THIS DOCUMENT IS A COPY OF THE ANNUAL REPORT ON FORM 10KSB
FOR THE FISCAL YEAR ENDED JUNE 30, 1996 OF
AMERICAN COMMUNICATIONS SERVICES, INC.
FILED ON OCTOBER 1, 1996 PURSUANT TO A RULE 201
TEMPORARY HARDSHIP EXEMPTION.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10 - KSB
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended: June 30, 1996 Commission File number 0 - 25314
AMERICAN COMMUNICATIONS SERVICES, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-1947746
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No. formerly 05-0440761)
131 National Business Parkway Annapolis Junction, MD 20701
(Address of Principle Executive Offices)
Issuer's telephone number (301) 617-4200
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.01 per share
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 last 90 days. YES X
NO_________
Check here if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in the definitive proxy
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenues for the fiscal year ended June 30, 1996 were $3,415,137.
The aggregate market value of the voting stock held by non-affiliates based
upon the last reported sales price of a share of common stock as reported on the
Nasdaq National Market on September 20, 1996 was $36,551,138. As of September
20, 1996 there were 6,761,466 shares of common stock outstanding, par value
$0.01 per share outstanding.
The Index to Exhibits appears on page 63.
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Documents Incorporated By Reference
The registrant's definitive Proxy Statement for its annual meeting of
stockholders scheduled to be held on November 15, 1996, to be filed with the
Commission not later than 120 days after the close of the registrant's fiscal
year, has been incorporated by reference, in whole or in part, into Part III,
Items 9, 10, 11 and 12 of this Annual Report on Form 10-KSB.
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AMERICAN COMMUNICATIONS SERVICES, INC.
1996 FORM 10 - KSB ANNUAL REPORT
Index
Part I Page
Item 1. Business 1
Item 2. Properties 46
Item 3. Legal Proceedings 46
Item 4. Submission of Matters to a Vote of Security Holders 47
Part II
Item 5. Market for Common Equity and Related Stockholders 48
Matters
Item 6. Management's Discussion and Analysis of Results of 50
Operations and Financial Condition
Item 7. Financial Information 61
Item 8. Changes in and Disagreements with Accountants on 61
Accounting and Financial Disclosure
Part III
Item 9 Directors and Executive Officers of the Registrant 62
Item 10. Executive Compensation 62
Item 11. Security Ownership of Certain Beneficial Owners and 62
Management
Item 12. Certain Relationships and Related Transactions 62
Item 13. Exhibits and Reports on Form 8-K 63
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Part I
Item 1. Business
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Industry Overview
The continuing deregulation of the telecommunications industry and
technological change have resulted in an increasingly information-intensive
business environment. The ability to access information quickly has become
critical to the success of both business and government end users. Both voice
and data communications traffic of large business and government end users have
increased significantly. In addition, deregulation has led to an increase in
competition in the telecommunication services industry, most recently in the
local exchange markets. Competitive local exchange carriers ("CLEC") such as
American Communications Services, Inc. ("ACSI" or "Company") have sought to take
advantage of the opportunities presented by increased competition and the demand
for timely and reliable telecommunications services. Regulatory initiatives in
the telecommunications industry introduced to foster competition in the local
exchange market have stimulated demand for local voice services, the total
market for which was approximately $93.0 billion in 1994.
Several factors have served historically to promote competition in the
local exchange market, including (i) rapidly growing customer demand for an
alternative to the local exchange carrier's ("LEC") monopoly, spurred partly by
the development of competitive activities in the long distance market; (ii)
advances in the technology for transmission of data and video, which require
greater capacity and reliability levels than copper-based LEC networks were able
to accommodate; (iii) a monopoly position and rate of return-based pricing
structure that provided little incentive for LECs to upgrade their networks;
(iv) the development of fiber optics and digital electronic technology, which
combined the ability to build a network economically with the ability to
transmit data and video at high-speeds and greatly increased capacity as
compared to the LECs' copper-based networks; and (v) the significant access
charges that long distance companies (interexchange carriers or "IXC") were
required to pay to LECs to access the LECs' networks.
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Competition in the local exchange services market began in the mid-1980s. In
New York City, Chicago and Washington, D.C., newly formed companies, known as
competitive access providers ("CAPs"), provided dedicated non-switched services
by installing fiber optic facilities connecting points of presence ("POPs") of
IXCs within a metropolitan area and, in some cases, connecting business and
government end users with IXCs. Most of these early CAPs operated limited
networks in the central business districts of major cities in the US where the
highest concentration of voice and data traffic, including IXC traffic, is
typically found. CAPs used the substantial capacity and economies of scale
inherent in fiber optic cable to offer customers service that was generally less
expensive and of higher quality than could be obtained from the LECs due, in
part, to antiquated copper-based facilities used in many LEC networks. In
addition, based on management's experience, CAPs offered shorter installation
and repair intervals, improved reliability and more responsive customer service
in comparison to the LECs.
Initially, CAPs could effectively compete only for special access and
private line services to customers in buildings directly connected to their
separate networks. The Federal Communications Commission's ("FCC")
interconnection decisions of September, 1992, and August, 1993, allowed CAPs to
significantly increase the number of customers and markets serviced without
physically expanding their networks. Those interconnection decisions also
enabled CAPs to provide interstate switched access services in competition with
LECs, which has encouraged the development of competitive interstate switched
access market.
With the enactment of the Telecommunications Act of 1996
("Telecommunications Act") in February of this year, the Company believes that
competition in the local telecommunications marketplace will be enhanced through
(i) removal of state and local entity barriers, (ii) requirements that LECs
provide interconnections to their facilities, (iii) facilitation of the process
of changing from LEC services to those offered by CLECs and (iv) access to
rights-of-way. To the extent that LECs begin to compete with IXCs for long
distance services, IXCs may have a competitive incentive to move access business
away from LECs to CLECs, and CLEC market share may increase.
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The Company
ACSI is a rapidly growing CLEC that constructs and operates digital fiber
optic networks and offers local telecommunications services to IXCs and business
and government end users in Tier II and Tier III markets (200,000 to 2,000,000
in population) principally in the southern United States. The Company provides
non-switched dedicated services, including special access, switched transport
and private line services. These services generally are offered by the Company
at a discount to those of the LEC and are delivered with a high level of network
reliability. In addition to these dedicated services, the Company is developing
and has begun offering high-speed data services to business, government and
other communications providers (including Internet service providers, or
"ISPs"). High-speed data services include Internet Protocol ("IP") switching,
frame relay and Asynchronous Transfer Mode ("ATM"). Management believes this
wide range of data services will ensure support of legacy, current and emerging
applications, including multimedia applications such as desktop
videoconferencing. The Company has also begun offering on a limited basis
enhanced voice messaging services. Management believes that successful marketing
of these high-speed data and enhanced voice messaging services should provide
the Company with increased revenues, an expanded end-user customer base and
relevant marketing experience that can be leveraged into offering local switched
voice services. The Company plans to begin offering local switched voice
services by late 1996.
As of June 30, 1996, ACSI had 15 operational networks and nine additional
networks under construction. Since June 30, 1996, the Company has completed
construction of three of the networks under construction at June 30, 1996 and
begun construction of six additional networks. From June 30, 1995 to June 30,
1996, the Company increased its operational networks from five to 15 and
increased its route miles from 43 to 415. The Company intends, subject to
receipt of necessary additional financing, to have a total of 50 local
distribution networks in service or under construction by the middle of calendar
year 1998. To date, management believes that it has been able to use its capital
most efficiently by constructing, rather than acquiring, fiber optic networks.
By constructing all of its networks, ACSI believes it has realized significant
cost savings, created considerable networking efficiencies and ensured quality,
reliability and high operating standards. The Company believes the concentration
of its 50 networks
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principally throughout the southern United States, together with its planned
inter-city broadband data backbone network, will provide an effective platform
for the provision of its local switched voice, enhanced voice messaging and
high-speed data services at reduced costs. ACSI's management team includes
several pioneers in the development of the competitive access industry with
demonstrated expertise in successfully deploying fiber optic networks and
aggressively managing operations to generate positive operating cash flow.
ACSI Networks
Targeted to be
Operational by
Operational as of September 30, 1996 December 31, 1996
-----------------
Albuquerque, NM Las Vegas, NV Amarillo, TX
Birmingham, AL Lexington, KY Baton Rouge, LA
Charleston, SC Little Rock, AR Central Maryland
Columbia, SC Louisville, KY Chattanooga, TN
Columbus, GA Mobile, AL Colorado Springs, CO
El Paso, TX Montgomery, AL Corpus Christi, TX
Fort Worth, TX Spartanburg, SC
Greenville, SC Tucson, AZ Targeted to be
Irving, TX Operational by
Jackson, MS March 31, 1997
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Dallas, TX
Jacksonville, FL
Kansas City, MO
New Orleans, LA
Shreveport, LA
Tulsa, OK
Information contained herein contains "forward-looking statements" (as such
term is defined in the Private Securities Litigation Reform Act of 1995) which
can be identified by 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. Certain statements contained in "Business," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and other
sections herein, including statements regarding the development of the Company's
businesses, the markets for the Company's services and products, the Company's
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anticipated capital expenditures, regulatory reform and other statements
contained herein regarding matters that are not historical facts, are
forward-looking statements. No assurance can be given that the future results
covered by the forward-looking statements will be achieved. The matters set
forth in Exhibit 99.1 hereto constitute cautionary statements identifying
important factors with respect to such forward-looking statements, including
risks and uncertainties, that could cause actual results to vary materially from
the future results indicated, expressed or implied, in such forward-looking
statements. Other factors could also cause actual results to vary materially
from the future results indicated in such forward-looking statements.
Company Strategy
The Company's objective is to become a leading provider of dedicated and private
line, high-speed data, including IP switching, and enhanced voice messaging and
local switched voice services in its 50 planned markets by implementing the
following strategies:
Early Entry in Tier II and Tier III Markets in the Southern United
States. The Company principally targets Tier II and Tier III markets, as
they are generally subject to less competition from other CLECs relative to
larger, more developed Tier I markets, thereby generally enabling the
Company to achieve market penetration quickly. ACSI intends to continue
focusing its market entry principally in areas of the southern United States
because of attractive demographic trends and expected growth in demand for
telecommunications services in these regions, which the Company believes
have been underserved to date. Between 1989 and 1994, the rate of access
line growth in all regions of the South exceeded the national average by
approximately two and one-half times. Additionally, the 18-state area
targeted by the Company accounts for approximately 37% of the US population
and approximately 35% of the total access lines in the United States.
Although not precluding entry into a particular market by competitors, the
Company believes that the first operational competitive network in a market
generally has a competitive advantage in attracting customers willing to
switch from the LEC. Management believes that the Company will be the first
competitor to offer dedicated services in half of the above-listed 30
markets.
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Building on Strong Relationships with IXCs. ACSI has significant customer
relationships with most of the major IXCs serving its markets. Currently, a
substantial portion of the Company's revenues is billed to IXCs for services
provided for the benefit of their customers (i.e. private label). IXCs often
choose the access provider for the local portion of a long distance call and
have a strong presence in all of the Company's target markets. By
demonstrating its ability to provide high quality services in its existing
markets and by not providing interexchange service in competition with the
IXCs, the Company has the opportunity to obtain commitments for dedicated
services from IXCs in new markets. The Company has signed a five-year
agreement with MCImetro Access Transmission Services, Inc. ("MCImetro"), in
which MCImetro has agreed to purchase minimum levels of dedicated services
from ACSI and has committed to construct portions of ACSI's fiber optic
networks in six cities. The Company has also signed agreements with AT&T
Communications, Inc. ("AT&T") and two other IXCs, pursuant to which the
Company expects AT&T and such other IXCs to use the Company as a supplier of
dedicated special access services, as well as such other services as may be
agreed upon, in particular markets. Additionally, the Company is currently
negotiating similar arrangements with other IXCs. The Company markets its
services directly to the end user in conjunction with IXC representatives.
The Company expects further growth to the extent that LECs begin to compete
with IXCs for long distance services, thereby providing IXCs with a
competitive incentive to move access business away from LECs to CLECs.
Moreover, because the Telecommunications Act prohibits the three largest
IXCs from jointly marketing their long distance services with resold local
services of a Regional Bell Operating Company ("RBOC") (until that RBOC
itself offers in-region long distance service), the Company believes that
IXCs should have incentive to resell CLEC services.
Aggressive Bottom-Line Approach to Network Deployment. The Company
rapidly deploys its networks and markets its services in order to quickly
achieve operating cash flow breakeven, i.e., positive EBITDA (net income
(loss) before net interest, income taxes, depreciation and amortization)
before overhead allocations. The Company's objective is to commence
construction of a network in the central business district of a market
immediately upon receipt of the requisite municipal approval. ACSI targets
completion of its initial network
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phase and commencement of commercial service in a market within
approximately six months after the start of construction. The Company
typically begins premarketing its services at the start of construction so
that once a network becomes operational, customer demand already exists for
its dedicated services. The Company then seeks to extend the reach of its
network outside the central business district in response to customer
demand. ACSI anticipates that each dedicated services network will achieve
operating cash flow breakeven within ten to fifteen months after
commencement of service. In its more mature markets, Louisville, Little Rock
and Greenville, the Company achieved operating cash flow breakeven in a year
or less after initiation of service.
Cost-Effective Entry into Local Switched Voice and Value-Added Services. To
take advantage of the opportunities created by the Telecommunications Act
and following receipt of state regulatory approval and LEC interconnections,
the Company plans to offer local switched voice services beginning in the
4th calendar quarter of 1996 where it is deploying local distribution
networks. The Company expects to deploy telecommunications switching
equipment in eight markets by mid-1997 and in 24 markets by early 1999. To
take advantage of the size and regional concentration of ACSI's markets,
where technically feasible and economically practicable, the Company plans
to implement a hubbed switching strategy whereby one switch can serve
multiple smaller markets via remote switching modules. This strategy would
justify the switch investment in Tier II and Tier III markets by reducing
capital costs and operating expenses. The Company recently agreed initially
to lease eight Lucent Technologies, Inc. 5ESS-2000 switching systems. The
Company believes that providing dedicated, enhanced voice messaging and
high-speed data services will enhance the Company's ability to cross-market
local switched voice services.
The Company's local switched voice services plan is targeted at small and
medium sized business and government end users. The typical customer is
expected to have between ten and 100 employees. The Company plans to
initially target users within the buildings of ACSI's existing customers to
connect such users directly to its network and then to offer its services to
customers that are not directly connected to the Company's network through
interconnection with the incumbent LECs. In accordance with the
Telecommunications Act, the Company has negotiated partial agreements for
interconnection with BellSouth, Southwestern Bell, US West and GTE,
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covering a total of 12 states and is currently arbitrating outstanding
issues before public service commissions ("PSCs") in those states. In
addition, the Company is negotiating interconnection agreements with Bell
Atlantic and Sprint Central. The Company believes that many of these
potential customers can be gradually attracted as the Company expands the
range of local switched voice services within specific buildings, thereby
justifying the expansion of the Company's network to connect these
additional customers and buildings.
Additionally, the Company will seek existing and emerging technical
solutions in order to serve smaller markets, where feasible and cost
justified. The Company will continue to seek and evaluate opportunities in
the future to deploy regional switching hubs that can serve multiple smaller
markets. In addition, the Company is evaluating opportunities, on a
market-by-market basis, to partner with certain entities that have local
switching requirements, experience, facilities and/or back-office operations
that can result in mutually beneficial alliances. Successful negotiation of
switching partnerships may further reduce the Company's capital and
operating expenses associated with the provisioning of local switched
services in its markets.
The Company believes that its local digital fiber optic networks, coupled
with the distributed hub configuration and its planned broadband inter-city
data network, will provide a robust platform for the provision of a wide
variety of voice, data and communications services at a reduced cost. Over
time, the Company believes it can increase its market share in all of its
service offerings as a result of the reliability and quality of its
networks, prompt customer service, competitive pricing,
cross-marketing/bundling synergy's and new service offerings over its target
50-city market area.
ACSI has begun offering on a limited basis a range of enhanced voice
messaging services to small and mid-sized business and government end users.
The Company's initial offerings of enhanced voice messaging services include
business voice messaging services utilizing the Company's First Line and
First Line Plus products and one-number services utilizing the Company's
Virtualine and Virtualine 800 products. The Company's enhanced voice
messaging service can function as a virtual PBX. Management believes that
the market for voice messaging services in 1993 was approximately $1.4
billion, that this market is underserved and that, with the availability of
enhanced voice messaging
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services such as the Company's, this market has the potential for continued,
rapid growth as customers become more accustomed to use of these services.
The Company believes that this market should also serve as an additional
customer base to which the Company can market its local switched voice
services.
Developing a Broadband Data Communications Backbone Network with Extensive
Local Points of Presence. The Company believes that switched data
communications represent one of the fastest growing segments of the
telecommunications services market. Industry sources estimate that the US
business switched data services market was approximately $1.1 billion in
1995 and the Company believes that this market will grow to approximately
$10.0 billion by 2000 due, in part, to the continuing proliferation of
computers and the increasing need to interconnect these computers via local
and wide area networks, the dramatic growth of the Internet and the
emergence of multimedia applications. Together, these applications have
spawned numerous network technologies and communications protocols to
support legacy, current and emerging needs. The domestic network
infrastructure currently supporting both voice and data transport
requirements is being strained by the increasing demand for high bandwidth
transport at both the local and national levels. The Company believes that
the growth of high speed applications will further strain the networks that
exist today. Unless additional network infrastructure supporting these high
bandwidth requirements is developed, the ability of existing networks to
service the demand for both speed and capacity may continue to be strained
and may result in further degradation of the quality of service afforded by
network service providers. The Company believes that this constraint in
bandwidth capacity creates a significant business opportunity for the
Company, particularly in its Tier II and Tier III markets, which have
largely been ignored by the larger data communications providers.
The Company is deploying a coast-to-coast broadband data communications
backbone network via leased inter-city fiber connections on which customers'
high-speed data and multimedia traffic may be transported at a high-quality
level on a cost-effective basis. ACSI believes its ATM-based high bandwidth
network will be capable of simultaneously supporting IP switching, frame
relay and multimedia applications. This technology will allow network
customers to migrate transparently from lower speed services to high
bandwidth services, as
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their data communications requirements expand. The Company currently has 25
data POPs, and plans to have 40 data POPs in service by the end of calendar
year 1996. The Company believes this backbone, coupled with its planned 50
local distribution networks, provides the Company with both a service
quality and a cost advantage for its high speed data services.
The Company believes that it can become a major provider of high-speed data
communications services (including IP switching, frame relay and ATM) in the
southern United States by:
- Offering Data Communications Solutions Based on Proven Carrier-Grade,
Standards-Based Technology with Flexible and Superior Back-Office Systems.
The Company believes open and carrier-grade, standards-based technology is
necessary for companies to compete effectively (with respect to features
and price), avoid costly conversion from legacy systems, offer multiple
data solutions with minimal equipment and manpower cost, and cost
effectively establish interconnection among key IXCs, LECs and customers.
The Company believes that its ability to maintain flexibility on
provisioning and billing with respect to its initial and future product
offerings and pricing differentiates ACSI from its competitors. Examples
of the billing flexibility that the Company plans to offer include
accounting and billing information at the wholesale level to IXCs and
resellers, retail level accounting and billing information to business
customers and ISPs, flat/transaction billing, volume discounts
(multi-product/multi-service) and chain billing.
- Packaging Complex Data Solutions as a Simple Offering. ACSI packages its
data communications service capabilities through a solutions-oriented,
consultative selling approach supported by a highly trained sales and
support staff, which provides the customer with easy and uncomplicated
access to a series of complex services. Pricing, provisioning, and
customer interface to the product has been structured as simply as
possible. The Company expects that one-stop shopping through ACSI's data
services business unit will facilitate implementation and minimize
customers' need to interface with multiple vendors. A complete service
offering capability is expected to enable the Company to provide improved
quality of service as an "upstream" network provider to regional and local
service providers as well as to public sector, corporate and institutional
customers.
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- Addressing the Need for High Bandwidth Data Network Infrastructure in the
Southern United States. The Company believes that, to date, major data
services providers, such as the IXCs, have focused on serving the Tier I
markets. An increasing number of regional, national and multinational
corporations are located in mid-sized markets within the southern United
States (the principal target markets of ACSI's local network
infrastructure) and are demanding the entire range of switched data
communications services, including IP switching, frame relay and high
bandwidth transport services. The Company believes there is inadequate
data services infrastructure in this region to support these services.
- Offering Integrated Data Communications Services Via a Single High
Bandwidth Network. While current growth in demand for data communications
services has been focused on IP switching and frame relay services, the
Company does not believe that either has been engineered to meet the
growing demand for bandwidth. The Company believes that end users will
benefit from being able to have their diverse data communications needs
met by a single provider over a single network. By deploying an ATM-based,
high bandwidth network, the Company can offer business, institutional and
government customers the entire range of switched data communications
service offerings through a single integrated network, aggregating traffic
and increasing network efficiencies, managing bandwidth, ensuring
consistent delivery and servicing of customers' diverse data
communications requirements. This backbone should enable the Company to
expand its range of service coverage and offerings.
- Leveraging Local Network and Switching Infrastructure to Reduce Cost of
Service. Local access charges and switched local lines are a major cost
component of data communications. Most data communications service
providers, such as IXCs and ISPs, do not currently have local distribution
network facilities in place and, therefore, must purchase these local
components from other parties such as the LEC or a CLEC. Similarly, to the
extent data service requirements include a need for local switched
services, these lines must be obtained from the LEC or a CLEC with local
switching capability. Because ACSI is planning local network facilities in
50 markets
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and switching capability in at least 24 of those markets, the Company
believes that it can provide data communications services to customers in
those markets where it has network and switching facilities at a lower
cost with higher quality of service.
