate of prime minus 1.25%. The
revolving credit note matures on April 6, 2001 and includes a commitment fee,
after the first request for an advance, of 1/8% on any unused portion of the
note. The new loan agreement contains certain restrictive covenants, which,
among others, require the Company to maintain certain financial ratios. There
were no borrowings under the agreement as of March 28, 1999.
Cash Flow From Operating Activities. For fiscal 1999, net cash provided
by operating activities was $5.8 million. This was due primarily to the
Company's depreciation and amortization, which totaled $3.1 million, and a
reduction in combined accounts receivable and work-in-process, which totaled
$3.3 million. The reduction in combined accounts receivable and work-in-process
is due primarily to lower revenue levels in fiscal 1999.
Cash Used In Investing Activities. Net cash used in investing
activities for fiscal 1999 totaled $6.2 million, primarily as a result of the
$4.6 million of cash utilized in the acquisition of MCCI (net of acquired cash),
and the purchase of property and equipment which totaled $2.6 million.
-20-
<PAGE> 21
VARIABILITY IN QUARTERLY RESULTS AND SEASONALITY
The Company's quarterly revenues and associated operating results have
in the past, and may in the future, vary depending upon a number of factors. The
Company has no long-term contractual commitments to provide its services. The
contractual commitments which do exist generally can be terminated on 30 days'
notice. These contractual commitments do not involve a firm backlog of committed
work because the nature of the Company's contracts with MSOs, Telcos, CLECs, DBS
providers, and other telecommunication providers produce daily work orders only
on a project-by-project basis which must be funded by an approved purchase
order. In addition, network cabling services are generally nonrecurring in
nature and are contracted on a project-by-project basis. Therefore, the amount
of work performed at any given time and the general mix of customers for which
work is being performed can vary significantly. Consolidation within the
telecommunications industry may also delay or depress capital spending, as
companies assess their new business plans and strategies and focus on
administrative and operational issues associated with their acquisitions or
alliances. The Company's operations historically have also been influenced by
the budget cycles of the Company's customers. Many of the Company's MSO
customers utilize a calendar year budget cycle, funded with quarterly purchase
authorizations, which in certain fiscal years has resulted in a lack of
availability of funds in the Company's third fiscal quarter and has delayed work
authorizations in the early part of the calendar year (the Company's fourth and
first fiscal quarters.) Telecommunications providers are also subject to actual
and potential local, state, and federal regulations that influence the
availability of work for which the Company may compete. Weather may affect
operating results due to the fact that construction cabling services are
performed outdoors. Weather can also impact the Company's premises wiring
cabling services due to the limited and lost production associated with poor
driving conditions, and soft ground which may prevent underground premises
installations, the burying of cable drops, and increased restoration costs.
Operating results may also be affected by the capital spending patterns of the
Company's customers and by the success of various technologies and business
strategies employed by them. In fiscal 1998, the Company recorded approximately
$25.9 million (or 30.2% of total revenues for the year) in revenues from Telcos
that are building or expanding video systems. Of the total $25.9 million of
revenues from Telcos, approximately $14.7 million (or 17% of total Company
revenues) was generated from work orders issued under contracts with GTE Media
Ventures, a part of GTE Corporation. In late 1997 there was a reassessment by
Telcos with regard to their video strategies, primarily of pursuing less costly
DBS and MMDS wireless cable systems in lieu of the more costly hybrid
fiber-coaxial hardwire systems. Revenues from Telcos for video services,
excluding DirecTV re-sale programs, have declined sequentially in the six
consecutive quarters that ended December of 1998, from approximately $8.3
million in the quarter ended June 1998 to approximately $2.5 million in the
third and fourth quarters of fiscal 1999. Company revenues from GTE in fiscal
1999 declined $11.6 million to $3.0 million. The amount of future capital
allocated by these companies to their video programs is largely contingent upon
the financial success of these programs, possible new technical developments,
and overall strategic decisions by the companies regarding video services. The
Company's operating profitability and capacity to increase revenues is also
largely dependent upon its ability to locate and attract qualified field
managers, project managers, and technical production personnel. Other factors
that may affect the Company's operating results include the size and timing of
significant projects, and the gain or loss of a significant contract or
customer.
INFLATION
Historically, inflation has not been a significant factor to the
Company as labor is the primary cost of operations and its contracts are
typically short-term in nature. On an ongoing basis, the Company attempts to
minimize any effects of inflation on its operating results by controlling
operating costs and, whenever possible, seeking to insure that selling prices
reflect increases in costs due to inflation.
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<PAGE> 22
ENVIRONMENTAL MATTERS
The Company anticipates that its compliance with various laws and
regulations relating to the protection of the environment will not have a
material effect on its capital expenditures, future earnings or competitive
position.
YEAR 2000
The Year 2000 problem arises from the fact that due to early
limitations on memory and disk storage many computer programs indicate the year
by only two digits, rather than four. This limitation can cause programs that
perform arithmetic operations, comparisons, or sorting of data fields to yield
incorrect results when working outside the year range of 1900-1999. This could
cause computer hardware or software to fail or to create erroneous results
unless corrective measures are taken. Incomplete or untimely resolution of the
Year 2000 issue could have a material adverse impact on the Company's business,
operations or financial condition in the future. The Company has undertaken a
Year 2000 project which includes an assessment of computer equipment, software,
network infrastructure, and telephone equipment. The project addresses inventory
and assessment, impact analysis, implementation, and testing. The Company is
utilizing primarily internal resources to complete and test the Year 2000
project. External costs associated with the project through May 1999 were
approximately $40,000, and the Company estimates that it will incur additional
external costs of approximately $70,000, including the replacement of identified
non-compliant computer hardware, to complete the project. The Company is
currently in the late stages of implementation and testing and believes that all
critical parts of the project will be complete by September 1999, prior to any
anticipated impact on the Company's operating systems. The Company is also in
the process of surveying its bank, critical suppliers, and significant third
parties to determine the extent to which related interfaces with the Company's
systems are vulnerable if these third parties fail to remediate their Year 2000
issues. The Company will be formulating a contingency plan to address the
possible effects , if any, of any significant third parties experiencing Year
2000 problems. Assuming that project plans can be implemented as planned, the
Company believes future costs relating to the Year 2000 issue will not have a
material adverse impact on the Company's business, operations, or financial
condition. However, there is no assurance that the Company's year 2000
compliance efforts will prevent all consequences, and there may be undetermined
future costs due to business disruption that may be caused by customers,
suppliers, or unforeseen circumstances.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk through derivative financial
instruments and other financial instruments, such as investments in short-term
marketable securities and long-term debt, is not material. The existing credit
facility of the Company has a variable interest rate and could be adversely
affected by an increase in interest rates. There were no borrowings under this
facility as of March 28, 1999.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Registrant's consolidated financial statements and related notes
and independent auditors' reports follow on the subsequent pages of this report.
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<PAGE> 23
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
AmeriLink Corporation
We have audited the accompanying consolidated balance sheets of AmeriLink
Corporation as of March 29, 1998 and March 28, 1999, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the three years in the period ended March 28, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
AmeriLink Corporation at March 29, 1998 and March 28, 1999, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended March 28, 1999, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Columbus, Ohio
May 11, 1999, except for
Note 12, as to which the date
is May 21, 1999
-23-
<PAGE> 24
AMERILINK CORPORATION
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 29, March 28,
1998 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,723,230 $ 5,958,882
Accounts receivable-trade, net of allowance for doubtful
accounts of $234,000 in 1998 and $237,000 in 1999 13,884,731 12,084,381
Work-in-process 5,690,546 5,322,616
Materials and supply inventories 1,655,809 2,100,419
Other receivables 229,702 225,372
Deferred income taxes 458,584 361,400
Other 114,895 519,978
------------ ------------
Total current assets 30,757,497 26,573,048
Property and equipment - net 7,585,118 6,366,853
Goodwill - net -- 7,168,168
Deferred income taxes -- 128,184
Deposits and other assets 185,291 114,474
------------ ------------
Total assets $ 38,527,906 $ 40,350,727
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 2,658,091 $ 2,565,298
Liability to subcontractors 1,886,173 1,610,121
Accrued compensation and related expenses 1,845,507 1,643,872
Accrued insurance 509,965 397,713
Other 307,579 383,223
------------ ------------
Total current liabilities 7,207,315 6,600,227
Shareholders' equity:
Preferred stock, without par; 1,000,000 shares authorized;
none issued or outstanding -- --
Common stock, without par; 10,000,000 shares authorized;
4,255,930 and 4,534,344 shares issued and outstanding
in 1998 and 1999 24,017,256 25,872,715
Common stock held in treasury, at cost; 84,570 shares at
March 28, 1999 -- (648,877)
Retained earnings 7,303,335 8,526,662
------------ ------------
Total shareholders' equity 31,320,591 33,750,500
------------ ------------
Total liabilities and shareholders' equity $ 38,527,906 $ 40,350,727
============ ============
</TABLE>
- --------------------------------------------------------------------------------
See notes to consolidated financial statements
-24-
<PAGE> 25
AMERILINK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Fifty-Two Weeks Ended
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 30, March 29, March 28,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues $ 63,035,814 $ 85,645,991 $ 65,211,040
Cost of sales 41,297,467 52,615,969 39,511,832
------------ ------------ ------------
Gross profit 21,738,347 33,030,022 25,699,208
Selling, general and administrative expenses 18,436,896 25,183,821 24,063,055
------------ ------------ ------------
Income from operations 3,301,451 7,846,201 1,636,153
Interest income (expense) (617,004) (187,633) 464,174
Other income 7,047 -- --
------------ ------------ ------------
Income before income taxes 2,691,494 7,658,568 2,100,327
Provision for income taxes 1,123,000 3,073,000 877,000
------------ ------------ ------------
Net income $ 1,568,494 $ 4,585,568 $ 1,223,327
============ ============ ============
Earnings per share:
Basic $ 0.45 $ 1.20 $ 0.29
============ ============ ============
Diluted $ 0.44 $ 1.15 $ 0.28
============ ============ ============
Weighted average shares:
Basic 3,479,025 3,805,866 4,244,790
Diluted 3,589,131 4,002,089 4,334,465
</TABLE>
- --------------------------------------------------------------------------------
See notes to consolidated financial statements
-25-
<PAGE> 26
AMERILINK CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock
Common Stock Held in Treasury
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance at March 31, 1996 3,478,580 $ 8,061,395
Net Income -- --
Issuance of restricted stock 3,000 23,250
--------- ------------ -------- ------------
Balance at March 30, 1997 3,481,580 8,084,645 -- --
Net income -- --
Proceeds from exercise of
stock options 174,350 813,275
Tax benefit from exercise of
stock options -- 1,223,779
Net proceeds from sale of
common stock, less issuance
expenses of $279,443 600,000 13,895,557
--------- ------------ -------- ------------
Balance at March 29, 1998 4,255,930 24,017,256 -- --
Net income -- --
Proceeds from exercise of stock options 25,000 158,750 -- --
Repurchases of common stock -- -- (333,570) $ (2,528,400)
MCCI Acquisition 251,000 1,685,477 249,000 1,879,523
Issuance of restricted stock,
net of deferred compensation expense 2,414 -- -- --
Amortization of deferred
compensation expense -- 11,232 -- --
--------- ------------ -------- ------------
Balance at March 28, 1999 4,534,344 $ 25,872,715 (84,570) $ (648,877)
========= ============ ======== ============
</TABLE>
<TABLE>
<CAPTION>
Retained
Earnings Total
-------- -----
<S> <C> <C>
Balance at March 31, 1996 $ 1,149,273 $ 9,210,668
Net Income 1,568,494 1,568,494
Issuance of restricted stock -- 23,250
------------ ------------
Balance at March 30, 1997 2,717,767 10,802,412
Net income 4,585,568 4,585,568
Proceeds from exercise of
stock options -- 813,275
Tax benefit from exercise of
stock options -- 1,223,779
Net proceeds from sale of
common stock, less issuance
expenses of $279,443 -- 13,895,557
------------ ------------
Balance at March 29, 1998 7,303,335 31,320,591
Net income 1,223,327 1,223,327
Proceeds from exercise of stock options -- 158,750
Repurchases of common stock -- (2,528,400)
MCCI Acquisition -- 3,565,000
Issuance of restricted stock,
net of deferred compensation expense -- --
Amortization of deferred
compensation expense -- 11,232
------------ ------------
Balance at March 28, 1999 $ 8,526,662 $ 33,750,500
============ ============
</TABLE>
- --------------------------------------------------------------------------------
See notes to consolidated financial statements
-26-
<PAGE> 27
AMERILINK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fifty-Two Weeks Ended
<TABLE>
<CAPTION>
March 30, March 29, March 28,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,568,494 $ 4,585,568 $ 1,223,327
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,242,312 2,967,518 3,105,767
Net loss (gain) on disposal of fixed assets (14,950) (4,400) 8,515
Gain on investments (6,199) -- --
Deferred income taxes (145,000) (304,281) (31,000)
Changes in operating assets and liabilities net of effect
of acquisition:
Accounts receivable and work-in-process (6,051,531) (1,721,686) 3,334,630
Materials and supply inventories 200,244 (145,969) (20,354)
Other receivables (86,558) 78,515 4,330
Other assets 357,138 38,230 (309,831)
Trade accounts payable 516,554 339,416 (555,320)
Liability to subcontractors 877,568 (74,581) (276,052)
Accrued compensation and related expenses 356,737 409,835 (517,077)
Accrued insurance (168,615) 141,708 (112,252)
Other liabilities 95,199 51,428 (70,930)
------------ ------------ ------------
Net cash provided by (used in) operating activities (258,607) 6,361,301 5,783,753
INVESTING ACTIVITIES
Purchase of property and equipment (2,752,254) (4,917,240) (2,593,451)
Proceeds from sale of property and equipment 629,525 297,066 936,630
Cash paid for acquisition net of acquired cash -- -- (4,592,446)
Deposits and other assets (82,912) (1,713) 70,816
------------ ------------ ------------
Net cash used in investing activities (2,205,641) (4,621,887) (6,178,451)
FINANCING ACTIVITIES
Principal payments on long-term debt (20,400,000) (25,794,190) --
Proceeds from borrowings on long-term debt 22,905,963 16,725,000 --
Common stock repurchased -- -- (2,528,400)
Proceeds from issuance of common stock -- 13,895,557 --
Proceeds from exercise of stock options -- 813,275 158,750
Tax benefit from exercise of options -- 1,223,779 --
------------ ------------ ------------
Net cash provided by (used in) financing activities 2,505,963 6,863,421 (2,369,650)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 41,715 8,602,835 (2,764,348)
Cash and cash equivalents at beginning of year 78,680 120,395 8,723,230
------------ ------------ ------------
Cash and cash equivalents at end of year $ 120,395 $ 8,723,230 $ 5,958,882
============ ============ ============
Supplemental cash flow disclosures:
Interest paid $ 619,192 $ 347,484 $ --
Income taxes paid $ 762,048 $ 2,304,584 $ 1,056,089
</TABLE>
- --------------------------------------------------------------------------------
See notes to consolidated financial statements
-27-
<PAGE> 28
AMERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fifty-two weeks ended March 30, 1997, March 29, 1998 and March 28, 1999
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: AmeriLink Corporation (the "Company") designs, constructs,
installs and maintains fiber optic, coaxial and twisted-pair copper cabling
systems for the transmission of video, voice and data. The Company's cabling
services include the drops and cable feeds to, and wiring of, residences,
multiple dwelling units and commercial buildings and the construction of aerial
and underground distribution plant. The Company offers these services on a
national basis to providers of telecommunications services, including: major
cable television multiple system operators; traditional telephone service
providers, including local exchange carriers and long distance carriers;
competitive local exchange carriers; Direct Broadcast Satellite ("DBS")
providers; system integrators and users of local area network ("LAN") and
wide-area network ("WAN") systems; and other businesses providing specific or
bundled telecommunications services. The Company's services are provided
predominately through the use of independent contractors via its national
network of regional and satellite field offices.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and all of its wholly owned subsidiaries. All
significant inter-company accounts and transactions have been eliminated in
consolidation.
FISCAL YEAR: Fiscal years are designated in the financial statements and notes
thereto by the year in which the fiscal year ends. Accordingly, results for the
fiscal years 1997, 1998 and 1999 represent the 52 weeks ended March 30, 1997,
March 29, 1998, and March 28, 1999, respectively.
REVENUES AND COST RECOGNITION: The Company recognizes revenues from its fixed
and unit price contracts in process on the percentage of completion method of
accounting. Anticipated losses on these contracts are recorded when identified.
Contract costs include all direct labor, material, subcontract and other direct
project costs related to contract performance.
Work-in-process typically represents amounts earned under the Company's
contracts but not billed due to timing or not billable to clients according to
contract terms, which usually consider passage of time, achievement of certain
milestones or completion of the project.
MAJOR CUSTOMERS: Customers comprising 10% or greater of the Company's fiscal
year net sales are summarized as follows:
1997 1998 1999
---- ---- ----
Time Warner Cable 19% 16% 12%
Tele-Communications, Inc. (TCI) 9% 4% 11%
GTE Media Ventures 8% 17% 5%
CONCENTRATIONS OF CREDIT RISK: Financial instruments, which potentially subject
the Company to concentration of credit risk, consist principally of
uncollateralized trade receivables and unbilled work-in-process. The Company
performs ongoing credit evaluations of its customers' financial conditions but
does not require collateral to support customer receivables. The Company
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers, historical trends and other information.
The following is a summary of activity in the allowance for doubtful accounts
for the fiscal years ended 1997, 1998 and 1999.
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Beginning balance $ 95,000 $ 171,000 $ 234,000
Provision for bad debts 349,000 229,600 76,000
Allowance acquired in acquisition -- -- 40,000
Account write-offs, net (273,000) (166,600) (113,000)
--------- --------- ---------
Ending Balance $ 171,000 $ 234,000 $ 237,000
========= ========= =========
</TABLE>
- --------------------------------------------------------------------------------
-28-
<PAGE> 29
AMERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fifty-two weeks ended March 30, 1997, March 29, 1998 and March 28, 1999
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
MATERIALS AND SUPPLY INVENTORIES: Materials and supply inventories are comprised
primarily of cabling materials and are stated at cost. Cost is determined using
the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT: Property and equipment is recorded at cost. Depreciation
and amortization for financial reporting purposes is computed using the
straight-line method over the estimated useful lives of the assets. Generally,
the useful lives for all major classes of assets are two to seven years.
Recovery of capital costs for income tax reporting purposes is primarily
provided by the use of accelerated methods over the statutory recovery periods.
The costs of assets sold or retired and the related accumulated depreciation are
removed from the accounts in the year of disposal, and any gain or loss is
included in net income. Maintenance and repairs are charged to expense as
incurred.
GOODWILL: Goodwill represents the excess of the purchase price over the fair
value of net assets acquired. Goodwill is being amortized ratably over a 25 year
period. The carrying value of goodwill will be reviewed periodically by the
Company, and impairments, if any, will be recognized when expected future
operating cash flows derived from goodwill are less than its carrying value.
Goodwill related amortization expense charged to operations for fiscal 1999 was
$69,856.
CASH AND CASH EQUIVALENTS: For purposes of the statements of cash flows, the
Company considers all highly liquid investments with a maturity of three months
or less at the time of purchase to be cash equivalents. Cash equivalents consist
of money market fund investments and short-term commercial paper, substantially
all of which were held with two financial institutions.
INCOME TAXES: Income taxes are calculated in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes".
Deferred tax assets and liabilities are recognized based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair values of all financial
instruments approximate carrying values because of the short maturities of those
instruments.
- --------------------------------------------------------------------------------
-29-
<PAGE> 30
AMERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fifty-two weeks ended March 30, 1997, March 29, 1998 and March 28, 1999
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
COMMON STOCK AND EARNINGS PER SHARE: The Company follows SFAS No. 128, "Earnings
per Share," which requires the presentation of basic and diluted earnings per
share ("EPS"). Basic EPS excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS includes the dilution of common stock
equivalents consisting of shares subject to stock options.
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Basic:
------
Net income $1,568,494 $4,585,568 $1,223,327
Weighted average common
shares outstanding 3,479,025 3,805,866 4,244,790
---------- ---------- ----------
Basic EPS $ 0.45 $ 1.20 $ 0.29
========== ========== ==========
Diluted:
--------
Net income $1,568,494 $4,585,568 $1,223,327
Weighted average common
shares outstanding 3,479,025 3,805,866 4,244,790
Dilutive stock options 110,106 196,223 89,675
---------- ---------- ----------
Total shares and dilutive potential shares 3,589,131 4,002,089 4,334,465
---------- ---------- ----------
Diluted EPS $ 0.44 $ 1.15 $ 0.28
========== ========== ==========
</TABLE>
Some options were outstanding during fiscal years 1997, 1998 and 1999 but were
not included in the computation of diluted earnings per share because the
average market price of the Company's common stock during the period was greater
than the exercise price of the options and, therefore, were anti-dilutive. Note
7 provides additional information on the Company's stock options.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Management believes those estimates and assumptions utilized
in preparing the financial statements are reasonable. Actual results could
differ from those estimates.
Estimates used in the Company's consolidated financial statements include, but
are not limited to, revenue recognition of work-in-process, the allowance for
doubtful accounts, self-insured claims liabilities, the valuation of deferred
tax assets, depreciation and amortization and the estimated lives of assets.
BUSINESS SEGMENTS: In June 1997, the Financial Accounting Standards Board issued
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 131 changes the way public companies
report segment information in annual financial statements and also requires
those companies to report selected segment information in interim financial
reports to stockholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. Management
believes the Company's operations comprise only one segment and as such,
adoption of SFAS No. 131 does not impact the disclosures made in the Company's
financial statements.
- --------------------------------------------------------------------------------
-30-
<PAGE> 31
AMERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fifty-two weeks ended March 30, 1997, March 29, 1998 and March 28, 1999
- --------------------------------------------------------------------------------
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of March 29, 1998 and March
28, 1999:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Leasehold improvements $ 224,331 $ 238,633
Transportation equipment 7,105,535 6,968,000
Machinery and equipment 5,380,994 5,594,254
Computer equipment and related software 1,621,867 2,055,927
Furniture and fixtures 974,463 854,813
------------- -------------
Total 15,307,190 15,711,627
Less accumulated depreciation (7,722,072) (9,344,774)
------------- --------------
Net property and equipment $ 7,585,118 $ 6,366,853
============= =============
</TABLE>
3. EMPLOYEE BENEFIT PLANS
The Company has a Profit Sharing and 401(k) Plan covering substantially all of
its employees. Profit sharing contributions are at the discretion of the Board
of Directors, although limited to the maximum amount permitted under the
Internal Revenue Code. The Company did not make a profit sharing contribution
for fiscal years 1997, 1998, and 1999. The Company's 401(k) Plan allows eligible
employees to contribute a portion of their compensation to the Plan. The
employer may make an additional contribution subject to the terms of the Plan.
The contribution expense for the Company to the 401(k) Plan for fiscal years
1997, 1998 and 1999 was $66,109, $160,557, and $65,274, respectively.