The Company believes that the following data communications services
constitute the principal growth areas in commercial data market:
Internet Access Services. Businesses are increasingly using the Internet
to transmit e-mail, engage in commercial transactions (e.g., electronic
commerce) and develop internal communications networks, or "intranets."
Businesses are also using the World Wide Web to disseminate information
about their products and services. Increasing business utilization of the
Internet has added to the demand for higher- speed Internet connections,
increased port capacity and secure network facilities.
Industry analysts estimate that the number of Internet users during the
past five to ten years has grown by 100% a year. Demand for Internet
services, including access (i.e., services connecting users to the
Internet), applications (such as "Web browsers") and hardware, has resulted
in significant demand for local and interexchange communications network
services, applications software and systems integration services. The
current U.S. market for IP switching is estimated to be approximately $550.0
million and is projected to grow to approximately $3.5 billion by 2000.
Managed Services. Managed services are comprehensive value-added
offerings that provide the design, installation, and on-going management,
maintenance and hardware (such as switches, routers and modems) for a
customer's network. By eliminating many of the timing, coordination and
inter-operability issues that arise in installations requiring multiple
vendors to design and install a network, managed services offer a single
source solution. In addition, configuration management issues, such as
maintaining consistent versions of the router software, deploying consistent
configurations and overall network management, are addressed in most managed
services offerings.
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While managed services can be provided for all data communications
applications and technologies (including frame relay and ATM), the most
immediate market opportunity for managed services is with local and regional
ISPs. Managed services, via a turnkey approach, address numerous network
implementation, expansion and management issues for ISPs, including the
provision of hardware of local lines and dedicated circuits, and securing
physical space via collocation for expansion of the ISP's network hardware.
Collocation of the ISP's equipment in the managed services provider's
network facility also reduces the ISP's local access costs by reducing
circuits to approach the "zero-mile" level. Finally, because a managed
services provider can aggregate and consolidate interexchange data
communications traffic from multiple customers (and thus purchase transport
at more cost effective higher bandwidths, e.g., 45 mbps versus 1.5 mbps),
the provider can offer ISPs lower pricing on their interexchange (longhaul)
transport than if the ISPs obtained the service directly from a longhaul
carrier (such as an IXC). The U.S. market for Internet-related data network
equipment was an estimated $800.0 million in 1995 and is projected to grow
to approximately $4.0 billion by the year 2000. Managed service providers
can penetrate this market for network equipment through bundling an ISP's
hardware needs with network services on a turnkey basis.
Frame Relay. Frame relay service is a fast-packet transport solution
targeted at LAN-to-LAN and legacy networks such as SNA. Frame relay service
is designed to meet fluctuating, or periodic, data transfer requirements by
offering shared virtual bandwidth connectivity at high speed. Frame relay
services offer low cost data transmission with generally minimal delay, few
errors and high speed performance. Frame relay provides a solution that
satisfies customer requirements for integrated, cost-effective data
communications in environments where transmission needs fluctuate. As users'
requirements expand into multimedia applications, which require higher
bandwidth, frame relay offers a natural migration path to ATM. Industry
sources project that the U.S. market for frame relay services will grow from
an estimated $1.3 billion in 1996 to approximately $3.7 billion by the end
of the year 2000.
ATM. ATM is a high bandwidth service providing virtual networking for
voice, data and multimedia traffic. The ability to combine all three media
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provides opportunities to reduce costs associated with running three
separate networks for each medium. The major benefits of ATM include
providing shared access to trunk bandwidth for multiple application and
application types, minimizing the number of wide area connections needed,
and supporting user access speeds of at least 1.5 mbps (T-1). Frame relay
customers whose capacity requirements increase can achieve cost savings by
migrating to fractional T-3 transmission speeds (between 1.5 mbps and 45
mbps) or to full 45 mbps and higher connectivity. Large customers, such as
regional or national ISPs, financial institutions and other entities with
very high volume data transport requirements, may also seek redundant
dedicated transport at T-3 to OC-3 levels or higher, essentially obtaining
the same level of network capacity and self-healing network reliability as a
dedicated facilities customer with SONET service. Local ATM applications
include native speed LAN connectivity, diagnostic imaging, videoconferencing
and other high bandwidth applications. Industry sources estimate the ATM
market will be approximately $63.0 million during 1996, and the Company
believes that this market will increase to approximately $1.6 billion by the
end of 2000.
Attract and Retain a Management Team with Extensive Telecommunications
Experience. The senior management of ACSI pioneered the development of many of
the first fiber optic networks in Tier I markets in the United States and has
substantial experience in rapidly building cost-effective networks and managing
service operations. The Company's Chairman, Anthony J. Pompliano, is the
co-founder and former President and Chief Executive Officer of MFS. Richard A.
Kozak, the Company's President and Chief Executive Officer, has held senior
management positions at several telecommunications companies, including MFS and
Sprint International (formerly Telenet Communications Corporation). Other
members of the Company's senior management team have experience working at MFS
Communications Group, Inc. ("MFS"), Teleport Communications Group, AT&T, MCI,
WilTel, Inc., BellSouth Telecommunications, Inc. and other telecommunications
companies. The Company's management team collectively has over 200 years of
marketing and operating experience in the telecommunications industry.
The Company believes that various telecommunications companies, such as the
IXCs and other LECs, will seek entry into the now competitive local exchange
services market through relationships with alternative service providers such as
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the Company. The Company further believes that its service offerings will be
attractive to such competitive telecommunications providers due to the Company's
breadth of market coverage in a significant number of Tier II and Tier III
markets in the southern United States. The Company is developing relationships
with key partners and intends to create the infrastructure to support this
resale opportunity.
Network Development
The Company constructs and operates digital fiber optic networks. Signal
transmissions carried over digital fiber optic networks are superior in many
respects to older analog transmissions carried over copper wire and by
microwave, which continues to be used in varying degrees by the LECs. Digital
fiber optic telecommunications networks generally offer faster and more accurate
transmissions for all data and voice communications than analog
telecommunications systems or digital transmission systems using copper wire.
Fiber optic networks also generally require less maintenance than copper wire or
microwave facilities or comparable transmission capacity, thereby decreasing
operating costs. An increase in capacity can be achieved through a change in
electronics. Because ACSI is employing the latest digital transmission
technology in its networks, its digital fiber optic networks will have
substantial additional capacity. The Company believes it will be able to use its
CLEC networks to provide a wide range of telecommunications services with only
incremental facilities costs.
Management believes that it can currently deploy its capital more
efficiently by constructing fiber optic networks rather than acquiring networks
constructed by other CLECs. In light of the significant premium to book values
associated with recent acquisitions within the CLEC industry, there are
considerable efficiencies associated with utilizing consistent vendors and
equipment in the Company's network, therefore ensuring high quality, reliability
and operating standards.
Key elements of the Company's network development plan include: (i)
thoroughly analyzing potentially favorable markets for development; (ii) seeking
authorizations from public and private entities for rights-of-way; and (iii)
efficiently implementing construction plans in a timely manner, thereby allowing
the Company to gain a competitive position in the chosen market.
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Site Selection. Before deciding to enter a market, the Company conducts a
detailed feasibility study to determine the potential size of the market,
existing competition within the market, the Company's ability to obtain
municipal authorizations, including franchises and access to rights-of-way, and
the relative ease of market entry from a local and state regulatory standpoint.
The rights-of-way assessment, done by independent telecommunications
consultants, determines whether another CAP/CLEC network is under construction
or ready to construct in the target market, the availability of economical
rights-of-way, the local utility's receptiveness to allow use of its
rights-of-way, the topology of the city and concentrations of commercial real
estate, and the local city permitting and franchise requirements. The market or
end-user survey, also done by independent telecommunications consultants,
identifies the significant commercial and government end users in the target
service areas. Individual telephone and/or face-to-face interviews are then
conducted with potential end users, focusing on those anticipated to have the
largest business volume. The interviews determine the end user's receptiveness
to using a competitor to the LEC, the telecommunications requirements of such
end user, current pricing by the LEC and other relevant information. This
"bottom up" sizing of the target service areas provides an estimate of the
prospective business by building and by customer.
Rights-of-Way. As part of its due diligence on a market during its site
selection process, the Company seeks municipal authorizations (such as
franchises, licenses, or permits) to construct and operate its network within
the public rights-of-way. The duration of this approval process can vary from
less than three months to several years, depending on the specific legal,
administrative, and political factors existing in that market. The initial term
of these municipal approvals, once granted, may range from as few as five years
to as many as 25 years, and such approvals typically may be renewed for
additional terms.
Concurrent with its seeking municipal authorizations, the Company initiates
discussions with electric or gas utilities, cable television companies ("CATV")
and other private providers of rights-of-way and/or facilities that may be used
by the Company for installation of its network. These discussions are intended
to result in agreements that allow the Company to make use of those parties'
fiber optic cables (such as IRUs), the underground conduits, distribution poles,
transmission towers, and building entrances. The Company's ability to enter into
such
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agreements can have a material impact on the Company's capital costs for network
construction and the speed with which the Company can construct its networks.
Additionally, obtaining such agreements facilitates the Company's ability to
expand efficiently beyond the central business district to serve additional end
users in its markets. The term of such agreements is typically ten to 25 years,
with renewal terms of five to 15 years. The Company believes that the experience
of members of its senior management team in negotiating such agreements gives it
a competitive advantage over other CLECs that have less experience in
successfully negotiating such agreements.
Implementation of Network Construction. The Company initially builds a one-
to three-mile self-healing fiber loop in the central business district or a
discrete area outside the central business district of a given target market.
This network provides the users with lower costs, fiber optic clarity, diversity
of access, and fault tolerant reliability of service, with automatic stand-by
and rerouting in the event of operator, system or network failure. The Company's
networks are then expanded into suburban business areas and other LEC central
offices to serve additional customers. These expansions may be in excess of 100
route miles. The Company utilizes outside contractors to construct its networks.
Prior to its obtaining required municipal authorizations, the Company, through
outside consultants, prepares preliminary and final engineering studies for the
initial portions of its networks. The Company's intent is to have the necessary
route maps, detailed final engineering drawings, and other construction
documents completed by the time municipal authorizations are obtained. This
process enables the Company to initiate network construction activities
immediately upon receipt of municipal authorizations. Concurrent with the
engineering process, the Company identifies commercial space for the location of
its administrative and sales offices and node (hub) site and commences
negotiations for the lease of such space. Outside plant construction of a
typical downtown network will take from four to six months, depending on various
factors. Preparation and build out of the Company's office and node space and
subsequent installation of electronics and cabling typically proceed during the
outside construction activity and are scheduled to be completed concurrently.
Finally, the Company initiates the application processes for collocation with
the LEC's downtown central office and interconnection with selected IXC POPs to
coincide with other construction milestones. The Company believes that this
coordinated construction process
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reduces overall network development costs and reduces construction intervals,
allowing it to initiate operations at an earlier date.
Following completion of its initial network and the commencement of network
operations, the Company's local staff, in consultation with personnel at the
Company's headquarters, designs expansion routes that will enable the Company to
reach additional end users and to interconnect with additional LEC central
offices outside the central business district or the targeted construction area.
Construction of these expansion routes is typically done under agreements with
third party rights-of-way providers as described above, but in some instances
the Company constructs its own new facilities (typically by trenching or
directional boring) where third party facilities (whether aerial or underground)
do not exist or are not available for use by the Company. The Company also
constructs lateral network facilities from its fiber optic backbone to provide
on-network service to its customers. In some instances, the Company will design
and construct some or substantially all of its routes outside the central
business district concurrent with the construction of the downtown network,
increasing the speed of overall network construction and, in the Company's
opinion, creating a competitive advantage over other CLECs that may have entered
or are seeking to enter the market. To the extent possible, the Company engages
the third party right-of-way provider to install ACSI's cable in or on the third
party's facilities, usually at a lower cost and with greater speed than that
obtained by using outside contractors.
The Company's network management center in Annapolis Junction, Maryland
monitors all of the Company's networks from one central location. Centralized
electronic monitoring and control of the Company's networks allows the Company
to avoid duplication of this function in each city. This consolidated operations
center also helps to reduce the Company's per customer monitoring and customer
service costs, such that they are lower than would be available if monitored on
a single-city basis. The Company also plans to use this facility to monitor the
performance of data and switched voice services.
Products and Services
The Company currently provides, or is actively implementing plans to
provide, a wide range of local telecommunications services including dedicated
and private line, high-speed data service solutions, including IP switching and
managed
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services, local switched voice services and enhanced voice messaging. The
Company's local distribution networks are designed to support this wide range of
enhanced communications services, provide increased network reliability and
reduce costs for its customers.
Dedicated Services. During fiscal 1996, dedicated and private line services
for IXCs and other carriers accounted for a substantial portion of the Company's
revenues with the remainder coming from business and government end users. The
Company's dedicated services provide high capacity non-switched
interconnections: (i) between POPs of the same IXC; (ii) between POPs of
different IXCs; (iii) between large business and government end users and their
selected IXCs; (iv) between an IXC POP and a LEC central office or between two
LEC central offices; and (v) between different locations of business or
government end users.
- Special access services. Special access services provide a link between an
end-user location and the POP of its IXC, or links between IXC POPs, thus
bypassing the facilities of the incumbent LEC. These services, which may
be ordered by either the long distance customer or directly by its IXC,
typically provide the customer better reliability, shorter installation
intervals, and lower costs than similar services offered by the LEC.
Customer charges are based on the number of channel termination's, fixed
and mileage-sensitive transport charges, and costs for any services
required to multiplex (increase or decrease the bandwidth or transmission
speed) circuits (e.g., taking VGE circuits at 64 kilobits per second and
stepping them up to a single DS-1 (1.54) megabit circuit, which has the
capacity to carry up to 24 VGE circuits and is priced at a significant
discount to multiple VGE circuits over the same route). A CAP may provide
special access service on an on-net basis by connecting an end user
directly to its fiber backbone, or on an off-net basis by reselling a
portion of the LEC's network to terminate the circuit at the end user's
location and passing the cost of the LEC services on through to the
customer (who realizes cost savings and network benefits for the portion
of the circuit that is on the CAP's network). While resulting in lower
margins than on-net service due to the payout to the LEC, off-net service
can be provided to any customer within a LATA, reducing the CAP's need to
build pervasive network infrastructure.
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- Switched transport services. Switched transport services are offered to
IXCs that have large volumes of long distance traffic aggregated by a LEC
switch at a central office where the CAP has collocated its network. The
CAP provides dedicated facilities for transporting these aggregated
volumes of long distance traffic from the LEC central office to the IXC's
POP or between LEC central offices. The flat monthly charge to the IXC is
typically lower than the transport fees charged by the LEC, which are
typically lower than the LEC charges for special access services that
include a charge for terminating the traffic at the end user's location
and/or the IXC POP. Switched transport services, however, are also
typically associated with higher volume orders compared to most special
access orders, thus providing potential for large monthly recurring
revenues to the CAP.
- Private line services. Private line services provide dedicated facilities
between two end-user locations in the same metropolitan area (e.g., a
central banking facility and a branch office or a manufacturing facility
and its remote data processing center) and are priced like special access
services (channel termination charges plus transport and any associated
multiplexing charges). The Company expects the demand for private line
service to increase in conjunction with higher bandwidth customer
applications.
High-Speed Data Services. The Company is developing and has begun offering
advanced high-speed data services, including Internet access service, and plans
to offer frame relay and ATM services to businesses, government entities, IXCs
and ISPs in the Company's targeted markets.
The Company expects that the majority of its initial high-speed data network
traffic will be composed of Internet access traffic from regional and national
ISPs, online service providers, major corporations and educational and financial
institutions. The Company expects frame relay, LAN-to-LAN and network
consolidation traffic to constitute the second largest element of its high-speed
traffic. The Company believes that during the next five years, the high-speed
data market will evolve to higher bandwidth requirements and will accept new ATM
applications and technology. Therefore, the Company believes the price of ATM
service will decrease relative to that of frame relay offerings. The Company
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expects the growth in demand for frame relay services to slow and the demand for
ATM services to increase. While ATM is currently in its introductory stage and
is generally considered a premium service offering, the Company believes that
ATM technology affords ACSI the ability to consolidate its internal and customer
traffic on large backbone links. This consolidation will enable the Company to
reduce its overall cost of service and position it to migrate its customers to
higher bandwidth as their demand increases, with minimal impact to customers'
applications.
ACSI initially plans to utilize its ATM network to provide IP and frame relay
transport for ISPs and major customers. The rapid growth in the Internet has
strained the existing network infrastructure, which was not engineered to
support the speeds or volumes of traffic that it now bears. The current
infrastructure supporting the Internet protocol has been engineered to support
speeds of up to 2 mbps (slightly above T-1 speed), while many major IP customers
are demanding up to 45 mbps. ATM offers an immediate solution for providing
efficient transport of IP switching traffic (as well as frame relay), allowing
ACSI to utilize available capacity long before it becomes cost effective for a
larger number of customers to deploy high bandwidth video, voice, WAN-to-WAN
connectivity and multimedia applications via ATM. ACSI, as a network-based
national service provider, will be positioned to offer Internet access and
connectivity to national, regional and local ISPs, as well as to corporate,
government and institutional customers that require direct access to the
Internet for both internal and/or external communications. Early focus on IP
customers is also expected to bolster demand for the Company's dedicated and
local switched service offerings; a large regional ISP can require hundreds or
up to several thousands of dial-up lines and numerous T-1 and DS-3 circuits to
meet its subscribers' demands.
Local Switched Voice Services. Following receipt of the requisite regulatory
approvals and when cost-effective, the Company plans to offer local switched
voice services, such as origination and termination of local calls, Centrex
services, PBX trunking and switched access services, in certain of its markets
beginning in late 1996.
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The Company intends to offer the following local switched voice services:
- Local Telephone Services. The Company plans to offer small and medium size
businesses local telephone exchange service, which will also include
optional enhanced services (e.g. call waiting, caller ID and three-way
conference calling).
- PBX Trunking. For those customers that use PBX equipment in their business
offices, the Company plans to offer services to switch traffic between
ACSI's switch and a business customer's PBX, routing local, intraLATA and
interLATA phone calls according to the customers' specific requirements.
- Centrex Services. The Company plans to offer advanced telecommunications
services for those businesses desiring the advanced features available in
a PBX environment without the investment in PBX premise equipment and its
attendant support staff. The Company intends to provide local dial tone
services with functionality such as free internal communications, call
forwarding, call transfer, conference call and speed dialing.
- ISDN Services. ACSI also will offer ISDN data services to its local
customer base. Those small businesses that require higher bandwidth for
data communications needs such as remote file transfer, e-mail,
collaborative computing, multi-media computing, telecommuting and Internet
access services, will be able to access the lower cost data services
provided by ACSI. As these customers' data requirements expand, the
Company's advanced data services can be offered, thereby expanding the
Company's opportunity to increase revenues from existing customers.
- Enhanced Services. The Company already offers enhanced voice messaging
services on a stand-alone basis. These and other services will also be
offered on an integrated basis with local switched services, allowing the
business or government customer to meet their telecommunications
requirements from a single source.
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- Switched Access. The Company will offer origination and termination of
long distance traffic between a customer premise and interexchange carrier
via shared trunks utilizing the Company's local switch.
Enhanced Voice Messaging Services. Market sources estimate that the voice
messaging services marketplace was approximately $1.4 billion in 1993. The
market for voice messaging services is projected to grow at a compound annual
rate of 13% to approximately $3 billion nationally in 2000. Local service
providers (i.e., incumbent local exchange carriers ("ILEC"), CLECs and wireless
CATVs), are expected to begin to displace voice messaging services offered by
IXCs. The Company is developing and has begun offering, on a limited basis, an
enhanced voice messaging service to small and mid-sized business and government
end users. The Company's enhanced voice messaging service can function as a
virtual PBX. The Company's business voice messaging services will include its
First Line and First Line Plus products. The Company also plans to market one
number services under the brand names Virtualine and Virtualine 800. These
offerings will be targeted towards the small and medium sized companies without
voice messaging and those who are currently seeking to upgrade their existing
systems, which marketplace has a significantly lower penetration rate than the
larger business market. The Company believes there are significant growth
opportunities in this market. Industry sources estimate that in 1994 fewer than
25% of companies with less than 100 employees had voice messaging services and
that fewer than 12% of companies with 50 employees or less had voice messaging
services.
The services for the Company's enhanced messaging will include basic voice
messaging, follow-me call routing, virtual calling card services, fax services,
e-mail and paging notification services, and automated attendant services.
- Voice messaging -- a basic voicemail solution that allows the subscriber
greater flexibility, including closed-end user group message forwarding
and interface capabilities with the office attendant.
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- Follow-me call routing -- the platform can be programmed to find the
subscriber by forwarding calls to designated phone numbers anywhere
nationwide at the subscriber's discretion and control. The current market
for follow-me messaging is relatively undersized, as the technology
enabling this feature has only recently begun to emerge. However,
industry sources estimate that this market will have grown from less than
60,000 subscribers in 1995 to approximately 2.9 million subscribers in
1999.
- Virtual calling card -- the platform enables the subscriber to use the
service to make outbound calls in response to messages received without
disconnecting the call.
- Fax services -- the platform enables faxes to be stored and
transmitted at the discretion of the subscriber.
- Notification services -- at the subscriber's discretion, the arrival
of voicemail can trigger pager or e-mail notification.
- Automated attendant -- the platform can provide all of the above
services, as well as call screening for the subscriber.