4. EXISTING CREDIT FACILITY
On March 9, 1999 the Company received a commitment from a commercial bank for a
$10.0 million unsecured revolving credit note. The formal loan agreement was
executed on April 5, 1999 and provides for borrowings under the note at a rate
of prime minus 1.25%. The revolving credit note matures on April 6, 2001 and
includes a commitment fee, after the first request for an advance, of 1/8% on
any unused portion of the note. The new loan agreement contains certain
restrictive covenants which, among others, require the Company to maintain
certain financial ratios. There were no borrowings under the agreement as of
March 28, 1999.
- --------------------------------------------------------------------------------
-31-
<PAGE> 32
AMERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fifty-two weeks ended March 30, 1997, March 29, 1998 and March 28, 1999
- --------------------------------------------------------------------------------
5. INCOME TAXES
The provision for income taxes consists of the following for the fiscal years
ended 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 1,013,000 $ 2,728,000 $ 771,000
State and local 255,000 649,000 137,000
----------- ----------- -----------
1,268,000 3,377,000 908,000
Deferred:
Federal (123,000) (259,000) (27,000)
State and local (22,000) (45,000) (4,000)
----------- ----------- -----------
(145,000) (304,000) (31,000)
----------- ----------- -----------
Total provision for income taxes $ 1,123,000 $ 3,073,000 $ 877,000
=========== =========== ===========
</TABLE>
Deferred tax assets recorded in the consolidated balance sheets at fiscal years
ended 1998 and 1999, consist of the following:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Deferred tax assets:
Depreciation $ -- $128,184
Accrued compensation 169,073 80,749
Accrued insurance 88,128 126,646
Allowance for doubtful accounts 93,600 78,800
Other 107,783 75,205
-------- --------
Total deferred tax assets $458,584 $489,584
======== ========
</TABLE>
A reconciliation of the federal corporate income tax rate and the effective tax
rate on income taxes is summarized below for the fiscal years ended 1997, 1998
and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Statutory income tax rate 34.0% 34.0% 34.0%
State and local taxes, net of Federal benefit 5.2% 5.2% 3.4%
Goodwill amortization -- -- 1.4%
Other permanent differences 2.5% 0.9% 3.0%
---- ---- ----
Effective income tax rate 41.7% 40.1% 41.8%
==== ==== ====
</TABLE>
- --------------------------------------------------------------------------------
-32-
<PAGE> 33
AMERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fifty-two weeks ended March 30, 1997, March 29, 1998 and March 28, 1999
- --------------------------------------------------------------------------------
6. OPERATING LEASES
The Company is committed under non-cancelable operating leases for offices and
warehouse space which will require future minimum rental commitments of
$1,058,968, $270,707, $87,960, $20,760, and $19,030 in fiscal years 2000 through
2004, respectively. The Company also operates under lease agreements which do
not exceed one year in term. Rental expense under all operating leases amounted
to $923,752, $1,222,171 and $1,255,549 for the fiscal years 1997,1998 and 1999,
respectively.
Subsequent to fiscal 1999, the Company executed a new ten-year non-cancelable
lease agreement that is in addition to leases that were in effect as of March
28, 1999. The agreement will require future minimal rental commitments of
$230,000 per year effective upon the targeted occupation and commencement date,
which is currently estimated to be April 1, 2000.
7. STOCK OPTIONS AND STOCK INCENTIVE PLAN
Prior to the Company's initial public offering in August 1994, key officers were
granted options to purchase outstanding shares of common stock from the majority
shareholders of the Company, and in connection with the offering agreed to
restated option agreements. The Chief Executive Officer was granted options to
purchase 135,000 shares at $4.00 per share, all of which were exercised during
fiscal 1998, and 225,000 shares at $6.35 per share. Of the 225,000 shares,
25,000 were exercised during fiscal 1998 and 25,000 were exercised during fiscal
1999. The remaining 175,000 options are currently exercisable and shall remain
in effect until the later of termination of employment or, in the event
employment is terminated by death, one year after death. The Company's Senior
Vice President of Operations was granted options to purchase 81,000 shares at
$4.69 per share. These options shall remain effective until the earlier of May
1, 2004, or the termination of employment (if employment is terminated by death,
then one year after death). Options to purchase 40,500 of the shares became
exercisable on April 1, 1997, and the remaining options will become exercisable,
on a cumulative basis, at the rate of 10% per year commencing on April 1, 1998.
None of the options have been exercised as of March 28, 1999.
Effective August 1994, and amended in August 1998, the Company adopted a stock
incentive plan (the "Plan") for key employees and directors of the Company. The
Plan is administered by the Compensation Committee of the Board of Directors,
and provides for grants of stock options, stock appreciation rights, restricted
stock awards and phantom stock. The maximum aggregate number of common shares
which may be granted under the Plan is 950,000 shares, and the maximum number of
shares that may be awarded during any calendar year may not exceed 10% of the
total number of issued and outstanding common shares of the Company. Any awards
that lapse or are canceled are available for re-grant under the terms of the
Plan. At March 28, 1999, there were 350,933 shares available for grant.
Stock option grants may be in the form of incentive stock options or
non-qualified options. Key employee options awarded under the plan vest either
20% or 25% annually from the date of the grant. Non-employee Director option
awards granted after August 4, 1998 vest on the first anniversary of the date of
the grant, and those granted before August 4, 1998 vest 25% annually from the
date of grant. Stock options awarded under the plan are at exercise prices that
equal or exceed the fair market value at the date of the grant, and any shares
not exercised lapse on the earliest of ten years from the grant date or 90 days
after termination with the Company. In February 1997, a grant of 3,000 shares of
restricted stock was issued to non-employee Directors of the Company. In May
1998, the Company awarded 2,414 shares of restricted stock to the Senior Vice
President of Operations. One-third of the restricted shares becomes exercisable
on each anniversary of the date of the award.
- --------------------------------------------------------------------------------
-33-
<PAGE> 34
AMERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fifty-two weeks ended March 30, 1997, March 29, 1998 and March 28, 1999
- --------------------------------------------------------------------------------
7. STOCK OPTIONS AND STOCK INCENTIVE PLAN (CONTINUED)
The following table summarizes all stock option transactions under the Stock
Incentive Plan for the fiscal years ended March 30, 1997, March 29, 1998, and
March 28, 1999.
<TABLE>
<CAPTION>
1997 1998 1999
---------------------- ---------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning
of year 142,450 $ 8.70 177,490 $ 8.50 220,736 $ 10.80
Granted 48,425 $ 7.75 57,596 $ 17.19 368,251 $ 10.02
Forfeited (13,385) $ 7.95 -- (9,684) $ 15.04
Exercised -- (14,350) $ 7.98 --
------- ------- -------
Outstanding - end of year 177,490 $ 8.50 220,736 $ 10.80 579,303 $ 10.23
======= ======= =======
Exercisable at end of year 49,125 $ 8.81 71,410 $ 8.84 120,190 $ 9.43
======= ======= =======
</TABLE>
The following table summarizes information about stock options outstanding at
March 28, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- ---------------------
Weighted Weighted
Weighted Average Average Average
Remaining Exercise Exercise
Range of Exercise Prices Options Contractual Life Price Options Price
- ------------------------ ------- ---------------- ----- ------- -----
<S> <C> <C> <C> <C> <C>
$7.75 - $8.25 194,216 7.7 $ 8.05 71,636 $ 7.95
$10.00 - $14.06 343,101 8.3 $ 10.38 40,000 $ 10.00
$19.13 41,986 8.4 $ 19.13 8,554 $ 19.13
------- -------
579,303 8.1 $ 10.23 120,190 $ 9.43
======= =======
</TABLE>
The Company follows the disclosure requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation", but has elected to continue to measure compensation
expense in accordance with Accounting Principles Board Opinion No. 25, ("APB
25") "Accounting for Stock Issued to Employees". Under APB 25, no compensation
expense for stock options has been recognized because the exercise prices equal
or exceed the market price of the underlying stock on the date of grant.
- --------------------------------------------------------------------------------
-34-
<PAGE> 35
AMERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fifty-two weeks ended March 30, 1997, March 29, 1998 and March 28, 1999
- --------------------------------------------------------------------------------
7. STOCK OPTIONS AND STOCK INCENTIVE PLAN
(CONTINUED)
The fair value of the options granted in fiscal years 1997, 1998 and 1999 has
been estimated at the date of grant using the Black-Scholes option-pricing model
with the following assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected stock volatility 40.0% 70.0% 60.0%
Risk-free interest rate 6.5% 6.2% 5.3%
Expected lives 5 years 5 years 4 to 5 years
Dividend yield 0.0% 0.0% 0.0%
</TABLE>
The weighted average estimated fair value of stock options granted during fiscal
1997, 1998 and 1999 was $3.53, $10.85 and $5.51 per share, respectively. Had
compensation cost for the Company's stock option and stock incentive plans been
determined based on the fair value at the grant dates of awards under those
plans, consistent with the method of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the proforma amounts indicated
below:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C> <C>
Net income: As reported $ 1,568,494 $ 4,585,568 $ 1,223,327
Proforma 1,544,000 4,502,000 958,572
Basic EPS As reported $ 0.45 $ 1.20 $ 0.29
Proforma 0.44 1.18 0.23
Diluted EPS As reported $ 0.44 $ 1.15 $ 0.28
Proforma 0.44 1.13 0.23
</TABLE>
The Black-Scholes option valuation model was developed for estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. Because option valuation models require the use of subjective
assumptions and changes in these assumptions can materially impact the fair
value of the options and the Company's options do not have the characteristics
of traded options, the option valuation models do not necessarily provide a
reliable measure of the fair value of its options.
8. STOCK OFFERING
On October 23, 1997, the Company issued 600,000 new shares of its common stock.
The proceeds from the offering were $14,175,000 before deducting related
expenses totaling $279,443. The Company used part of the proceeds to pay in full
the outstanding balance of its unsecured revolving credit note with its
commercial bank.
- --------------------------------------------------------------------------------
-35-
<PAGE> 36
AMERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fifty-two weeks ended March 30, 1997, March 29, 1998 and March 28, 1999
- --------------------------------------------------------------------------------
9. ACQUISITION
On February 2, 1999, the Company, through a wholly-owned subsidiary, MCC
Acquisition Corp. ("MAC"), acquired Midwest Computer Cable, Inc. ("MCCI"), a
commercial cabling installation firm headquartered in Des Moines, Iowa. Pursuant
to the Merger Agreement, MCCI was merged with and into MAC and the separate
corporate existence of MCCI ceased. Following the Merger, MAC changed its name
to "Midwest Computer Cable, Inc." and will continue to conduct business as a
wholly-owned subsidiary of the Company. The consideration delivered to the
shareholders of MCCI in connection with the acquisition consisted of $4.4
million in cash and 500,000 common shares (without par value) of the Company
valued at $3,565,000. The acquisition has been accounted for as a purchase, and
the results of operations of MCCI have been included in the consolidated results
of the Company from the date of acquisition. The excess of the total cost over
the fair value of the net assets acquired is being amortized under the
straight-line method over twenty-five years. The purchase price allocation is
subject to final adjustments which management believes will not be material.
The following unaudited pro forma data summarize the results of operations for
the fifty-two weeks ended March 29, 1998 and March 28, 1999 as if the
acquisition took place as of the beginning of the periods presented. The
unaudited pro forma data gives effect to actual operating results prior to the
acquisition and reflects pro forma adjustments for amortization of goodwill on a
straight-line basis over 25 years, and interest charges on the $4,734,452 of
cash utilized in the acquisition. In December 1998 the shareholders of MCCI
declared special one-time bonuses to three key employees in the aggregate amount
of $1,369,575 payable by issuing a total of 17,823.53 shares of MCCI common
stock. This bonus is not representative of the bonuses expected to be paid to
those key employees subsequent to the acquisition, and therefore, the unaudited
pro forma consolidated statement of income for the fifty-two weeks ended March
28, 1999 has been adjusted as if these special bonuses had not been made.
Effective July 1, 1998 MCCI elected under Subchapter S of the Internal Revenue
Code to have the shareholders recognize their proportionate share of MCCI's
taxable income on their personal income tax returns in lieu of paying corporate
income tax. Pro forma net income includes a provision for income taxes
reflecting adjustments to provide for income taxes as if MCCI were included in
AmeriLink's federal and state income tax returns, including the associated
amortization of goodwill resulting from the acquisition which is not deductible
for income tax purposes.
PRO FORMA DATA
(UNAUDITED) 1998 1999
----------- ---- ----
Revenues $92,622,068 $72,652,772
Net income $ 4,526,841 $ 1,587,358
=========== ===========
Earnings per share:
Basic $ 1.05 $ 0.34
=========== ===========
Diluted $ 1.01 $ 0.33
=========== ===========
Weighted average shares:
Basic 4,305,866 4,669,447
Diluted 4,502,089 4,759,122
These unaudited pro forma results do not purport to be indicative of the results
that would have actually been obtained if MCCI had been acquired as of the
beginning of the earliest period presented.
- --------------------------------------------------------------------------------
-36-
<PAGE> 37
AMERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fifty-two weeks ended March 30, 1997, March 29, 1998 and March 28, 1999
- --------------------------------------------------------------------------------
10. STOCK REPURCHASE PROGRAM
On September 4, 1998 the Company's Board of Directors authorized the repurchase
of up to 400,000 common shares of the Company's stock in the open market or in
privately negotiated transactions depending upon market conditions and other
factors. The Company intends to use current cash reserves to finance the share
repurchase program. Repurchased common shares will be held in the Company's
treasury and used for employee benefit plans, potential acquisitions and other
general corporate purposes. A total of 333,750 shares have been repurchased,
249,000 of which were re-issued in connection with the MCCI acquisition (see
note 9). As of March 28,1999 there were 84,570 shares held in Treasury.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited quarterly results from operations
for the 52 weeks ended March 29, 1998, and March 28, 1999 (in thousands, except
per share amounts).
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Revenues:
Fiscal 1998 $21,651 $21,717 $22,736 $19,542
Fiscal 1999 16,649 15,759 15,669 17,134
Gross profit:
Fiscal 1998 8,302 8,338 8,791 7,599
Fiscal 1999 6,482 6,041 6,252 6,924
Income before income taxes:
Fiscal 1998 2,001 2,001 2,322 1,335
Fiscal 1999 717 570 536 277
Net income:
Fiscal 1998 1,181 1,212 1,389 804
Fiscal 1999 444 339 321 119
Basic EPS:
Fiscal 1998 $ 0.34 $ 0.35 $ 0.35 $ 0.19
Fiscal 1999 $ 0.10 $ 0.08 $ 0.08 $ 0.03
Diluted EPS:
Fiscal 1998 $ 0.33 $ 0.31 $ 0.32 $ 0.18
Fiscal 1999 $ 0.10 $ 0.08 $ 0.08 $ 0.03
</TABLE>
12. SUBSEQUENT EVENT - PLANNED TRANSACTION
On May 21, 1999, AmeriLink Corporation and Tandy Corporation ("Tandy") each
announced their signing of a definitive merger agreement (the "Merger"). Under
terms of the Merger, Tandy will acquire 100% of AmeriLink's common stock at an
exchange ratio designed to reflect $15.60 per share of AmeriLink's stock in a
tax-free exchange for Tandy stock. If the average closing price of Tandy's
common shares falls below a specified amount for a twenty-day trading period
ending just before the merger is completed, AmeriLink shareholders will receive
$14.50 cash for every AmeriLink common share they own instead of Tandy stock.
Following the merger, AmeriLink will continue its operations as a wholly owned
subsidiary of Tandy. The Merger has been approved by the Board of Directors of
each Company and is subject to usual and customary closing conditions, including
regulatory and shareholder approval. It is currently anticipated that the
transaction will close in late August 1999.
- --------------------------------------------------------------------------------
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<PAGE> 38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names and ages of the directors and
executive officers of the Company as well as offices held by such persons. A
summary of the background and experience of each of these individuals is set
forth after the table. The Board of Directors is divided into two classes of
three members each. The members of the two classes are elected to serve for
staggered terms of two years. There are no family relationships among the
directors or executive officers of the Company.
<TABLE>
<CAPTION>
Director or Executive
Name Age Officer Since Position
---- --- ------------- --------
<S> <C> <C> <C>
Larry R. Linhart 53 1984 Chairman of the Board of Directors,
President and Chief Executive Officer
Joseph L. Govern 41 1986 Senior Vice President - Operations
Robert B. Horn 50 1997 Vice President - Human Resources
James W. Brittan 40 1994 Treasurer and Vice President - Finance
Robert L. Powelson 57 1981 Director
Robert D. Setzer 51 1998 Director
William H. Largent 43 1994 Director
Richard W. Rubenstein 55 1997 Director
George R. Manser 68 1994 Director
</TABLE>
Larry R. Linhart is the Chairman of the Board of Directors, President
and Chief Executive Officer of the Company. Mr. Linhart has been the President,
Treasurer and Chief Executive Officer of AmeriLink Corp. ("The Operating
Company") since 1986 and a Director of the Operating Company since 1984. From
1984 to 1986, Mr. Linhart served as Executive Vice President and General Counsel
of the Operating Company. Mr. Linhart was previously a partner in the Columbus
law firm of Murphey, Young and Smith (currently, Squire, Sanders & Dempsey),
which he joined in 1971.
Joseph L. Govern is the Senior Vice President - Operations of the
Corporation. Mr. Govern has been Senior Vice President - Operations of the
Operating Company since 1992. From 1991 to 1992, Mr. Govern served as the
Operating Company's Vice President of Finance and Director of Operations. From
1986 to 1991, Mr. Govern was the Vice President of Finance and Administration
for the Operating Company. He is a Certified Public Accountant and from 1980
through 1985 was employed by Coopers & Lybrand.
Robert B. Horn is the Vice President - Human Resources of the
Corporation. Mr. Horn was hired as Vice President Human Resources in February,
1997. From 1993 to 1997, Mr. Horn was the Vice President of Human Resources of
Damon's International, Inc., a 110 unit casual dining restaurant chain. From
1985 to 1993, Mr. Horn owned and operated five restaurants, co-owned and
operated an international meeting planning firm and served as a
-38-
<PAGE> 39
management development consultant to various small companies and trade
associations. From 1974 to 1985, Mr. Horn was employed by RAX Restaurants, Inc.
and served as Executive Vice President - Operations.
James W. Brittan is the Treasurer and Vice President - Finance of the
Corporation. Mr. Brittan has been Treasurer and Vice President - Finance of the
Operating Company since May, 1994. Mr. Brittan served as the Operating Company's
Controller from 1986 to May, 1994. From 1984 to 1986, Mr. Brittan was employed
by The Limited, Inc., a national fashion retailer, as Senior Accountant. Mr.
Brittan is a Certified Public Accountant and from 1981 through 1984 was employed
by Coopers & Lybrand.
Robert L. Powelson was a co-founder of the Operating Company with E.
Len Gibson. From 1987 to 1994, Mr. Powelson served as a consultant for the
Operating Company.
Robert D. Setzer is currently the Chairman of the Board of Directors,
President and Chief Executive Officer of Capital-Plus, Inc. From 1989 to 1991
Mr. Setzer was President and a Director of Liebert Corporation.
William H. Largent is the Senior Vice President - Operations and Chief
Financial Officer of Applied Innovation, Inc. Previously Mr. Largent was the
Chief Financial Officer and a Director of Metatec, Corporation from 1993 to
1997, and was President of Liebert Capital Management Corporation from 1990 to
1993.
Richard W. Rubenstein is a Partner of Squire, Sanders & Dempsey, L.L.P.
From 1992 until 1994 Mr. Rubenstein was a Partner of Schwartz, Kelm, Warren &
Rubenstein.
George R. Manser is currently Chairman of the Board of Directors of
UniGlobe Travel (Capital Cities) Inc., a travel agency franchiser; Director of
Corporate Finance of UniGlobe Travel USA since 1997; Advisory Director to J.C.
Bradford & Co. since 1994; Director of Cardinal Health, Inc., a wholesale
pharmaceutical distributor; Director of State Auto Financial Corporation, an
insurance holding company; Director of Hallmark Financial Services, Inc., a
nonstandard, Texas-only, auto insurer; Director of Checkfree Corporation, a
business facilitating electronic commerce and prior to 1994, Chairman of North
American National Corporation.
-39-
<PAGE> 40
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth all cash compensation paid or accrued by
the Company for services rendered to the Company and its subsidiaries in all
capacities during the fiscal years ended March 30, 1997, March 29, 1998 and
March 28, 1999 for the chief executive officer of the Company and other
executive officers (together, the "Named Executives"), whose total salary and
bonus for the fiscal year ended March 29, 1998 exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards
--------------------------------------------- ----------------------------
Other Restricted Stock
Name and Fiscal Annual Stock Award Options
Principal Position Year Salary ($) Bonus ($) Comp.(1) ($) Granted (#)
------------------ ---- --------- -------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Larry R. Linhart, 1999 $ 377,145 $ 14,154 $ 2,400 $ -0- 200,000
President and Chief 1998 372,673 115,229 4,750 -0- -0-
Executive Officer 1997 361,818 105,089 1,365 -0- -0-
Joseph L. Govern, 1999 $ 138,000 $ 5,000 $ 1,400 $ -0- 5,208
Senior Vice President - 1998 115,000 86,250 2,980 40,435(2) -0-
Operations 1997 105,000 37,991 1,718 -0- -0-
James W. Brittan, 1999 $ 80,000 $ 5,000 $ 1,400 $ -0- 4,167
Vice President - 1998 80,000 60,692 2,886 -0- 5,000
Finance, Treasurer 1997 73,500 15,193 1,428 -0- 5,000
Robert B. Horn, 1999 $ 75,000 $ 5,000 $ 530 $ -0- 10,000
Vice President - 1998 75,000 37,500 -0- -0- 2,500
Human Resources 1997 (3)
</TABLE>
- ----------
(1) Represents the Named Executive's share of the Operating Company's
contribution under the Operating Company's 401(k).
(2) Represents 2,414 restricted shares granted to Mr. Govern on May 15, 1998,
as part of his fiscal 1998 bonus. The shares are subject to annual vesting
of 805 shares on May 15, 1999, 805 shares on May 15, 2000, and 804 shares
on May 15, 2001, contingent upon Mr. Govern's continued employment through
the years then ended.
(3) Mr. Horn joined the Company in February 1997 and earned cash compensation
of $11,500 during fiscal year 1997.
-40-
<PAGE> 41
STOCK OPTION GRANTS IN FISCAL 1999
The following table sets forth information regarding stock option
grants to the Named Executives during the 1999 fiscal year. All options were
awarded at exercise prices that equal or exceed the market price of the
Corporation's stock on the date of grant.