The Company's enhanced voice messaging services will also provide links to
the Internet through ACSI's web site, providing users with the capability to
access their voice, electronic mail and fax messages. In addition to offering
these services in its operational network markets, the Company may offer these
services in other markets where it does not intend to construct or has not yet
constructed a network. The Company believes that such services will allow it to
develop relationships with end users that may be potential customers for either
dedicated services or switched voice services that may be offered in these
markets in the future. However, unlike traditional telephone service, customers
have not yet become fully accustomed to use of voice messaging services, and
neither the usage ramp-up of these services nor their market acceptance is
certain at this time.
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Sales and Marketing
While a network is under construction, the Company's salespeople in each
city begin selling on-network interstate dedicated services to the major
business and government end users in that city, while the central headquarters'
sales staff concentrates on selling services to IXCs. The Company expects to
initially price its services at a discount to the LEC's tariffs and sells on the
basis of cost savings to the customer. However, based on management's experience
in other cities where CAPs offer services, end users are expected to be
attracted to the Company as a provider of back-up service for disaster recovery
and a 100% fiber optic network that can provide generally higher quality and
more reliable service than can the incumbent LEC's network.
The Company's sales efforts with respect to dedicated services emphasize
cooperation between ACSI's centralized and local sales staff and the regional
and field sales staff of the IXCs. ACSI's centralized sales staff works closely
with senior management of the IXCs to establish technical and service
requirements, pricing, and quality standards on a nationwide basis, then
coordinates at the local level specific orders for service to the IXC and/or its
end user customers in a given market. The Company is pursuing multiple-city
service arrangements with a number of IXCs, but no assurance can be made that
the Company will ultimately be successful in negotiating such agreements with
any of the IXCs.
The Company typically has a general manager and at least one account
executive in each of its major markets. In many cases, the general manager
oversees the operations and sales efforts of additional smaller markets that may
be operated as satellites of the larger market, thus reducing operating
overhead. In the Company's experience, the sales process in the southern regions
of the country is largely affected by personal relationships, and the Company's
ability to hire sales and management staff with existing customer relationships
enhances its ability to penetrate the market.
The Company plans to utilize two separate sales forces to market its
enhanced voice messaging services to business and government customers. While
the Company's dedicated services sales force will target their on-net customers
for
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such enhanced services, the enhanced voice sales staff will focus on potential
customers that are not connected to ACSI's network and on potential resellers of
the Company's services. These enhanced voice salespersons will also be
responsible for encouraging existing accounts to subscribe to additional
features and to increase their usage of those features. The Company believes
that, once established, the customer relationships will enhance the Company's
ability to market local switched voice services to these customers as such
services are offered. The Company's enhanced voice messaging sales force will be
augmented by additional sales personnel as local switched services are
introduced on a market by market basis.
The Company's data services will be marketed by a separate sales group that
focuses on providing total solutions to a customer's data and networking needs.
This marketing will require a more technically sophisticated staff than for the
Company's dedicated, enhanced and switched voice services. The Company believes
that it will be able to package and cross-market all of its services through
centralized and local account team coordination, making ACSI a full-service
regional provider of local telecommunications services.
As of June 30, 1996, the Company has entered into contracts to provide
managed services to ISPs for fees to the Company totaling approximately $6.2
million. In addition, the Company has begun providing local area frame relay
services to customers via the Company's local fiber optic networks.
ACSI is marketing its data communications services via national, regional
and local sales personnel supported by teams of sales engineers. In addition,
sales representatives in the Company's network services group (primarily
responsible for selling dedicated circuits at the local level) cross-market
ACSI's data communications service offerings, generating leads and supporting
the development and closure of relationships with established local access
customers.
The Company also plans to expand its distribution of certain data
communications service offerings through alternative channels such as CATVs,
electric utilities, out-of-region RBOCs, and independent LECs. ACSI is currently
in discussions with several providers regarding reseller and private labeling
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arrangements involving the Company's data communications service offerings, but
there can be no assurance that any of these discussions will result in an
agreement to resell and private label such offerings.
Competition
Dedicated Services. The Company operates in a highly competitive environment
and has no significant market share in any market in which it operates. The
Company provides dedicated services to large business and government end users.
In each of the metropolitan areas to be served by the Company's networks, the
Company's dedicated services will compete principally with the dedicated
services offered by the incumbent LEC. The LECs, as the historical monopoly
providers of local access and other services, have long-standing relationships
with their customers and have financial and technical resources substantially
greater than those of the Company. The LECs also offer certain services that the
Company cannot currently provide without first obtaining requisite regulatory
approvals.
Competition for dedicated services is based on price, quality, network
reliability, customer service, service features and responsiveness to the
customer's needs. The Company believes that its management expertise, coupled
with its highly reliable, state-of-the-art digital networks, which offer
significant transmission capacity at competitive prices, will allow it to
compete effectively with the LECs, which may have not yet fully deployed fiber
optic networks in many of the Company's target markets. The Company currently
prices its services at a modest discount compared to the prices of the LEC while
providing a higher level of customer service. The Company's fiber optic networks
will provide both diverse access routing and redundant electronics, design
features not widely deployed by the LEC's networks (which were originally
designed in tree and branch or star configurations).
Other potential competitors of the Company include CATV operators, public
utilities, IXCs, wireless telecommunications providers, microwave carriers,
satellite carriers, teleports, private networks built by large end users, and
other CLECs. With the passage of the Telecommunications Act and the entry of
RBOCs into the long distance market, the Company believes that IXC's may be
motivated
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to construct their own local facilities and/or resell the local services of
ACSI's competitors. For example, AT&T has announced its intention to offer local
services and has filed for state certification in markets that include, among
others, several of the Company's markets. Other CLECs or CATVs currently are
competitors in various markets in which the Company has networks in operation or
under construction. Based on management's experience at other CLECs, the initial
market entrant with an operational fiber optic CLEC network generally enjoys a
competitive advantage over other CLECs that later enter the market. The Company
expects that there will be other CLECs operating in most, if not all, of its
target markets and that some of these CLECs may have networks in place and
operating before the Company's network is operational. While it is generally
considered within the CLEC industry that being the first market entrant to offer
services typically enhances that CLEC's competitive advantage relative to CLECs
that enter the market at a later time, the Company recognizes that in some
instances it may have other competitive advantages (such as a superior
right-of-way arrangement or large customer commitments) that it believes
outweighs another CLEC's first to market advantage; in these instances, the
Company may elect to enter a market where an established CLEC already exists.
High-Speed Data Services. The Company's competitors for high-speed data
services include the major IXCs, other CLECs, and various providers of niche
services (e.g., Internet access providers, router management services and
systems integrators). In general, none of these competitors currently offers a
comprehensive solution for a customer's potential data service requirements, a
core premise of the Company's data strategy. The Company intends to pursue
arrangements with other data service providers to leverage each entity's
strengths in a given market or segment of the service chain by bundling elements
of complete data solutions (i.e., bundle its local access and frame relay
services with an IXC's longhaul transport services). The interconnectivity of
the Company's markets will create additional competitive advantages over other
data service providers that must obtain local access from the LEC or another
CLEC in each market or that cannot obtain intercity transport rates on as
favorable terms as the Company.
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There is significant competition for Internet access and related services in
the United States, with few barriers to entry other than capital. The Company
expects that competition will increase as existing services and network
providers and new entrants compete for customers. ACSI's current and future
competitors include telecommunications companies, including the RBOCs, IXCs,
other CLECs and CATVs, and other Internet access providers, such as UUNET
Technologies, Inc., Advanced Network & Services, Inc., BBN Corporation, NETCOM
On-Line Communications Services, Inc. and PSINet Inc. Many of these competitors
have greater financial, technical, marketing and human resources, more extensive
infrastructure and stronger customer and strategic relationships than ACSI. The
Company believes that it will have a competitive advantage in offering Internet
access services to those ISP and commercial customers in markets where ACSI has
local fiber optic network facilities relative to other Internet access providers
that must purchase local loop access from the LEC, ACSI or another CLEC in that
market. Additionally, ACSI believes that customers with operations in multiple
locations served by ACSI local fiber optic networks will find single-source
Internet access services from ACSI attractive and more cost effective.
All of the seven original RBOCs offer at least some basic frame relay
service. The Company believes that most IXCs offer substantial domestic and
international frame relay service, generally positioned to provide a significant
savings over traditional private lines. Other frame relay service providers
include MFS and Intermedia Communications. A number of companies, primarily
CLECs, have announced plans to offer frame relay service. ATM offerings are only
beginning to emerge. ATM service is currently being offered by most of the
original RBOCs, MFS, AT&T, MCI, Sprint and WilTel, Inc. A number of other data
communications providers, CLECs and facilities-based CATVs have announced their
intentions to offer ATM services in the future.
A number of equipment vendors, systems integrators and Internet access and
service providers offer components of managed services. The Company believes
that it will have a competitive advantage over those managed services providers
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that do not have local loop facilities that means they cannot provide a full
solution for customers.
Local Switched Voice Services. In all of the markets where the Company is
currently operating or plans to operate, the LEC currently is a de jure or de
facto monopoly provider of local switched voice services. The Company expects
that the enactment of the Telecommunications Act will enable CLECs, CATVs,
electric utilities, cellular and wireless providers, and others to offer local
switched voice services in competition with the LECs in the Company's target
markets. The Company believes that its strategy to leverage its basic network
infrastructure into higher margin service offerings, migrating to local switched
voice services, will allow it to procure a profitable share of the market. The
Company's ability to cross-market services will create opportunities to increase
margins by migrating customers from off-network to on-network status. As the
number of end users in a given off-network building increases for all service
offerings, the economics improve to the point where the capital costs of
connecting the building to ACSI's network are more than covered by the increased
margins represented by retaining the portion of customer revenue paid out to the
LEC.
Enhanced Voice Messaging Services. Competition for enhanced voice messaging
services primarily consists of basic voice mail services offered by LECs and
cellular providers in connection with their core offerings and customer
premise-based voice mail platforms. The voice mail offerings of the LECs
typically have limited features and flexibility compared to the services
contemplated by the Company; thus, the Company believes its enhanced voice
messaging services and focused sales efforts should be able to penetrate
effectively those segments of the small and mid-sized business market that
require more features and/or flexibility than services offered by the LECs.
Customer premise-based platform voice mail offerings typically require a
relatively large up front capital investment and recurring maintenance costs and
are generally marketed to large companies rather than the small and mid-sized
end users targeted by the Company.
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Regulation
Overview
The Company's services are subject to federal, state and local regulation.
The FCC exercises jurisdiction over all facilities and services of
telecommunications common carriers to the extent those facilities are used to
provide, originate or terminate interstate or international communications.
State regulatory commissions retain jurisdiction over the Company's facilities
and services to the extent they are used to originate or terminate intrastate
communications. Local governments may require the Company to obtain licenses or
franchises regulating use of public rights-of-way necessary to install and
operate its networks.
The allocation of jurisdiction between federal and state regulation of
dedicated facilities carrying both interstate and intrastate traffic raises
definitional issues. Although the FCC generally does not rule as to the
jurisdictional nature of a carrier's traffic, under FCC practice, such services
are considered to be jurisdictionally interstate if at least 10% of the traffic
is interstate in nature. Virtually all dedicated services provided by the
Company between long distance carrier POPs, and between IXCs and their end
users, satisfy this requirement and are jurisdictionally interstate in the
opinion of the Company.
Recent Federal Legislation
On February 1, 1996, the U.S. Congress enacted comprehensive
telecommunications reform legislation, which the President signed into law as
the Telecommunications Act of 1996 on February 8, 1996 (the "Telecommunications
Act"). The Telecommunications Act amends the Communications Act of 1934 to
impose a legal duty upon incumbent LECs to provide interconnection (i) for the
transmission and routing of telephone exchange service and exchange access, (ii)
at any technically feasible point within the LECs' network, (iii) that is at
least equal in quality to that provided by the LEC to itself, its affiliates or
any other party to which the LEC provides interconnection, and (iv) at rates,
terms and conditions that are just, reasonable and nondiscriminatory. LECs also
are required
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under the new law to provide nondiscriminatory access to network elements on an
unbundled basis at any technically feasible point, to offer its local telephone
services for resale at wholesale rates, and to facilitate collocation of
equipment necessary for competitors to interconnect with or access the unbundled
network elements.
The Telecommunications Act also imposes a legal duty on all
telecommunications carriers (including LECs and CLECs) (i) not to prohibit or
unduly restrict resale of their services; (ii) to provide dialing parity and
nondiscriminatory access to telephone numbers, operator services, directory
assistance and directory listings; (iii) to afford access to poles, ducts,
conduits and rights-of-way; and (iv) to establish reciprocal compensation
arrangements for the transport and termination of telecommunications.
In addition, under the terms of the Telecommunications Act, the RBOC's must
offer terms and conditions for interconnection that satisfy a prescribed
14-point checklist before they may obtain authority to provide interLATA
services within their operating regions. In addition to the obligations
discussed in the preceding paragraphs in this subsection, RBOCs must offer
interconnection that includes each of the following:
- local loop transmission from the central office to the customer's
premises, unbundled from local switches, or other services;
- local switching, unbundled from transport, local loop transmission, or
other services;
- nondiscriminatory access to 911 and E911 services, directory
assistance services and operator services;
- white page directory listings;
- nondiscriminatory assignment of telephone numbers;
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- nondiscriminatory access to data bases and associated signaling
necessary for call routing or completion; and
- interim number portability through remote call forwarding, direct
inward dialing trunks or other comparable arrangements.
The Company believes that this legislation is likely to enhance competition
in the local telecommunications marketplace through (i) removal of state and
local entry barriers, (ii) requirements that LECs provide interconnections to
their facilities, (iii) facilitation of the process of changing from LEC
services to those offered by CLECs and (iv) access to rights-of-way. Although
there can be no assurances, the Company expects further growth to the extent
that LECs begin to compete with IXCs for long distance services, thereby
providing IXCs with a competitive incentive to move access business away from
LECs to CLECs, such as ACSI. However, the legislation also has granted important
benefits to the LECs. The LECs have substantial new pricing flexibility. RBOCs
have regained the ability to provide long distance services and have obtained
new rights to provide certain cable TV services. In addition, the legislation
may encourage IXCs to construct their own local facilities and/or resell local
services in order to compete with the bundled local and long distance services
to be offered by the LECs as a result of the Telecommunications Act.
The Telecommunications Act also amends the Communications Act of 1934 to
preempt any state or municipal action requiring cable companies to obtain a
franchise before offering telecommunications services or allowing their
franchise fees to be based on their telecommunications revenues. The
Telecommunications Act also lifts restrictions previously contained in the
Public Utility Holding Company Act of 1935, which had previously prevented
certain registered utility holding companies from diversifying into
telecommunications services. These changes will tend to enhance the competitive
position of the LECs and increase local competition by IXCs, CATVs and public
utility companies, which may have a material adverse effect on the Company.
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The FCC has opened numerous proceedings intended to implement the provisions
of the Telecommunications Ac, including its CC Docket No. 96-98 for adoption of
rules relating to local network interconnection, unbundling, and resale, which
is discussed hereunder.
Federal Regulation
In general, the FCC has a policy of encouraging entry of new competitors,
such as the Company, in the telecommunications industry and preventing
anti-competitive practices.
The FCC has established different levels of regulation for dominant carriers
and nondominant carriers. For domestic common carrier telecommunications
regulation, large LECs such as GTE and the RBOCs are currently considered
dominant carriers, while CLECs such as the Company are considered nondominant
carriers. As a nondominant carrier, the Company may install and operate
facilities for the transmission of domestic interstate communications without
prior FCC authorization. Services of nondominant carriers have been subject to
relatively limited regulation by the FCC, primarily consisting of the filing of
tariffs and periodic reports concerning the carrier's interstate circuits and
deployment of network facilities. However, the FCC has proposed adopting rules
that would preclude IXCs from filing tariffs and is considering a request that
the proposed rules also be applicable to CLECs. Moreover, the Company must offer
its interstate services on a nondiscriminatory basis, at just and reasonable
rates, and remains subject to FCC complaint procedures.
Pursuant to these FCC requirements, the Company has filed and maintains a
tariff for its interstate services with the FCC. All of the interstate retail
"basic" services (as defined by the FCC) provided by the Company are described
therein. "Enhanced" services (as defined by the FCC) need not be tariffed. The
Company has an "enhanced" frame relay product, which is not contained in the
Company's
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current FCC tariff. A tariff for a "basic" frame relay offering is under
development. The Company believes that its voice messaging and Internet access
products are "enhanced" services which need not be tariffed.
In 1991, the FCC replaced traditional rate of return regulation for large
LECs with price cap regulation. Under price caps, LECs can only raise prices for
certain services, including interconnection services provided to CLECs, by a
small percentage each year. In addition, there are constraints on the pricing of
LEC services that are competitive with those of CLECs. On September 14, 1995,
the FCC proposed to adopt a three-stage plan that would substantially reduce LEC
price cap regulation as local markets become increasingly competitive. The FCC
proposed to immediately eliminate the lower service band index limit on price
reductions within service categories, modify tariff filing requirements and
revise the structure of price cap baskets. The FCC also sought comment on
whether LECs should be permitted to expand use of option discount plans such as
volume and term discounts. Under the FCC's proposal, during the second phase
certain LEC services could be removed from price cap regulation and regulated on
a streamlined basis if they were deemed to be subject to competition. In the
third stage, LECs would be granted nondominant status. Adoption of the FCC's
proposal to significantly reduce its regulation of LEC pricing would
significantly enhance the ability of LECs to compete against the Company and
could have a material adverse effect on the Company.
The FCC has granted LECs additional flexibility in pricing their interstate
special and switched access services on a specific central office by central
office basis. Under this pricing scheme, LECs may establish pricing zones based
on access traffic density and charge different prices for each zone. The Company
anticipates that this pricing flexibility will result in LECs lowering their
prices in high traffic density areas, the probable arena of competition with the
Company. The Company also anticipates that the FCC will grant LECs increasing
pricing flexibility as the number of interconnections and competitors increases.
In a concurrent proceeding on transport rate structure and pricing, the FCC
enacted interim pricing rules that restructure LEC switched transport rates in
order to facilitate competition for switched access.
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On February 15, 1996, the FCC released an order granting in part Ameritech
Corporation's (one of the seven RBOCs) request for a waiver of the Commission's
access charge rules sufficient to grant it certain access charge pricing
flexibility. The FCC permitted Ameritech to "bulk bill" IXCs for the portion of
the Carrier Common Line Charge ("CCLC") that contributes to the National
Exchange Carriers Association Long Term Support Fund for high-cost carriers. The
FCC also allowed Ameritech to reduce the transport interconnection charge on a
geographically deaveraged basis in the Chicago and Grand Rapids LATAs, on the
basis that Ameritech faces actual competition from CCLCs in those LATAs. Such
access charge pricing flexibility is likely to make it more difficult for CLECs
to compete against Ameritech in the affected areas. Although the Company does
not provide service in the Ameritech operating region, if the FCC grants similar
access pricing flexibility to other LECs, it could become more difficult for the
Company to compete for access traffic.
FCC Rules Implementing the Local Competition Provisions of the
Telecommunications Act
On August 8, 1996, the FCC released both a First Report and Order and a
Second Report and Order and Memorandum Opinion and Order in its CC Docket No.
96-98 (combined, the "Interconnection Orders") establishing new policies and
rules governing local telephone services interconnection and competition.
Although the new rules were scheduled to become effective on September 30, 1996,
numerous parties to the rulemaking appealed the Interconnection Orders, and the
U.S. Court of Appeals for the Eighth Circuit ("Court of Appeals") issued a
temporary stay of the effect of the Interconnection Orders on September 27,
1996. The temporary stay will defer effectiveness of the new rules until at
least October 3, 1996, during which time the Court of Appeals will consider
whether to extend the stay for the duration of the appeal process. In addition,
some parties have asked the FCC to stay its own order, and multiple parties are
expected to file petitions with the FCC on September 30, 1996, asking the agency
to reconsider and revise portions of the Interconnection Orders. Moreover,
several energy utilities have initiated litigation challenging the
constitutionality of the Telecommunications Act itself.
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The Interconnection Orders establish a framework of minimum, national rules
that will enable state Public Service Commissions ("PSCs") and the FCC to begin
implementing many of the local competition provisions of the Act. The FCC's
decision in CC Docket No. 96-98 is the first part of a trilogy of actions that
the Commission contends will promote competition in the local telecommunications
market. The second part is reform of the system for funding and providing
universal service support (as described hereafter). The FCC stated that the
third part of the trilogy of actions consists of further reform of its rules for
establishing interexchange access charges. The FCC has stated that a competitive
telecommunications market requires that access charges be moved to more
economically efficient levels.
As described in greater detail below, in its Interconnection Orders, the FCC
prescribed certain minimum points of interconnection necessary to permit
competing carriers to choose the most efficient points at which to interconnect
with the ILECs' networks. In addition, the Commission also adopted a minimum
list of unbundled network elements that ILECs must make available to competitors
upon request. The Commission also set forth a methodology for states to use in
establishing rates for interconnection and the purchase of unbundled network
elements, and a methodology for states to use when applying the
Telecommunications Act's "avoided cost standard" for setting wholesale prices
with respect to retail services. The following summarizes the key issues
addressed in the Interconnection Orders.