<TABLE>
<CAPTION>
Potential Realizable Value
Number % of Total at Assumed Annual Rates
of Securities Options Granted of Stock Price Appreciation
Underlying to Employees Exercise for Option Term
Options in Fiscal Price Expiration ---------------
Name Granted (#) Year ($/Share) Date 5% ($) 10% ($)
---- ----------- ---- --------- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Larry R. Linhart 50,000 13.6% $ 11.000 August 3, 151,955 335,781
2003
150,000 40.7% $ 10.000 August 3, 943,342 2,390,614
2008
Joseph L. Govern 5,208 (1) 1.4% $ 14.063 August 20, 16,508 35,701
2002
James W. Brittan 4,167 (1) 1.1% $ 14.063 August 20, 13,208 28,565
2002
Robert B. Horn 10,000 2.7% $ 10.000 August 3, 62,889 159,374
2008
</TABLE>
- ----------
(1) Shares became fully exercisable on May 26, 1999.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
The following table sets forth certain information concerning stock
options exercised during fiscal year 1999 and the value of unexercised stock
options held as of March 28,1999, by the Named Executives.
<TABLE>
<CAPTION>
Value of Unexercised
Shares Unexercised Options In-The-Money Options
Acquired at Fiscal Year End (#) at Fiscal Year End ($)(1)
Name and on Value ---------------------- -------------------------
Principal Position Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
------------------ ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Larry R. Linhart 25,000 $ -0- 215,000 210,000 $135,625 $ -0-
Joseph L. Govern -0- -0- 48,600 37,608 118,341 78,894
James W. Brittan -0- -0- 10,500 15,667 -0- -0-
Robert B. Horn -0- -0- 3,500 16,500 -0- -0-
</TABLE>
- ----------
(1) Amount shown represents the difference between the fair market value of the
Common Shares underlying the options based on the closing price of the
Common Shares of $7.125 on March 26, 1999, the last trading day prior to
the end of fiscal 1999, and the exercise price of the options.
-41-
<PAGE> 42
EMPLOYMENT AGREEMENTS
Larry R. Linhart. Larry R. Linhart has entered into an employment
agreement with the Corporation pursuant to which he has agreed to serve as
Chairman of the Board of Directors, President and Chief Executive Officer of the
Corporation. In August 1998 the Company amended the existing employment
agreement and extended Mr. Linhart's employment through March 31, 2008. Mr.
Linhart receives a base annual salary, subject to annual cost of living
adjustments, which for fiscal 1999 was $377,145. Mr. Linhart also receives
incentive compensation based upon the operating results of the Company which may
be payable in a combination of cash, deferred compensation, and restricted
stock. Mr. Linhart received cash incentive compensation for fiscal 1999 in the
amount of $14,154.
In the event Mr. Linhart's employment is terminated for cause, the
Corporation will pay Mr. Linhart the compensation (including a pro rata share of
any incentive compensation) and benefits due under his employment agreement
through the date of such termination. In the event Mr. Linhart's employment is
terminated by the Corporation other than for cause, disability or death, or if
Mr. Linhart voluntarily terminates his employment with the Corporation for good
reason, all restricted stock held will be deemed fully vested, and all incentive
bonus compensation remaining unpaid shall be payable in cash.
Pursuant to the August 1998 amendment to Mr. Linhart's employment
agreement, the Corporation granted to Mr. Linhart the right to purchase 200,000
Common Shares subject to the terms and conditions of the Corporation's 1994
Stock Incentive Plan. Mr. Linhart was granted 50,000 Incentive Stock Options at
a price equal to 110% of the fair market value on the day of the grant ($11.00
per share) and 150,000 non-qualified Options equal to the fair market value at
the time of grant. The Incentive Stock Options expire five years from the date
of grant and the non-qualified Options expire ten years from the date of grant.
All options vest and become exercisable ratably over the four successive years
following the grant date.
Joseph L. Govern. The Operating Company and Joseph L. Govern are
parties to an employment agreement pursuant to which Mr. Govern is serving as
Senior Vice President - Operations of the Operating Company. The employment
agreement renews every two years and may be terminated by the Operating Company
for cause or in the event of Mr. Govern's disability. In the event the
Corporation terminates Mr. Govern's employment other than for cause (as defined
in the agreement), the Corporation will be obligated to pay Mr. Govern his base
salary over the remaining term of his employment. Mr. Govern's employment
agreement contains certain non-competition and non-solicitation provisions,
which prohibit him from competing with the Operating Company during his
employment and for a period of three years after termination of his employment.
Mr. Govern's salary for fiscal 1999 was $138,000. With respect to fiscal 1999,
Mr. Govern was eligible to receive a bonus, payable in cash and restricted
stock, based upon the operating profitability of the Company. Mr. Govern
received cash incentive compensation for fiscal 1999 in the amount of $5,000.
COMPENSATION OF DIRECTORS
In connection with the consummation of the Corporation's initial public
offering of its Common Shares in fiscal 1995, the Corporation, pursuant to its
1994 Stock Incentive Plan, granted to each non-employee Director an option to
purchase 1,875 Common Shares at $8.00 per share. Under the original provisions
of The Corporation's 1994 Stock Incentive Plan, the Corporation granted to each
non-employee Director on the date of each year's annual meeting of shareholders
an option to purchase that number of Common Shares equal to the lesser of (i)
2,500, and (ii) the quotient derived from dividing $15,000 by the fair market
value of one Common Share on the date the option is granted. Each option vests
or will vest over a four-year period and has or will have an exercise price
equal to the market price at the time of grant. In accordance with the
amendments to the 1994 Stock Incentive Plan, the Corporation granted to each
non-employee Director on August 3, 1998 options to purchase 2,000 Common Shares.
In addition, on February 4, 1997, the Corporation granted 1,500 Common Shares
each to William H. Largent and George R. Manser (or a total of 3,000 Common
Shares), as awards of restricted stock, subject to the condition that such
restricted stock awards shall each become exercisable as to 500 Common Shares on
each of the next three anniversaries of the grant date, except that if the
grantee shall cease to be a Director at any time, any unvested portion of such
restricted stock awards shall be subject to forfeiture, and subject to certain
other terms and conditions contained in certain Restricted Stock Award
Agreements between the Corporation and each such grantee. Non-employee Directors
also receive reimbursement for travel expenses incurred in connection with
attending meetings. Directors who are employees do not receive any separate
compensation for their services as Directors. The
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<PAGE> 43
Corporation has agreed to provide health insurance benefits to Messrs. Powelson
and Gibson on the same terms as provided to all other participants in the
Corporation's health care plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Linhart is Chairman of the Board of Directors, President and Chief
Executive Officer of the Corporation and Mr. Powelson is Secretary of the
Corporation. Mr. Manser is not an officer or employee of the Corporation. Mr.
Linhart has and intends to continue to abstain from participating in any actions
of the Compensation Committee affecting his compensation. Mr. Powelson is not
compensated for his services as Secretary of the Corporation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information regarding the beneficial
ownership of Common Shares as of May 25, 1999, by each person known by the
Corporation to own beneficially more than five percent of the Corporation's
outstanding Common Shares, by each Nominee and Continuing Director, by each
executive officer named in the Summary Compensation table contained in
"Executive Compensation," and by all Directors and executive officers as a
group. As of May 25, 1999, there were 4,427,874 Common Shares issued and
outstanding (net of 106,470 Common shares held in treasury) and an aggregate of
382,377 Common Shares subject to options exercisable within 60 days thereafter.
Except as otherwise noted, each person named in the table has sole voting and
investment power with respect to all shares shown as beneficially owned by him.
<TABLE>
<CAPTION>
Percent of Shares
Name of Shares Beneficially Beneficially
Beneficial Owner Owned at May 18, 1999 Owned
---------------- --------------------- -----
<S> <C> <C>
Larry R. Linhart 638,808 (1) 13.8%
Robert L. Powelson 760,631 (2) 17.2%
E. Len Gibson 616,871 (3) 13.9%
Joseph L. Govern 64,322 (4) 1.4%
James W. Brittan 14,667 (5) *
Robert B. Horn 12,500 (6) *
William H. Largent 7,945 (2) *
Richard W. Rubenstein, Esq. 396 (7) *
Robert D. Setzer -0- *
George R. Manser 14,065 (2) *
All Directors and Executive 2,130,205 (1)(2)(3) 46.3%
Officers as a group (10 Persons) (4)(5)(6)(7)
</TABLE>
- ----------
* Represents less than 1%.
(1) Share amount shown includes the following exercisable options to purchase
215,000 Common Shares: (i) exercisable options to purchase 175,000 Common
Shares pursuant to the 1991 Options and (ii) exercisable options to
purchase 40,000 Common Shares, representing 80% of the 50,000 Common Shares
subject to the options
-43-
<PAGE> 44
granted in fiscal 1995 to Mr. Linhart pursuant to his employment agreement.
See "Executive Compensation -- Aggregated Option Exercises and Fiscal
Year-End Option Value Table" and "Executive Compensation -- Employment
Agreements."
(2) Share amount shown includes exercisable options to purchase 4,445 Common
Shares, representing the exercisable portion of the 8,469 Common Shares
subject to options granted to each non-employee Director of the
Corporation. See "Compensation of Directors."
(3) Share amount shown includes exercisable options to purchase 5,685 Common
Shares. In conjunction with Mr. Gibson's decision not to stand for
re-election, the Board elected to vest 100% of Mr. Gibson's options granted
through 1996 in consideration of his past services to the Company, and to
forfeit the 784 shares granted in August 1997.
(4) Share amount shown amount shown includes (1) 2,414 shares of restricted
stock, granted as part of Mr. Govern's fiscal year 1998 bonus (2)
exercisable options to purchase 56,700 Common Shares, representing 70% of
the 81,000 Common Shares subject to the options granted in fiscal 1995, and
(3) exercisable options to purchase 5,208 Common Shares granted in fiscal
1999. See "Executive Compensation - Aggregated Option Exercises and Fiscal
Year-End Option Value Table" and "Executive Compensation - Employment
Agreements".
(5) Share amount shown includes exercisable options to purchase 10,500 Common
Shares, representing the exercisable portion of the 26,167 Common Shares
subject to options granted to Mr. Brittan. See "Executive Compensation --
Aggregated Option Exercises and Fiscal Year-End Option Value Table".
(6) Share amount shown includes (1) 2,000 shares owned by family members and
(2) exercisable options to purchase 3,500 Common Shares, representing the
exercisable portion of the 20,000 Common Shares subject to options granted
to Mr. Horn. See "Executive Compensation -- Aggregated Option Exercises and
Fiscal Year-End Option Value Table".
(7) Share amount shown includes exercisable options to purchase 196 Common
Shares, representing the exercisable portion of 2,784 Common Shares subject
to options. See "Compensation of Directors."
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not Applicable
-44-
<PAGE> 45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) FINANCIAL STATEMENTS.
The following consolidated financial statements and notes of the
Company, together with the report thereon of Ernst & Young LLP, appear
in this Form 10-K:
Report of Independent Auditors
Consolidated Balance Sheets as of March 29, 1998, and March 28, 1999
Consolidated Statements of Income for the 52 weeks ended March 30,
1997, March 29, 1998, and March 28, 1999
Consolidated Statements of Changes in Shareholders' Equity for the 52
weeks ended March 30, 1997, March 29, 1998, and March 28, 1999
Consolidated Statements of Cash Flows for the 52 weeks ended March 30,
1997, March 29, 1998, and March 28, 1999
Notes to Consolidated Financial Statements
(a) (2) FINANCIAL STATEMENT SCHEDULES.
All schedules have been omitted because they are either not applicable,
not required, or the required information is provided in the financial
statements or notes thereto.
(a) (3) SEE INDEX TO EXHIBITS ON PAGE 46
(b) REPORTS ON FORM 8-K.
On April 13, 1999 the Company filed a current report on Form 8-K
reporting under Item 2, Acquisition or Disposition of Assets, that on
February 2, 1999, the Company, through a wholly-owned subsidiary,
acquired Midwest Computer Cable, Inc. ,a commercial cabling
installation firm headquartered in Des Moines, Iowa.
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<PAGE> 46
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 Agreement and Plan of Merger, dated February 2, 1999,
among Larry Kendall, Dayton Kendall, Linda Kendall,
Midwest Computer Cable, Inc., AmeriLink Corporation
and MCC Acquisition Corp., a wholly-owned subsidiary
of AmeriLink Corporation, incorporated by reference
herein to Exhibit 2 to the Company's December 27,
1998 quarterly report Form 10-Q dated February 2,
1999 which was filed on February 9, 1999.
3.1 Amended Articles of Incorporation.*
3.2 Code of Regulations.*
4.1 Specimen Certificate for Common Shares.*
4.2 Bank Loan Agreement and Promissory Note dated April
5, 1999 between AmeriLink Corporation and KeyBank
National Association **
10.1 Form of 1994 Stock Incentive Plan (incorporated by
reference herein to the registrant's registration
statement on form S-1 file no. 33-79832 and to
Exhibit A to the registrant's 1998 Proxy Statement
dated July 6, 1998 which was filed on July 7, 1998).
10.2 Executive Employment Agreement between Larry R.
Linhart and Registrant including amendments **
10.3 Employment Agreement between Joseph L. Govern and
Operating Company, dated October 1, 1991.*
10.4 Form of Joseph L. Govern Stock Option Agreement.*
10.5 Form of Shareholders' Agreement among the Principal
Shareholders and Registrant.*
10.9 Stock Purchase and Close Corporation Agreement as
amended among the Principal Shareholders and the
Operating Company (without exhibits).*
10.10 Restricted Stock Award Agreement between AmeriLink
Corporation and William H. Largent and George Manser
(Incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the fiscal
year ended March 30, 1997).
10.12 Employment Agreement of Larry Kendall, dated February
2, 1999 incorporated by reference herein to Exhibit
10 to the Company's December 27, 1998 quarterly
report Form 10-Q dated February 2, 1999 which was
filed on February 9, 1999
11.1 Incorporated by reference to Page 30 of the 1999
Financial Statements beginning on page 22 herein.
21.1 Subsidiaries of the registrant.**
23.1 Consent of Ernst & Young LLP.**
27.1 Financial Data Schedule. **
* Incorporated by reference from the registrant's registration statement on
form S-1, file no. 33-79832.
** Filed herewith.
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<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: June 1, 1999 AMERILINK CORPORATION
/s/ Larry R. Linhart
---------------------
By Larry R. Linhart, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Larry R. Linhart Chairman of the Board, President and June 1, 1999
- --------------------------- and Chief Executive Officer (Principal
Larry R. Linhart Executive Officer)
/s/ James W. Brittan Treasurer and Vice President Finance June 1, 1999
- --------------------------- (Principal Financial and Accounting
James W. Brittan Officer)
/s/ Robert Powelson Secretary and Director June 1, 1999
- ---------------------------
Robert Powelson
/s/ William H. Largent Director June 1, 1999
- ---------------------------
William H. Largent
/s/ Richard W. Rubenstein Director June 1, 1999
- ---------------------------
Richard W. Rubenstein
</TABLE>
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<PAGE> 1
EXHIBIT 4.2
LOAN AGREEMENT
This agreement is made effective April 5, 1999, between Amerilink Corporation,
an Ohio corporation ("Borrower"), and KeyBank National Association, a
national banking association ("Lender").
Background Information
A. Borrower has applied to Lender for a $10,000,000 revolving line of credit
(the "Revolving Loan").
B. Lender has approved Borrower's application for the Revolving Loan by the
commitment letter dated March 9, 1999 (the "Loan Commitment"), and Lender
is willing to make the Revolving Loan to Borrower but only on the terms and
subject to the conditions set forth in the Loan Commitment, this agreement,
and the Loan Documents (defined in Section 2, below).
Statement of Agreement
Borrower and Lender acknowledge the accuracy of the foregoing Background
Information and hereby agree as follows:
Section 1. Loan; Use of Loan Proceeds. On the terms and subject to the
conditions set forth in this agreement, the Loan Commitment, and the
Loan Documents (as defined below), Lender shall lend to Borrower on
a revolving basis, in one or more loans, advances of funds, or other
extensions of credit (each an "Advance") from time to time during
the period beginning on the date of this agreement and ending on
April 6, 2001 (the "Availability Period"), an amount up to, but not
in excess of, $10,000,000.00 (the "Maximum Amount"); provided that
the Bank shall not be obligated to make any Advance hereunder if
immediately after giving effect to the requested Advance, the
aggregate unpaid principal amount of all Advances outstanding would
exceed the Maximum Amount. The aggregate unpaid principal amount of
all Advances and interest thereon outstanding on April 6, 2001 (the
"Termination Date"), shall be due and payable on the Termination
Date. After the Termination Date, the Borrower shall not be entitled
to receive and the Lender shall not be obligated to make or
otherwise fund any Advance. Borrower shall use the proceeds of the
Revolving Loan to finance working capital and other general
corporate purposes.
Section 2. Evidence of Indebtedness and Security for the Revolving Loan. The
Revolving Loan shall be evidenced by a Revolving Variable Rate
Cognovit Promissory Note (the "Revolving Note"), a copy of which is
attached to this agreement as Exhibit A and incorporated into this
agreement by reference. The Note and Loan Agreement shall be
referred to collectively as the "Loan Documents."
Section 3. Rate of Interest; Terms of Payments; Late Charges; Prepayment
Charges; and Default. The rate of interest, terms of payment, late
charges, prepayment charges, and default rates for the Revolving
Loan shall be those set forth in the Revolving Note and this
agreement.
Section 4. Term of Loans. The principal balance of the Revolving Note and
accrued interest thereon shall be due and payable in accordance with
the Revolving Note, and the entire unpaid principal balance of the
Revolving Note and all accrued and unpaid interest thereon shall be
due and payable on or before the "Maturity Date" as set forth in the
Revolving Note.
Section 5. Commitment Fee. Borrower shall pay a fee of $2,500 at the end of
each six-month period that lapses prior to the first request for an
Advance. In addition, after the first Advance, Borrower shall pay a
commitment fee on the unused portion of the Loan which shall be
billed to Borrower quarterly in arrears at a rate of 1/8% per annum.
The foregoing fees are hereinafter collectively referred to as the
"Commitment Fee".
Section 6. Costs and Expenses. In addition to the payment of the Commitment
Fee, Borrower shall pay or reimburse Lender, as applicable, for all
of Lender's out-of-pocket costs and expenses relating to, or
incidental with, the Revolving Note,
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including without limitation costs and expenses relating to
administration of the Revolving Note and Lender's attorneys' fees
(including costs and expenses) whether incurred before or after the
Closing (collectively, "Lender's Costs").
Section 7. Depository Requirements. No later than October 1, 1999, Borrower
shall move its primary depository/cash management relationship to
Lender. Cash management fees associated with the Depository
Requirements shall be negotiated subsequent to the Closing of the
Revolving Note.
Section 8. Representations, Warranties, and Affirmative Covenants. Borrower
represents, warrants, and covenants, as applicable, that all of the
following statements are true and correct as of the date of this
agreement and shall continue to be true and correct until such time
as the Revolving Note is paid in full and all of Borrower's
obligations under this agreement and the Loan Documents are
satisfied in full:
(a) Borrower is a corporation duly organized, validly existing, and in good
standing under the laws of the State of Ohio and is qualified to do
business and is in good standing in all jurisdictions in which it is
required to be so qualified and has the corporate power and authority to
own its properties and assets and to transact the business in which it is
engaged.
(b) There has been no material adverse change in Borrower's financial
statements and other documents and materials submitted to Lender with
Borrower's application for the Revolving Loan since the period covered by
such statements, documents and materials.
(c) Borrower has not employed or engaged any broker, finder, or agent who may
claim a commission or fee relating to the Revolving Loan, and Borrower
shall indemnify and hold Lender harmless from any such claim, demand, or
litigation resulting therefrom.
(d) Borrower has full power and authority to execute and deliver this agreement
and the Loan Documents and to perform and observe its obligations under
this agreement and the Loan Documents; and this agreement and the Loan
Documents have been duly and validly executed and delivered by Borrower and
are the legal, valid, and binding obligations of Borrower enforceable in
accordance with their respective terms.
(e) Neither the execution or delivery of this agreement or the Loan Documents,
nor the consummation of any of the transactions contemplated by this
agreement or the Loan Documents, nor compliance with the terms and
provisions of this agreement or the Loan Documents, will contravene or
conflict with: (i) any provision of law, statute, or regulation to which
Borrower or any of its properties is subject; (ii) any judgment, license,
order, or permit applicable to Borrower or any of its properties; (iii) any
indenture, mortgage, or other agreement or instrument to which Borrower is
a party or by which Borrower or any of its properties is subject or bound;
or (iv) Borrower's articles of incorporation, code of regulations,
qualifications to do business in any state, or any actions or proceedings
of Borrower. No consent, approval, authorization, or order of any court or
governmental authority or third party is required in connection with the
execution, delivery, and performance by Borrower of this agreement or the
Loan Documents. Borrower shall promptly provide Lender with certified
copies of the documents used to effectuate any amendments to its articles
of incorporation, code of regulations, or other organizational documents,
as the case may be.
(f) To the best of Borrower's knowledge after reasonable investigation,
Borrower is not in default under any agreement, indenture, mortgage, deed
of trust, security agreement, lease, franchise, or other obligation to
which it is a party or by which it or any of its property is bound which
would have a material adverse affect on the business, prospects, profits,
properties or financial condition of Borrower. To the best of Borrower's
knowledge after reasonable investigation, Borrower is not in violation of
any law, ordinance, governmental rule, or regulation to which it is
subject, which violation might materially adversely affect the business,
prospects, profits, properties, or financial condition of Borrower. To the
best of Borrower's knowledge after reasonable investigation, no event has
occurred and is continuing which constitutes an Event of Default (as
defined in Section 11, below) or would, with the lapse of time or giving of
notice or both, constitute such a default.
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(g) Borrower shall comply with all applicable laws, rules, regulations, and all
orders of any governmental authority, a breach of which could materially
and adversely affect its business or credit.
(h) To the best of Borrower's knowledge after reasonable investigation, there
are no claims, suits, or causes of action (whether legal, equitable, or
administrative) pending or threatened against Borrower which will or may
have a material adverse affect on the properties, business, prospects,
profits, or financial condition of Borrower or the ability of Borrower to
consummate or perform the transactions contemplated by this agreement or
the Loan Documents.
(i) Borrower is not in default or delinquent in the payment of any type of tax
or assessment with any governmental entity which will or may have a
material adverse affect on the properties, business, prospects, profits, or
financial condition of Borrower or the ability of Borrower to consummate or
perform the transactions contemplated by this agreement or the Loan
Documents.
(j) Borrower is not a party to any contract or agreement which is not referred
to herein, contemplated hereby, or previously disclosed in writing to
Lender, which materially adversely affects Borrower. There is no fact that
Borrower has not disclosed in writing to Lender which could materially or
adversely affect the properties, business, prospects, or conditions
(financial or other) of Borrower. Borrower shall comply in all material
respects with all material agreements, indentures, mortgages or documents
binding on it or affecting its properties or business.
(k) Borrower shall use the proceeds of the Revolving Loan solely for those uses
permitted under Section 1.
(l) Borrower shall furnish to Lender, promptly upon becoming aware of the
existence of any condition or event constituting an Event of Default or
which, with the giving of notice or lapse of time or both, would constitute
an Event of Default under this agreement or any Loan Document, a written
notice specifying the nature and period of existence thereof and what
action Borrower is taking or proposes to take with respect thereto.