Interconnection. Section 251(c)(2) of the Telecommunications Act requires
ILECs to provide interconnection to any requesting telecommunications carrier at
any technically feasible point. The interconnection must be at least equal in
quality to that provided by the ILEC to itself or its affiliates, and must be
provided on rates, terms and conditions that are just, reasonable and
nondiscriminatory. The FCC determined that the term "interconnection" under
Section 251(c)(2) refers only to the physical linking of two networks for the
mutual exchange of traffic. The Commission concluded that, at a minimum, ILECs
must provided interconnection at
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- the line side of a local switch (i.e., the main distribution frame)
- the trunk side of a local switch
- the trunk interconnection points for a tandem switch
- central office cross-connect points
- out-of-band signaling transfer points
- the points of access to unbundled network elements
The Commission found that telecommunications carriers may request
interconnection to provide telephone exchange service or exchange access
service, or both. If the request is for such purposes, the ILEC must provide
interconnection to any telecommunications carrier, including IXCs and commercial
mobile radio service (CMRS) providers.
Access to Unbundled Elements. Section 251(c)(3) of the Telecommunications
Act requires ILECs to provide requesting telecommunications carriers with
nondiscriminatory access to network elements on an unbundled basis at any
technically feasible point on rates, terms, and conditions that are just,
reasonable and nondiscriminatory. The FCC identified the following minimum set
of network elements that ILECs must unbundle and provide access to:
- network interface devices
- local loops
- Local and tandem switches (including all software features provided by
such switches
- interoffice transmission facilities
- signaling and call-related database facilities
- operations support systems and information
- operator and directory assistance facilities
States may require ILECs to provide additional network elements on an unbundled
basis, pursuant to a bona fide request by a telecommunications carrier or
otherwise. The FCC also ruled that ILECs must provide requesting carriers
nondiscriminatory access to certain operations support systems and information
that ILECs use to provide telecommunications services commercially, such as
information required for pre-ordering, ordering, provisioning, billing and
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maintenance and repair services. Moreover, the new rules require ILECs to
provide access to network elements in a manner that allows requesting carriers
to combine such elements as they choose. Thus, ILECs may not impose
restrictions, limitations or requirements upon the use of unbundled network
elements by other carriers.
Methods of Obtaining Interconnection and Access to Unbundled Elements.
Section 251(c)(6) of the Telecommunications Act requires ILECs to provide
physical collocation of equipment necessary for interconnection or access to
unbundled network elements at the ILEC's premises, except that the ILEC may
provide virtual collocation if it demonstrates to the state commission that
physical collocation is not practical for technical reasons or because of space
limitations. Under the FCC's Interconnection Orders, ILECs are required to
provide any technically feasible method of interconnection or access requested
by a telecommunications carrier, including physical collocation, virtual
collocation, and interconnection at meet points. The Commission adopted, with
certain modifications, the existing physical and virtual collocation
requirements it adopted in the early 1990s in its Expanded Interconnection
proceeding.
Pricing Methodologies. The Telecommunications Act requires the states in
arbitrating interconnection disputes not resolved by negotiation to set prices
for interconnection and unbundled elements that are cost-based,
nondiscriminatory and may include a reasonable profit. To help the state PSCs
accomplish this, the FCC concluded that the state commissions should set
arbitrated rates for interconnection and access to unbundled elements pursuant a
forward-looking economic cost pricing methodology. The FCC concluded that the
prices that new entrants pay for interconnection and unbundled elements should
be based on the ILEC's Total Element Long-Run Incremental Cost (TELRIC) of
providing a particular network element, plus a reasonable share of
forward-looking joint and common costs. States will determine, among other
things, the appropriate risk-adjusted cost of capital and depreciation rates.
The TELRIC-based costing and pricing methodology described above must be used to
set permanent rates for both interconnection and unbundled network elements.
However, recognizing that many states already have begun arbitration
proceedings, and that TELRIC cost information may not be available for
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consideration within the statutory time frame for arbitrating interconnection
disputes, the FCC authorized the states to use certain default proxies as
ceilings on the pricing for local interconnection and unbundled network element
pricing. If a proxy default is used, however, the states must replace such rates
with TELRIC-based rates on a going forward basis once they have completed a
review of the TELRIC cost studies.
With the exception of a default proxies for switching, which are expressed
as a rate range, the FCC's default proxies are maximum rates. State commissions
are free to establish rates below the ceilings. The FCC's default proxies are as
follows:
Element FCC Proxy
Local Loops Varies by state, with a low of $9.83 (Mass.)
and a high of $25.36 (N.D.)
Switching $0.002 to $0.004/min. plus an additional
$0.001515/min. if tandem switching is used
Local Transport Existing tariffed interstate dedicated
switched access transport charges, with
adjustments when tandem switched transport
is used
Signaling/Database Access Existing tariffed interstate charges
Collocation Existing rates established in the FCC's
Expanded Interconnection proceeding
Notably, the FCC's default ceiling applicable to unbundled loop rates applies to
the rated average of all loop rates established for regions within the state.
The FCC requires that states establish at least three density zones for loop
rates. A state is within the ceiling if the average of its loop prices, weighted
according to the number of loops in each zone, is at or below the proxy level.
The FCC did not establish default proxies for the non-recurring charges often
associated with the
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initial installation of unbundled loops (or other network elements), which are
often relatively high in the Company's experience.
Access Charges for Unbundled Switching and Access Charge Reform. Nothing in
the FCC's Interconnection Orders alter the collection of access charges paid by
an interexchange carrier under Part 69 of the FCC rules, when the ILEC provides
exchange access service to an interexchange carrier, either directly or through
ILEC service resale. Because access charges are not included in the cost-based
prices for unbundled network elements, and because certain portions of access
charges currently support the provision of universal service, until the access
charge reform and universal service proceedings have been completed, the FCC
plans to continue providing for access charge recovery with respect to use of an
ILEC's unbundled switching element, for a defined period of time.
Under the new rules, ILECs will recover from all interconnecting carriers
the carrier common line charge and a charge equal to 75% of the transport
interconnection charge for all interstate minutes traversing the ILECs' local
switches for which the interconnecting carriers pay unbundled network element
charges. This aspect of the rules will expire at the earliest of: 1) June 30,
1997; 2) issuance of final decisions by the FCC in the universal service and
access reform proceedings; or 3) if the ILEC is a Bell Operating Company (BOC),
the date on which that BOC is authorized under Section 271 of the
Telecommunications Act to provide in-region interLATA service, for any given
state. The FCC is expected to issue a Notice of Proposed Rulemaking establishing
a proceeding to reform its access charge rules in November 1996, with an
objective of issuing revised access charge rules by June 30, 1997. Although it
is impossible to predict the outcome of the upcoming access charge reform
proceeding, the Company believes that it is likely that the planned reform of
the FCC's access charge rules will result ultimately in a significant reduction
in the rate levels of interstate switched access charges.
Resale. The Telecommunications Act requires all ILECs to offer for resale any
telecommunications service that the carrier provides at retail to subscribers
who are not telecommunications carriers. The Telecommunications Act's pricing
standard for wholesale rates requires state PSCs to identify which marketing,
billing, collection and other costs will be avoided or that are avoidable by
ILECs
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when they provide services wholesale, and calculate the portion of the retail
rates for those services that is attributable to the avoided and avoidable
costs. The application of this definition is left to the states. If a state
elects not to implement the methodology, it may elect, on an interim basis, a
discount rate from within a default range of discount rates established by the
FCC. The Commission established a default discount range of 17-25% off retail
prices. State PSCs will be able to set specific rates within that range, in the
exercise of their discretion.
Transport and Termination. The Telecommunications Act requires that charges
by LECs for the transport and termination of local traffic delivered to them by
competing LECs be cost-based. The FCC concluded that state PSCs, during
arbitrations, should set symmetrical prices based on the LECs' TELRIC cost of
providing the service. The FCC established a default range of $0.002-$0.004 per
minute for end officer termination for states which have not conducted a TELRIC
cost study. The Commission found significant evidence in the record in support
of the lower end of the ranges. In addition, the Commission found that
additional reciprocal charges could apply to termination through a tandem
switch. The default ceiling for tandem switching is $0.0015 per minute, plus
applicable charges for transport from the tandem switch to the end office.
Access to Rights of Way. The FCC also amended its rules to implement the
pole attachment provisions of the Telecommunications Act. Specifically, the
Commission established procedures for nondiscriminatory access by
telecommunications carriers and poles, ducts, conduits, and rights-of-way owned
by utilities or LECs. The Interconnection Orders include several specific rules
as well as a number of more general guidelines designed to facilitate the
negotiation and mutual performance of fair, pro-competitive access agreements
without the need for regulatory intervention. Additionally, an expedited dispute
resolution procedure is provided when good faith negotiations fail.
ACSI is unable to predict whether the new rules and policies described above
will be revised by the FCC on reconsideration, be stayed or set aside by the
Court of Appeals, or whether another federal court will find some or all
portions of the Telecommunications Act to be unconstitutional.
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Universal Service Reform. Section 254(a) (1) of the Telecommunications Act
requires the FCC to institute a Federal-State Joint Board for the purpose of
recommending a revised universal service funding program to the FCC. By means of
a Notice of Proposed Rulemaking and Order Establishing Joint Board issued in its
CC Docket No. 96-45 on March 8, 1996, the FCC proceeded to establish such a
Joint Board and seek public comment on a new or reformed system of universal
service support. While it is impossible to predict what system of universal
service support will ultimately result from this effort, the Telecommunications
Act requires that all telecommunications carriers, including the Company,
contribute to the funding effort on an equitable and nondiscriminatory basis, in
an amount sufficient to preserve and advance universal service pursuant to a
specific or predictable universal service funding mechanism. The Company cannot
at this time predict the level or form of its mandatory contribution, but the
Company believes that it will likely be a significant expenditure. The Joint
Board is expected to release its proposal for universal service reform on or
about November 8, 1996, and the proceeding must be concluded by May 8, 1997.
State Regulation
The Company believes that most, if not all, states in which it proposes to
operate will require a certification or other authorization to offer intrastate
services. Many of the states in which the Company operates or intends to operate
have not yet addressed issues relating to the regulation of CLECs. Some states
that have authorized the competitive provision of dedicated services have not
authorized the provision of competitive local switched services. Some states may
require authorization to provide enhanced services.
In some states, existing state statutes, regulations or regulatory policy may
preclude some or all forms of local service competition. The Telecommunications
Act contains provisions that prohibit states and localities from adopting or
imposing any legal requirement that may prohibit, or have the effect of
prohibiting, the ability of any entity to provide any interstate or intrastate
telecommunications service. The FCC is required to preempt any such state or
local requirements to the extent necessary to enforce the Telecommunications
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Act's open market entry requirements. States and localities may, however,
continue to regulate the provision of intrastate telecommunications services,
and, presumably, require carriers to obtain certificates or licenses before
providing service.
The Company currently has obtained intrastate authority for the provision of
dedicated services in Alabama, Arkansas, Florida, Georgia, Kentucky, Maryland,
Nevada, New Mexico, South Carolina, Tennessee and Texas. The Company has
applications pending before the PSCs in Arizona, Colorado, Louisiana, Missouri,
Oklahoma and Virginia for intrastate dedicated services authority. To the extent
the Company expands the scope of its intrastate services in the future in these
states to include the full range of local switched services, the Company is
required to seek additional authorization from such PSCs. The Company has
applied for authorization to provide local switched services in Arizona,
Arkansas, Colorado, Kentucky, Louisiana, Mississippi, Missouri, New Mexico,
Oklahoma, South Carolina and Virginia and has been granted such authority in
Alabama, Florida, Georgia, Maryland, Nevada, South Carolina, Tennessee, and
Texas. There can be no assurances that the Company will receive the
authorizations it is currently seeking, or will seek, from these PSCs.
In most states, the Company is required to file tariffs setting forth the
terms, conditions and prices for services that are classified as intrastate.
The Company believes that, as the degree of intrastate competition
increases, the states will offer the LECs increasing pricing flexibility. This
flexibility may present the LECs with an opportunity to subsidize services that
compete with the Company's services with revenues generated from non-competitive
services, thereby allowing LECs to offer competitive services at prices below
the cost of providing the service. The Company cannot predict the extent to
which this may occur or its impact on the Company's business.
Local Interconnection. The Telecommunications Act imposes a duty upon all
incumbent LECs to negotiate in good faith with potential interconnectors to
provide interconnection to the ILEC network, exchange local traffic, make
unbundled basic local network elements available, and permit resale of most
local services. In the event that negotiations do not succeed, the Company has a
right to
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seek state PSC arbitration of any unresolved issues. The state PSC must conclude
the arbitration within nine months of the date upon which the incumbent LEC
received the Company's initial request for interconnection. The Company has
negotiated partial agreements with BellSouth for local interconnection and
access to unbundled elements in South Carolina, Georgia, Florida, Kentucky,
Tennessee, Alabama, Mississippi and Florida. Similar partial agreements have
been reached with Southwestern Bell for Arkansas and Texas, with US West for New
Mexico and Arizona and with GTE for Texas, Kentucky and Florida. In all
instances, the Company was forced to seek state PSC arbitration for some
material issues. State commission arbitration of ACSI requests for
interconnection are currently underway in the twelve states listed above. In
addition, the Company has initiated formal interconnection negotiations with
Bell Atlantic and Sprint/Central Telephone.
Local Government Authorizations
The Company is required to obtain street use and construction permits and
licenses and/or franchises to install and expand its fiber optic networks using
municipal rights-of-way. In some municipalities where the Company has installed
or anticipates constructing networks, it will be required to pay license or
franchise fees based on a percentage of gross revenues or on a per linear foot
basis, as well as post performance bonds or letters of credit. There can be no
assurance that the Company will not be required to post similar bonds in the
future, nor is there any assurance that, following the expiration of existing
franchises, fees will remain at their current levels. In many markets, the LECs
do not pay such franchise fees or pay fees that are substantially less than
those required to be paid by the Company. To the extent that competitors do not
pay the same level of fees as the Company, the Company could be at a competitive
disadvantage. However, the Telecommunications Act provides that any compensation
extracted by states and localities for use of public rights-of-way must be "fair
and reasonable," applied on a "competitively neutral and nondiscriminatory
basis" and be "publicly disclosed" by such government entity. Termination of the
existing franchise or license agreements prior to their expiration dates could
have a materially adverse effect on the Company.
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Employees
As of June 30, 1996, the Company employed a total of 199 individuals full
time. The Company believes that its future success will depend on its continued
ability to attract and retain highly skilled and qualified employees. None of
the Company's employees is subject to a collective bargaining agreement. The
Company believes that its relations with its employees are good.
Item 2. Properties
The Company leases a 23,925 square foot office space in Annapolis Junction,
Maryland for its corporate headquarters and network management center for
$28,647 per month as of June 30, 1996, subject to periodic increases in
specified amounts. The lease expires in 2002, but may be renewed for two
additional five-year terms. The Company's field office, housing its network
development and real estate development operations, is located in a 1,358 square
foot facility in Lombard, Illinois which the Company leases for $1,643 per
month, subject to periodic increases in specified amounts. This lease expires on
January 31, 1999.
As of June 30, 1996, the Company's various operating subsidiaries have leased
facilities for their offices and network nodes. The aggregate monthly rent on
these properties is approximately $136,444. The various leases expire on dates
ranging from February 28, 1998, to October 30, 2005. Most have renewal options.
Additional office space and equipment rooms will be leased as additional
networks are constructed and the Company's operations are expanded.
The Company believes that its insurance coverage on these properties is
adequate and in compliance with the related leases.
Item 3. Legal Proceedings
On July 24, 1996, the Company was notified that a complaint against a
subsidiary had been filed in the District Court of El Paso County, Texas wherein
the plaintiff alleged permanent paraplegia resulting from his fall into a
concealed basement during construction of the Company's El Paso network. At the
time of
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the incident giving rise to the lawsuit, the plaintiff was an employee of the
subcontractor hired by the Company's general contractor for this project. The
plaintiff seeks recovery from the Company's subsidiary and the general
contractor of at least $25 million in damages (plus punitive damages). Both the
Company and the general contractor have begun investigations into the facts
surrounding the incident and intend to defend against this suit vigorously.
However, based on the facts known as of the date hereof, the Company does not
believe it is likely, although it is possible, that the Company could be liable
for payment of all or a portion of the requested damages, which potential
liability could materially adversely affect the results of operation and
financial condition of the Company.
Additionally, the Company and its subsidiaries are currently parties to
routine litigation incidental to their business, none of which, individually or
in the aggregate, are expected to have a material adverse effect on the Company.
The Company and its subsidiaries continue to participate in regulatory
proceedings before the FCC and state regulatory agencies concerning the
authorization of services and the adoption of new regulations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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Part II
Item 5. Market for Common Equity and Related Stockholders Matters
---------------------------------------------------------
The Company's Common Stock is traded under the symbol "ACNS" in the
over-the-counter market. The Company's Common Stock has been quoted on the
Nasdaq National Market since May 22, 1996. From March 3, 1995 to May 21, 1996,
the Company's Common Stock was quoted on the Nasdaq SmallCap Market. Prior to
that time the Common stock was quoted in the pink sheets, although it was not
consistently quoted therein. On September 20, 1996, the high and the low bid
prices for the Company's Common Stock as reported by the Nasdaq National Market
were $11.13 and $10.75, respectively. As of September 20, 1996, there were
approximately 266 stockholders of record of the Company's Common Stock.
The following table sets forth the range of high and low bid quotations obtained
from the National Quotations Bureau for the Common Stock for the first two
quarters of the fiscal year ended June 30, 1995 and a portion of the third
quarter of the fiscal year ended June 30, 1995 (the period from January 1, 1995
through March 2, 1995, the day prior to the day the Common Stock began being
quoted on the Nasdaq SmallCap Market). The following table also sets forth the
high and low bid quotations as reported by the Nasdaq SmallCap Market for a
portion of the third quarter of the fiscal year ended June 30, 1995 (the period
from March 3, 1995 through March 31, 1995), the last quarter of the fiscal year
ended June 30, 1995, the first three quarters of the fiscal year ended June 30,
1996 and a portion of the fourth quarter of the fiscal year ended June 30, 1996
(the period from April 1, 1996 through May 21, 1996, the day prior to the day
the Common Stock began being quoted on the Nasdaq National Market). Finally, the
following table also sets forth the high and low bid quotations as reported by
the Nasdaq National Market for a portion of the fourth quarter of the fiscal
year ended June 30, 1996 (the period from May 22, 1996 through June 30, 1996).
The quotes as set forth below are believed to be representative of inter-dealer
quotations, without retail mark-up, mark-down or commission, and may not
necessarily represent actual transactions.
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High Bid Low Bid
Fiscal Year Ended June 30, 1995
- --------------------------------
First Quarter $ 4.50 $ 1.50
Second Quarter $ 4.25 $ 2.50
Third Quarter (through March 2, 1995) $ 4.75 $ 3.25
Third Quarter (March 3 through March 31, 1995) $ 4.75 $ 3.25
Fourth Quarter $ 4.00 $ 3.12
Fiscal Year Ended June 30, 1996
- --------------------------------
First Quarter $ 8.25 $ 3.75
Second Quarter $ 7.25 $ 5.37
Third Quarter $ 9.75 $ 5.00
Fourth Quarter (through May 21, 1996) $ 16.00 $ 8.00
Fourth Quarter (May 22 through June 30, 1996) $ 15.62 $ 12.00
The Company has paid no dividends on its Common Stock since its
inception and does not plan to pay dividends on its Common Stock in the
foreseeable future. Except as may be utilized to pay dividends payable on the
Series A-1 Preferred Stock and the Series B Preferred Stock, any earnings which
the Company may realize will be retained to finance the growth of the Company.
The agreements relating to the Company's secured debt financing prohibits the
Company from paying any dividends on its capital stock, except the Series A-1
Preferred Stock and the Series B Preferred Stock, and restrict the ability of
the
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Company's subsidiaries to transfer funds to the Company, unless in each case
certain financial covenants are met. The indentures relating to the Company's
Senior Notes prohibit the Company from paying any dividend on its capital stock
unless certain financial covenants are met. The Company's certificate of
incorporation prohibits the payment of dividends on the Common Stock unless all
dividends due and payable (including accrued dividends) on the Series A-1
Preferred Stock and the Series B Preferred Stock have been paid in full.
Item 6. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results and Operations
- --------------------------
Overview
ACSI provides or plans to provide a variety of telecommunications services to
IXCs and business and government end users in Tier II and Tier III markets
located principally in the southern United States. The Company began
construction of its first fiber optic network in Louisville in February 1994 and
began to provide commercial service on that network in November 1994. Between
August 1994 and June 30, 1996, the Company commenced construction of an
additional 23 networks, 17 of which (in addition to the Louisville network) are
currently operational. Since June 30, 1996 the Company has begun construction on
an additional six networks. The Company expects to provide commercial service in
the Amarillo, Baton Rouge, Central Maryland, Chattanooga, Colorado Springs, and
Corpus Christi markets by the end of the fourth calendar quarter of 1996 and in
the Dallas, Jacksonville, Kansas City, New Orleans, Shreveport and Tulsa markets
by March 31, 1997. The Company is actively developing necessary marketing and
engineering plans and pursuing required municipal authorizations to begin
construction of additional markets during 1996 and plans to have, subject to
receipt of additional necessary financing, a total of 50 networks in service or
under construction by June 30, 1998. The Company provides dedicated services to
IXCs and to those business and government end users whose volumes of voice and
data traffic are large enough to warrant paying a fixed monthly charge for a
specific capacity requirement rather than a usage-based variable charge. These
monthly charges vary according to the capacity of each circuit, the volume of
individual circuits ordered by the customer, the mileage of the circuits, the
need
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for any ancillary services and the term of the service contract, but are
typically less than the rates charged by the LECs for similar services, volumes
and terms. The Company focuses its sales efforts on the largest IXCs, with whom
it believes it has good customer relationships. Sales of dedicated services are
typically coordinated with the end user's IXC account team and billed by the IXC
rather than by the Company, thus providing the end user a single point of
contact for its entire long distance account and reducing the Company's
back-office overhead requirements. Currently, the Company offers these services
in all of its operational markets and plans to offer these services in all
markets where it constructs and operates networks.
The Company is developing and has begun offering high-speed data services,
including Internet services and frame relay. Internet services facilitate the
connectivity of corporate, institutional and governmental customers to the
Internet, a collection of data networks that communicate with one another using
common protocols. Frame relay is a cost-effective data transport solution for
LAN-to-LAN connectivity, legacy networks and client-server applications. ATM is
a high-bandwidth service offering virtual networking for voice, data and video
traffic, allowing a customer to use a single network for all three applications.
Customer charges include nonrecurring charges for installation and provisioning
and either flat rate or usage-based recurring charges based on network access
speed and the statistically guaranteed throughput rate of data for the
particular service order. The Company is deploying a broadband inter-city
backbone data network using leased lines with ATM switches that will connect the
Company's service markets, major data markets and Internet access points. The
same backbone network architecture can be utilized by the Company's enhanced
voice and local switched voice services for its inter-market connectivity and
networking requirements, which the Company believes will result in operational
efficiencies and lower costs while further enhancing opportunities for cross
marketing and bundling services to ACSI's customers.
ACSI is implementing its data communications network via high bandwidth
(DS-3) longhaul circuits leased from various interexchange carriers. Network
connectivity within each node will be via OC-3 bandwidth, enabling the
transparent migration of longhaul circuits to OC-3 capacity as needed.
Ultimately, the platform technology is capable of upgrading the backbone to
OC-12, without further modification. The Company's initial network phase
established data POPs
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in seven markets plus a link to ACSI's network management center in Maryland,
where the data network is monitored on a 24-hour-a-day basis. The Company
currently has 25 POPs in operation and plans at least 40 POPs by the end of
calendar year 1996.
The Company attained national service provider status for Internet services
in May 1996. Subsequently, the Company entered into agreements to interconnect
at two major Network Access Points ("NAPs") where national Internet service
providers interconnect their networks, allowing the multitude of local and
regional ISPs to exchange data and access the Internet globally, seamlessly and
transparently. In addition to these two initial NAP agreements at MAE-East
(Vienna, Virginia) and MAE-West (San Jose, California), ACSI is currently
negotiating for interconnection at three additional NAPs as well as negotiating
peering agreements and Network-to-Network Interfaces ("NNIs") with most major
interexchange carriers. The Company is deploying a coast-to-coast DS-3/OC-3
backbone and deploying domain name systems for Internet routing. As the Company
deploys additional data POPs (including POPs in all markets where ACSI has local
infrastructure), it intends to negotiate additional NNIs to facilitate the
exchange of data among other carriers' networks both domestically and abroad.
In addition, with a limited capital investment, the Company is developing
and during May 1996 began offering to small and mid-sized business and
government end users in its first five markets, enhanced voice messaging
services. These customers will be billed by the Company. The range of services
includes a voice messaging service for a flat monthly charge that may be bundled
with one or more additional features (such as automated attendant/call
screening, follow-me calling, remote fax and paging and e-mail notification) in
order to meet the customer's specific communications requirements. The
additional features will be offered for incremental fixed charges and/or usage
based charges. Management believes that successful marketing of these enhanced
voice messaging services will help build the Company's customer base and provide
relevant sales experience that can be leveraged into offering local switched
services. The Company may also offer these enhanced voice messaging services on
a retail or wholesale basis in markets where it has no network facilities,
resulting in increased revenue potential. However, the gross margins associated
with such revenues may be lower, resulting from the
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payment of LEC access charges in those non-ACSI markets. Additionally, unlike
traditional telephone service, customers have not yet become fully accustomed to
use of voice messaging services, and the demand for these services cannot be
predicted at this time.
As requisite interconnection agreements and regulatory approvals are obtained on
a state-by-state basis, the Company plans to provide local switched voice
services, such as local dial tone, termination of local calling, Centrex
services, PBX trunking and switched access services. These services will be
offered for appropriate fixed and usage-based charges at rates below those
charged by LECs for similar services. Where technically feasible and
economically practicable, the Company intends to deploy a hubbed switching
strategy by using Company-owned or leased switch capacity in a large, centrally
located market to provide services within that market and to serve several other
smaller markets located within the same geographical area via remote switching
modules. The Company believes that this strategy, if successfully implemented,
could reduce the capital expense associated with installing a fully configured
switch in each market, which market may otherwise be too small on its own to
justify the investment. By aggregating switched traffic from multiple small
markets through a central hub switch, the Company also can expect to realize
reduced operating expenses associated with switch engineering and maintenance.
The Company believes that providing dedicated and private line, high-speed data
and enhanced voice messaging services will enhance the Company's ability to
cross-market local switched voice services to its then existing customers at a
reduced cost. Finally, the Company is evaluating opportunities, on a
market-by-market basis, to establish mutually beneficial alliances with certain
entities that have local switching requirements, experience, facilities and/or
administrative back-office operations. Successful negotiation of switching
alliances may further reduce the Company's capital and operating expenses
associated with the provision of switched voice services as well as providing
additional market opportunities by utilizing embedded switching technology in
those markets or deploying incremental switches more efficiently.
The Company believes that its local digital fiber optic networks, coupled
with its inter-city broadband digital networks described above, will provide a
platform for the provision of a wide variety of voice, data and other
communications
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services at a reduced cost. While the Company may offer its services to
customers that are not directly connected to its network through resale of the
LEC's network, the Company believes that it can gradually migrate many of these
off-net customers to higher margin on-net accounts as it increases penetration
of all its services within a given building. As a result, the capital investment
of connecting additional buildings and customers to ACSI's network should become
more cost-effective. Over time, the Company believes it can increase its market
share of all of its service offerings as a result of the reliability and quality
of its networks, prompt customer service, competitive pricing, cross
marketing/bundling synergy's and new service offerings over its target 50-city
market area.
Initially, the Company expects to experience negative cash flow from operations
in each of its operating networks. The Company estimates that because of the
reduced operating costs associated with its smaller markets and IXC-focused
sales force, it can achieve operating cash flow breakeven (i.e., positive EBITDA
before overhead allocations) results on its networks within ten to 15 months
from the start of commercial service. Thereafter, the Company anticipates that
its profit margins will increase as each network is expanded to directly connect
additional customers to its backbone, and as off-net customers migrate to on-net
status (thus allowing the Company to retain the portion of customer charges
previously paid out to the LEC for resale of LEC facilities). The Company will
also experience initial negative cash flow from operations as additional
value-added services such as high-speed data, enhanced voice messaging and local
switched voice services are offered and until networks providing those services
reach operating cash flow breakeven.
Capital Expenditures; Operating Cash Flow
As of September 30, 1996 the Company is operating 18 digital fiber optic
networks, with an additional 12 networks under construction, and intends to
have, subject to receipt of necessary additional financing, 50 networks
operating or under construction by June 30, 1998. The costs associated with the
initial construction and operation of a network may vary greatly, primarily due
to market variations in geographic and demographic characteristics, and the
types of construction technologies which can be used to deploy the network.
Management estimates that construction of the initial one-to-three mile fiber
optic backbone and
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installation of related network transmission equipment for dedicated services
for each market will generally cost between $3.5 million and $6.0 million,
depending on the size of the market served. Including planned expansion routes,
total capital expenditures per network are estimated to average $6.0 million. In
addition to capital expenditure requirements, the Company incurs sales and
marketing (including sales commissions) and operating expenses and other
expenses such as property taxes and, in certain markets, franchise fees. Prior
to the completion of network construction, certain of these expenses, to the
extent they are related to pre-service construction, are capitalized. These
capitalized expenses, estimated by management to be between approximately
$500,000 and $1.0 million per network, are amortized over the anticipated life
of the network. These costs vary depending on the size of the market, the length
of time required to build-out the network and the rate of growth of the customer
base.
At such time as the Company develops, introduces and rolls out its
high-speed data, enhanced voice messaging and local switched services in its
target markets, additional capital expenditures and net operating costs will be
incurred. The amount of these costs will vary based on the number of customers
served and the actual services provided to the customers.
Although the Company is now generating revenues from 18 of its fiber optic
networks, on a consolidated basis it is still incurring negative cash flows due,
in part, to the funding requirements for the networks the Company is now
planning or has under construction or development and due, in part, to the
roll-out of its new data and voice services. The Company expects to continue to
incur negative cash flow for at least the next several years.
Results of Operations
Fiscal Year Ended June 30, 1996 Compared to Fiscal Year Ended June 30, 1995
Revenues
During the fiscal year ended June 30, 1996, the Company recorded revenues of
$3,415,137 as compared to revenues of $388,887 during the fiscal year ended June
30, 1995. Four of the largest IXCs accounted for approximately $1,708,000, or
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60%, of revenues for fiscal 1996 as compared to fiscal 1995 when three of the
largest IXCs accounts for approximately $329,000, or 85% of revenues for fiscal
1995 reflecting the Company's increased sales to end users.
Total Operating Expenses
Network development and operations expenses for fiscal 1996 increased to
$5,264,570 from $3,282,200 in fiscal 1995, reflecting significant increases in
personnel, network development and non-payroll operating expenses. These
increased costs were associated with developing and establishing centralized
engineering, circuit provisioning and network management functions, constructing
and initially operating the Company's competitive access networks and performing
market feasibility, engineering, rights-of-way and regulatory evaluations in
additional target cities, as well as the start up of two new business units to
provide advanced data service and switched voice services. Related personnel
costs increased to $4,464,358 in fiscal 1996 from approximately $1,341,100 in
fiscal 1995. Other operating expenses related to the development of prospective
new markets, which include expenses such as contract labor and legal expenses
and certain franchise fees, travel expenses, rent, utilities, charges and taxes,
decreased to $800,212 in fiscal 1996 from approximately $1,941,100 in fiscal
1995.
In fiscal 1996, selling, general and administrative expenses increased to
$13,463,775 from $4,597,600 in fiscal 1995. Related personnel costs increased to
$3,232,811 in fiscal 1996 from $1,974,200 in fiscal 1995, and corresponding
operating costs increased to $10,230,964 in fiscal 1996 from $2,210,900 in
fiscal 1995. This increase reflected costs associated with the Company's efforts
in significantly expanding its national and local city sales, marketing and
administrative staffs, as well as increased legal and other consulting expenses
associated with its aggressive programs for obtaining regulatory approvals and
certifications and providing quality network services.
Depreciation and amortization expenses increased to $3,078,426 in fiscal
1996 from $497,811 in fiscal 1995. During fiscal 1996 the Company increased its
capital assets to approximately $80,147,964 representing an increase from
$15,900,000 at the end of fiscal 1995. Non-cash stock compensation expense
decreased to $2,735,845 for fiscal 1996 from $6,419,412 for fiscal 1995. This
expense reflects the Company's accrual of non-cash costs for options and
warrants
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granted to key executives, employees and others arising from the difference
between the exercise price and the valuation prices used by the Company to
record such costs and from the vesting of those options and warrants. Certain of
these options had put rights and other factors that required variable plan
accounting in fiscal 1994 and fiscal 1995 but, at the end of fiscal 1995, the
Company renegotiated contracts with certain of its officers, establishing a
limit of $2,500,000 on the Company's put right obligations with respect to those
contracts. During fiscal 1996, the limit was further reduced to 2,000,000.
Interest and Other Expenses
Interest and other income increased to $4,409,734 for fiscal 1996 from $217,525
in fiscal 1995. Interest expense and other costs increased to $10,476,904 in
fiscal 1996 from $706,100 in fiscal 1995. The increase in interest income
reflects the significant increase in available funds from the Company's sale of
its 9% Series B Preferred Stock in June and November 1995, the Company's 13%
Senior Discount Notes Due 2005 (the "2005 Notes") in November 1995 and the
Company's 12 3/4% Senior Discount Notes Due 2006 (the "2006 Notes") in March
1996. The increase in interest and other expenses reflected the accrual of
interest related to the 2005 Notes and 2006 Notes and the Company's increased
borrowings under its secured financing facility with AT&T Credit Corporation
(the "AT&T Credit Facility"). Payments of principal and interest on the AT&T
Credit Facility will begin in calendar 1997, payments of interest on the 2005
Notes do not begin until November 2000 and payments of interest on the 2006
Notes do not begin until October 2001.
Debt conversion expense in fiscal 1995 totaled $385,000, reflecting expenses
incurred in connection with the conversion of certain of the Company's debt to
equity in September 1994. AT&T Credit Corporation's minority interest in the
Company's operating subsidiaries for which it provided funding, reduced
operating losses by approximately $412,606 for fiscal 1996, and by $48,655 for
fiscal 1995.
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Liquidity and Capital Resources
To date, the Company has funded the construction of its networks and its
operations with external financing. Prior to November 1995, the primary sources
of funds used to finance the building of existing networks and the completion of
new targeted networks were two private offerings of preferred stock completed in
October 1994 and June 1995, through which the Company raised approximately $39.6
million, and the AT&T Credit Facility, through which the Company has financing
commitments for $31.2 million. On November 14, 1995, the Company completed a
private offering of 190,000 Units consisting of $190.0 million in principal
amount of the 2005 Notes and the Warrants to purchase an aggregate of shares of
common stock at a price of $7.15 per share (as may be adjusted) from which the
Company received approximately $96.8 million in net proceeds. The 2005 Notes
will accrete to an aggregate principal amount of $190.0 million by November 1,
2000, after which cash interest will accrue and be payable on a semi-annual
basis. In November 1995 the Company also received net proceeds of approximately
$5.0 million from the private sale of an additional 50,000 shares of its
Preferred Stock to a principal stockholder and the exercise by that stockholder
of warrants to purchase 214,286 shares of Common Stock acquired in the Company's
June 1995 private placement. On March 21, 1996, the Company completed a private
offering of $120.0 million in principal amount of the 2006 Notes. The 2006 Notes
will accrete to an aggregate principal amount of $120.0 million by April 1,
2001, after which cash interest will accrue and be payable on a semi-annual
basis. The Company received net proceeds of approximately $61.8 million from the
sale of the 2006 Notes.
The Company intends to continue to use these funds towards completion of the
Company's 50-city business plan, including the development and construction of
fiber optic networks, the further development and introduction of new services,
including high-speed data, enhanced voice messaging and local switched services,
for expansion of the Company's existing networks and to fund negative operating
cash flow until cash flow break even. The Company has estimated that from July
1, 1996 through the end of the calendar year 1998, capital requirements for
implementation of its 50-city business plan are approximately $410.9 million. At
June 30, 1996, the Company had approximately $132.7 million in cash and cash
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equivalents available for this purpose. To meet additional capital requirements,
ACSI may be required to sell additional debt or equity securities or increase
its existing credit facility. The Company may also need to seek such additional
equity financing to maintain balance sheet and liquidity ratios required under
certain of its debt instruments. In addition, the Company in the past has
considered and expects to continue to consider potential acquisitions or other
strategic arrangements that may fit the Company's strategic plan. Although the
Company has had discussions concerning such potential acquisitions or
arrangements, to date no agreements have been reached with regard to any
particular transaction. Any such acquisitions or strategic arrangements that the
Company might consider are likely to require additional equity or debt
financing, which the Company will seek to obtain as required.
Preferred Stock. In October 1994, the Company completed the private placement of
186,664 shares of its 9% Series A Convertible Preferred Stock, par value $1.00
per share (which was later exchanged for Series A-1 Preferred Stock that is
convertible into 7,466,560 shares of Common Stock) with accompanying warrants to
purchase an aggregate of 2,674,506 shares of Common Stock, for an aggregate
consideration of $16.8 million (before deduction of estimated offering
expenses), including the conversion of $4.3 million of outstanding debt. Of the
warrants sold in October 1994, warrants to acquire 1,491,222 shares of Common
Stock were exercised by a principal stockholder for an aggregate exercise price
of approximately $100,000.
In June 1995, the Company completed a private placement of 227,500 shares of
its Series B Preferred Stock with accompanying warrants to purchase an aggregate
of 1,584,303 shares of Common Stock, for an aggregate consideration of
$22,750,000. In addition, in November 1995, the Company completed a private
placement of 50,000 shares of its Series B Preferred Stock together with the
exercise of accompanying warrants to purchase 214,286 shares of Common Stock to
a principal stockholder for an aggregate consideration of $5,000,000. The Series
B Preferred Stock is convertible into an aggregate of 9,910,718 shares of Common
Stock.
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Under the terms of the Preferred Stock, the Company is required to accrue
quarterly dividends at an annual rate of 9% of the face value of the Preferred
Stock outstanding. Such accrued dividends will be payable cumulatively beginning
January 1, 1998, subject to certain covenants contained in the indentures
relating to the 2005 Notes and the 2006 Notes, or earlier upon conversion into
Common Stock.
AT&T Credit Facility. In October 1994, the Company entered into the AT&T Credit
Facility pursuant to which AT&T Credit Corporation has agreed to provide up to
$31.2 million in financing for the development and construction of fiber optic
networks by the Company's subsidiaries. In connection with each loan made under
the AT&T Credit Facility, AT&T Credit Corporation purchases 7.25% of the capital
stock of the funded subsidiary, and ACSI pledges the other shares and the assets
of the subsidiary to AT&T Credit Corporation as security for the loan. During
fiscal 1995, the Company's subsidiaries in Louisville, Fort Worth, Greenville
and Columbia entered into loan agreements under the AT&T Credit Facility
providing for AT&T Credit Corporation funding of up to $19.8 million in the
aggregate, and in September 1995, the Company's subsidiary in El Paso entered
into a loan agreement under the AT&T Credit Facility providing for up to $5.5
million of AT&T Credit Corporation funding. As of June 30, 1996, an aggregate of
$15.0 million had been borrowed under these agreements.
Effects of New Accounting Standards
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to Be Disposed Of, which will require the Company to review for the
impairment of long-lived assets and certain identifiable intangibles to be held
and used by the Company whenever events or changes in circumstances indicate
that the carrying amount of any asset may not be recoverable. Adoption of SFAS
No. 121 is required in fiscal 1997.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which establishes a fair value-based method for financial
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accounting and reporting stock-based employee compensation plans. However, the
new standard allows compensation to continue to be measured by using the
intrinsic value based method accounting prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, but requires
expanded disclosures. SFAS No. 123 is effective in fiscal year 1997. The Company
has elected to continue to apply the intrinsic value-based method of accounting
for stock options.
While the Company does not know precisely the impact of adopting SFAS No. 121
and SFAS No. 123, the Company does not expect that the adoption of SFAS No. 121
and SFAS No. 123 will have a material effect on the Company's consolidated
financial statements.
Item 7. Financial Statements
The response to this Item is submitted as a separate section of this report
commencing on Page F-1.
Item 8. Changes In and Disagreements With Accountants on
------------------------------------------------
Accounting and Financial Disclosure
-----------------------------------
Not Applicable.
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Part III
The information required by Item 9 - Directors, Executive Officers,
Promotors and Control Persons; Compliance with Section 16(a) of the Exchange
Act; Item 10 - Executive Compensation; Item 11 - Security Ownership of Certain
Beneficial Owners and Management; and Item 12 - Certain relationships and
Related Transactions is incorporated into Part III of this Annual Report on Form
10-KSB by reference to the Company's Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on November 15, 1996.