(m) Upon becoming aware thereof, Borrower shall promptly notify Lender in
writing of (i) any material adverse change in its financial condition or
business, (ii) any default under any material agreement, contract or other
instrument to which Borrower is a party or by which any of its properties
are bound, or any acceleration of the maturity of any indebtedness owing by
Borrower, and (iii) any material adverse claim against or affecting
Borrower.
(n) Borrower shall maintain proper books of account and records containing
entries of all of the transactions entered into by Borrower in accordance
with generally accepted accounting principles.
(o) Borrower shall preserve and maintain its corporate existence and all of its
rights, privileges and franchises necessary or desirable in the normal
conduct of its business, and conduct its business in an orderly and
efficient manner consistent with good business practices and in accordance
with all valid regulations and orders of any governmental authority.
(p) All of the properties and operations of Borrower of a character usually
insured by persons or entities of established reputation engaged in the
same or similar business similarly situated are adequately insured, by
financially sound and reputable insurers, against loss or damage of the
kinds and in the amounts customarily insured against by such persons or
entities; and Borrower carries, with one or more such insurers, in
customary amounts, such other insurance, including public and product
liability insurance, as is usually carried by persons or entities of
established reputation engaged in the same or a similar business similarly
situated. Borrower shall maintain workers' compensation insurance,
liability insurance, casualty insurance and other insurance on its present
and future properties, assets and business against such casualties, risks
and contingencies, and in such types and amounts, as are prudent and
customary in the industry and as Lender may from time to time reasonably
request.
(q) Borrower shall pay when due all taxes, assessments, and other governmental
charges imposed upon it or its assets, franchises, business, income, or
profits before any penalty or interest accrues thereon, and all claims
which would or may have a material adverse affect on Borrower (including
without limitation claims for labor, services, materials, and
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supplies) for sums which by law might be a lien or charge upon any of its
assets; provided that (unless any material item or property would be lost,
forfeited, or materially damaged as a result thereof) no such charge or
claim need be paid if it is being diligently contested in good faith by
Borrower, if Lender is notified in advance of such contest, and if Lender
receives adequate reserve or other appropriate security acceptable to
Lender to protect the Lender against any loss therefrom.
(r) Borrower shall deliver, or cause to be delivered, to Lender: (i) year-end
financial statements prepared in accordance with generally accepted
accounting principles for Borrower, audited by a firm of independent
accountants, not later than 120 days after the expiration of each fiscal
year of Borrower; (ii) not later than 45 days after the end of each fiscal
quarter, quarterly balance sheets and income statements prepared in a form
satisfactory to Lender certified as being true, accurate, and complete by
the Chief Financial Officers of the Borrower; and (iii) all other
information or documentation (financial or otherwise), including without
limitation, financial statements, tax returns, income statements, balance
sheets, accounts receivable and accounts payable agings relating to
Borrower upon request of Lender from time to time.
(s) All representations and warranties made by Borrower herein shall survive
the delivery of the Revolving Note and the making of the Revolving Loan,
and any investigation at any time made by or on behalf of Lender shall not
diminish Lender's rights to rely thereon. All statements contained in any
certificate or other instrument delivered by or on behalf of Borrower by
one of its officers under or pursuant to this agreement or the other Loan
Documents or in connection with the transactions contemplated hereby or
thereby shall constitute representations and warranties made by Borrower
hereunder.
(t) Borrower shall furnish such other information and documentation as the
Lender may reasonably request.
Section 9. Negative Covenants. In addition to the affirmative covenants set
forth in Section 8, until such time as the Revolving Note is paid in
full and all of Borrower's obligations under this agreement and the
Loan Documents are satisfied in full, Borrower shall not (unless
Lender consents in writing):
(a) Incur, create, assume, have outstanding, guaranty or otherwise be or become
directly or indirectly liable in respect of any Indebtedness except
Permitted Indebtedness.
For purposes of this Section 9(a), "Indebtedness" shall mean (i) all obligations
of Borrower for borrowed money (including without limitation all notes
payable and drafts accepted representing extensions of credit, all
obligations evidenced by bonds, debentures, notes or other similar
instruments and all obligations upon which interest charges are customarily
paid); (ii) all obligations under conditional sale or other title retention
agreements and all obligations issued or assumed as full or partial payment
for property, whether or not any such obligations represent obligations for
borrowed money; (iii) all indebtedness secured by any Additional
Encumbrances (as defined in Section 9(b), below) existing on property owned
or acquired by Borrower subject to any such Lien, whether or not the
obligations secured thereby shall have been assumed; (iv) all indebtedness
guaranteed (other than by endorsement of negotiable instruments for
collection in the ordinary course of business), directly or indirectly, in
any manner, by Borrower, or in effect guaranteed, directly or indirectly,
by Borrower through an agreement contingent or otherwise: (A) to purchase
securities or indebtedness, (B) to purchase, sell or lease (as lessee or
lessor) property or to purchase or sell services primarily for the purpose
of enabling the debtor to make payment of the indebtedness or to assure the
owner of the indebtedness against loss, (C) to supply funds to or in any
other manner invest in the debtor, or (D) to repay amounts drawn down by
beneficiaries of letters of credit, whether or not issued directly or
indirectly for the account of Borrower; (v) all indebtedness for which
Borrower has agreed, contingently or otherwise, to advance or supply funds;
and (vi) indebtedness of any joint venture, partnership or other person or
entity for which Borrower is liable. Obligations under leases shall be
treated as Indebtedness only to the extent shown as such on Borrower's
balance sheet prepared in accordance with generally accepted accounting
principles. Indebtedness shall not include the long-term portion of
deferred federal income taxes.
For purposes of this Section 9(a), "Permitted Indebtedness" shall mean
Indebtedness to finance specific capital expenditures not to exceed in the
aggregate during the Availability Period the amount of $4,000,000.00.
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(b) Create or suffer to exist any Additional Encumbrances upon any of its
property or assets now owned or hereafter acquired, except Permitted
Encumbrances.
For purposes of this Section 9(b), "Additional Encumbrances" shall mean any
lien, mortgage, security interest, tax lien, pledge, encumbrance or
conditional sale or title retention arrangement, or any other interest in
property designed to secure the repayment of indebtedness, whether arising
by agreement or under any statute or law or otherwise.
For purposes of this Section 9(b), "Permitted Encumbrances" shall mean: (i)
purchase money security interests and liens securing Permitted Indebtedness
of the type described in the above definition of Permitted Indebtedness;
(ii) pledges or deposits made to secure payment of workers' compensation,
or to participate in any fund in connection with workers' compensation,
unemployment insurance, pensions, or other social security programs; (iii)
landlords' liens for rent not yet due and payable; (iv) liens securing the
payment of taxes due and payable or claims of mechanics, materialmen,
warehousemen, carriers, and operators; and (v) liens for taxes not yet due
and payable; provided that liens of the types described in items (ii)
through (iv) of this definition shall be "Permitted Encumbrances" only so
long as: (A) the validity or amount of such claims is being contested in
good faith by appropriate and lawful proceedings, and (B) levy and
execution on such Liens have been stayed and continue to be stayed..
(c) With the exception of loans and advances to non-consolidated Affiliates and
Related Parties which may not exceed $1,000,000 in the aggregate during the
Availability Period, make or have outstanding any loans, advances of funds,
or other extensions of credit to any person or entity. For purposes of this
agreement the terms "Affiliates" and "Related Parties" shall mean: (i) any
non-consolidated corporation, proprietorship, firm, partnership, limited
liability company, limited liability partnership, trust, association or
other entity which, directly or indirectly, is owned or controlled, is
under common ownership or control with, or is owned or controlled by,
Borrower; or (ii) any person who is a director, officer, employee, member,
manager or partner of Borrower or is, directly or indirectly, the
beneficial owner of 10 percent or more of any class of equity securities of
the Borrower.
(d) Directly or indirectly declare or pay any dividend, distribution or other
payment on any shares of any class of Borrower's stock, or make any other
distribution to the holders of its securities.
(e) Except in the ordinary course of business and not to exceed $5,000,000 in
any one fiscal year during the Availability Period, transfer, sell, assign,
convey, lease, or otherwise dispose of any of Borrower's properties,
rights, assets, or business.
(f) Amend its articles of incorporation, code of regulations, or other
organizational documents without the prior written consent of Lender, which
consent shall not be unreasonably withheld or delayed.
(g) Dissolve or liquidate, or merge or consolidate with or into any other
person or entity.
(h) Without the written consent of Lender which shall not be unreasonably
withheld, directly or indirectly, repurchase, redeem or retire more than
25% of its outstanding shares of stock or other securities.
(i) Change its fiscal year or method of accounting.
(j) Enter into any asset purchase agreement or acquisition agreement(s) that
would cause the Borrower's balance sheet leverage (defined as Total
Liabilities divided by Tangible Net Worth (defined as Borrower's total
assets excluding intangible assets (i.e. goodwill, trademarks, patents,
copyrights, organizational expenses and similar intangible items, but
including leaseholds and leasehold improvements) less Borrower's Total
Liabilities) (the "Balance Sheet Leverage") to exceed a ratio of 1.25:1.00
on a post-acquisition/pro-forma basis.
(k) Have capital expenditures exceeding the aggregate of $5,000,000 (the
"Capital Expenditures Limitation") in any one fiscal year; however if
Borrower's Balance Sheet Leverage is less than or equal to a ratio of
1.25:1.00 on a post-
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acquisition/pro-forma basis and Tangible Net Worth is greater than or equal
to $20,000,000, the Capital Expenditures Limitation shall be increased to
$10,000,000.
Section 10. Closing Deliveries; Existence and Authority. At or prior to the
Closing, Borrower shall have delivered or caused to be delivered to
Lender, unless specifically waived by Lender in writing, the
following items, each of which shall be in form and content
satisfactory to Lender:
(a) Fully-executed originals of this agreement and all of the Loan Documents.
(b) All items, instruments, documents, certificates listed on the attached
Exhibit A and all other matters and documents required to be furnished by
Borrower at or prior to the Closing under this agreement, the Loan
Commitment, any of the Loan Documents or otherwise required by Lender.
(c) Payment of all of Lender's Costs.
(d) Certified Articles of Incorporation and Certificate of Good Standing for
Borrower from the Ohio Secretary of State.
(e) Copy of Borrower's articles of incorporation, and all amendments thereto,
as filed with the Ohio Secretary of State, certified by Borrower's
secretary as being true, accurate, and complete.
(f) Copy of Borrower's code of regulations certified by the Borrower's
secretary as being true, accurate, and complete.
(g) Resolutions of Borrower approving the execution, delivery and performance
of this agreement, the Revolving Note, and all other Loan Documents and the
transactions contemplated herein and therein, each duly adopted by the
Board of Directors of Borrower, and accompanied by a certificate of the
secretary or assistant secretary of Borrower stating that such resolutions
are true and correct, have not been altered or repealed, do not violate or
conflict with Borrower's articles of incorporation, code of regulation,
other organizational documents, or actions by the shareholders of Borrower,
and are in full force and effect.
(h) A certificate of the secretary of Borrower, which shall certify the names
of the officers of Borrower authorized to sign each of the Loan Documents,
together with the true signatures of such officers. Lender may conclusively
rely on such certificate until it shall receive a further certificate of
the secretary or assistant secretary of Borrower canceling or amending the
prior certificate and submitting the signatures of the officers named in
such further certificate.
(i) Any other documents, items, instruments, insurance policies, certificates,
and all other matters that Lender reasonably requests.
Section 11. Events of Default. The occurrence of any of the following events
shall be an Event of Default under this agreement and all of the
Loan Documents:
(a) The determination by Lender, acting on written advice of its legal counsel
which shall be furnished to Borrower, that any representation or warranty
made by Borrower in this agreement (including without limitation those
representations and warranties set forth in Section 8) or any of the Loan
Documents is materially false or misleading in any material respect when
made.
(b) The failure by Borrower to pay the full amount of any installment of
interest or principal and interest when due under the Revolving Note.
(c) The failure by Borrower to perform or observe any covenant, condition, or
obligation contained in this agreement or any of the Loan Documents
(excluding those monetary obligations covered under (b), above, and
excluding the
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representations and warranties covered under (a), above) which failure
continues uncured for 20 days after delivery by Lender to Borrower of
notice of such failure.
(d) The filing of a voluntary or involuntary petition in bankruptcy or
insolvency or for reorganization, arrangement, adjustment, liquidation,
dissolution or composition or for the appointment of a receiver, guardian,
or trustee by or against Borrower.
(e) The making of an assignment for the benefit of creditors by Borrower or
Borrower's failure generally to pay its debts as they become due.
(f) The dissolution, merger, reorganization, or other change in the corporate
structure of Borrower, without the prior written consent of Lender.
(g) The entry of a final judgment or lien in excess of $250,000 against
Borrower which final judgment or lien is not satisfied, discharged or
bonded-off within 10 days after the date of entry of such judgment or lien,
or, with respect to any collection action relating to such judgment or
lien, in the event such collection action is not stayed so as to prevent
the issuance of a certificate of judgment against Borrower within 10 days
after the date of entry of such judgment or lien.
(h) The concealment or removal by Borrower of any part of its property with
intent to hinder, delay, or defraud its creditors or any of them, or the
making or suffering of a transfer of any of its property which may be
fraudulent under any bankruptcy, fraudulent conveyance, or similar law, or
the making by Borrower of any transfer of its property to or for the
benefit of a creditor at a time when other creditors similarly situated
have not been paid, or any other action by Borrower which results in
Borrower permitting any creditor to obtain a lien upon any of its property
through legal proceedings which is not vacated within 10 days from the date
thereof.
Upon the occurrence of any of the above-described events, Lender may declare the
Revolving Note due and payable upon demand without presentment, protest,
notice, or demand of any kind. Borrower shall not have the opportunity to
cure any default if such failure is incapable of being cured, in Lender's
reasonable discretion, or if the failure is described under any of (a),
(b), (d), (e), (f) and (g).
Section 12. Procedure for Borrowing under Revolving Loan. Provided all
conditions described in this Section 12 are satisfied, Borrower may
borrow under the Revolving Loan on any Business Day (meaning a day
other than a Saturday, Sunday or other day on which commercial banks
in Columbus, Ohio, are authorized or required by law to close)
provided that the Borrower gives the Lender telephonic or written
notice (each, a "Notice of Borrowing") which must be received by the
Lender prior to 1:00 p.m., Columbus, Ohio, time, on the requested
Borrowing Date (as defined below) for each Revolving Loan
disbursement, specifying (i) the requested Borrowing Date of such
borrowing, which shall be a Business Day and (ii) the aggregate
amount of such requested borrowing. Each borrowing pursuant to the
Revolving Loan shall be in an aggregate principal amount equal to or
greater than $10,000. Upon receipt of each such Notice of Borrowing
from the Borrower, the Lender shall deposit such requested borrowing
for the benefit of the Borrower on the requested Borrowing Date,
subject to the satisfaction of the terms and conditions of this
agreement, by crediting the loan account on the books of the Lender
in the amount of such requested borrowing. Lender is hereby
authorized, and may at its option, but shall have no obligation to,
record the date and amount of each borrowing made in connection with
the Revolving Loan, and the date and the amount of each payment or
prepayment of principal thereof, on its separate written or
electronic records maintained in the ordinary course of its
business, and any such recordation shall constitute prima facie
evidence of the accuracy of the information so recorded; however,
the failure of the Lender to make such recordations shall not effect
the obligations of the Borrower to repay outstanding principal,
interest or any other amounts due hereunder or under the Revolving
Note in accordance with the terms hereof and thereof.
The obligation of Lender to continue making disbursements pursuant to the
Revolving Note until the Maturity Date as set forth in the Revolving Note
and this agreement is subject to the following conditions:
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(a) The determination by Lender, acting on written advice of its legal counsel
which shall be furnished to Borrower, that the representations, warranties
and covenants made by Borrower in this agreement or any other Loan
Document, and any representations, warranties and covenants made by
Borrower which are contained in any certificate, document or financial or
other statement furnished at any time under or in connection herewith or
therewith, are true and correct in all material respects as of the date the
Lender makes a disbursement to Borrower pursuant to the Revolving Note (the
"Borrowing Date").
(b) No Event of Default shall have occurred and be continuing on the Borrowing
Date.
(c) There shall have been no material adverse change in the financial condition
(which shall be defined as the Balance Sheet Leverage exceeding a ratio of
1.25 to 1.00) or no material adverse change in the business of either
Borrower and its Affiliates from the date of the most recent quarterly
financials furnished to Lender prior to the Borrowing Date.
(d) All resolutions, certificates, corporate and other proceedings and all
other documents and legal matters in connection with the transactions
contemplated by this agreement and the Loan Documents shall have been
provided prior to the Borrowing Date in form and substance reasonably
satisfactory to Lender.
Each time Lender makes an Advance to Borrower under the Revolving Note pursuant
to a request by Borrower, it shall constitute a representation, warranty
and covenant by Borrower that, as of the Borrowing Date, the conditions
contained in paragraphs (a), (b), (c) and (d) of this Section 12 have been
fully satisfied.
Section 13. Assignment. No rights under this agreement nor in or to the proceeds
of the Revolving Loan may be assigned by Borrower without the prior
written consent of Lender.
Section 14. Non-Waiver. No failure by either party to insist upon strict
compliance with any term of this agreement or to exercise any
option, enforce any right, or seek any remedy upon any default of
the other party shall affect, or constitute a waiver of, the first
party's right to insist upon that strict compliance, exercise that
option, enforce that right, or seek that remedy with respect to that
default or any prior, contemporaneous, or subsequent default. No
custom or practice of the parties at variance with any provision of
this agreement shall affect, or constitute a waiver of, either
party's right to demand strict compliance with the provisions of
this agreement.
Section 15. Notices. All notices and other communications under this agreement
to be made to either Lender or Borrower shall be in writing and
shall be deemed given when delivered personally, telecopied (which
is confirmed electronically), or mailed by certified mail (return
receipt requested) or sent by Federal Express, UPS, or other
nationally recognized overnight delivery service for overnight
delivery to that party at the address for that party (or at such
other address for such party as such party shall have specified in
notice to the other party):
(a) If to Lender:
KeyBank National Association
88 East Broad Street
Columbus, Ohio 43215
Attention: Roger D. Campbell, Sr. Vice President
Telecopy No. (614)_______________________________
With a copy to:
Baker & Hostetler LLP
65 East State Street, Suite 2100
Columbus, Ohio 43215
Attention: Michael D. Bridges, Esq.
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Telecopy No. (614) 462-2616
(b) If to Borrower:
Amerilink Corporation
1900 E. Dublin-Granville Road
Columbus, Ohio 43229
Attention: James Brittan, Vice President - Finance
Telecopy No. (614)
Section 16. Governing Law. All questions concerning the validity or meaning of
this agreement or relating to the rights and obligations of the
parties with respect to performance under this agreement shall be
construed and resolved under the laws of Ohio.
Section 17. Venue. The parties to this agreement hereby designate the Court of
Common Pleas of Franklin County, Ohio, as a court of proper
jurisdiction and exclusive venue for any actions or proceedings
relating to this agreement; hereby irrevocably consent to such
designation, jurisdiction, and venue; and hereby waive any
objections or defenses relating to jurisdiction or venue with
respect to any action or proceeding initiated in the Court of Common
Pleas of Franklin County, Ohio.
Section 18. Severability. It is the intention of the parties to comply fully
with all laws and public policies, and this agreement shall be
construed consistently with such laws and public policies to the
extent possible. If and to the extent that any court of competent
jurisdiction is unable to so construe any provision of this
agreement and holds that provision to be invalid, that invalidity
shall not affect the remaining provisions of this agreement, which
shall remain in full force and effect.
Section 19. Time is of the Essence. Time is of the essence relating to this
agreement and with respect to all other obligations to be performed
under this agreement, but delay in the exercise by Lender of its
rights hereunder shall not be deemed a waiver of such right by
Lender.
Section 20. Captions. The captions at the beginning of the Sections and several
subSections of this agreement are not part of the context of this
agreement, but are only labels to assist in locating those Sections
and subSections, and shall be ignored in construing this agreement.
Section 21. Jury Trial Waiver. Borrower and Lender, after consulting or having
the opportunity to consult with legal counsel, knowingly,
voluntarily and intentionally waives any right it may have to a
trial by jury in any action or proceeding based upon or arising out
of this agreement or any of the Loan Documents or any course of
conduct, dealings, statements, whether oral or written, or actions
of either party. Borrower and Lender shall not seek to consolidate,
by counterclaim or otherwise, any action in which a jury trial has
been waived with any other action in which a jury trial cannot be or
has not been waived.
Section 22. No Third Party Benefit. This agreement is intended for the exclusive
benefit of the parties and their respective heirs, successors and
assigns. Nothing contained in this agreement shall be construed as
creating any rights or benefits in or to any third party.
Section 23. Complete Agreement. This document, along with the Loan Documents,
contains the entire agreement among the parties and supersedes any
prior discussions, negotiations, representations, or agreements
among them respecting the subject matter. No additions or other
changes to this agreement shall be made or be binding unless made in
writing and signed by each party to this agreement.
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AMERILINK CORPORATION KEYBANK NATIONAL ASSOCIATION
By:_______________________________ By:_________________________________
(Name) (Title) (Name) (Title)
VARIABLE RATE COGNOVIT PROMISSORY NOTE
$10,000,000.00 April 5, 1999
For value received, the undersigned, Amerilink Corporation, an Ohio corporation,
with offices at 1900 E. Dublin-Granville Road, Ohio 43229 (hereinafter
referred to as "Maker"), promises to pay to the order of KeyBank National
Association, a national banking association (hereinafter referred to as
"Payee," which term shall include any holder hereof), at its principal
place of business at 88 East Broad Street, Columbus, Ohio 43215, or at such
other place as Payee may designate, the principal sum of Ten Million
Dollars ($10,000,000), or so much thereof as may be advanced by Payee to
Maker from time to time, together with all charges herein provided and
interest on the unrepaid advances of said principal sum from the date of
disbursement by Payee, payable in cash at the rates and in the manner
hereinafter set forth.
ARTICLE I
DEFINITIONS
1.1 The following terms wherever used in this Note shall have the following
meanings:
"Advance" shall mean any loan, advance of funds, or extension of credit under
the Loan Agreement.
"Default Rate of Interest" shall mean the Prime Rate of Interest as may be
charged by Lender.
"Loan Agreement" shall mean that certain Loan Agreement dated April 5, 1999
pursuant to which the principal amount of this Note is to be disbursed, by
which Payee agrees to loan funds to Maker pursuant to the terms and
conditions stated therein.
"Loan Documents" shall collectively mean this Note, Loan Agreement and any other
instrument, affidavit, certificate or document heretofore, now or hereafter
given by Maker in connection with the closing of the loan evidenced by this
Note.
"Maturity Date" shall mean April 6, 2001.
"Note" shall mean this Variable Rate Cognovit Promissory Note.
"Prime Rate" shall mean the interest rate established and announced from time to
time by Maker as its prime rate, based upon its consideration of economic,
money market, business and competitive factors, and it is not necessarily
the most
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favorable rate of Maker. Each change in said Prime Rate shall, without
notice, automatically and immediately change the rate of interest due
hereon.