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
a) EXHIBITS (Numbered in accordance with Item 601 of Regulation S-B)
<TABLE>
<CAPTION>
EXHIBIT NO. O
EXHIBIT INCORPORATION
NO. DESCRIPTION BY REFERENCE
======= =========== =============
<C> <S> <C>
3.1 Amended and Restated Certificate of Incorporation of the Company. #
3.2 Certificate of Designations of the Company's 9% Series A-l, Series
B-1, Series B-2, Series B-3 and Series B-4 Convertible Preferred Stock. **
3.3 Certificate of Elimination regarding the 9% Series A Preferred Stock **
3.4 Amended and Restated By-Laws of the Company, as amended. *
3.5 Governance Agreement dated November 8, 1995, between the Company and
the holders of its Preferred Stock. ++
3.8 Certificate of Correction dated March 11, 1996. #
3.9 Supplemental Governance Agreement dated February 26, 1996. #
4.1 Specimen Certificate of the Company's Common Stock. #
4.2 Specimen Certificate of the Company's 9% Series A-l Preferred Stock. ****
4.3 Specimen Certificate of the Company's 9% Series B-1 Preferred Stock. ****
4.4 Specimen Certificate of the Company's 9% Series B-2 Preferred Stock. ****
4.5 Specimen Certificate of the Company's 9% Series B-3 Preferred Stock. ****
4.6 Certificate of the Company's 9% Series B-4 Preferred Stock dated
November 14, 1995. ++
4.7 Indenture dated November 14, 1995, between the Company and Chemical
Bank, as trustee, relating to $190,000,000 in principal amount of
13% Senior Discount Notes due 2005, including the form of global note. ++
4.8 Initial Global Note dated November 14, 1995. ++
4.9 Warrant Agreement dated November 14, 1995, between the Company and
Smith Barney Inc. and Salomon Brothers Inc. +++
4.10 Initial Global Warrant dated November 14, 1995. +++
4.11 Indenture dated March 21, 1996, between the Company and Chemical Bank,
as trustee, relating to $120,000,000 in principal amount of 12 3/4%
Senior Discount Notes due 2006, including the form of global note. +++++
9.1 Standstill Agreement dated June 26, 1995, between the Company and
certain of its Preferred Stockholders. ****
9.2 Standstill Agreement dated November 8, 1995, between the Company and
certain of its Preferred Stockholders. ++
9.3 Voting Rights Agreement dated November 8, 1995, between the Company and
certain of its Preferred Stockholders. ++
9.4 Amendment to Voting Rights Agreement dated December 14, 1995. #
10.1 Exchange Agreement, dated June 1, 1994, between the Company and certain of
its Preferred Shareholders. *
10.2 Exchange Agreement, dated June 26, 1995, between the Company and its 9%
Series A Preferred Shareholders. **
10.3 Company's 1994 Stock Option Plan. *
10.4 Registration Rights Agreement dated July 1, 1992, between American
Lightwave, Inc. and persons named therein. *
10.5 Supplemental Registration Rights Agreement dated June 26, 1995. ****
10.6 Management Registration Rights Agreement dated June 30, 1995. ****
10.7 Registration Rights Agreement dated June 26, 1995, between the Company
and certain Preferred Stockholders. **
10.8 Form of Warrant Agreement issued to certain Preferred Stockholders on
June 26, 1995. ****
10.9 Form of $.01 Warrant Agreement. ****
10.10 Form of $1.79 Warrant Agreement. ****
10.11 Form of $2.25 Warrant Agreement. ****
10.12 Stockholders Agreement dated June 26, 1995, between the Company and
certain Preferred Stockholders. ****
10.13 Third Amended and Restated Employment Agreement between the Company
and Anthony J. Pompliano. ****
<PAGE>
10.14 Third Amended and Restated Employment Agreement between the Company
and Richard A. Kozak. ****
10.15 Third Amended and Restated Employment Agreement between the Company
and George M. Tronsrue, III. ****
10.16 Third Amended and Restated Employment Agreement between the Company
and Riley M. Murphy. ****
10.17 Third Amended and Restated Employment Agreement between the Company
and Douglas R. Hudson. ****
10.18 Second Amended and Restated Employment Agreement between the Company
and Ronald W. Kaiser. ****
10.19 Employment Agreement between the Company and Robert Ottman ****
10.20 Form of Non-Qualified Stock Option Certificates, as amended, issued to
Richard A. Kozak. ****
10.21 Form of Stock Option Certificates, as amended, issued to George M.
Tronsrue, III under employment agreement. ****
10.22 Form of Stock Option Certificates, as amended, issued to Riley M.
Murphy under employment agreement. ****
10.23 Form of Stock Option Certificates, as amended, issued to Douglas R.
Hudson under employment agreement. ****
10.24 Form of Stock Option Certificates, as amended, issued to Ronald W.
Kaiser under employment agreement. ****
10.25 Form of Stock Option Certificates, as amended, issued to Robert Ottman. ****
10.26 Agreement, dated March 2, 1994, between the Company and Gerard Klauer
Mattison & Co., as amended. *
10.27 Agreement, dated March 20, 1995, between the Company and Gerard Klauer
Mattison & Co., as amended. ****
10.28 Agreement, dated October 19, 1994, between the Company and Marvin
Saffian & Company. *
10.29 Lease Agreement for the Company's executive offices at 131 National
Business Parkway, Suite 100, Annapolis Junction, Maryland, as amended. ****
10.30 Loan and Security Agreement, dated October 17, 1994, between AT&T Credit
Corporation and American Communication Services of Louisville, Inc. *
10.31 Loan and Security Agreement, dated February 28, 1995, between AT&T Credit
Corporation and American Communication Services of Fort Worth, Inc. ****
10.32 Loan and Security Agreement, dated June 30, 1995, between AT&T Credit
Corporation and American Communication Services of Greenville, Inc. and
American Communication Services of Columbia, Inc. ****
10.33 Amendment No. 1 to Parent Support and Pledge Agreement (Louisville)
between the Company and AT&T Credit Corporation. ****
10.34 Amendment No. 1 to Parent Support and Pledge Agreement (Fort Worth)
between the Company and AT&T Credit Corporation. ****
10.35 Amendment No. 1 to Loan and Security Agreement between American
Communications Services of Louisville, Inc. and AT&T Credit Corporation. ****
10.36 Consulting Agreement, dated October 25, 1993, between the Company and
Thurston Partners, Inc. *
10.37 Consulting Agreement, effective July 1, 1994, between the Company and SGC
Advisory Services, Inc. *
10.38 Consulting Agreement, dated June 16, 1994, between the Company and Thurston
Partners. Inc. and Global Capital, Inc. *
10.39 Note Purchase Agreement, dated June 28, 1994. *
10.40 Investment Agreement dated October 21, 1994, between the Company and the
Purchasers named therein. *
10.41 Stock Purchase Agreement, dated October 17, 1994, between the Company and
AT&T Credit Corporation. *
10.41 American Communication Services of Louisville, Inc. Common Stock Purchase
Agreement, dated October 17, 1994. *
10.42 Stock Purchase Agreement, dated November 28, 1994, by and among the
Company, CitiLink Corp., and the former directors and shareholders of
CitiLink Corp., as amended August 3, 1995. ****
10.43 Stock Purchase Agreement, dated May 12, 1995, by and among the Company,
Piedmont Teleport, Inc., Randal Holcombe and Karen Holcombe, as amended. ****
10.44 Stock and Warrant Purchase Agreement, dated June 26, 1995, between the
Company and the Purchasers named therein. **
10.45 Form of Indemnity Agreement between the Company and its Director, as
- 2 -
<PAGE>
amended. ****
10.46 Assignment and Assumption Agreement dated June 21, 1995, between the
Company and Apex Investment Fund II, L.P. ****
10.47 Registration Agreement dated November 9, 1995, between the Company and
the Initial Purchasers. ++
10.48 Loan and Security Agreement, dated September 8, 1995, between AT&T Credit
Corporation and American Communications Services of E1 Paso, Inc. ++
10.49 Parent Support and Pledge Agreement (E1 Paso) dated September 8, 1995,
between the Company and AT&T Credit Corporation. ++
10.50 Letter Agreement dated November 14, 1995, between the Company and ING
Equity Partners, L.P.I, with respect to the purchase of 50,000 shares of
the Company's 9% Series B-4 Convertible Preferred Stock and warrants to
purchase 214,286 shares of Common Stock. ++
10.51 Warrant to Purchase Shares of American Communications Services, Inc.
Common Stock dated December 28, 1995, between the Company and Gerard
Klauer, Mattison & Co. ("GKM Warrant I"). ++
10.52 Warrant to Subscribe For and Purchase Common Stock of American
Communications Services, Inc. dated December 28, 1995, between the
Company and Gerard Klauer, Mattison & Co. ("GKM Warrant II"). ++
10.53 Amended 1994 Stock Option Plan of the Company. ++
10.54 Parent Pledge and Support Agreement dated as of October 17, 1994 between
the Company and AT&T Credit Corporation. *
10.55 American Communication Services of E1 Paso Inc. Common Stock Purchase
Agreement dated September 8, 1995. #
10.56 Form of Non-Qualified Stock Option Certificates, as amended, issued to E-1
Anthony J. Pompliano.
10.57 Employment Agreement between the Company and Harry J. D'Andrea. E-2
10.58 Master Amendment to Loan and Security Agreements dated November 30, 1995, E-3
among American Communication Services of Louisville, Inc., American
Communication Services of Fort Worth, Inc., American Communication
Services of Columbia, Inc., American Communication Services of
Greenville, Inc., American Communication Services of El Paso and AT&T
Credit Corporation.
10.59 Master Reaffirmation of Parent Pledge and Support Agreements dated E-4
November 30, 1995, between the Company and AT&T Credit Corporation.
10.60 Letter of Amendment to Loan and Security Agreements dated December 19, 1995, E-5
among American Communication Services of Fort Worth, Inc., American
Communication Services of Columbia, Inc., American Communication Services
of Greenville, Inc., American Communication Services of El Paso and AT&T
Credit Corporation.
10.61 Second Master Amendment to Loan and Security Agreements, Waiver and E-6
Equipment Notes Modification Agreement dated September 6, 1996 among
American Communication Services of Louisville, Inc., American
Communication Services of Fort Worth, Inc., American Communication
Services of Columbia, Inc., American Communication Services of
Greenville, Inc., American Communication Services of El Paso and AT&T
Credit Corporation.
10.62 Second Master Reaffirmation of Parent Pledge and Support Agreements dated E-7
September 6, 1996 between the Company and AT&T Credit Corporation.
10.63 Master Equipment Lease Agreement dated August 26, 1996, between the Company E-8
and AT&T Credit Corporation.
11.1 Statement re: computation of per share earnings (loss). E-9
16.1 Letter re: change in certifying accountant. ***
21.1 Subsidiaries of the Registrant. E-10
23.1 Consent of KPMG Peat Marwick LLP. E-11
27.1 Financial Data Schedules. E-12
99.1 Certain Factors to Consider in Connection with Forward Looking Statements. E-13
</TABLE>
- ------------------
* Previously filed as an exhibit to the Company's Registration Statement on
Form SB-2 (File No. 33-87200) and incorporated herein by reference thereto.
** Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated
- 3 -
<PAGE>
June 26, 1995, and incorporated herein by reference thereto.
*** Previously filed as an exhibit to the Company's Quarterly Report on Form
10-QSB for the fiscal quarter ended March 31, 1995, and incorporated herein
by reference thereto.
**** Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1995, and incorporated herein by
reference thereto.
+ Previously filed as an exhibit to the Company's Annual Report on Forrn
10-QSB for the fiscal year ended June 30, 1995, and the Company's Quarterly
Report on Form 10-QSB for the fiscal quarter ended September 30, 1995, both
of which are incorporated herein by reference thereto.
++ Previously filed as an exhibit to the Company's Registration Statement on
Form S-4 (File No. 33-80305) and incorporated herein by reference thereto.
+++ Previously filed as an exhibit to the Company's Registration Statement on
Form SB-2 (File No. 33-80673) and incorporated herein by reference thereto.
+++++Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated March 26, 1996 and incorporated herein by reference thereto.
# Previously filed as an exhibit to the Company's Registration Statement on
Form S-4 (File No. 333-3632) and incorporated herein by reference thereto.
b) Reports on Form 8-K
On April 11, 1996, the Company filed with the Securities and Exchange
Commission (the "Commission") a Current Report on Form 8-K dated March 26, 1996
relating to the completion of the Company's private placement of $120,000,000 of
the Company's 12-3/4% Senior Discount Notes due 2006 under Rule 144A of the
Securities Act of 1933, as amended. (Item 5).
On July 12, 1996, the Company filed with the Commission a Current Report on
Form 8-K dated June 17, 1996 relating to the filing on June 17, 1996 of a
Registration Statement on Form SB-2 with the Commission, and relating to the
filing on July 2, 1996 of Amendment No. 1 to the Form SB-2 with the Commission,
relating to the registration of the Company's Common Stock. (Item 5 and Item 7).
- 4 -
<PAGE>
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.
Dated: September 30, 1996.
AMERICAN COMMUNICATIONS SERVICES, INC.
/s/ Richard A. Kozak
By: Richard A. Kozak, 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/ ANTHONY J. POMPLIANO Chairman of the Board of Directors September 30, 1996
Anthony J. Pompliano
/s/ RICHARD A. KOZAK President and Chief Executive September 30, 1996
Richard A. Kozak Officer
(Principal Executive Officer)
/s/ HARRY J. D'ANDREA Chief Financial Officer September 30, 1996
Harry J. D'Andrea (Principal Financial and Accounting
Officer)
/s/ EDWIN M. BANKS Director September 30, 1996
Edwin M. Banks
/s/ PETER C. BENTZ Director September 30, 1996
Peter C. Bentz
/s/ BENJAMIN P. GIESS Director September 30, 1996
Benjamin P. Giess
/s/ GEORGE M. MIDDLEMAS Director September 30, 1996
George M. Middlemas
/s/ CHRISTOPHER L. RAFFERTY Director September 30, 1996
Christopher L. Rafferty
/s/ OLIVIER L. TROUVEROY Director September 30, 1996
Olivier L. Trouveroy
</TABLE>
<PAGE>
F-1
AMERICAN COMMUNICATIONS SERVICES, INC.
Consolidated Financial Statements
June 30, 1996 and 1995
INDEX TO FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report..................................................................................F-2
Consolidated Balance Sheets as of June 30, 1996 and 1995......................................................F-3
Consolidated Statements of Operations for the Years Ended June 30, 1996 and 1995..............................F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended
June 30, 1996 and 1995...................................................................................F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1996 and 1995..............................F-6
Notes to Consolidated Financial Statements....................................................................F-7
</TABLE>
<PAGE>
F-2
Independent Auditors' Report
The Board of Directors and Stockholders
American Communications Services, Inc.:
We have audited the accompanying consolidated balance sheets of American
Communications Services, Inc. and subsidiaries as of June 30, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 financial position of American
Communications Services, Inc. and subsidiaries as of June 30, 1996 and 1995, and
the results of their operations and their cash flows for the years then ended,
in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Washington, DC
September 27, 1996
<PAGE>
AMERICAN COMMUNICATIONS SERVICES, INC.
Consolidated Balance Sheets
June 30, 1996 and 1995
================================================================================
<TABLE>
<CAPTION>
Assets 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents (note 1) $ 132,706,427 20,350,791
Restricted cash (note 1) 3,751,706 752,000
Trade accounts receivable, net of allowance for doubtful accounts of $189,510
and
$8,570 at June 30, 1996 and 1995, respectively 735,260 350,436
Other current assets 1,003,465 92,325
- -----------------------------------------------------------------------------------------------------------------------
Total current assets 138,196,858 21,545,552
Networks, equipment and furniture, gross (note 2) 80,147,964 15,897,562
less: Accumulated depreciation (3,408,698) (330,272)
- -----------------------------------------------------------------------------------------------------------------------
76,739,266 15,567,290
Deferred financing fees, net of accumulated amortization of $732,775 and $64,458
at June 30, 1996 and 1995, respectively 8,334,183 292,113
Other assets 329,584 222,010
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ 223,599,891 37,626,965
=======================================================================================================================
Liabilities, Redeemable Stock, Options and Warrants, Minority Interest
and Stockholders' Equity
- -----------------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 21,317,346 3,843,167
Accrued financing fees - 1,542,255
Accrued employee costs 774,262 836,509
Other accrued liabilities 886,692 1,269,484
Notes payable - current portion (note 4) 252,809 146,083
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 23,231,109 7,637,498
Long term liabilities:
Notes payable (note 4) 184,129,361 3,652,085
Dividends payable (note 3) 4,942,313 1,070,985
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 212,302,783 12,360,568
- -----------------------------------------------------------------------------------------------------------------------
Redeemable stock, options and warrants (notes 6 and 11) 2,155,025 2,930,778
- -----------------------------------------------------------------------------------------------------------------------
Minority interest (note 4) 160,270 194,402
- -----------------------------------------------------------------------------------------------------------------------
Stockholders' equity (notes 4, 5 and 6):
Preferred stock, $1.00 par value, 186,664 shares designated as 9% Series A-1 Convertible
Preferred Stock authorized, issued and outstanding at June 30, 1996 and
1995,
respectively, convertible into 7,466,560 shares of common stock (notes 3 and 4) 186,664 186,664
Preferred stock, $1.00 par value, 277,500 shares authorized and designated as 9%
Series B Convertible Preferred Stock; 277,500 and 227,500 shares issued and
outstanding at June 30, 1996 and 1995, respectively, convertible into 9,910,718
shares of common stock (notes 3 and 5) 277,500 227,500
Common stock, $.01 par value, 30,000,000 shares authorized, 6,645,691 and 5,744,782
shares issued and outstanding at June 30, 1996 and 1995, respectively, (note 5) 65,837 56,827
Additional paid-in capital 55,975,078 42,411,448
Accumulated deficit (47,523,266) (20,741,222)
- -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 8,981,813 22,141,217
- -----------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (notes 1, 4, 6, 7, 8, and 9)
Total liabilities, redeemable stock, options and warrants, minority interest
and stockholders' equity $ 223,599,891 37,626,965
=======================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
AMERICAN COMMUNICATIONS SERVICES, INC.
Consolidated Statements of Operations
June 30, 1996 and 1995
<TABLE>
<CAPTION>
=====================================================================================================================
1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues (note 1) $ 3,415,137 388,887
- ---------------------------------------------------------------------------------------------------------------------
Operating expenses:
Network development and operations 5,264,570 3,282,183
Selling, general and administrative 13,463,775 4,597,615
Noncash stock compensation (note 6) 2,735,845 6,419,412
Depreciation and amortization 3,078,426 497,811
- ---------------------------------------------------------------------------------------------------------------------
Total operating expenses 24,542,616 14,797,021
Non-operating income (expenses):
Interest and other income 4,409,733 217,525
Interest and other expense (note 4) (10,476,904) (170,095)
Debt conversion expense (note 4) - (385,000)
- ---------------------------------------------------------------------------------------------------------------------
Loss before minority interest (27,194,650) (14,745,704)
Minority interest 412,606 48,055
- ---------------------------------------------------------------------------------------------------------------------
Net loss (26,782,044) (14,697,649)
Preferred stock dividends and accretion (note 3) (3,871,328) (1,070,985)
- ---------------------------------------------------------------------------------------------------------------------
Net loss to common stockholders $ (30,653,372) (15,768,634)
=====================================================================================================================
Net loss per common share $ (4.96) (3.30)
=====================================================================================================================
Average number of common shares outstanding (note 3) 6,185,459 4,771,689
=====================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
AMERICAN COMMUNICATIONS SERVICES, INC.
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended June 30, 1996 and 1995
================================================================================
<TABLE>
<CAPTION>
Series A-1 Series B
Preferred Stock Preferred Stock Preferred Stock Common Stock '
------------------ ------------------ --------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1994 1,700 $ 1,700,000 $ $ 2,755,005$
Preferred Stock exchange (note 12) (1,700) (1,700,000) 548,387
Set par value for common stock (note 5) 33,033
Acquisition of Piedmont Teleport, Inc. (note 62,000
13)
Write-ff of note receivable for common stock
Series A Preferred private placement, net of 186,664 186,664
related costs (note 3)
Series B Preferred private placement, net of 227,500 227,500
related costs (note 3)
Issuance of put right obligations (notes 6
and 9)
Cancellation of put right obligation (note
7)
Warrant and stock option exercises and stock 2,379,390 23,794
grant (note 6)
Establish limitation on common stock put
right obligation (note 6)
Series A Preferred Stock dividends accrued
(note 3)
Net loss
- --------------------------------------------------------------------------------------------------------------------
Balances at June 30, 1995 $ 186,664 $ 186,664 227,500 $ 227,500 5,744,782$ 56,827
Issuance of Series B-4 Preferred Stock (note 50,000 50,000
3)
Issuance of detachable warrants (note 4)
Warrants and stock options exercised (note 900,909 9,010
5)
Series A and B Preferred Stock dividends
accrued (note 3)
Cancellation of and adjustments to put right
obligations (note 6)
Stock compensation expense
Net loss
- ------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 1996 $ 186,664 $ 186,664 277,500 $ 277,500 6,645,691$ 65,837
==============================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Notes
Additional receivable Total
paid-in on sale of Accumulated stockholders
capital common stock deficit equity (deficit)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances at June 30, 1994 1,080,566 (2,750) (6,043,573) (3,265,757)
Preferred Stock exchange (note 12) 1,700,000
Set par value for common stock (note 5) (33,033)
Acquisition of Piedmont Teleport, Inc. (note 13)
Write-off of note receivable for common stock (2,750) 2750
Series A Preferred private placement, net of 15,009,461 15,196,125
related costs (note 3)
Series B Preferred private placement, net of 20,434,000 20,661,500
related costs (note 3)
Issuance of put right obligations (notes 6 (53,303) (53,303)
and 9)
Cancellation of put right obligation (note 487,500 487,500
7)
Warrant and stock option exercises and stock 349,030 372,824
grant (note 6)
Establish limitation on common stock put 4,510,962 4,510,962
right obligation (note 6)
Series A Preferred Stock dividends accrued (1,070,985) (1,070,985)
(note 3)
Net loss (14,697,649) (14,697,649)
- -----------------------------------------------------------------------------------------
Balances at June 30, 1995 42,411,448 (20,741,222) 22,141,217
Issuance of Series B-4 Preferred Stock (note 4,950,000 5,000,000
3)
Issuance of detachable warrants (note 4) 8,684,000 8,684,000
Warrants and stock options exercised (note 289,360 298,370
5)
Series A and B Preferred Stock dividends (3,871,328) (3,871,328)
accrued (note 3)
Cancellation of and adjustments to put right 775,753 775,753
obligations (note 6)
Stock compensation expense 2,735,845 2,735,845
Net loss (26,782,044) (26,782,044)
- -----------------------------------------------------------------------------------------
Balances at June 30, 1996 55,975,078 (47,523,266) 8,981,813
========================================
</TABLE>
<PAGE>
AMERICAN COMMUNICATIONS SERVICES, INC.
Consolidated Statements of Cash Flows
Years ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
========================================================================================================================
1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (26,782,044) (14,697,649)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 3,078,426 497,811
Interest deferral and accretion 10,447,687 -
Amortization of deferred financing fees 668,317 323,900
Provision for doubtful accounts 180,940 8,570
Loss attributed to minority interest (412,606) (48,055)
Noncash compensation, consultants and other expenses 2,735,845 6,419,412
Noncash debt conversion expense - 385,000
Changes in operating assets and liabilities:
Trade accounts receivable (565,764) (359,007)
Restricted cash related to operating activities - 200,000
Other current assets (911,140) (92,325)
Other assets (107,574) (26,545)
Accounts payable 17,474,179 3,170,885
Accrued financing fees (1,542,255) 1,542,255
Accrued employee costs (62,247) 719,333
Other accrued liabilities (382,792) 1,055,673
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities 3,818,972 (900,742)
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of net assets of Piedmont Teleport, Inc. - (19,135)
Purchase of equipment and furniture (2,966,987) (306,454)
Restricted cash related to network activities (2,999,706) (752,000)
Network development costs (57,889,227) (14,996,303)
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (63,855,920) (16,073,892)
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of notes payable 166,888,210 3,510,349
Payment of deferred financing fees (8,710,387) (310,175)
Warrant and stock option exercises 298,370 372,824
Issuances of Series A Preferred Stock, net of offering costs and conversion of bridge - 10,962,046
financing
Issuances of Series B Preferred Stock, net of offering costs 5,000,000 20,661,500
Issuance of warrants with 2005 Notes 8,684,000 -
Issuance of notes payable - stockholders - 250,000
Proceeds from sale of minority interest in subsidiaries 378,474 242,457
Payments of notes payable - stockholders (146,083) (481,692)
Payments of bridge notes - (1,000,000)
Payments of secured note - (75,000)
Payments of secured convertible notes - (77,281)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 172,392,584 34,055,028
- ------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 112,355,636 17,080,394
-
Cash and cash equivalents, beginning of year 20,350,791 3,270,397
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 132,706,427 20,350,791
========================================================================================================================
Supplemental disclosure of cash flow information - interest paid on all debt obligations $ 29,217 219,554
========================================================================================================================
Supplemental disclosure of noncash investing and financing activities:
Equipment financing $ 343,024 -
========================================================================================================================
Dividends declared in connection with Series A Preferred Stock $ 3,871,328 1,070,985
========================================================================================================================
Bridge financing, secured convertible notes, and notes payable - stockholders converted to
equity in connection with private placements $ - 4,080,079
========================================================================================================================
Cancellation of and adjustments to put right obligations $ (775,753) (487,500)
========================================================================================================================
Write off of note receivable from sale of common stock $ - 2,750
========================================================================================================================
Preferred stock exchange $ - 1,700,000
========================================================================================================================
Purchase of Piedmont Teleport, Inc. for common stock and related put right obligation $ - 192,303
========================================================================================================================
Negotiation of right-of-way agreement for option discount $ - 201,000
========================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
AMERICAN COMMUNICATIONS SERVICES, INC.
Notes to Consolidated Financial Statements
June 30, 1996 and 1995
================================================================================
(Continued)
F-1
(1) Basis of Presentation and Related Matters
Organization
The consolidated financial statements include the accounts of American
Communications Services, Inc. and its majority-owned subsidiaries (ACSI
or the Company). As discussed in note 4 to the consolidated financial
statements, all of the Company's subsidiaries are wholly owned with the
exception of the Louisville, Fort Worth, El Paso, Greenville, and
Columbia subsidiaries, in which the Company has a 92.75% controlling
ownership interest. All material intercompany accounts and transactions
have been eliminated in consolidation.
Business
ACSI constructs and operates digital fiber optic networks and offers
local telecommunications services to long distance companies and
business and government end users in selected target markets,
principally in the southern United States. The Company provides
nonswitched dedicated services, including special access, switched
transport and private line services. In addition to these dedicated
services, the Company is developing and has begun offering high speed
data services to business, government and other communications
carriers, including Internet service providers. The Company has also
begun offering on a limited basis enhanced voice messaging services and
plans to begin offering local switched voice services in the future.
The Company is a competitive local exchange carrier and is referred to
as a competitive access provider with respect to provision of dedicated
services.
To date, the Company has funded the construction of its networks and
its operations with external financing. Prior to November 1995, the
primary sources of funds were two Preferred Stock private offerings
completed in October 1994 and June 1995 (see note 3), and a credit
facility from AT&T Credit Corporation (see note 4). During the fiscal
year ended June 30, 1996, the Company raised additional funds through
an additional sale of Preferred Stock (see note 3), two private
offerings of Senior Notes, one of which included detachable warrants
and further borrowings under the AT&T Credit Corporation Credit
Facility (see note 4).
The Company has utilized and intends to continue to utilize funds from
its existing equity and debt financings towards the completion of its
business plan, including the development and construction of fiber
optic networks, the further development and introduction of new
services, including high speed data, enhanced voice messaging and local
switched voice services, for expansion of the Company's existing
networks and to fund negative operating cash flow until cash flow break
even. To meet its capital requirements, the Company may be required to
sell additional debt or equity securities or increase its existing
credit facility. The Company may also need to seek such additional
financing to maintain balance sheet and liquidity ratios required under
certain of its debt instruments.
<PAGE>
================================================================================
AMERICAN COMMUNICATIONS SERVICES, INC.
================================================================================
Notes to Consolidated Financial Statements
================================================================================
(1) Continued
Cash Equivalents
Cash equivalents generally consist of highly liquid debt instruments
with an initial maturity date of three months or less. At June 30, 1996
and 1995, cash equivalents consisting of government securities and
overnight investments are approximately $137,938,000 and $20,945,000,
respectively.
The Company has provided performance bonds and letters of credit in
various cities in connection with its operations, resulting in a
restriction of cash amounting to $2,342,000 and $752,000 at June 30,
1996 and 1995, respectively. The face amount of all bonds and letters
of credits was approximately $4,629,000 as of June 30, 1996.
In addition, as required under the AT&T Credit Facility (see note 4),
the Company has approximately $1,410,000 deposited in restricted cash
accounts at June 30, 1996.
Networks, Equipment and Furniture
Networks, equipment and furniture are stated at cost less accumulated
depreciation. Costs capitalized during the network development stage
include expenses associated with network engineering, design and
construction, negotiation of rights-of-way, obtaining legal and
regulatory authorizations and the amount of interest costs associated
with the network development. In 1996 and 1995, the Company capitalized
interest of approximately $3,051,000 and $536,000, respectively.
Provision for depreciation of networks, equipment and furniture is
computed using the straight-line method over the estimated useful lives
of the assets beginning in the month a network is substantially
complete and available for use and equipment and furniture are
acquired.
The estimated useful lives of the Company's principal classes of assets
are as follows:
Networks:
Fiber optic cables and installation costs 20 years
Telecommunications equipment 3-7 years
Interconnection and collocation costs 3-10 years
Leasehold improvements Life of lease
Furniture and fixtures 5 years
Deferred Financing Fees
Deferred financing fees include commitment fees and other costs related
to certain debt financing transactions and are being amortized using
the effective interest method over the initial term of the related
debt.
<PAGE>
(1) Continued
Revenue Recognition
Revenue is recognized as services are provided. Billings to customers
for services in advance of providing such services are deferred and
recognized as revenue when earned.
Earnings (Loss) Per Common Share
The computation of earnings (loss) per common share is based upon the
weighted average number of common shares outstanding. The effect of
including common stock options and warrants as common stock equivalents
would be anti-dilutive and is excluded from the calculation of loss per
common share.
Income Taxes
Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities and
loss carryforwards and tax credit carryforwards for which income tax
benefits are expected to be realized in future years. A valuation
allowance is established to reduce deferred tax assets if it is more
likely than not that all, or some portion, of such deferred tax assets
will not be realized. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment
date.
Reclassifications
Certain reclassifications have been made to the 1995 consolidated
financial statements to conform to the 1996 presentation. Such
reclassifications had no effect on net loss or total stockholders'
equity.
Effect of New Accounting Standards
In March 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of, which will require the Company
to review for the impairment of long-lived assets and certain
identifiable intangibles to be held and used by the Company whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Adoption of SFAS No. 121 is required
in fiscal year 1997.
In October 1995, the FASB issued SFAS No. 123, Accounting for
Stock-Based Compensation, which establishes a fair value based method
for financial accounting and reporting for stock-based employee
compensation plans. However, the new standard allows compensation to
continue to be measured by using the intrinsic value based method of
accounting prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, but requires expanded
disclosures. SFAS No. 123 is effective in fiscal year 1997.
<PAGE>
(1) Continued
While the Company does not know precisely the impact that will result
from adopting SFAS No. 121 and SFAS No. 123, the Company does not
expect the adoption of SFAS No. 121 or SFAS No. 123 to have a material
effect on the Company's consolidated financial position or results of
operations.
Use of Estimates
The preparation of the consolidated 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 dates of the consolidated financial statements and
reported amounts of revenue and expenses during the reporting period.
Actual results may differ from those estimates.
Concentration of Credit Risk
The Company receives a significant portion of its revenues from a small
number of major customers, particularly the long distance
telecommunications companies that service the Company's markets. For
the years ended June 30, 1996 and 1995, approximately 60% and 85%,
respectively, of the Company's revenues were attributable to services
provided to four and three of the largest long distance
telecommunications companies, respectively. The loss of any one of
these customers could have an adverse material impact on the Company's
revenues.
<TABLE>
<CAPTION>
(2) Networks, Equipment and Furniture
Networks, equipment and furniture consists of the following at June 30:
<S> <C> <C>
Networks and telecommunications equipment $76,853,865 15,570,450
Furniture and fixtures 1,982,910 188,534
Computer software 948,848 56,485
Leasehold improvements 362,341 82,093
80,147,964 15,897,562
Less - accumulated depreciation and amortization 3,408,698 330,272
Total, net of accumulated depreciation and amortization $ 76,739,266 15,567,290
</TABLE>
<PAGE>
(3) Private Placements
In October 1994, the Company completed a private placement of its 9%
Series A Convertible Preferred Stock, $1.00 par value (the "Series A
Preferred Stock"). There were 138,889 shares issued for cash at $90 per
share resulting in proceeds of $10,962,046, net of placement agent
commissions and related placement fees and costs.
In addition, bridge financing was converted and several other
obligations were retired with proceeds of the offering. See note 4 to
the consolidated financial statements. Further, as discussed in note 6
to the consolidated financial statements, certain parties obtained
warrants to purchase shares of the Company's common stock. In June
1995, the Series A Preferred Stock was exchanged for an identical
number of 9% Series A-1 Convertible Preferred Stock, $1.00 par value.
(the "Series A-1 Preferred Stock").
In June 1995, the Company completed a private placement of its 9%
Series B-1 Convertible Preferred Stock (the "Series B-1 Preferred"), 9%
Series B-2 Convertible Preferred Stock (the "Series B-2 Preferred") and
9% Series B-3 Convertible Preferred Stock (the "Series B-3 Preferred"),
each having a par value of $1.00 per share. There were 227,500 shares
issued for cash at $100 per share with proceeds of $20,661,500, net of
placement agent commissions and related placement fees and costs. In
November, 1995, 50,000 shares of 9% Series B-4 Convertible Preferred
Stock (the "Series B-4 Preferred") were issued for cash of $100 per
share resulting in proceeds of $5,000,000. The Series B-1 Preferred,
the Series B-2 Preferred, the Series B-3 Preferred and the Series B-4
Preferred are hereafter collectively referred to as the "Series B
Preferred Stock." The Series A-1 Preferred Stock and the Series B
Preferred Stock are hereafter collectively referred to as the
"Preferred Stock." Further, as discussed in note 6 to the consolidated
financial statements, certain parties obtained warrants to purchase
shares of the Company's common stock.
The Company's Preferred Stock and common stock vote as a single class
(except with respect to the election of directors and certain other
transactions and matters) with the common stock entitled to one vote
per share and the Preferred Stock entitled to one vote for each share
of common stock into which it is convertible. At June 30, 1996, the
outstanding Series A-1 Preferred Stock was convertible into 7,466,560
shares of common stock and the outstanding Series B Preferred Stock was
convertible into 9,910,718 shares of common stock.
Pursuant to the Company's certificate of incorporation, the board of
directors is currently comprised of seven directors. The holders of
common stock are entitled to elect four directors and the holders of
the Preferred Stock are entitled to elect three directors. In addition,
certain transactions and matters require the consent of the holders of
at least 75% of the shares of Preferred Stock voting as a separate
class.
Certain holders of the Company's Preferred Stock and common stock have
entered into a Voting Rights Agreement pursuant to which such
stockholders have agreed to vote their shares of Preferred Stock and
common stock for the election of directors designated by the majority
Preferred stockholders.
<PAGE>
(3) Continued
In connection with its Series A-1 and Series B Preferred Stock, the
Company has recorded approximately $4,942,000 and $1,071,000 as of June
30, 1996 and 1995, respectively, as a reduction in additional paid-in
capital, for the payment of anticipated dividends. The Company's
certificate of incorporation requires the Company to accrue dividends,
on a quarterly basis, at an annual rate of 9% of the face value of the
Series A-1 and B Preferred Stock.
Although the Board of Directors of the Company has not taken any formal
action as of June 30, 1996, as a condition of the aforementioned
provisions of the certificate of incorporation, the dividends have been
deemed declared and properly reflected in the accompanying consolidated
financial statements as of June 30, 1996 and 1995. Pursuant to the
Company's certificate of incorporation, dividends accrued shall be paid
cumulatively, beginning December 31, 1997, or earlier upon conversion.
Upon such conversion prior to December 31, 1997, the Company may, in
lieu of accrued and unpaid dividends, issue promissory notes to the
holders of the Preferred Stock. The Company expects to issue promissory
notes to the holders on January 1, 1998 for dividends accrued, if
conversion has not occurred, subject to restrictions included in the
Senior Discount Note Indentures. Conversion may occur at any time at
the holder's option or automatically, upon a certain qualifying
issuance of common stock. As of June 30, 1996, no conversions had
occurred.
<TABLE>
<CAPTION>
(4) Debt
<S> <C> <C>
Long-term debt at June 30 consists of the following:
1996 1995
Notes payable - stockholders at 10-15%, maturing $ - $ 146,083
September 15, 1995
AT&T Credit Corporation equipment and working
capital financing facility 14,971,122 3,652,085
2006 Senior Discount notes, interest at 12 3/4%,
maturing April 1, 2006 66,635,887 -
2005 Senior Discount notes, interest at 13%,
maturing November 1, 2005 102,432,137 -
Secured equipment note payable, interest of 9.98%, payable in 36 equal
monthly installments of $2,766, including interest commencing March 1,
1996 343,024 -
Total Long-term debt 184,382,170 3,798,168
Less current portion 252,809 146,083
------- -------
$184,129,361 3,652,085
</TABLE>
<PAGE>
(4) Continued
Principal payments for each of the years from 1997 to 2001 and
thereafter, are due as follows at June 30, 1996:
Year ending June 30, Amount
-------------------------------------------------------------
1997 $ 252,809
1998 712,372
1999 861,939
2000 1,323,195
2001 1,902,943
Thereafter 179,328,912
-------------------------------------------------------------
$ 184,382,170
--------------
Notes Payable - Stockholders
At June 30, 1995, the Company had a total of $146,083 in notes payable
to stockholders which matured and were repaid on September 14, 1995.
AT&T Credit Corporation Equipment and Working Capital Financing
Facility
In October 1994, the Company entered into the AT&T Credit Facility
pursuant to which AT&T Credit Corporation has agreed to provide up to
$31.2 million (including a reserve for deferred interest) in financing
for the development and construction of fiber optic networks by the
Company's subsidiaries. In accordance with the terms of the facility,
the Company is obligated to use at least 10% of the borrowed funds for
purchases of equipment manufactured by AT&T or its affiliates. Pursuant
to the AT&T Credit Facility, during fiscal 1995 the Company's
subsidiaries in Louisville, Fort Worth, Greenville and Columbia entered
into loan agreements with AT&T Credit Corporation providing for up to
$19.8 million in loans secured by the assets of such subsidiaries. As
of June 30, 1995, an aggregate of approximately $3.7 million had been
borrowed under these agreements. Subsequent to June 30, 1995, the
Company's subsidiary in E1 Paso entered into a separate loan agreement
with AT&T Credit Corporation pursuant to the AT&T Credit Facility
providing for up to an aggregate of approximately $5.5 million in loans
secured by its assets. As of June 30, 1996, outstanding borrowings
under the AT&T Credit Facility totaled approximately $15 million,
including accrued interest of approximately $1.4 million. Interest
rates currently applicable to the loans range from 11.32% to 13.59%.
<PAGE>
(4) Continued
The loans under the AT&T Credit Facility are secured by all of the
assets of the respective borrowing subsidiary, including its installed
fiber optic system and other equipment. The principal of borrowed
amounts is payable in 28 consecutive quarterly installments, beginning
with the ninth quarter after the date of the loan. The principal of
borrowed amounts may be prepaid in certain circumstances, and must be
prepaid along with a premium in other circumstances. Interest is due
quarterly. At the borrowing subsidiary's option, the interest rate may
be fixed or variable. The borrowing subsidiary has a one-time option to
convert all variable rate loans to fixed rate loans. Upon certain
events of default, additional interest ranging from 2% to 4% will
become payable. Interest may generally be deferred so long as it would
not cause the outstanding principal balance to exceed the commitment
amounts for Capital Loans and for Equipment Loans (as defined in the
loan documents). To date, the Company has elected to defer all interest
due under the loans. In addition, the AT&T Credit Facility includes
covenants, some of which impose certain restrictions on the Company and
its subsidiaries including restrictions on the declaration or payment
of dividends, the conduct of certain activities, certain capital
expenditures, the creation of additional liens or indebtedness, the
disposition of assets, transactions with affiliates' and extraordinary
corporate transactions. The AT&T Credit Facility imposes restrictions
on the ability of those subsidiaries of ACSI that incur indebtedness
thereunder to transfer funds to ACSI in the form of dividends or other
distributions. The AT&T Credit Facility also imposes restrictions on
the ability of such subsidiaries to raise capital by incurring
additional indebtedness. These restrictions could limit ACSI's ability
to meet its obligations with respect to the 2005 and 2006 Senior
Discount Notes. The various agreements which comprise the AT&T Credit
Facility terminate on dates ranging from October 1996 to May 1997.
Pursuant to the AT&T Credit Facility, AT&T Credit Corporation purchased
7.25% of the outstanding capital stock of each of the Company's
operating subsidiaries for which it provided financing. The Company was
required to pledge its interest in these subsidiaries to AT&T Credit
Corporation as a condition to each loan. Under certain circumstances,
this pledge agreement also restricts the Company's ability to pay
dividends on its capital stock.
2005 Senior Discount Notes and 2006 Senior Discount Notes
On November 14, 1995, the Company completed an offering of 190,000
Units (the "Units") consisting of $190,000,000 principal amount of 13%
Senior Discount Notes due 2005 (the "2005 Notes") and warrants to
purchase 2,432,000 shares of the Company's common stock at a price of
$7.15 per share (the "Warrants"). The 2005 Notes will accrete at a rate
of 13% compounded semi-annually to an aggregate principal amount of
$190,000,000 by November 1, 2000. Thereafter, interest on the 2005
Notes will accrue at the annual rate of 13% and will be payable in cash
semi-annually. The Company received net proceeds of approximately
$96,826,000 from the sale of the Units. The value ascribed to the
Warrants was $8,684,000.
<PAGE>
(4) Continued
On March 21, 1996, the Company completed an offering of $120,000,000 of
12 3/4% Senior Discount Notes due 2006 (the "2006 Notes") resulting in
net proceeds of approximately $61,800,000. The 2006 Notes will accrete
at a rate of 12 3/4% compounded semi-annually, to an aggregate
principal amount of $120,000,000 by April 1, 2001. Thereafter, interest
on the 2006 Notes will accrue at the annual rate of 12 3/4% and will be
payable in cash semi-annually on April 1 and October 1, commencing on
October 1, 2001. The 2006 Notes will mature on April 1, 2006.
The 2005 Notes and 2006 Notes (collectively the "Notes") are general
unsubordinated and unsecured obligations of the Company. The Company's
subsidiaries have no obligation to pay amounts due on the Notes and do
not guarantee the notes. Therefore, the Notes are effectively
subordinated to all liabilities of ACSI's subsidiaries, including trade
payables. Any rights of the Company and its creditors, including the
holders of the Notes, to participate in the assets of any of the
Company's subsidiaries upon any liquidation or reorganization of any
such subsidiaries will be subject to the prior claims of that
subsidiary's creditors.
The Notes are subject to certain covenants which, among other things,
restrict the ability of ACSI and certain of its subsidiaries to incur
additional indebtedness, pay dividends or make distributions.
Debt Conversion
On June 28, 1994, the Company issued a total of $4,300,720 principal of
its 15 percent convertible bridge notes due December 31, 1994,
including $1,300,720 issued to then existing stockholders. During 1995,
the holders of $3,300,720 of these convertible bridge notes converted
the notes plus accrued interest thereon of $35,754 into 37,073 shares
of Series A Preferred Stock. The remaining $1,000,000 principal amount
was retired by cash payment from the proceeds of the Series A Preferred
Stock private offering (see note 3). The Company recorded noncash debt
conversion expense of $231,000 associated with the related unamortized
financing fees.
At June 30, 1994, the Company had outstanding loans from affiliates
with an aggregate principal balance of $606,640, which were notes
secured by certain assets of the Company. These loans bore interest at
15% per annum and had a scheduled maturity date of December 31, 1994.
In October 1994, the holders of $529,359 principal amount of these
notes, plus accrued interest thereon of $29,368, converted the notes
into 7,924 shares of Series A Preferred Stock. The remaining principal
on the secured convertible notes of $77,281 was retired by a cash
payment from the proceeds of the Series A Preferred Stock private
placement offering (see note 3). The Company recorded noncash debt
conversion expense of $154,000 equal to the premium to induce
conversion.
<PAGE>
(4) Continued
In August 1994, the Company borrowed $250,000, at a rate of 15% per
annum from an affiliate that was payable on demand. In October 1994,
this note was converted into 2,778 shares of Series A Preferred Stock.