"Variable Rate" shall mean the rate equal to the Prime Rate minus 125 basis
points (bps).
ARTICLE II
PAYMENTS OF PRINCIPAL AND INTEREST
2.1 From and after the date of this Note, interest on the unrepaid advances of
the principal sum from date of disbursement by Payee at the Variable Rate
shall be due and payable monthly on the first day of each month after the
initial advance and continuing on the first day of each month thereafter
through the Maturity Date.
2.2 All interest payable in accordance with this Note shall be calculated on
the basis of the actual number of calendar days elapsed but computed on a
daily basis as if each year consisted of 360 days.
2.3 All principal and all accrued and unpaid interest shall be due and payable
in full on the Maturity Date.
2.4 In the event that any applicable law, treaty, rule or regulation now or
hereafter in effect, or any interpretation or administration thereof by any
governmental authority charged with the interpretation or administration
thereof, or compliance by Payee with any request or directive of any such
authority (whether or not having the force of law) (each of the foregoing
being referred to as a "Regulatory Requirement"), shall (a) impose, modify
or deem applicable any reserve, special deposit or similar requirement
against assets of, deposits with or for the account of, or credit extended
by Payee, or (b) impose any other condition, requirement or charge with
respect to this Note or the Loan Documents (including, without limitation,
any capital adequacy requirement, any requirement which affects the manner
in which Payee allocates capital resources to its commitments or any
similar requirement), and the result of any of the foregoing change in
external conditions is to increase the actual cost to Payee of making or
maintaining the loan evidenced by this Note (the "Loan") or any Advance
hereunder, to reduce the actual amount of any sum receivable by Payee
thereon, or to reduce the actual rate of return on the capital of Payee
from the actual cost, sum receivable or rate of return applicable on the
date of this Note, then Maker shall pay to Payee, from time to time, upon
request of Payee, additional amounts sufficient to compensate Payee for
such increased cost, reduced sum receivable or reduced rate of return
(collectively, "Reduced Earnings") to the extent Payee is not compensated
therefor in the computation of the interest rates applicable to the Loan. A
detailed statement as to the amount of such increased cost, reduced sum
receivable or reduced rate of return, prepared in good faith and submitted
by Payee to Maker, shall be conclusive and binding for all purposes, absent
manifest error in determination. Payee shall promptly notify Maker of any
event occurring after the date of this Note that entitles Payee to
additional compensation pursuant to this Section. This provision is for the
benefit of Payee and is not intended to increase the yield to Payee above
the rates of interest provided for in this Note.
ARTICLE III
LATE CHARGES
3.1 If any of said payments of principal or interest or any combination thereof
are not paid in full within five days after such payment is due, then in
addition to the amount of said payment Lender shall have the right to
assess, and Maker promises to pay, a late charge in respect of each said
payment in the amount of 5% which Maker agrees is a fair and reasonable
charge for costs incurred by Payee in processing such late payment and
shall not be deemed a penalty.
ARTICLE IV
PREPAYMENT
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4.1 This Note evidences a loan in the form of a revolving line of credit, and
Maker may, subject to the applicable provisions under this Note and the
Loan Agreement, borrow, repay, and re-borrow sums an unlimited number of
times.
4.2 The privilege is hereby reserved by Maker to prepay this Note in whole or
in part at any time and from time to time without premium or penalty,
provided that Payee shall receive written notice of Maker's intention to so
prepay not less than three days prior to such prepayment and further
provided that a payment of all accrued and unpaid interest applicable to
the portion of the principal amount to be prepaid, to the date of such
prepayment, is included with such prepayment.
ARTICLE V
DEFAULT
5.1 The term "Event of Default" shall mean the occurrence of any one or more of
the following:
(a) A failure by Maker to make any payment of principal or interest or any
combination thereof under this Note within twenty (20) days when due.
(b) The material incorrectness of any representation or warranty made by Maker
to Payee in any of the Loan Documents or any financial statement or other
document delivered to Payee in connection with the Loan.
(c) The inability of Maker to satisfy any one or more of the conditions
specified in the Loan Agreement as precedent to the obligation of Payee to
make a loan disbursement after an application for a loan disbursement has
been submitted by Maker to Payee.
(d) The failure of Maker to observe, perform or comply with any of the other
terms, covenants or conditions of Maker set forth in the Loan Documents and
to cure such failure within the time period, if any, specified therein.
5.2 Upon the occurrence of any Event of Default, the entire unpaid balance of
principal and interest evidenced by this Note, together with all sums of
money advanced by Payee in accordance with the terms of the Loan Agreement,
and all sums due and owing for any late charge or charges hereunder (the
foregoing being hereinafter collectively referred to as the "Indebtedness")
shall thereupon bear interest at the Default Rate of Interest, and at the
option of Payee, all the Indebtedness together with interest at the Default
Rate of Interest shall immediately become due and payable ("Acceleration")
without demand made therefor and without notice to any person, notice of
the exercise of said option being hereby expressly waived, and Payee shall
have all remedies of a secured party under law and equity to enforce the
payment of all of the Indebtedness, time being of the essence of this Note.
The Default Rate of Interest shall be charged to Maker upon the occurrence
of any Event of Default notwithstanding any invoices or billing statements
sent by Payee to Maker indicating an interest rate to the contrary. In
addition, any waiver of Payee's right to charge the Default Rate of
Interest or to accelerate the Indebtedness must be made in writing and
cannot be waived by oral representation or the submission to Maker of
monthly billing statements.
ARTICLE VI
MISCELLANEOUS
6.1 The failure of Payee to exercise any option herein provided upon the
occurrence of any Event of Default shall not constitute a waiver of the
right to exercise such option in the event of any continuing or subsequent
Event of Default. Maker hereby agrees that the maturity of all or any part
of the Loan may be postponed or extended and that any covenants and
conditions contained in this Note or in any of the other Loan Documents may
be waived or modified without prejudice to the liability of Maker on said
Note or Loan Documents.
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6.2 Maker hereby authorizes Payee, in its sole discretion, upon the occurrence
of an Event of Default, to apply all or any portion of the balance of any
account, other than the Borrower's account for payroll, taxes and employee
contribution which shall be maintained in separate accounts by Payee,
maintained by Maker with Payee to the payment or reduction, in whole or in
part, of any and all principal and interest then due, whether by
acceleration or otherwise, to Payee under this Note. Upon the occurrence of
any Event of Default, Payee shall have the right to setoff against all
obligations of Maker to Payee hereunder, whether matured or unmatured, all
amounts owing to Maker by Payee, whether or not then due and payable, and
all other funds or property of Maker on deposit with or otherwise held in
the custody of Payee or any of its affiliates, all without notice to or
demand on Maker, such notice and demand being hereby waived.
6.3 Presentment for payment, notice of dishonor, protest, notice of protest and
diligence in bringing suit against any party hereto are hereby waived by
Maker.
6.4 Maker hereby waives all relief from any and all appraisement or exemption
laws now in force or hereafter enacted.
6.5 The obligations evidenced or created by this Note, as well as all waivers
of rights by Maker contained herein, shall effectively bind and be the
obligations and waivers of any and all others who may at any time become
liable for the payment of all or any part of this Note, including without
limitation all indorsers and guarantors.
6.6 Nothing herein contained, nor in any of the other Loan Documents or other
documents relating hereto, shall be construed or so operate as to require
Maker, or any person liable for the payment of the Loan, to pay interest in
an amount or at a rate greater than the highest rate permissible under
applicable law. Should any interest or other charges paid by Maker, or any
parties liable for the payment of the Loan, result in the computation or
earning of interest in excess of the highest rate permissible under
applicable law, then any and all such excess shall be and the same is
hereby waived by Payee, and all such excess shall be automatically credited
against and in reduction of the principal balance, and any portion of said
excess which exceeds the principal balance shall be paid by Payee to Maker
and any parties liable for the payment of the loan made pursuant to this
Note, it being the intent of the parties hereto that under no circumstances
shall Maker or any parties liable for the payment of the loan hereunder be
required to pay interest in excess of the highest rate permissible under
applicable law. All interest paid or agreed to be paid to Payee shall, to
the extent permitted under applicable law, be amortized, prorated,
allocated and spread throughout the full period until payment in full of
this Note, including the period of any renewal or extension thereof, so
that interest thereon for such full period shall not exceed the maximum
amount permitted by applicable law.
Notwithstanding anything to the contrary herein contained, in the event that the
Variable Rate should ever exceed the highest rate permissible under
applicable law, thereby causing the interest accruing on the Indebtedness
to be limited to such highest rate permissible under applicable law, then
any subsequent reduction in the Prime Rate shall not reduce the rate of
interest charged hereunder below the highest rate permissible under
applicable law until the total amount of interest accrued on the
Indebtedness equals the amount of interest which would have accrued on such
indebtedness if the Variable Rate had been in effect at all times in the
period during which the rate charged thereon was limited to the highest
rate permissible under applicable law.
6.7 If any provision (or any part of any provision) contained in this Note
shall for any reason be held or deemed to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision (or remaining part of
the affected provision) of this Note, and this Note shall be construed as
if such invalid, illegal or unenforceable provision (or part thereof) had
never been contained herein and the remaining provisions of this Note shall
remain in full force and effect.
6.8 Maker hereby authorizes any attorney-at-law to appear in any court of
record in the State of Ohio or in any other state or territory of the
United States at any time after this Note becomes due, whether by
acceleration or otherwise, to waive the issuing and service of process, and
to confess judgment against Maker in favor of Payee for the amount due
together with interest, expenses, the costs of suit and reasonable counsel
fees, and thereupon to release and waive all errors, rights of appeal and
stays of execution. Such authority shall not be exhausted by one exercise,
but judgment may be confessed
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from time to time as any sums and/or costs, expenses or reasonable counsel
fees shall be due, by filing an original or a photostatic copy of this
Note. Maker waives any right to move any court for an order having any
attorney or firm representing Payee removed or disqualified as counsel for
Payee as a result of such attorney or firm confessing judgment against
Maker in accordance with this Section 6.10. Maker hereby expressly waives
any conflicts of interest that may now or hereafter exist as a result of
any attorney representing Payee confessing judgment against Maker and
expressly consents to any attorney representing Payee or to any other
attorney to confess judgment against Maker in accordance with this Section
6.8. Maker hereby further consents and agrees that Payee may pay any
attorney confessing judgment and that any fees so paid may be included in
the amount of such judgment.
6.9 Maker hereby agrees to pay to Payee all costs of collecting and securing,
and of attempting to collect and to secure this Note, including without
limitation reasonable attorneys' fees, appraisers' fees, court costs, and
notice charges, whether such attempt be made by suit, in bankruptcy, or
otherwise, and said costs and any other sums due Payee by virtue of this
Note may be included in any judgment or decree rendered.
This Note is delivered in the State of Ohio and is to be governed by and
construed in accordance with the laws of the State of Ohio. In addition to
any other appropriate jurisdiction determined by Payee, Maker hereby
consents to and, by execution of this Note, submits to the personal
jurisdiction of the Court of Common Pleas of Franklin County, Ohio and the
United States District Court sitting in Columbus, Ohio for the purposes of
any judicial proceedings which are instituted for the enforcement of this
Note. Maker agrees that venue is proper in said jurisdiction.
WARNING -- BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO
COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR
WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY
WITH THE AGREEMENT, OR ANY OTHER CAUSE.
AMERILINK CORPORATION
By____________________________________________
Print Name____________________________________
Its___________________________________________
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EXHIBIT 10.2
AMERILINK CORPORATION
Executive Employment Agreement
This Executive Employment Agreement ("Agreement") is made in Columbus, Ohio
effective as of ______________, 1994, by and between AMERILINK CORPORATION,
an Ohio corporation (the "Company"), and LARRY R. LINHART, an individual
residing in Columbus, Ohio (the "Executive"), who hereby agree as
hereinafter provided.
Section 1. Definitions. As used herein, the following terms shall have the
meanings set forth below.
"Aggregate Operating Income" shall have the meaning set forth in Section
5(b).
"Agreement" shall have the meaning set forth in the introductory paragraph
hereof.
"Base Compensation" shall have the meaning set forth in Section 5(a).
"Board of Directors" means the incumbent directors of the Company as of the
point in time reference thereto is made in this Agreement.
"Cause" shall have the meaning set forth in Section 11(b).
"COLA Adjustment" means a cost of living adjustment, which shall correspond
to the percent rise in prices for the preceding year as measured by the
Consumer Price Index for all Urban Consumers (CPI-UC), All City Average,
All Items (base year 1982-1984 = 100) published by the United States
Department of Labor, Bureau of Labor Statistics (the "Index"). The COLA
Adjustment shall be determined by multiplying the amount or figure to be
adjusted by a fraction, the numerator of which is the Index published for
the month in which occurs the date of adjustment and the denominator of
which is the Index published for the same month of the preceding year.
"Company" shall have the meaning set forth in the introductory paragraph of
this Agreement, and shall include Subsidiaries where appropriate.
"Competitive Business" shall have the meaning set forth in Section 10(a).
"Confidential Information" shall have the meaning set forth in Section
10(c).
"Covered Options" shall have the meaning set forth in Section 7.
"Disability" of the Executive means that, as a result of the Executive's
incapacity due to physical or mental illness, the Executive shall have been
absent from his duties on a full-time basis for six consecutive months, or
for an aggregate of nine months in any consecutive 12-month period, and a
physician selected by the Executive is of the opinion that (a) he is
suffering from "total disability" as defined in the Company's disability
insurance program or policy and (b) he will qualify for Social Security
Disability Payments and (c) within 30 days after written notice thereof is
given by the Company to the Executive (which notice may be given at any
time after the end of such six or 12-month periods) the Executive shall not
have returned to the performance of his duties on a full-time basis. (If
the Executive is prevented from performing his duties because of
Disability, upon request by the Company the Executive shall submit to an
examination by a physician selected by the Company, at the Company's
expense, and the Executive shall also authorize his personal physician to
disclose to the selected physician all of the Executive's medical records.)
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"Employment Commencement Date" means the date on which the IPO is
consummated.
"Employment Period" means that period commencing on the Employment
Commencement Date and ending on the Employment Termination Date.
"Employment Termination Date" means the date the Employment Period
terminates as provided in Section 11.
"Executive" shall have the meaning set forth in the introductory paragraph
of this Agreement.
"Fiscal Year" means the fiscal year of the Company.
"Incentive Bonus Compensation" shall have the meaning set forth in Section
5(b).
"Insured Stock Options Value" shall have the meaning set forth in Section
7.
"IPO" means the initial public offering of common shares of the Company.
"Net Income" shall mean the net income of the Company for any Fiscal Year
as reflected in its annual financial statements prepared in accordance with
generally accepted accounting principles and audited by Ernst & Young or
such other accounting firm of national reputation as may be selected by the
Company from time to time.
"Notice of Termination" shall have the meaning set forth in Section
11(a)(1).
"Qualifying Excess Income" shall have the meaning set forth in Section
5(b).
"Required Life Insurance Coverage Amount" shall have the meaning set forth
in Section 7.
"Restricted Period" shall have the meaning set forth in Section 10(a).
"Scheduled Employment Termination Date" means the later of (a) the day
immediately preceding the fifth anniversary of the Employment Commencement
Date or (b) such date as is specified by either the Company or the
Executive in a Notice of Termination delivered for the purpose of fixing
the Scheduled Employment Termination Date, provided the date so specified
shall be at least three (3) years after the date such Notice of Termination
is so delivered.
"Shareholders" shall have the meaning provided in the Shareholders
Agreement dated as of the date hereof among the Company, Larry R. Linhart,
E. Len Gibson and Robert L. Powelson.
"Subsidiaries" means wholly owned subsidiaries of the Company.
Section 2. Employment and Term. The Company hereby employs the Executive,
and the Executive hereby accepts such employment by the Company, for the
purposes and upon the terms and conditions contained in this Agreement. The
term of such employment shall be for the Employment Period.
Section 3. Employment Capacity and Duties. The Executive shall be employed
throughout the Employment Period as the Chairman of the Board of Directors,
President and Chief Executive Officer of the Company. The Executive shall
have the duties and responsibilities incumbent with the positions of
Chairman of the Board of Directors, President and Chief Executive Officer
of the Company. Accordingly, and not by way of limitation, as Chairman of
the Board of Directors, President and Chief Executive Officer of the
Company, the Executive shall preside over all meetings of the shareholders
of the Company and of the Board of Directors, superintend and manage the
business of the Company and coordinate and supervise the work of its other
officers and employ, direct, fix the compensation of, discipline and
discharge its personnel, employ agents, professional advisors and
consultants and perform all functions of a general manager of the
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Company's business. The Company agrees that it will not, without the
Executive's written consent, relocate its principal executive offices to a
location outside Columbus, Ohio or require the Executive to be based
anywhere other than the Company's principal executive offices, except for
required travel on the Company's business to an extent substantially
consistent with present travel obligations.
Section 4. Executive Performance Covenants. The Executive accepts the
employment described in Section 3 and agrees to devote his full working
time and efforts (except for absences due to illness and appropriate
vacations) to the business and affairs of the Company and the performance
of the aforesaid duties and responsibilities. However, nothing in this
Agreement shall preclude the Executive from devoting a reasonable amount of
his time and efforts to civic, community, charitable, professional and
trade association affairs and matters. Section 5. Compensation. The Company
shall pay to the Executive, for his services hereunder, the compensation
hereinafter provided in this Section 5. Such compensation shall be paid to
the Executive at the times and in the manner as provided below.
(a) Base Compensation. The Executive shall be paid "Base Compensation"
for each Fiscal Year at an annual rate of $342,500 in 26 bi-weekly equal
installments. The Base Compensation (i) may be increased (but may not be
decreased) at any time or from time to time by action of the Board of
Directors or any committee thereof, and (ii) shall be increased by the COLA
Adjustment annually as of the beginning of each Fiscal Year, commencing
with the Fiscal Year beginning in 1995. The Base Compensation shall be
pro-rated for any Fiscal Year hereunder which is less than a full Fiscal
Year.
(b) Incentive Bonus Compensation. The Executive shall be paid
"Incentive Bonus Compensation" for each Fiscal Year in an amount equal to
5% of the Qualifying Excess Income (as hereinafter defined), if any, for
such Fiscal Year. The first $50,000 of any Incentive Bonus Compensation
otherwise earned (the "Current Portion") for any Fiscal Year shall be
payable to the Executive by the Company within 10 days after the issuance
of the Company's audited financial statements for the Fiscal Year involved.
The amount of any Incentive Bonus Compensation in excess of $50,000 for any
Fiscal Year (the "Deferred Portion") shall be deferred and (except as
provided in Section 11) shall be payable to the Executive only (i) if and
when the Aggregate Operating Income (as hereinafter defined) of the Company
is at least $2,118,000 (adjusted by the COLA Adjustment annually as of the
beginning of each Fiscal Year commencing with the Fiscal Year which begins
in 1995) in the succeeding Fiscal Year, or (ii) if, prior to the end of the
third succeeding Fiscal Year, the Executive's employment by the Company is
terminated for any reason other than termination by the Company under
Section 11(b) or termination by the Executive other than under Section
11(e)(1)(A). As used herein, "Qualifying Excess Income" for any Fiscal Year
shall mean the amount, if any, by which the Aggregate Operating Income for
the Fiscal Year, up to a maximum Aggregate Operating Income amount of
$3,706,500, exceeds $1,588,500 (with both numbers being adjusted annually
by the COLA Adjustment as of the beginning of each Fiscal Year commencing
with the Fiscal Year which begins in 1995). The "Aggregate Operating
Income" for any Fiscal Year shall be equal to the Net Income of the Company
for the Fiscal Year, calculated before taking into account (i) deductions
for any item of compensation, fees or bonuses paid or payable by the
Company or any of the Subsidiaries to any of the Shareholders, whether as
officer, director, consultant, agent, contractor or otherwise, (ii)
deductions for non-cash compensation expense associated with the exercise
of stock options or the granting of other rights or interests in securities
of the Company, so-called phantom stock interests and similar incentive
compensation arrangements, by any or all executive officers of the Company
(including, but not limited to, Mr. Linhart), (iii) deductions for interest
expense and any taxes on income and (iv) any other items properly
reportable on the audited financial statements of the Company below the
"income from operations" line, such as interest income and expense and
other types of investment income, loss or expense (provided, however, that
gain or loss from the sale or other disposition of depreciable assets used
by the Company in the ordinary course of its trade or business shall be
taken into account).
Section 6. Reimbursement of Expenses. The Company shall reimburse the
Executive for his reasonable expenses incurred in providing services to the
Company, including expenses for travel, entertainment and similar items, in
accordance with the Company's reimbursement policies as determined from
time to time by the Board of Directors. The Company shall also reimburse
the Executive for his reasonable expenses incurred for continuing legal
education and other reasonable expenses of maintaining his membership in
good standing in the Ohio Bar. If there is a dispute as to the eligibility
of an
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expense for reimbursement in accordance with the Company's reimbursement
policies, then such expense shall be determined to be reimbursable if
approved by a majority of the Board of Directors.
Section 7. Employee Benefits, Vacations. During the Employment Period, the
Executive shall receive the benefits and enjoy the perquisites described
below:
(a) Benefit Plans. The Company shall continue in effect any perquisite,
benefit or compensation plan (in addition to the compensation provided for
in Section 5) including its profit sharing plan and 401(k) plan, medical
insurance plan, life insurance plan, health and accident plan and
disability plan in which the Executive is currently participating, or to
maintain plans providing substantially similar benefits (collectively
referred to as the "Benefit Plans"); provided, however, that the Company
may make modifications in the Benefit Plans so long as such modifications
(i) are generally applicable to all salaried employees of the Company and
(ii) do not discriminate against the Executive or other highly-compensated
employees of the Company.
(b) Vacations. The Executive shall be entitled in each Fiscal Year to a
vacation of four weeks (20 working days), during which time his
compensation shall be paid in full, and such holidays and other nonworking
days as are consistent with the policies of the Company for executives
generally.
Section 8. Stock Options.
(a) 1987 and 1991 Options. The Company shall provide to the Executive,
pursuant to the Stock Options Addendum attached hereto, stock options (the
"1987 and 1991 Stock Options") to acquire common shares of the Company
("Common Shares").
(b) Participation in 1994 Stock Incentive Plan. Executive shall be
granted the right to purchase 50,000 Common Shares at 125% of the public
offering price for such Common Shares in the IPO, subject to vesting 20%
per year over 5 years, the options to expire 10 years after the date of
grant. The options shall be granted under and shall be subject to the terms
and conditions of the Company's 1994 Stock Incentive Plan and the
provisions of such Plan shall control in the event of the termination of
Executive's employment.
(c) Registration of Option Shares on Form S-8. The Company shall as
soon as reasonably practicable following the closing of the IPO file a
registration statement on Form S-8 with the Securities and Exchange
Commission for the purpose of registering the Common Shares underlying the
1987 and 1991 Options and the 1994 Stock Incentive Plan.
Section 9. Company Life Insurance; Medical Examinations. At any time during
the Employment Period, the Company may, in its discretion, apply for and
procure as owner and for its own benefit, insurance on the life of the
Executive, in such amounts and in such form or forms as the Company may
determine. The Executive shall have no right to any interest in any such
policy or policies, but he shall, at the request of the Company, submit to
such medical examinations, supply such information and execute such
applications, instruments and other documents as reasonably may be required
by the insurance company or companies to whom the Company has applied for
such insurance.
If requested by the Company, the Executive shall submit to at least one
medical examination during each Fiscal Year at such reasonable time and
place and by a physician or physicians determined and selected by the
Company. All the costs and expenses of said medical examination, including
transportation of the Executive to the place of examination and return,
shall be paid by the Company.
The Executive shall be entitled to a copy of all reports and other
information provided to the Company in connection with any examination
referred to in this Section 9. Any failure to pass any such medical
examination or to meet any health criteria or medical standard shall not of
itself be cause for termination of the Employment Period by the Company.
Section 10.Certain Company Protection Provisions. The below provisions
apply for the protection of the Company.
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(a) Noncompetition. During the Restricted Period (as hereinafter defined),
the Executive shall not directly or indirectly compete with the Company by
owning, managing, controlling or participating in the ownership, management
or control of, or be employed or engaged by or otherwise affiliated or
associated with, any Competitive Business in any location in which the
Company is doing business as of the Employment Termination Date. As used
herein, the term "Restricted Period" means the Employment Period and a
period of [three] years thereafter. As used herein, a "Competitive
Business" is any other corporation, partnership, proprietorship, firm,
association or other business entity which is engaged in any business from
which the Company derives five percent or more of its consolidated revenues
during the 12 months preceding the Employment Termination Date or in which
the Company has invested five percent or more of its total assets as of the
time in question, provided, however, that ownership of not more than five
percent of the stock of any publicly traded company shall not be deemed a
violation of this provision.
(b) Non-Interference. During the Restricted Period, the Executive shall not
induce or solicit any employee of the Company or any person doing business
with the Company to terminate his or her employment or business
relationship with the Company or otherwise interfere with any such
relationship.
(c) Confidentiality. The Executive agrees and acknowledges that, by reason
of the nature of his duties as an officer and employee, he will have or may
have access to and become informed of confidential and secret information
which is a competitive asset of the Company ("Confidential Information"),
including without limitation any lists of customers or subscribers,
financial statistics, research data or any other statistics and plans
contained in profit plans, capital plans, critical issue plans, strategic
plans or marketing or operation plans or other trade secrets of the Company
and any of the foregoing which belong to any person or company but to which
the Executive has had access by reason of his employment relationship with
the Company. The Executive agrees faithfully to keep in strict confidence,
and not, either directly or indirectly, to make known, divulge, reveal,
furnish, make available or use (except for use in the regular course of his
employment duties) any such Confidential Information. The Executive
acknowledges that all manuals, instruction books, price lists, information
and records and other information and aids relating to the Company's
business, and any and all other documents containing Confidential
Information furnished to the Executive by the Company or otherwise acquired
or developed by the Executive, shall at all times be the property of the
Company. Upon termination of the Employment Period, the Executive shall
return to the Company any such property or documents which are in his
possession, custody or control, but his obligation of confidentiality shall
survive such termination of the Employment Period until and unless any such
Confidential Information shall have become, through no fault of the
Executive, generally known to the trade. The obligations of the Executive
under this subSection are in addition to, and not in limitation or
preemption of, all other obligations of confidentiality which the Executive
may have to the Company under general legal or equitable principles.
(d) Remedies. It is expressly agreed by the Executive and the Company that
these provisions are reasonable for purposes of preserving for the Company
its business, goodwill and proprietary information. It is also agreed that
if any provision is found by a court having jurisdiction to be unreasonable
because of scope, area or time, then that provision shall be amended to
correspond in scope, area and time to that considered reasonable by a court
and as amended shall be enforced and the remaining provisions shall remain
effective. In the event of any breach of these provisions by the Executive,
the parties recognize and acknowledge that a remedy at law will be
inadequate and the Company may suffer irreparable injury. The Executive
acknowledges that the services to be rendered by him are of a character
giving them peculiar value, the loss of which cannot be adequately
compensated for in damages; accordingly, the Executive consents to
injunctive and other appropriate equitable relief upon the institution of
proceedings therefor by the Company in order to protect the Company's
rights. Such relief shall be in addition to any other relief to which the
Company may be entitled at law or in equity.
Section 11.Termination of Employment.
(a) Notice of Termination; Employment Termination Date.
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(1) Any termination of the Executive's employment by the Company or the
Executive shall be communicated by written Notice of Termination to the
other party thereto. For purposes of this Agreement, a "Notice of
Termination" shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis
for termination under the provision so indicated. Furthermore, either the
Executive or the Company may give a Notice of Termination to the other
party for the purpose of terminating this Agreement, as such, without
terminating the Executive's employment with the Company, which Notice of
Termination shall have the effect of terminating this Agreement on the
Scheduled Employment Termination Date as in effect on the date of giving
such Notice of Termination.
(2) "Employment Termination Date" shall mean the date on which the
Employment Period and the Executive's right and obligation to perform
employment services for the Company shall terminate effective upon the
first to occur of the following, it being understood that in no event may
the Employment Period be terminated other than as the result of one of the
following events:
(A) If the Executive's employment is terminated for Disability, the date
which is thirty (30) days after Notice of Termination is given (provided
that the Executive shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period);
(B) If the Executive's employment is terminated by the Executive for Good
Reason or otherwise by voluntary action of the Executive (see Section
11(e)), the date specified in the Notice of Termination, which date (except
with the written consent of the Company to the contrary) shall not be more
than sixty (60) days after the date that the Notice of Termination is
given;
(C) The death of the Executive;
(D) The Scheduled Employment Termination Date;
(E) If the Executive's employment is terminated by the Company for Cause
(see Section 11(b)(1)), the date on which a Notice of Termination is given;
provided that if within thirty (30) days after any Notice of Termination is
given the party receiving such Notice of Termination notifies the other
party that a dispute exists concerning the termination, the Employment
Termination Date shall be the date on which the dispute is finally
determined, either by mutual written agreement of the parties, by a binding
and final arbitration award or by a final judgment, order or decree of a
court of competent jurisdiction (the time for appeal therefrom having
expired and no appeal having been perfected); and
(F) If the Executive's employment is terminated by the Company other than
for Cause, Disability or death of the Executive, the date specified in the
Notice of Termination which date (except with the written consent of the
Executive to the contrary) shall not be more than 60 days after the date
that the Notice of Termination is given.
(b) Termination for Cause.
(1) The Company may terminate the Executive's employment and the
Employment Period for Cause. For the purposes of this Agreement, the
Company shall have "Cause" to terminate employment hereunder only (A) if
termination shall have been the result of an act or acts of misconduct
materially injurious to the Company, monetarily or otherwise, or (B) upon
the willful and continued failure by the Executive substantially to perform
his duties with the Company (other than any such failure resulting from
incapacity due to mental or physical illness) after a demand in writing for
substantial performance is delivered by the Board, which demand
specifically identifies the manner in which the Board believes that the
Executive has not substantially performed his duties, and such failure
results in demonstrably material injury to the Company. The Executive's
employment shall in no event be considered to have been terminated by the
Company for Cause if such termination took place as the result of (i) bad
judgment or negligence, or (ii) any act or omission without intent of
gaining therefrom directly or indirectly a profit to which the Executive
was not legally entitled, or (iii) any act or omission believed in good
faith to have been in or not opposed to the interest of the Company, or
(iv) any act or omission in respect of which a determination is made that
the Executive met the applicable standard of
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conduct prescribed for indemnification or reimbursement or payment of
expenses under the Code of Regulations of the Company or the laws of the
State of Ohio, in each case as in effect at the time of such act or
omission. The Executive shall not be deemed to have been terminated for
Cause unless and until there shall have been delivered to him a copy of a
resolution duly adopted by the affirmative vote of not less than
three-quarters of the entire membership of the Board of Directors at a
meeting of the Board of Directors called and held for the purpose (after
not less than 30 days written notice to the Executive and an opportunity
for him, together with his counsel, to be heard before the Board of
Directors, such notice of meeting to indicate the specific termination
provision of this Agreement relied upon and specify in reasonable detail
the facts and circumstances claimed to provide a basis for termination
under the provision so indicated), finding that in the good faith opinion
of the Board of Directors the Executive was guilty of conduct set forth
above in clauses (A) or (B) of the second sentence of this paragraph and
specifying the particulars thereof in detail.
(2) If the Executive's employment shall be terminated for Cause, the
Company shall pay the Executive (A) within 10 days of such termination, his
unpaid Base Compensation through the Employment Termination Date at the
rate in effect at the time Notice of Termination is given plus (B) within
10 days after issuance of the Company's audited financial statements for
the Fiscal Year in which the Employment Termination Date occurs, the
Deferred Portion of any Incentive Bonus Compensation payable with respect
to any previous Fiscal Year (without regard to the termination of
Executive's employment), plus a pro-rata share of the Current Portion of
any Incentive Bonus Compensation computed with respect to the Fiscal Year
in which occurs the Employment Termination Date as if such termination had
not occurred, plus (C) within 10 days following the issuance of the
Company's audited financial statements for its Fiscal Year following the
Fiscal Year in which the Employment Termination Date occurs, if the
Deferred Portion of any Incentive Bonus Compensation would otherwise have
been payable to Executive had his employment not been terminated, a
pro-rata share of the Deferred Portion so payable.
(c) Termination for Disability. The Company may terminate the Executive's
employment because of the Disability of the Executive and thereafter shall
pay to the Executive (or his successors) (1) his unpaid Base Compensation
through the sixth full month following the Employment Termination Date at
his then effective Base Compensation rate, plus (2) the Deferred Portion of
any Incentive Bonus Compensation accrued and deferred with respect to any
previous Fiscal Year, the full amount of which shall become immediately
payable without regard to the deferral provisions of Section 5(b), plus (3)
an amount equal to a pro-rata share of any Incentive Bonus Compensation
calculated through the sixth full month following the Employment
Termination Date as though all of such six month period were part of the
Fiscal Year in which occurred the Employment Termination Date, (but
otherwise as though such termination had not occurred) and assuming for
purposes of calculating the amounts due, the largest amount of Incentive
Bonus Compensation accrued for any of the two most recently completed
Fiscal Years. No portion of such Incentive Bonus Compensation shall be
deferred pursuant to the provisions of clause (i) of Section 5(b). In
addition, the Executive shall be entitled to the amounts and benefits
specified in Paragraphs (2) and (3) of Section 11(f) of this Agreement.
(d) Termination Upon Executive's Death. In the event of the Executive's
death, the Company shall pay to the Executive's estate (1) any unpaid
amount of Base Compensation through the date of death at the then effective
Base Compensation rate plus (2) the Deferred Portion of any Incentive Bonus
Compensation accrued and deferred with respect to any previous Fiscal Year,
the full amount of which shall become immediately payable without regard to
the deferral provisions of Section 5(b), plus (3) an amount equal to the
pro-rata share of any Incentive Bonus Compensation calculated with respect
to the Fiscal Year in which the death occurs and assuming for purposes of
calculating the amounts due, the largest amount of Incentive Bonus
Compensation accrued for any of the two most recently completed Fiscal
Years. No portion of such Incentive Bonus Compensation shall be deferred
pursuant to the provisions of clause (i) of Section 5(b). All previously
granted stock options, rights, warrants and awards shall fully vest on the
death of the Executive, except that the provisions of the Company's Stock
Incentive Plan and any other Benefit Plan shall control the benefits and
awards covered thereby.
(e) Termination of Employment by the Executive.
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(1) The Executive may terminate his employment for Good Reason and
receive the payments and benefits specified in Section 11(f) in the same
manner as if the Company had terminated his employment. For purposes of
this Agreement, "Good Reason" will exist if any one or more of the
following occur:
(A) Failure by the Company to honor any of its obligations under this
Agreement, including, without limitation, its obligations under Section 3
(Employment Capacity and Duties), Section 4 (Executive Performance
Covenants), Section 5 (Compensation), Section 6 (Reimbursement of
Expenses), Section 7 (Employee Benefits, Vacations, Life Insurance),
Section 8 (Stock Options), Section 12 (Indemnification) and Section 13
(Successors and Assigns); or
(B) Any purported termination by the Company of the Executive's
employment that is not effected pursuant to a Notice of Termination
satisfying the requirements of Section 11(a) above and, for purposes of
this Agreement, no such purported termination shall be effective.
(C) If there is a Change in Control of the Company (as defined below)
and the employment of the Executive is concurrently or subsequently
terminated (i) by the Company without Cause, (ii) by service of a Notice of
Termination or (iii) by the resignation of the Employee because he has
reasonably determined in good faith that his titles, authorities,
responsibilities, salary, bonus opportunities or benefits have been
materially diminished, or that a material adverse change in his working
conditions has occurred or the Company has breached this Agreement. For the
purpose of this Agreement, a Change in Control of the Company has occurred
when: (x) any person (defined for the purposes of this Section 11 to mean
any person within the meaning of Section 13(d) of the Securities Exchange
Act of 1934 (the "Exchange Act")), other than the Company, or an employee
benefit plan established by the Board of Directors of the Company,
acquires, directly or indirectly, the beneficial ownership (determined
under Rule 13 d-3 of the regulations promulgated by the Securities and
Exchange Commission under Section 13(d) of the Exchange Act) of securities
issued by the Company having 20% or more of the voting power of all of the
voting securities issued by the Company in the election of directors at the
next meeting of the holders of voting securities to be held for such
purpose; or (y) a majority of the directors elected at any meeting of the
holders of voting securities of the Company are persons who were not
nominated for such election by the Board of Directors of the Company or a
duly constituted committee of the Board of Directors of the Company having
authority in such matters; or (z) the Company merges or consolidates with
or transfers substantially all of its assets to another person.
(2) The Executive shall have the right voluntarily to terminate his
employment other than for Good Reason prior to the Scheduled Employment
Termination Date, and if the Executive shall so terminate his employment,
he shall be entitled only to payment of the amounts which would be payable
under Section 11(b)(2) had he been terminated for Cause.
(f) Compensation Upon Certain Termination.
(1) If the Company shall terminate the Executive's employment other
than pursuant to Section 11(b), (c) or (d), or if the Executive shall
terminate his employment for Good Reason pursuant to Section 11(e)(1) (but
not a termination voluntarily by the Executive other than for Good Reason
under Section 11(e)(2)), then the Company shall pay to the Executive the
following amounts:
(A) (1) His unpaid Base Compensation through the Employment Termination
Date at his then effective Base Compensation rate, plus (2) the Deferred
Portion of any Incentive Bonus Compensation accrued and deferred with
respect to any previous Fiscal Year, the full amount of which shall become
immediately payable without regard to the deferral provisions of Section
5(b), plus (3) an amount equal to a pro-rata share of the amount of any
Incentive Bonus Compensation payable to him with respect to the Fiscal Year
in which occurs the Employment Termination Date (assuming for purposes of
calculating Incentive Bonus Compensation, the largest amount thereof
accrued for any of the two most recently completed Fiscal Years) and no
part thereof shall be subject to the deferral provisions of clause (i) of
Section 5(b).
(B) In addition, the Company shall pay to the Executive promptly in a
single lump sum in cash an amount equal to the product of (i) three,
multiplied by (ii) 100% of the aggregate total amount which would have been
payable to
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Executive under Section 5 for the entire Fiscal Year in which occurs the
Employment Termination Date as if his employment had not been terminated
(and without deduction or offset for any amounts actually paid for such
Fiscal Year on account of Base Compensation or Incentive Bonus
Compensation, under Section 5, this Section 11 or otherwise), and assuming
for purposes of calculating (x) the Base Compensation, 100% of the amount
thereof at the annual rate payable for such Fiscal Year pursuant to Section
5(a) and (y) the Incentive Bonus Compensation, the largest amount thereof
accrued for any of the two most recently completed Fiscal Years. For
purposes of the foregoing calculation, no part of the Incentive Bonus
Compensation shall be subject to the deferral provisions of clause (i) of
Section 5(b).
(C) The Company shall also pay all legal fees and expenses incurred as
a result of such termination (including all such fees and expenses, if any,
incurred in contesting or disputing any such termination, in seeking to
obtain or enforce any right or benefit provided by this Agreement, or in
interpreting this Agreement). The Company agrees, in the event the
Executive desires to relocate within one year after the Date of
Termination, to pay for (or reimburse) all reasonable moving expenses
incurred relating to a change of principal residence in connection with
such relocation and to indemnify the Executive in connection with any loss
he may sustain in the sale of his primary residence.
(D) The Executive shall be under no obligation to seek other employment
and there shall be no offset against any amounts due the Executive under
this Agreement on account of any remuneration attributable to any
subsequent employment that the Executive may obtain (any amounts due under
this Section 11(f) are in the nature of severance payments, or liquidated
damages, or both, and are not in the nature of a penalty).
(2) Unless the Executive is terminated for Cause, the Company shall
maintain in full force and effect, for the Executive's continued benefit
through the Scheduled Employment Termination Date, all active and retired
Benefit Plans and other benefit programs or arrangements in which he was
entitled to participate immediately prior to the Scheduled Employment
Terminate Date (except as specified in Section 7(a) of this Agreement),
provided that continued participation is possible under the general terms
and provisions of such plans and programs. In the event that participation
in any such plan or program is barred, the Company shall arrange to provide
him with benefits substantially similar to those which he is entitled to
receive under such plans and programs.
(3) Unless the Executive is terminated for Cause, the Company shall
allow the Executive at Company expense, to continue to utilize the services
of Ernst & Young, Steven D. Elsea & Co., and/or another accountant or
attorney of his choice for assistance in enforcing this Agreement and
preparation of his tax returns for the year following termination of
employment.
(g) Compensation Upon Disability. During any period that the Executive
fails to perform his duties hereunder as a result of incapacity due to
physical or mental illness, he shall continue to receive his full Base
Compensation at the rate then in effect and his full Incentive Bonus
Compensation calculated according to the provisions of Section 5(b); all
until this Agreement is terminated pursuant to Section 11(c) hereof.
Thereafter, his benefits shall be determined in accordance with the
Company's Benefit Plans.
Section 12. Certain Tax Matters
(a) Optional Right of Partial Disclaimer
It is recognized that under certain circumstances:
(1) Payments or benefits provided to the Executive under this Agreement
and/or under the attached Stock Option Addendum or the Company's 1994 Stock
Incentive Plan Agreements might give rise to an "excess parachute payment"
within the meaning of Section 280G of the Internal Revenue Code of 1986, or
any successor provision thereof.
(2) It might be beneficial to the Executive to disclaim some portion of
the payment or benefit in order to avoid such "excess parachute payment"
and thereby avoid the imposition of an excise tax resulting therefrom.
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(3) Under such circumstances it would not be to the disadvantage of the
Company to permit the Executive to disclaim any such payment or benefit in
order to avoid the "excess parachute payment" and the excise tax resulting
therefrom.
Accordingly, the Executive may, at the Executive's option, exercisable
at any time or from time to time, disclaim any entitlement to any portion
of the payment or benefits arising under this Agreement and/or under the
attached Stock Option Addendum or the Company's 1994 Incentive Stock Plan
which would constitute "excess parachute payments," and it shall be the
Executive's choice as to which payments or benefits shall be so
surrendered, if and to the extent that the Executive exercises such option,
so as to avoid "excess parachute payments."
(b) Additional Payments
(1) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined (as hereafter provided) that any payment or
distribution to or for the Executive's benefit, whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise pursuant to or by reason of any other agreement, policy, plan,
program or arrangement (including without limitation the attached Stock
Option Addendum or the 1994 Stock Incentive Plan or other similar
agreement), or similar right (a "Payment"), would be subject to the excise
tax imposed by Section 4999 of the Internal Revenue Code of 1986 (or any
successor provision thereto), or any interest or penalties with respect to
such excise tax (such excise tax, together with any such interest and
penalties, are hereafter collectively referred to as the "Excise Tax"),
then the Executive shall be entitled to receive an additional payment or
payments (a "Gross-Up Payment") in an amount such that, after payment by
the Executive of all taxes (including any interest or penalties imposed
with respect to such taxes), including any Excise Tax, imposed upon the
Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments.
(2) Subject to the provisions of Section 12(b) (5), all determinations
required to be made under this Section Section 12(b), including whether an
Excise Tax is payable by the Executive, the amount of such Excise Tax,
whether a Gross-Up Payment is required, and the amount of such Gross-Up
Payment, shall be made by Steven Elsea C.P.A. or a nationally-recognized
legal or accounting firm (the "Firm") selected by the Executive in the
Executive's sole discretion. The Executive agrees to direct the Firm to
submit its determination and detailed supporting calculations to both the
Executive and the Company as promptly as practicable. If the Firm
determines that any Excise Tax is payable by the Executive and that a
Gross-Up Payment is required, the Company shall pay the Executive the
required Gross-Up Payment within ten business days after receipt of such
determination and calculations. If the Firm determines that no Excise Tax
is payable by the Executive, it shall, at the same time as it makes such
determination, furnish the Executive with an opinion that the Executive has
substantial authority not to report any Excise Tax on the Executive's
federal income tax return. Any determination by the Firm as to the amount
of the Gross-Up Payment shall be binding upon the Executive and the
Company. As a result of the uncertainty in the application of Section 4999
of the Internal Revenue Code of 1986 (or any successor provision thereto)
at the time of the initial determination by the Firm hereunder, it is
possible that Gross-Up Payments which will not have been made by the
Company should have been made (an "Underpayment"). In the event that the
Company exhausts its remedies pursuant to Section 12(b)(5) hereof and the
Executive thereafter is required to make a payment of any Excise Tax, the
Executive may direct the Firm to determine the amount of the Underpayment
(if any) that has occurred and to submit its determination and detailed
supporting calculations to both the Executive and the Company as promptly
as possible. Any such Underpayment shall be promptly paid by the Company to
the Executive, or for the Executive's benefit, within ten business days
after receipt of such determination and calculations.
(3) The Executive and the Company shall each provide the Firm access to
and copies of any books, records and documents in the possession of the
Company or the Executive, as the case may be, reasonably requested by the
Firm, and otherwise cooperate with the Firm in connection with the
preparation and issuance of the determination contemplated by Section
12(b)(2) hereof.
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(4) The fees and expenses of the Firm for its services in connection
with the determinations and calculations contemplated by Section 12(b)(2)
hereof shall be borne by the Company. If such fees and expenses are
initially paid by the Executive, the Company shall reimburse the Executive
the full amount of such fees and expenses within ten business days after
receipt from the Executive of a statement therefor and reasonable evidence
of the Executive's payment thereof.
(5) The Executive agrees to notify the Company in writing of any claim
by the Internal Revenue Service that, if successful, would require the
payment by the Company of a Gross-Up Payment. Such notification shall be
given as promptly as practicable but no later than 10 business days after
the Executive actually receives notice of such claim. The Executive agrees
to further apprise the Company of the nature of such claim and the date on
which such claim is requested to be paid (in each case, to the extent known
by the Executive). The Executive agrees not to pay such claim prior to the
earlier of (a) the expiration of the 30-calendar-day period following the
date on which the Executive gives such notice to the Company and (b) the
date that any payment with respect to such claim is due. If the Company
notifies the Executive in writing at least five business days prior to the
expiration of such period that it desires to contest such claim, the
Executive agrees to:
(a) provide the Company with any written records or documents in the
Executive's possession relating to such claim reasonably requested by the
Company;
(b) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time, including
without limitation accepting legal representation with respect to such
claim by an attorney competent in respect of the subject matter and
reasonably selected by the Company;
(c) cooperate with the Company in good faith in order effectively to
contest such claim; and
(d) permit the Company to participate in any proceedings relating to
such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including interest and penalties) incurred in connection with
such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, from and against any Excise Tax or income tax, including
interest and penalties with respect thereto, imposed as a result of such
representation and payment of costs and expenses. Without limiting the
foregoing provisions of this Section 12(b)(5), the Company shall control
all proceedings taken in connection with the contest of any claim
contemplated by this Section 12(b)(5) and, at its sole option, may pursue
or forego any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim (provided,
however, that the Executive may participate therein at the Executive's own
cost and expense) and may, at its option, either direct the Executive to
pay the tax claimed and sue for a refund or contest the claim in any
permissible manner, and the Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to
pay the tax claimed and sue for a refund, the Company shall advance the
amount of such payment to the Executive on an interest-free basis and shall
indemnify and hold the Executive harmless, on an after-tax basis, from any
Excise Tax or income tax, including interest or penalties with respect
thereto, imposed with respect to such advance; and provided further,
however, that any extension of the statute of limitations relating to
payment of taxes for the Executive's taxable year with respect to which the
contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of any such contested claim
shall be limited to issues with respect to which a Gross-Up Payment would
be payable hereunder and the Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
(6) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 12(b)(5) hereof, the Executive receives any
refund with respect to such claim, the Executive agrees (subject to the
Company's complying with the requirements of Section 12(b)(5) hereof) to
promptly pay to the Company the amount of such refund (together with any
interest paid or credited thereon after any taxes applicable thereto). If,
after the Executive's receipt of an amount advanced by the Company pursuant
to Section 12(b)(5) hereof, a determination is made that the Executive is
not entitled to any
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refund with respect to such claim and the Company does not notify the
Executive in writing of its intent to contest such denial of refund prior
to the expiration of 30 calendar days after such determination, then such
advance shall be forgiven and shall not be required to be repaid and the
amount of such advance shall offset, to the extent thereof, the amount of
Gross-Up Payment required to be paid pursuant to this Section 12(b).
Section 13. Indemnification. As an employee, officer and director of the
Company, the Executive shall be indemnified against all liabilities,
damages, fines, costs and expenses by the Company in accordance with the
indemnification provisions of the Company's Code of Regulations as in
effect on the date hereof, and otherwise to the fullest extent to which
employees, officers and directors of a corporation organized under the laws
of Ohio may be indemnified pursuant to Section 1701.13(E), Ohio Revised
Code, as the same may be amended from time to time (or any subsequent
statute of similar tenor and effect), subject to the terms and conditions
of such statute.
Section 14. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration
in Columbus, Ohio in accordance with the rules of the American Arbitration
Association then in effect; provided that all arbitration expenses shall be
borne by the Company. Notwithstanding the pendency of any dispute or
controversy concerning termination or the effects thereof, the Company will
continue to pay the Executive his full compensation in effect immediately
before any Notice of Termination giving rise to the dispute was given
(including, but not limited to, Base Salary and incentive pay) and continue
him as a participant in all compensation, benefit and insurance plans in
which he was then participating, until the dispute is finally resolved.
Judgment may be entered on the arbitrators' award in any court having
jurisdiction; provided, however, that the Executive shall be entitled to
seek specific performance of his right to be paid until the Employment
Termination Date during the pendency of any dispute or controversy arising
under or in connection with this Agreement.
Section 15. Successors and Assigns. Except as hereinafter expressly
provided, the agreements, covenants, terms and provisions of this Agreement
shall bind the respective heirs, executors, administrators, successors and
assigns of the parties. Specifically, and not by way of limitation of the
foregoing, the Executive shall be bound by the terms and conditions of this
Agreement to any successor assignee of the Company's rights and obligations
hereunder as a result of any merger, consolidation or sale or lease of all
or substantially all of the Company's business and assets. If any successor
(whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company fails, concurrently with the effectiveness of any such succession,
to agree in writing in form and substance reasonably satisfactory to the
Executive expressly to assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to
perform if no such succession had taken place, then the Executive shall
have the right, effected by notice to such successor not later than 90 days
after the effectiveness of such succession, to terminate the Employment
Period under Section 11(e) as though such failure was an uncured breach by
the Company of a material covenant or agreement of the Company contained in
this Agreement.
If the Executive should die while any amounts are payable to him hereunder,
or if by reason of his death payments are to be made to him hereunder, then
this Agreement shall inure to the benefit of and be enforceable by the
Executive's executors, administrators, heirs, distributees, devisees and
legatees and all amounts payable hereunder shall then be paid in accordance
with the terms of this Agreement to the Executive's devisee, legatee or
other designee or, if there is no such designee, to his estate.
This Agreement is personal in nature and neither of the parties hereto
shall, without the consent of the other, assign or transfer this Agreement
or any rights or obligations hereunder, except as hereinbefore provided in
this Section 15. Without limiting the foregoing, the Executive's right to
receive payments hereunder shall not be assignable or transferable, whether
by pledge, creation of a security interest or otherwise, other than a
transfer by his will or by the laws of descent or distribution, and in the
event of any attempted assignment or transfer contrary to this paragraph
the Company shall have no liability to pay to the purported assignee or
transferee any amount so attempted to be assigned or transferred.
As used in this Agreement, the "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which executes and delivers the agreement provided for in the
first paragraph of this Section 15 or which otherwise becomes bound by all
the terms and provisions of this Agreement by operation of law.
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Section 16. Notices. Any notice or other communication required or desired
to be given hereunder shall be in writing and shall be deemed sufficiently
given when personally delivered or when mailed by first class certified
mail, return receipt requested and postage prepaid, addressed to the
parties at their respective addresses set forth under their respective
signatures below or such other person or addresses as shall be given by
notice of any party.
Section 17. Waiver; Remedies Cumulative. No waiver of any right or option
hereunder by any party shall operate as a waiver of any other right or
option, or the same right or option as respects any subsequent occasion for
its exercise, or of any legal remedy. No waiver by any party of any breach
of this Agreement or of any agreement or covenant contained herein shall be
held to constitute a waiver of any other breach or a continuation of the
same breach. All remedies provided by this Agreement are in addition to all
other remedies by it or the law provided.
Section 18. Governing Law; Severability. This Agreement is made and is
expected to be performed in Ohio, and the various terms, provisions,
covenants and agreements, and the performance thereof, shall be construed,
interpreted and enforced under and with reference to the laws of the State
of Ohio. It is the intention of the Company and the Executive to comply
fully with all laws and matters of public policy relating to employment
agreements and restrictive covenants, and this Agreement shall be construed
consistently with such laws and public policy to the extent possible. If
and to the extent any one or more covenants, agreements, terms and
provisions of this Agreement or any portion or portions thereof shall be
held invalid or unenforceable by a court of competent jurisdiction, then
such covenants, agreements, terms and provisions (or portions thereof)
shall be deemed separable from the remaining covenants, agreements, terms
and provisions of this Agreement and such holding shall in no way affect
the validity or enforceability of any of the other covenants, agreements,
terms and provisions hereof.
Section 19. Miscellaneous. This Agreement constitutes the entire
understanding of the parties hereto with respect to the subject matter
hereof. This Agreement may not be modified, changed or amended except in a
writing signed by each of the parties hereto. This Agreement may be signed
in multiple counterparts, each of which shall be deemed an original hereof.
The captions of the several Sections and subSections of this Agreement are
not a part of the context hereof, are inserted only for convenience in
locating such Sections and subSections and shall be ignored in construing
this Agreement.
Section 20. Agreement Void. This Agreement shall be void and of no force
and effect if, and only if, the Company does not close on the IPO on or
before December 31, 1994.
[SIGNATURES FOLLOW ON NEXT PAGE]
IN WITNESS WHEREOF, the Company and the Executive have executed multiple
counterparts of this Agreement.
Company: Executive:
AMERILINK CORPORATION
1900 East Dublin-Granville Road
Columbus, Ohio 43229
By:
Name: Larry R. Linhart Name: Larry R. Linhart
Title: Chairman of the Board Address: 65 South Merkle Road
of Directors, President Columbus, Ohio 43209
and Chief Executive Officer
and by:
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Name: Robert Powelson
Title: Secretary
[STOCK OPTION ADDENDUM FOLLOWS ON NEXT PAGE]
STOCK OPTION ADDENDUM
to
Executive Employment Agreement
between
AmeriLink Corporation
and
Larry R. Linhart ("Executive")
Performance-Based Option
As of ______________, 1994
Subject to all of the terms and conditions contained herein, the
undersigned AMERILINK CORPORATION, an Ohio corporation (the "Company"),
hereby grants to LARRY R. LINHART (the "Executive") the following options
to purchase shares (the "Executive Option Shares") of the Company's common
stock, without par value ("Common Shares") as follows:
Recitals:
A. Pursuant to Stock Purchase and Close Corporation Agreement dated January
15, 1987, among AmeriLink Corp., an Ohio corporation (the "Operating
Company") and its shareholders, E. Len Gibson ("Gibson"), Robert L.
Powelson ("Powelson") and the Executive, Gibson and Powelson granted to the
Executive (together with Gibson and Powelson, the "Shareholders") the
option to purchase up to five percent (5%) of the common stock of the
Operating Company, up to two and one-half percent (2-1/2%) each from Gibson
and Powelson, upon the terms and conditions therein stated (such options
being herein called the "1987 Options");
B. Under a certain "Second Amendment to Stock Purchase and Close
Corporation Agreement" dated November 30, 1991 among the Operating Company
and the Shareholders, Gibson and Powelson granted to the Executive the
option to purchase up to an additional eight and one-third percent (8-1/3%)
of the common stock of the Operating Company, up to four and one-sixth
percent (4-1/6%) each, from Gibson and Powelson, upon the terms and
conditions therein stated (such options being herein called the "1991
Options"); and
C. The Shareholders are parties to a certain Recapitalization Agreement and
Plan of Merger, pursuant to which, among other things, the Shareholders
will contribute all of their Common Stock in the Operating Company to
AmeriLink Holdings Corporation, an Ohio corporation ("AHC") and receive in
exchange, common shares of AHC in proportion to their respective equities
in AHC, and AHC has, in turn, assumed the obligation of Gibson and Powelson
to perform their obligations pursuant to the 1987 Options and the 1991
Options and has agreed to issue and sell to Executive, upon his exercise of
such options, a proportionate equivalent number of common shares of AHC
upon his exercise of such options and payment of the purchase price thereof
in accordance with the terms and conditions thereof, and to cause the
successors and assigns of AHC to be bound by and agree to perform such
duties and obligations of Powelson and Gibson under the 1987 Options and
1991 Options; and
D. Pursuant to the Recapitalization Agreement, AHC is about to or has
merged with and into the Company and pursuant thereto, among other things,
the Company has agreed to assume and perform the obligations of AHC with
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respect to the performance of the 1987 Options and the 1991 Options and the
performance of the obligations of Gibson and Powelson thereunder; and
E. The Company and Executive are entering into this Stock Option Addendum
for the purpose of amending (but only in the respects hereinafter
reflected) and restating the 1987 Options and the 1991 Options.
Restated Option Agreement
Performance-Based Option
The Company and Executive hereby agree as follows:
Subject to all of the terms and conditions contained herein, the Company
hereby grants to Executive the following performance-based options to
purchase Common Shares:
1. 1987 Options. The Company hereby grants to Executive the right and
option to purchase from the Company 135,000 Common Shares (the "1987
Option") upon the following terms and conditions:
(a) Term of 1987 Option. The 1987 Option shall be effective throughout
the Employment Period and must be exercised on or before the Employment
Termination Date, subject, however to the provisions of Section 5 below.
(b) Purchase Price. The purchase price for the 1987 Option shall be
$4.00 per Common Share (the "1987 Exercise Price").
(c) Options Non-transferable. Executive's option rights with respect to
the 1987 Option are non-transferable and are personal to Executive and may
be exercised only by Executive and by no one else.
2. 1991 Options. In addition to the 1987 Option, the Company grants to
Executive the right and option to purchase from the Company 225,000 Common
Shares (the "1991 Option") upon the following terms and conditions:
(a) Term of 1991 Option. The 1991 Option shall remain effective
throughout the Employment Period and for a period of 180 days following the
Employment Termination Date.
(b) Purchase Price. The purchase price for the 1991 Option shall be
$6.35 per Common Share.
(c) Time of Exercise. Except as set forth herein, there are no
conditions to the exercise or the exercisability by the Executive of 1991
Options.
3. Securities Act. etc. In the absence of an effective Registration
Statement under the Securities Act of 1933, as from time to time in effect
(the "Act"), relating thereto, the Company shall not be required to
register a transfer of shares delivered or deliverable upon exercise of the
1987 and the 1991 Option ("Delivered Shares") on its books unless the
Company shall have been provided with an opinion of counsel satisfactory to
it prior to such transfer that registration under the Act is not required
in connection with the transaction resulting in such transfer. Each
certificate evidencing Delivered Shares or issued upon any transfer of
Delivered Shares shall bear an appropriate restrictive legend, except that
such certificate shall not bear such a restrictive legend if the opinion of
counsel referred to above is to the further effect that such legend is not
required in order to establish compliance with the provisions of the Act.
Nothing in this paragraph 3 shall modify or otherwise effect the provisions
applicable to the Delivered Shares of, or the obligations of the Executive
pursuant to, paragraph 4 hereof or the Shareholders Agreement referred to
therein.
4. Shareholders Agreement. By acceptance of the 1987 and 1991 Options,
Executive agrees that all shares issued upon the exercise hereof shall
become "Shares" for purposes of the Shareholders Agreement dated [as of the
date hereof] among the Company and the Shareholders (as defined therein).
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<PAGE> 16
5. Termination, Exercise, etc.
(a) The 1987 and 1991 Options shall expire and terminate, to the extent
not previously exercised, as to all 1987 and 1991 Option Shares, whether or
not they have become exercisable on the termination of the Executive's
employment by the Company; provided, however that: (i) in the event the
employment of the Executive by the Company shall be terminated by reason of
the Executive's death, the [1987 and] 1991 Options shall, to the extent
exercisable, at the date of the Executive's death, be exercisable by the
Executive's estate or any trust established solely for the benefit of one
or more of the Executive's heirs (such estate and each such trust being
referred to herein, collectively, as the "Estate") during the period
beginning on the date of the Executive's death and ending on the one
hundred eightieth (180th) day thereafter; (ii) in the event the employment
of the Executive by the Company shall be terminated other than by reason of
the Executive's death, the [1987 and] 1991 Options shall, to the extent
exercisable at the date of such termination, be exercisable by the
Executive during the period beginning on the date of such termination and
ending on the ninetieth (90th) day thereafter; and (iii) no termination of
the [1987 and] 1991 Options shall modify or otherwise affect the provisions
applicable to the Delivered Shares of, or the obligations of the Executive
pursuant to, the Shareholders Agreement referred to in Section 4 hereof.
(b) Subject to the preceding paragraph 5(a) and the other provisions of
this Addendum, the [1987 and] 1991 Options may, to the extent exercisable
but not previously exercised, be exercised at any time and from time to
time, in whole or in part, by written notice delivered to the Company
signed by the Executive or the Estate thereof. Such notice shall state the
number of [1987 and] 1991 Option Shares in respect to which the [1987 and]
1991 Options are being exercised, shall contain the acknowledgement and
agreement of the Executive or the Estate thereof that the Delivered Shares
are subject to the Shareholders Agreement as Shares thereunder and shall
also contain such representations and warranties of the Executive or the
Estate thereof as the Company may then deem necessary or desirable in order
to comply with federal or state securities laws or as may otherwise be
reasonably requested by the Company; and shall be accompanied either (i) by
payment in full (in cash, by personal check or by any other method
acceptable to the Company) of the full Exercise Price in respect thereof or
(ii) delivery to the Company of that number of Common Shares owned by the
Executive and having a fair market value (determined reasonably and in good
faith by the Board of Directors and, if reasonably possible, prior to such
exercise) equal to the full Exercise Price in respect thereof. In addition,
the Company shall have the right to require that the Executive or the
Estate thereof, when exercising the 1987 and 1991 Options in whole or in
part, remit to the Company an amount sufficient to satisfy any federal,
state or local withholding tax requirements (or make other arrangements
satisfactory to the Company with regard to such taxes prior to the delivery
of any Delivered Shares pursuant to such exercise, including without
limitation by withholding Delivered Shares otherwise deliverable upon such
exercise, and, if requested by the Executive or such Estate, the Company
shall so withhold at least a number of Delivered Shares requested to be so
withheld by the Executive at the time of such exercise. As soon as
practicable after such notice and payment shall have been received, the
Company shall deliver a certificate or certificates representing the number
of Delivered Shares with respect to which the Performance-Based Option was
exercised, registered in the name of the person or persons exercising the
Performance-Based Option.
(c) All Delivered Shares that shall be purchased upon the exercise of
the 1987 and 1991 Options as provided herein shall be fully paid and
non-assessable.
6. Certain Conditions. In the event the Company (i) pays a dividend or
makes a distribution on its Common Stock in shares of Common Stock, (ii)
subdivides its outstanding shares of Common Stock into a greater number of
shares, (iii) combines its outstanding shares of Common Stock into a
smaller number of shares, (iv) makes a distribution on its Common Stock in
shares of its capital stock other than Common Stock, (v) issues by
reclassification of its Common Stock any shares of its capital stock, or
(vi) consummates any merger, reorganization or consolidation pursuant to
which any securities or other consideration is issued to the holders of
outstanding shares of capital stock of the Company (each an "Adjustment
Event"), then, upon the exercise of the 1987 and 1991 Options in whole or
in part on or after the record date for determining the holders of record
of outstanding shares to which such Adjustment Event shall apply, the
Executive shall be entitled to receive such securities of the Company or
other consideration as the Executive would have
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<PAGE> 17
held immediately after the consummation of such Adjustment Event had the
Delivered Shares issuable upon such exercise been held by the Executive on
such record date.
7. Hardship Withdrawal. Notwithstanding any other provision hereof, the
Optionee shall not be entitled to exercise this option during the period of
twelve months immediately following the date upon which the Optionee
receives a "hardship withdrawal" from a retirement plan sponsored by the
Company which then qualifies under Section 401(k) of the Internal Revenue
Code of 1986, as amended, and during such twelve month period all rights of
the Optionee to exercise this option shall be suspended.
8. Miscellaneous. Except as specifically otherwise provided in Section 6
hereof as to exercise by the Executive's Estate, the 1987 and 1991 Options
may not be assigned or transferred, in whole or in part, whether by
operation of law, upon death or otherwise, by the Executive without the
written consent of the Company which the Company may withhold in its sole
and absolute discretion, with or without any reason. Neither the 1987
Option nor the 1991 Option are intended to constitute an "incentive stock
option" as that term is used in Section 422 of the Internal Revenue Code of
1986, as amended, and shall not be treated as incentive stock options. The
1987 and 1991 Options shall be governed by and construed in accordance with
the laws of the State of Ohio.
AMERILINK CORPORATION
By
Name:
Title:
AMERILINK CORPORATION
AMENDMENT NO. 1 TO
EXECUTIVE EMPLOYMENT AGREEMENT
This AMENDMENT NO. 1 TO EXECUTIVE EMPLOYMENT AGREEMENT (the"Amendment") is
made in Columbus, Ohio effective as of ______________, 1997, by and between
AMERILINK CORPORATION, an Ohio corporation (the "Company"), and LARRY R.
LINHART, an individual residing in New Albany, Ohio (the "Executive"), who,
for and in consideration of the mutual promises hereinafter made and other
good and valuable consideration, each of them intending to be bound hereby,
agree that that certain Executive Employment Agreement dated as of August
19, 1994 between the Company and the Executive, including the Stock Option
Addendum of even date therewith (together, the "Agreement") shall be and
hereby is modified and amended as hereinafter provided:
SECTION 1. DEFINITIONS. As used herein, capitalized terms shall have the
meanings set forth in the Agreement unless expressly otherwise defined
herein.
SECTION 2. COMPENSATION. Section 5(b) of the Agreement is hereby amended
and restated in its entirety as follows:
(b) Incentive Bonus Compensation. The Executive shall be paid
"Incentive Bonus Compensation" for each Fiscal Year in an amount equal to
5% of the Qualifying Excess Income (as hereinafter defined), if any, for
such Fiscal Year. The Incentive Bonus Compensation earned for any Fiscal
Year shall be payable to the Executive by the Company within 10 days after
the issuance of the Company's audited financial statements for the Fiscal
Year involved. As used herein, the "Qualifying Excess Income" for any
Fiscal Year shall mean the amount, if any, by which the Aggregate Operating
Income for the Fiscal Year, up to a maximum Aggregate Operating Income
amount of $3,706,500, exceeds $1,588,500 (with both numbers being adjusted
annually by the COLA Adjustment as of the beginning of each Fiscal Year
commencing with the Fiscal Year which begins in 1995). The "Aggregate
Operating Income" for any Fiscal Year
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<PAGE> 18
shall be equal to the Net Income of the Company for the Fiscal Year,
calculated before taking into account (i) deductions for any item of
compensation, fees or bonuses paid or payable by the Company or any of the
Subsidiaries to any of the Shareholders, whether as officer, director,
consultant, agent, contractor or otherwise, (ii) deductions for non-cash
compensation expense associated with the exercise of stock options or the
granting of other rights or interests in securities of the Company,
so-called phantom stock interests and similar incentive compensation
arrangements, by any or all executive officers of the Company (including,
but not limited to, Mr. Linhart), (iii) deductions for interest expense and
any taxes on income and (iv) any other items properly reportable on the
audited financial statements of the Company below the "income from
operations" line, such as interest income and expense and other types of
investment income, loss or expense (provided, however, that gain or loss
from the sale or other disposition of depreciable assets used by the
Company in the ordinary course of its trade or business shall be taken into
account).
SECTION 3. TERMINATION OF EMPLOYMENT.
(a) Section 11(b)(2) of the Agreement is hereby amended and restated in
its entirety as follows:
(2) If the Executive's employment shall be terminated for
Cause, the Company shall pay the Executive (A) within 10 days of such
termination, his unpaid Base Compensation through the Employment
Termination Date at the rate in effect at the time Notice of Termination is
given plus (B) within 10 days of such termination, the amount of any unpaid
Incentive Bonus Compensation earned with respect to any previous Fiscal
Year (without regard to the termination of Executive's employment or of the
time of delivery of the Company's annual audited financial statements),
plus (C) within 10 days following the issuance of the Company's audited
financial statements for its Fiscal Year in which the Employment
Termination Date occurs, a pro-rata share of any Incentive Bonus
Compensation with respect to the Fiscal Year in which the Employment
Termination Date occurs, which would otherwise have been payable to
Executive had his employment not been so terminated.
(b) Section 11(c) of the Agreement is hereby amended and restated in
its entirety as follows:
(c) Termination for Disability. The Company may terminate the
Executive's employment because of the Disability of the Executive and
thereafter shall pay to the Executive (or his successors) (1) his unpaid
Base Compensation through the sixth full month following the Employment
Termination Date at his then effective Base Compensation rate, plus (2) the
amount of any Incentive Bonus Compensation with respect to any previous
Fiscal Year, which shall become immediately payable without regard to the
time of delivery of the company's annual audited financial statements, plus
(3) an amount equal to a pro-rata share of any Incentive Bonus Compensation
calculated through the sixth full month following the Employment
Termination Date as though all of such six-month period were part of the
Fiscal Year in which occurred the Employment Termination Date (but
otherwise as though such termination had not occurred), and which shall be
immediately payable assuming for purposes of calculating the amounts due,
the largest amount of Incentive Bonus Compensation accrued for any of the
two most recently completed Fiscal Years. In addition, the Executive shall
be entitled to the amounts and benefits specified in Paragraphs (2) and (3)
of Section 11(f) of this Agreement.
(c) Section 11(d) shall be and hereby is amended and restated in its
entirety as follows:
(d) Upon Executive's Death. In the event of the Executive's
death, the Company shall pay to the Executive's estate (1) any unpaid
amount of Base Compensation through the date of death at the then effective
Base Compensation rate plus (2) the amount of any Incentive Bonus
Compensation earned and unpaid with respect to any previous Fiscal Year,
which shall become immediately payable without regard to the time of
delivery of the Company's annual audited financial statements, plus (3) an
amount equal to the pro-rata share of any Incentive Bonus Compensation
calculated with respect to the Fiscal Year in which the death occurs, and
which shall be immediately payable assuming for purposes of calculating the
amounts due, the largest amount of Incentive Bonus Compensation accrued for
any of the two most recently completed Fiscal Years (but otherwise as
though such Termination had not occurred). All previously granted stock
options, rights, warrants and awards shall fully vest on the death of the
Executive, except that the
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provisions of the Company's Stock Incentive Plan and any other Benefit Plan
shall control the benefits and awards covered thereby.
(d) Clauses (A) and (B) of Paragraph (1) of Section 11(f) (Compensation
Upon Certain Termination), shall be and hereby are amended and restated in
their entirety as follows:
(A) (i) His unpaid Base Compensation through the Employment
Termination Date at his then effective Base Compensation rate, plus (ii)
the amount of any Incentive Bonus Compensation earned and unpaid with
respect to any previous Fiscal Year, which shall become immediately payable
without regard to the time of delivery of the Company's annual audited
financial statements, plus (iii) an amount equal to a pro-rata share of the
amount of any Incentive Bonus Compensation calculated with respect to the
Fiscal Year in which occurs the Employment Termination Date, and which
shall be immediately due and payable assuming for purposes of calculating
the amounts due, the largest amount thereof accrued for any of the two most
recently completed Fiscal Years.
(B) In addition, the Company shall pay to the Executive promptly in a single
lump sum in cash an amount equal to the product of (i) three, multiplied by
(ii) 100% of the aggregate total amount which would have been payable to
Executive under Section 5 of this Agreement for the entire Fiscal Year in
which occurs the Employment Termination Date as if his employment had not
been terminated (and without deduction or offset for any amounts actually
paid for such Fiscal Year on account of Base Compensation or Incentive
Bonus Compensation, under Section 5, this Section 11 or otherwise), and
assuming for purposes of calculating (x) the Base Compensation, 100% of the
amount thereof at the annual rate payable for such Fiscal Year pursuant to
Section 5(a) above and (y) the Incentive Bonus Compensation, the largest
amount thereof accrued for any of the two most recently completed Fiscal
Years.
AMERILINK CORPORATION
Amendment No. 2 To
Executive Employment Agreement
This AMENDMENT NO. 2 TO EXECUTIVE EMPLOYMENT AGREEMENT (the "Amendment") is
made in Columbus, Ohio effective as of August 4, 1998, by and between
AMERILINK CORPORATION, an Ohio corporation (the "Company"), and LARRY R.
LINHART, an individual residing in New Albany, Ohio (the "Executive"), who,
for and in consideration of the mutual promises hereinafter made and other
good and valuable consideration, each of them intending to be bound hereby,
agree that that certain Executive Employment Agreement dated as of August
19, 1994 between the Company and the Executive, as amended by Amendment No.
1 to Executive Employment Agreement dated on or about April 29, 1997
(together, the "Agreement") shall be and hereby is modified and amended as
hereinafter provided:
Section 1. Definitions. As used herein, capitalized terms shall have the
meanings set forth in the Agreement except as expressly otherwise defined
herein. As used in the Agreement, the following terms shall have the
following meanings, and any prior or different definition of any of the
following terms shall be and hereby is amended and restated as set forth
below:
"Common Shares" means the common shares, without par value, of the Company.
"Compensation Committee" means the Compensation Committee of the Board of
Directors, as constituted from time to time.
"Extended Employment Period" means the period of time commencing on the first
day of the Fiscal Year which began March 31, 1998 and ending on the
Employment Termination Date.
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"IBT" means, for each Fiscal Year, the dollar amount of the consolidated net
income before income taxes of the Company and its subsidiaries determined
in accordance with generally accepted accounting principles, consistently
applied in accordance with past practice. The amount of IBT reflected on
the Company's annual financial statements prepared in accordance with
generally accepted accounting principles and audited by Ernst & Young, LLP
or such other accounting firm of national reputation as may be selected as
the Company's auditor from time to time, shall be conclusively binding on
the Company and the Executive for purposes of this Agreement.
"Incentive Bonus Compensation" means the amounts payable to the Executive
pursuant to paragraphs (b), (c), (d) and (e) of Section 5 of the Agreement.
"Restricted Stock" means awards of Common Shares granted as "restricted stock
awards" pursuant to Section 10 of the Company's 1994 Stock Incentive Plan
as the same shall be extended and amended from time to time with the
approval of the Executive (which shall be deemed evidenced by his approval
thereof by his vote in favor thereof as a Director of the Company or his
signature thereof on behalf of the Company in his capacity as President of
the Company), or pursuant to equivalent provisions of a subsequent stock
incentive plan adopted hereafter by the Company with the approval of the
Executive (evidenced as indicated above).
"Scheduled Employment Termination Date" means March 31, 2008.
"Target Adjustment Amount" means, for the first Fiscal Year of the Extended
Employment Period, an amount of Target IBT equal to $30,000,000, and for
each subsequent Fiscal Year of the Extended Employment Period, an amount of
Target IBT equal to 110% of the Target Adjustment Amount applicable to the
previous Fiscal Year.
"Target IBT" means, for each Fiscal Year, the forecasted amount of IBT to be
earned by the Company pursuant to a budgetary forecast or financial plan
which shall be prepared annually by the Executive in consultation with
senior executives of the Company and approved by resolution of the Board of
Directors annually prior to the beginning of such Fiscal Year (or such
later date as shall be approved by the Board of Directors) in order to
establish levels of Incentive Bonus Compensation with respect to such
Fiscal Year in accordance with Section 5(b) of the Agreement.
"Target Range" means, for each Fiscal Year, a range of amounts of IBT having a
lower limit equal to 95% of Target IBT and an upper limit equal to 105% of
Target IBT, and including all amounts of IBT equal to and greater than such
lower limit and equal to and less than such upper limit, each of such lower
and upper limits of the Target Range to be in the dollar amounts specified
by the Compensation Committee in connection with its approval of the
forecasted amount of Target IBT for such Fiscal Year.
Section 2. Compensation. Section 5 of the Agreement is hereby amended and
supplemented by adding thereto the following paragraphs (c), (d) and (e),
as follows:
(c) Alternate Incentive Bonus Compensation. For each Fiscal Year during the
Extended Employment Period in which IBT equals or is less than $5,000,000,
Incentive Bonus Compensation shall be determined exclusively in accordance
with the provisions of Section 5(b), above. For each Fiscal Year during the
Extended Employment Period in which IBT exceeds $5,000,000, notwithstanding
the provisions of Section 5(b), above, Incentive Bonus Compensation shall
be determined exclusively in accordance with the provisions of this Section
5(c) and Section 5(d) and (e), below. For each such Fiscal Year in which
IBT exceeds $5,000,000, the Executive shall be paid "Incentive Bonus
Compensation" in an amount equal to the percentages of IBT for such Fiscal
Year determined as follows:
(i) If IBT for such Fiscal Year exceeds $5,000,000 but does not equal or
exceed the lower limit of the Target Range for such Fiscal Year, the
Incentive Bonus Compensation for such Fiscal Year shall equal 2.5% of total
IBT for such Fiscal Year.
(ii) If IBT for such Fiscal Year equals or exceeds the lower limit of the
Target Range for such Fiscal Year, the Incentive Bonus Compensation for
such Fiscal Year shall equal 3.1% of the amount of total IBT for such
Fiscal year up to but not
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exceeding the upper limit of the Target Range for such Fiscal Year, plus
the sum of the amounts, if any, calculated pursuant to clause (iii), below.
(iii) If IBT in such Fiscal Year exceeds the upper limit of the Target
Range for such Fiscal Year, the Executive shall be entitled to additional
Incentive Bonus Compensation equal to (A) 3.5% of the amount of such excess
IBT up to, but not exceeding, $1,000,000 plus (B) 3.7% of the amount, if
any, by which such excess IBT exceeds $1,000,000 but does not exceed
$2,000,000, plus (C) 4% of the amount, if any, by which such excess IBT
exceeds $2,000,000 but does not exceed $3,000,000 plus (D) 5% of the
amount, if any, by which such excess IBT exceeds $3,000,000, but does not
exceed $4,000,000 plus (E) 2% of the amount, if any, by which such excess
IBT exceeds $4,000,000.
(d) Adjustment.
For any Fiscal Year, in the event that Target IBT exceeds the Target Adjustment
Amount, the amount of Incentive Bonus Compensation payable for such Fiscal
Year shall be adjusted by multiplying the amount calculated as set forth in
clauses (i), (ii) and (iii) of Section 5(c) above by a fraction, the
numerator of which is the Target Adjustment Amount and the denominator of
which is the Target IBT less one-half of the amount by which the Target IBT
exceeds the Target Adjustment Amount.
(ii) In the event that the Company or any of its subsidiaries shall, whether by
merger, consolidation, combination, purchase of assets or other form of
acquisition, acquire during any Fiscal Year another business (an
"Acquisition") the financial operations of which (A) were not taken into
account in the determination of Target IBT for such Fiscal Year and (B)
will, in accordance with generally accepted accounting principles, be
reported for such Fiscal Year on a consolidated basis with the operations
of the Company and its consolidated subsidiaries, whether as a "pooling" or
a "purchase" (as such terms are defined according to generally accepted
accounting principles), the Board of Directors may, in its discretion after
consultation with the Executive, make such adjustment to the Incentive
Bonus Compensation for such Fiscal Year, to the extent based on IBT
directly attributable to such Acquisition, as the Board of Directors may
determine to be equitable to the Executive and the Company in the
circumstances.
(iii) The Board of Directors shall be exclusively responsible, and is hereby
authorized, to make all determinations on behalf of the Company with
respect to the calculation of Incentive Bonus Compensation. In the event
that the Board of Directors and the Executive shall be unable to resolve
any dispute relating to the calculation of Incentive Bonus Compensation for
any Fiscal Year, the issue may be referred by either party to Ernst &
Young, LLP, or such other accounting firm of national reputation as shall
then be the Company's auditor, and the determination of the issue by such
firm shall be final and binding on all parties.
(d) Payment of Incentive Bonus Compensation. The Executive's Incentive Bonus
Compensation for each Fiscal Year during the Extended Employment Period
shall be payable within 10 days after the issuance of the Company's audited
financial statements for the related Fiscal Year. The Incentive Bonus
Compensation shall be payable in a combination of cash, deferred
compensation pursuant to a deferred compensation plan as provided below,
and Restricted Stock. That portion of the Incentive Bonus Compensation for
any such Fiscal Year (the "Cash Portion") which is the greater of (i) 75%
of the Base Compensation of the Executive for such Fiscal Year, or (ii)
such larger portion as the Board of Directors shall determine after
consideration of the Company's compensation policies for other executive
officers of the Company and such other criteria as it shall determine to be
relevant, shall be paid to the Executive in cash or a combination of cash
and deferred compensation allocated as provided in the deferred
compensation plan to be adopted by the Company as provided below. The
balance of the Incentive Bonus Compensation remaining after payment of the
Cash Portion (the "Restricted Stock Portion") shall be paid by the issuance
and delivery of that number of shares of Restricted Stock which equals the
dollar amount of the Restricted Stock Portion divided by the average
closing price per share of the Common Shares on the last 10 trading days of
such Fiscal Year. The Company shall use diligent efforts to adopt a
deferred compensation plan reasonably acceptable to the Executive pursuant
to which receipt by the Executive of a part of the Cash Portion may be
deferred and made payable pursuant to such deferred compensation plan. In
connection with the payment of the Restricted Stock Portion for any Fiscal
Year, the only restrictions which shall apply to such Restricted Stock
grants shall be the requirement of continued employment hereunder during
the three Fiscal Years immediately following such Fiscal Year, provided,
however, that if the
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<PAGE> 22
Scheduled Employment Termination Date is less than three years from the
date of grant, the restrictions shall be limited to the time period which
ends on the Scheduled Employment Termination Date.
Section 3. Employee Benefits; Vacations.
(a) Section 7(a) of the Agreement is hereby amended and restated in its
entirety as follows:
(a) Benefit Plans. The Executive shall be entitled to participate in a deferred
compensation plan which the Company shall use reasonable efforts to adopt
on terms and conditions reasonably acceptable to the Executive. The Company
shall continue in effect any perquisite, benefit or compensation plan (in
addition to the deferred compensation provided for above) including its
profit-sharing plan and 401K plan, medical insurance plan, life insurance
plan, health and accident plan and disability plan in which the Executive
is currently participating, or shall maintain plans providing substantially
similar or improved benefits (collectively referred to as the "Benefit
Plans"); provided, however, that the Company may make modifications to the
Benefit Plans so long as such modifications (i) are generally applicable
either to all salaried employees of the Company, or, in connection with
plans which apply only to executive officers and/or other so-called highly
compensated employees of the Company, are generally applicable to such
executive officers and/or highly compensated employees, and, in either
case, (ii) do not discriminate adversely against the Executive or other
highly-compensated employees of the Company.
(b) Vacations. The Executive shall be entitled in each Fiscal Year to a
vacation of six weeks (30 working days) during the first five Fiscal Years
of the Extended Employment Period, and eight weeks (40 working days) during
the last five Fiscal Years of the Extended Employment Period, during all of
which time his compensation shall be paid in full, in addition to such
holidays and other non-working days as are consistent with the policies of
the Company for its executives generally. The Executive's unused vacation
days for any Fiscal Year shall not carry forward to any subsequent Fiscal
Year. In addition, the Executive shall be entitled to take a three-month
sabbatical leave of absence during any Fiscal Year of the last five Fiscal
Years of the Extended Employment Period, in lieu of his vacation time for
such Fiscal Year, during all of which time his compensation shall be paid
in full.
Section 4. Termination of Employment. Section 11(a)(1) is hereby amended
and restated in its entirety as follows:
Notice of Termination; Employment Termination Date.
Any termination of the Executive's employment by the Company or the Executive
shall be communicated by written Notice of Termination to the other party
thereto. For purposes of this Agreement, a "Notice of Termination" shall
mean a notice which shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable detail the
facts and circumstances claimed to provide a basis for termination under
the provision so indicated. If the Executive's employment shall be
terminated for any reason, or for no reason, other than termination for
Cause pursuant to Section 11(b) or voluntary termination of employment by
the Executive other than for Good Reason prior to the Scheduled Employment
Termination Date pursuant to Section 11(e)(2), all Restricted Stock held by
the Executive immediately, automatically and without any requirement of any
further action on the part of the Company or the Executive, shall be deemed
fully vested without any applicable restrictions, and shall be promptly
issued to the Executive without legend (except as to customary restrictions
relating to applicable securities laws); and all Incentive Bonus
Compensation then remaining unpaid, including any part of the Restricted
Stock Portion for which shares of Restricted Stock have not then been
issued to the Executive, and all Incentive Bonus Compensation for the
Fiscal Year in which the Employment Termination Date shall occur, shall be
payable in cash without reference to any requirement otherwise applicable
hereunder for payment partially in cash, partially in Restricted Stock
and/or partially pursuant to any deferred compensation plan adopted by the
Company.
Section 5. Stock Options. As a material part of the consideration to the
Executive for entering into this Amendment, the Company, through
the Compensation Committee or otherwise, shall grant to the
Executive options to purchase 200,000 Common Shares under and
subject to the provisions of the Company's 1994 Stock Incentive
Plan, as amended and supplemented as hereinafter set forth (the
"Plan"), at the price per share equal to the value thereof on
the date of the Company's 1998 Annual Meeting of Shareholders,
which shall be deemed for purposes of the Agreement to be the
closing price per share of the Common Shares on the NASDAQ
National Market on the immediately preceding trading day;
provided, however, that the
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<PAGE> 23
maximum number of such options which may be qualified as Incentive Stock
Options under Section 422 of the Internal Revenue Code of 1986 as amended
("ISO's") shall be granted as such ISO's at a price per share equal to 110%
of the closing price of the Common Shares on the NASDAQ National Market on
such day. The term of such options shall be for ten years (except that in
the case of the ISO's, the term shall be limited to five years) and such
options shall vest and become exercisable ratably over the four successive
years following the date of grant. The Company agrees to adopt and propose
for approval at its 1998 Annual Meeting of Shareholders, an amendment to
the 1994 Stock Incentive Plan which shall increase by 600,000 the number of
shares available for grant thereunder, and the Company shall use its
reasonable best efforts to solicit approval of the Shareholders of the
Company of such amendment at such meeting. Notwithstanding any of the
provisions of this Agreement, this Amendment is and shall be conditioned
upon (i) the grant by the Company of the options described above in this
Section 5, (ii) the adoption of an amendment to the Plan conforming to the
provisions of this Section 5 and (iii) the approving vote of the
Shareholders of the Company at the 1998 Annual Meeting with respect to said
amendment to the Plan.
Section 6. Ratification and Confirmation of Agreement.
The provisions of the Agreement, as herein above restated and amended, are
and remain in full force and effect, and, as so amended and restated, the
Agreement is hereby fully ratified and confirmed.
IN WITNESS WHEREOF, the Company and the Executive have executed multiple
counterparts of this Agreement.
COMPANY: EXECUTIVE:
AMERILINK CORPORATION /s/ Larry R. Linhart
1900 East Dublin-Granville Road -------------------------
Columbus, Ohio 43229 Name: Larry R. Linhart
Address: 4683 Yantis Road
New Albany, Ohio 43054
By: /s/ Joseph L. Govern
--------------------------------------------
Name: Joseph L. Govern
Title: Senior Vice President - Operations
and by: /s/ Richard W. Rubenstein
-------------------------------------------
Name: Richard W. Rubenstein
Title: Assistant Secretary
SECTION 4. RATIFICATION AND CONFIRMATION OF AGREEMENT.
The provisions of the Agreement, as herein above restated and amended,
are and remain in full force and effect, and, as so amended and restated,
the Agreement is hereby fully ratified and confirmed.
IN WITNESS WHEREOF, the Company and the Executive have executed multiple
counterparts of this Agreement.
COMPANY: EXECUTIVE:
AMERILINK CORPORATION
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<PAGE> 24
1900 East Dublin-Granville Road
Columbus, Ohio 43229
By:
--------------------------------- -----------------------------------
Name: Larry R. Linhart Name: Larry R. Linhart
Title: Chairman of the Board Address: 65 South Merkle Road
of Directors, President Columbus, Ohio 43209
and Chief Executive Officer
and by:
-----------------------------
Name: Robert Powelson
Title: Secretary
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF AMERILINK CORPORATION
The following are the only subsidiaries of AmeriLink Corporation:
Name of Subsidiary Jurisdiction of Incorporation
------------------ -----------------------------
AmeriLink Corp. Ohio
Nacom Corporation Ohio
AmeriLink Holdings Corporation Ohio
AmeriLink of Indiana, L.L.C. Delaware
AmeriLink of Kentucky, L.L.C. Delaware
AmeriLink of Texas , Limited Partnership Delaware
Nacom Cable Corp. Delaware
AmeriLink Management Corporation Ohio
Midwest Computer Cable, Inc. Ohio
-85-
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-96424) pertaining to: (i) AmeriLink Corporation 1994 Stock
Incentive Plan, (ii) the Stock Option Agreement dated as of August 19,
1994, between AmeriLink Corporation and Joseph L. Govern, and (iii) the
Stock Option Addendum to Executive Employment Agreement dated August 19,
1994, between AmeriLink Corporation and Larry R. Linhart; (Form S-8 No.
333-79423) pertaining to AmeriLink Corporation 1994 Stock Incentive Plan
and (Form S-3 No. 33-96422) pertaining to registration of 100,000 shares of
its common stock of our report dated May 11, 1999, except for Note 12 as to
which the date is May 21, 1999 with respect to the consolidated financial
statements of AmeriLink Corporation included in its Annual Report (Form
10-K) for the year ended March 28, 1999.
/s/ Ernst & Young LLP
Columbus, Ohio
June 2, 1999
-86-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF 3-28-99, AND THE CONSOLIDATED STATEMENT
OF INCOME FOR THE FIFTY-TWO WEEKS ENDED 3-28-99, OF AMERILINK CORPORATION AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000924774
<NAME> AMERILINK CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-28-1999
<PERIOD-START> MAR-30-1998
<PERIOD-END> MAR-28-1999
<CASH> 5,959
<SECURITIES> 0
<RECEIVABLES> 12,321
<ALLOWANCES> 237
<INVENTORY> 2,100
<CURRENT-ASSETS> 26,573
<PP&E> 6,367<F1>
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 40,351
<CURRENT-LIABILITIES> 6,600
<BONDS> 0
0
0
<COMMON> 25,873
<OTHER-SE> 7,878
<TOTAL-LIABILITY-AND-EQUITY> 40,351
<SALES> 65,211
<TOTAL-REVENUES> 65,211
<CGS> 39,512
<TOTAL-COSTS> 63,575
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 116
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,100
<INCOME-TAX> 877
<INCOME-CONTINUING> 1,223
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,223
<EPS-BASIC> 0.29
<EPS-DILUTED> 0.28
<FN>
<F1>PROPERTY, PLANT AND EQUIPMENT IS REPORTED NET OF ACCUMULATED DEPRECIATION ON THE
CONSOLIDATED BALANCE SHEET
</FN>
</TABLE>