(5) Stockholders' Equity
Common Stock
In fiscal 1995, the Company established a par value of $.01 for its
issued and outstanding common stock.
Preferred Stock
<TABLE>
<S> <C>
Pursuant to the Series B Preferred Stock offering, as described in note
3, four classes of Series B Preferred Stock have been designated and
issued. The composition of the Series B Preferred Stock at June 30,
1996 is as follows:
Preferred Stock, $1.00 par value, 100,000 shares designated as 9% Series $ 100,000
B-1 Convertible Preferred Stock authorized, issued and outstanding
Preferred Stock, $1.00 par value, 102,500 shares designated as 9% Series
B-2 Convertible Preferred Stock authorized, issued and outstanding 102,500
Preferred Stock, $1.00 par value, 25,000 shares designated as 9% Series B-3 25,000
Convertible Preferred Stock authorized, issued and outstanding
Preferred Stock, $1.00 par value, 50,000 shares designated
as 9% Series B-4 Convertible Preferred Stock authorized, issued and outstanding 50,000
---------------------------------------------------------------------------------------------------
Total $ 277,500
----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(6) Stock Options and Stock Purchase Warrants
The Company has a stock option plan which provides for the granting of
options to officers, employees, and consultants of the Company to
purchase shares of its common stock within prescribed periods.
In 1994, the Company entered into employment agreements with five
executive officers. Pursuant to the agreements, as amended, such
officers have been granted options to purchase an aggregate of
4,149,834 shares of common stock of the Company at exercise prices
ranging from $.875 to $3.40 per share. The options vest at various
dates as specified in the employment agreements with 4,069,834 of the
options vesting on specific dates ranging from November 1, 1993 to
November 4, 2001, and 80,000 of such options which vested upon the
occurrence of certain specified performance milestones. When the
employment of these individuals with the Company terminates, these
individuals have the right to sell certain of their shares to the
Company (the put right) for a price equal to fair market value. On June
26, 1995, the employment agreements were amended to limit the purchase
price paid by the Company pursuant to the put right to a maximum of
$2,500,000, which amount is subject to further reductions based on the
employee's sale of stock. During fiscal 1996, the limit was further
reduced to $2,000,000.
The Company has also issued 500,000 options to a supplier to purchase
stock at 90% of the fair value at the date of exercise. Such options
give the supplier the right to sell the stock acquired back to the
Company at fair value under certain circumstances. None of the options
have been exercised to date and they expire in December, 1997.
Stock option activity for the years ended June 30, 1996 and 1995 is as
follows:
Number Price Per Share
-----------------------------------------
Balances, June 30, 1994 858,875 $ .875 - 3.10
Granted 4,935,314 .875 - 4.00
Exercised - - -
Canceled (100,000) .875 - 4.00
------------------------------------------------------------------------
Balances, June 30, 1995 5,694,189 .875 - 4.00
Granted 1,225,786 2.25 - 6.27
Exercised (104,699) .875 - 4.57
Canceled (70,462) 2.25 - 6.27
------------------------------------------------------------------------
Balances, June 30, 1996 6,744,814 $ .875 - 6.27
- -----------------------------------------------------------------------------
<PAGE>
(6) Continued
As of June 30, 1996, a total of 4,681,343 options are vested and
exercisable. Noncash compensation expense associated with employee
stock options amounted to $2,735,845 and $6,382,000 in 1996 and 1995,
respectively.
During 1995 and 1996 in connection with the Series A-1 and Series B
Preferred Stock private placements and related bridge note conversions,
warrants for 4,367,078 shares of common stock were issued at prices
ranging from $.01 to $3.10. In 1996 and 1995, 1,189,958 and 2,299,967
of such warrants were exercised during the year for proceeds totaling
approximately $11,899 and $305,000, respectively. In 1996, as part of
the issuance at the 2005 Notes, detachable warrants to purchase
2,432,000 shares of the Company's common stock at a price of $7.15 per
share were issued.
At June 30, 1995, warrants for 408,391 shares at a price of $.875 per
share granted pursuant to consulting and subordinated note agreements,
during 1994 and 1995, were outstanding. During 1996, 150 of such
warrants were exercised.
At June 30, 1996, the remaining warrants outstanding are as follows:
<TABLE>
<CAPTION>
Number Price Per Share
---------------------------------------------
<S> <C> <C>
Pursuant to consulting and subordinated note
agreements, expiration through September 13, 408,241 $ 0.875
1996
Series A and Series B Preferred Stock placements 877,153 .01 - 3.10
2005 Senior Discount Notes offering 2,432,000 7.15
------------------------------------------------------------------------------------------------
Total 3,717,394 $ .875 - 7.15
------------------------------------------------------------------------------------------------
</TABLE>
The gross proceeds that would be received by the Company on the
exercise of all outstanding options and warrants is approximately
$33,700,000.
<PAGE>
(7) Commitments and Contingencies
Certain Agreements
The Company has signed nonexclusive license agreements with various
utility and inter-exchange carrier companies, including an affiliate of
one of the country's three largest long distance carriers, to install
and maintain fiber cable systems for the Company's use for periods up
to 15 years or more, upon exercising of extensions available to the
parties. Under these agreements, the Company has use of these
rights-of-way for its telecommunications systems, and may be entitled
to certain payments for providing telecommunications service, subject
to its satisfactory performance of certain agreed upon requirements.
Retirement Plan
On February 1, 1996, the Company began sponsoring the American
Communications Services, Inc. 401(k) Plan (the "Plan"), a defined
contribution plan. All individuals employed on February 1, 1996 were
eligible to participate. Participation to all other employees is
available after three months of full-time equivalent service. The
Company contributions under the Plan are discretionary and may be as
much as 6% of an employee's gross compensation subject to certain
limits. Total expense under the Plan amounted to approximately $30,000
in 1996.
Legal Proceedings
On July 24, 1996, the Company was named as a codefendant in a lawsuit
arising from a personal injury sustained during the construction of one
of its networks. At the time of the incident giving rise to the
lawsuit, the plaintiff was an employee of a subcontractor hired by the
Company's general contractor for the construction project. The lawsuit
seeks recovery from the Company and the general contractor of at least
$25 million plus punitive damages. The Company, the general contractor,
and the Company's insurance carrier have begun investigations into the
facts surrounding the incident and intend to defend against this suit
vigorously.
In addition, the Company is a party to certain litigation and
regulatory proceedings arising in the ordinary course of business. In
the opinion of management, based upon the advice of counsel, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position.
<PAGE>
(8) Leases
The Company is obligated under various noncancelable operating leases
for office and node space as well as office furniture. The minimum
future lease obligations under these noncancelable operating leases as
of June 30, 1996 are, approximately, as follows:
Year ending June 30, Amount
----------------------------------------------------------------
1997 $ 1,566,000
1998 1,458,000
1999 1,347,000
2000 1,245,000
2001 1,576,000
Thereafter 3,011,000
----------------------------------------------------------------
$ 10,203,000
-------------
Rent expense for the years ended June 30, 1996 and
1995 was approximately $1,166,000 and $200,000, respectively.
(9) Related-Party Transactions
In October 1993, the Company executed a financial consulting and
advisory agreement with a related party for a period of six months. In
consideration, the related party received warrants to purchase 300,000
shares of ACSI common stock exercisable at $.875 per share if a future
equity financing was successfully completed. The related party had the
right to resell the shares to ACSI for $2.50 per share two years from
the date of the agreement. At June 30, 1994, the Company provided an
accrual of $487,500 for this redemption privilege at the redemption
price net of the exercise price. In June 1995, the Company's
obligations to repurchase the shares were assumed by a stockholder of
the Company. Accordingly, as of June 30, 1995, the $487,500 share value
has been transferred from redeemable stock, options, and warrants to
additional paid-in-capital.
On June 16, 1994, the Company entered into a financial consulting
agreement for capital raising activities with an entity controlled by
significant stockholders of the Company. Under this agreement, the
Company paid $153,750 for consulting services rendered through the date
of the agreement relating to placement of the Convertible Bridge Notes.
Additionally, the Company agreed to pay a $7,500 monthly consulting fee
for a two year period beginning on the closing date of the first
private placement. During 1996 and 1995, the Company paid $90,000 and
$67,500 under this arrangement, respectively.
<PAGE>
(9) Continued
Effective July 1, 1994, the Company engaged SGC Advisory Services, Inc.
("SGC") as a financial and business consultant for three years. SGC is
an affiliate of Steven G. Chrust, a former director of the Company.
Pursuant to the agreement, the Company will compensate SGC as follows:
(1) a monthly fee of $5,000; and (2) options to purchase up to 50,000
shares of the Company's Common Stock which vest on July 1, 1997, and
are exercisable on or before July 1, 1999. At the end of each month of
the term of the agreement, SGC earns a credit against the exercise
price of those options equal to 1/36th of the exercise price. The
shares issued upon exercise of the options will be priced at $2.25 per
share and the shares issued will have piggy back registration rights.
(10) Income Taxes
Temporary differences and carryforwards that give rise to deferred tax
assets and liabilities at June 30 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------------
<S> <C> <C>
Deferred tax assets:
Capitalized start-up and other costs $ 3,733,898 4,163,941
Stock options - noncash compensation 3,848,128 2,768,488
Net operating loss carryforwards 12,181,162 1,149,755
Other accrued liabilities 496,634 454,391
-------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 20,259,822 8,536,575
Less: valuation allowance 18,304,754 8,291,380
-------------------------------------------------------------------------------------------------------
Net deferred tax assets 1,955,068 245,195
Deferred tax liabilities - fixed assets depreciation and amortization 1,955,068 245,195
------------------------------------------------------------------------------------------------------------
Net deferred tax assets (liabilities) $ - -
----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(10) Continued
The valuation allowance for deferred tax assets as of July 1, 1995 and
1994 was $8,291,380 and $2,375,327, respectively. The net change in the
total valuation allowance for the year ended June 30, 1996 and 1995 was
an increase of $10,013,374 and $5,916,053, respectively. The valuation
allowances at June 30, 1996 and 1995 are a result of the ultimate
utilization of the tax benefits related to the deferred tax assets. The
utilization of the tax benefits associated with net operating losses of
approximately $31,000,000 at June 30, 1996 is dependent upon the
Company's ability to generate future taxable income. The net operating
loss carryforward period expires commencing in 2008 through the year
2011. Further, as a result of certain financing and capital
transactions, an annual limitation on the future utilization of the net
operating loss carryforward may have occurred.
No income tax provision has been provided for the years ended June 30,
1996 and 1995 as the aforementioned deferred tax assets have provided
no tax benefit.
(11) Acquisition
On September 12, 1994 the Company executed a Stock Purchase Agreement
with Piedmont Teleport, Inc. under which the Company acquired certain
assets, liabilities, and certain right-of-way agreements for $20,000 in
cash and the issuance of 62,000 shares of the Company's common stock.
The Company accounted for the acquisition as a purchase and,
accordingly, the purchase price was allocated to the assets acquired
and liabilities assumed based upon their estimated fair values at
September 12, 1994. The seller has the right to put these shares back
to the Company on November 1, 1996 for a price of $2.50 per share.
Accordingly, this obligation is recorded as redeemable stock in the
accompanying consolidated financial statements.
(12)Fair Value of Financial Instruments
The following notes summarize the major methods and assumptions used in
estimating the fair value of financial instruments:
Cash and Cash Equivalents
The carrying amount approximates fair value due to the relatively short
period to maturity of these instruments.
Letters of Credit
The fair value of the Letters of credit is based on fees currently
charged for similar agreements.
<PAGE>
================================================================================
F-1
================================================================================
(12)Continued
Short-Term and Long-Term Debt
The fair value of the Company's long term debt is estimated based on
the quoted market prices for the same or similar issue if available or
based on the present value of expected cash flows at rates currently
available to the Company borrowing with similar terms.
The carrying amounts and fair values of the Company's financial
instruments at June 30, 1996 were:
<TABLE>
<CAPTION>
1996
----
Carrying Value Fair Value
-----------------------------------------
<S> <C> <C>
Cash and cash equivalents (including restricted cash) 136,458,133 136,458,133
Letters of credit - 69,000
Long-term debt 184,382,170 183,987,000
- ---------------------------------------------------------------------------------------------------------
===================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
====================================================================================================================================
Exhibit
Numbers Description Page Number
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
10.56 Form of Non-Qualified Stock Option Certificates, as amended, E-1
issued to Anthony J. Pompliano.
- ------------------------------------------------------------------------------------------------------------------------------------
10.57 Employment Agreement between the Company and Harry J. E-2
D'Andrea.
- ------------------------------------------------------------------------------------------------------------------------------------
10.58 Master Amendment to Loan and Security Agreements dated E-3
November 30, 1995, among American Communication Services of
Louisville, Inc., American Communication Services of Fort
Worth, Inc., American Communication Services of Columbia,
Inc., American Communication Services of Greenville, Inc.,
American Communication Services of El Paso and AT&T Credit
Corporation.
- ------------------------------------------------------------------------------------------------------------------------------------
10.59 Master Reaffirmation of Parent Pledge and Support Agreements E-4
dated November 30, 1995, between the Company and AT&T Credit
Corporation.
- ------------------------------------------------------------------------------------------------------------------------------------
10.60 Letter of Amendment to Loan and Security Agreements dated E-5
December 19, 1995, among American Communication Services of
Fort Worth, Inc., American Communication Services of
Columbia, Inc., American Communication Services of
Greenville, Inc., American Communication Services of El Paso
and AT&T Credit Corporation.
- ------------------------------------------------------------------------------------------------------------------------------------
10.61 Second Master Amendment to Loan and Security Agreements, E-6
Waiver and Equipment Notes Modification Agreement dated
September 6, 1996 among American Communication Services of
Louisville, Inc., American Communication Services of Fort
Worth, Inc., American Communication Services of Columbia,
Inc., American Communication Services of Greenville, Inc.,
American Communication Services of El Paso and AT&T Credit
Corporation.
- ------------------------------------------------------------------------------------------------------------------------------------
10.62 Second Master Reaffirmation of Parent Pledge and Support E-7
Agreements dated September 6, 1996 between the Company and
AT&T Credit Corporation.
- ------------------------------------------------------------------------------------------------------------------------------------
10.63 Master Equipment Lease Agreement dated August 26, 1996, E-8
between the Company and AT&T Credit Corporation
- ------------------------------------------------------------------------------------------------------------------------------------
11.1 Statement re: computation of per share earnings (loss). E-9
- ------------------------------------------------------------------------------------------------------------------------------------
21.1 Subsidiaries of the Registrant. E-10
- ------------------------------------------------------------------------------------------------------------------------------------
23.1 Consent of KPMG Peat Marwick LLP. E-11
- ------------------------------------------------------------------------------------------------------------------------------------
27.1 Financial Data Schedules. E-12
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
99.1 Certain Factors to Consider in Connection with Forward E-13
Looking Statements.
====================================================================================================================================
</TABLE>
<PAGE>
AMERICAN COMMUNICATIONS SERVICES, INC.
NON-QUALIFIED STOCK OPTION CERTIFICATE
A. A STOCK OPTION for the purchase of a total of 100,000
shares of the common stock, par value $0.01 (the "Common Stock"), of American
Communications Services, Inc. (the "Company") has been granted to Anthony J.
Pompliano (the "Optionee"), pursuant to subparagraph 5(c)(ii)(B) of a Third
Amended and Restated Employment Agreement dated as of June 30, 1995 between the
Optionee and the Company (the "Employment Agreement"). This option shall be
governed by the Employment Agreement and, except as otherwise specifically set
forth herein, the provisions of the Employment Agreement shall control in the
event of any conflict between the terms set forth herein and the provisions of
the Employment Agreement. Unless otherwise defined herein, all initially
capitalized terms used herein shall have the same meaning as set forth in the
Employment Agreement.
B. The exercise price of this option is $2.25 per share (the
"Exercise Price").
C. This option may not be exercised if the issuance of shares
of Common Stock of the Company upon such exercise would constitute a violation
of any applicable Federal or state securities or other law or regulation. The
Optionee, as a condition to his exercise of this option, shall (i) represent to
the Company that the shares of Common Stock of the Company that he acquires upon
exercise of this option are being acquired by him for investment and not with a
view to distribution or resale, and that he will not sell or otherwise transfer
such shares unless such
<PAGE>
shares are then registered under a currently effective registration statement
under the Securities Act of 1933, as amended (the "Act"), or counsel for the
Company is then of the opinion that such registration is not required under the
Act or any other applicable law, regulation, or rule of any governmental agency
and (ii) if the shares of Common Stock underlying this option are not registered
under the Act, acknowledge that the certificate evidencing such shares may be
stamped with a restrictive legend and such shares will be "restricted
securities" as defined in Rule 144 promulgated under the Act.
D. This option may not be transferred in any manner otherwise
than by will or the laws of descent and distribution, and may be exercised
during the lifetime of the Optionee only by the Optionee. The terms of this
option shall be binding upon the executors, administrators, heirs, successors,
and assigns of the Optionee.
E. The option shall vest and be exercisable in its entirety as
of the date hereof, and to the extent not exercised prior to such date, shall
terminate and be of no further effect as of 5:00 p.m. New York City time on June
26, 2000.
F. The rights represented by this option may be exercised by
the Optionee by delivery of:
a. The exercise form annexed hereto (the "Exercise Form") duly
executed and specifying the number of shares to be purchased, to the Company at
the offices of the Company located at 131 National Business Parkway, Suite 100,
Annapolis Junction,
-2-
<PAGE>
Maryland 20701 (or such other office or agency of the Company as it may
designate by notice to the Optionee at the address of such Optionee appearing on
the books of the Company) during normal business hours on any day other than a
Saturday, Sunday or day on which national banks are authorized to close in the
City of New York, State of New York (a "Business Day").
b. Payment to the Company, for the account of the Company, by
cash or by certified or bank cashier's check or wire transfer, of the Exercise
Price for the number of shares specified in the Exercise Form in lawful money of
the United States of America.
The Company agrees that such shares shall be deemed to be
issued to the Optionee as the record owner of such shares as of the commencement
of business on the date on which this option shall have been surrendered and
payment made for the shares as aforesaid. Certificates for the shares specified
in the Exercise Form shall be delivered to the Optionee as promptly as
practicable, and in any event within ten (10) days thereafter. If this option
shall have been exercised only in part, the Company shall, at the time of
delivery of the certificate or certificates delivered to the Optionee, deliver a
new option evidencing the right to purchase the remaining shares issuable under
this option, which new option shall in all other respects be identical to this
option. No adjustment shall be made on shares issuable on exercise of this
option for any cash dividends paid or payable to holders of record of Common
Stock out of consolidated earnings or earned surplus prior to the date as
-3-
<PAGE>
of which the Optionee shall be deemed to be the record-holder of such shares.
G. Certain Adjustments.
G.1 The number of shares purchasable upon the exercise of this
option and the Exercise Price shall be subject to adjustment as follows:
(a) In case the Company shall (i) pay a dividend in shares of
Common Stock or make a distribution in shares of Common Stock, (ii) subdivide
its outstanding shares of Common Stock (including, without limitation, by way of
stock splits and the like), (iii) combine its outstanding shares of Common Stock
into a smaller number of shares of Common Stock or (iv) issue by
reclassification of its shares of Common Stock other securities of the Company
(including any such reclassification in connection with a consolidation or
merger in which the Company is the surviving corporation), the number of shares
purchasable upon exercise of this option immediately prior thereto shall be
adjusted so that the Optionee shall be entitled to receive the kind and number
of shares or other securities of the Company which he would have owned or have
been entitled to receive after the happening of any of the events described
above had this option been exercised immediately prior to the happening of such
event or any record date with respect thereto. An adjustment made pursuant to
this paragraph (a) shall become effective immediately after the effective date
of each such event retroactive to the record date, if any, for such event,
without amendment or modification required to this document.
-4-
<PAGE>
(b) In case the Company shall issue rights, options or
warrants to all or substantially all holders of its outstanding Common Stock,
without any charge to such holders, entitling them to subscribe for or purchase
shares of Common Stock at a price per share which is lower at the record date
mentioned below than the then current market price per share of Common Stock (as
defined in paragraph (d) below), the number of shares thereafter purchasable
upon the exercise of this option shall be determined by multiplying the number
of shares theretofore purchasable upon exercise of this option by a fraction, of
which the numerator shall be the number of shares of Common Stock outstanding on
the date of issuance of such rights, options or warrants plus the number of
additional shares of Common Stock offered for subscription or purchase, and of
which the denominator shall be the number of shares of Common Stock outstanding
on the date of issuance of such rights, options or warrants plus the number of
shares which the aggregate offering price of the total number of shares of
Common Stock so offered would purchase at the current market price per share of
Common Stock at such record date. Such adjustment shall be made whenever such
rights, options or warrants are issued, and shall become effective immediately
after the record date for the determination of stockholders entitled to receive
such rights, options or warrants.
(c) In case the Company shall distribute to all or
substantially all holders of its shares of Common Stock evidences of its
indebtedness or assets (excluding cash dividends or
-5-
<PAGE>
distributions payable out of consolidated earnings or earned surplus and
dividends or distributions referred to in paragraph (a) above) or rights,
options or warrants, or convertible or exchangeable securities containing the
right to subscribe for or purchase shares of Common Stock (excluding those
referred to in paragraph (b) above), then in each case the number of shares
thereafter purchasable upon the exercise of this option shall be determined by
multiplying the number of shares theretofore purchasable upon the exercise of
this option by a fraction, of which the numerator shall be the then current
market price per share of Common Stock (as defined in paragraph (d) below) on
the date of such distribution, and of which the denominator shall be the then
current market price per share of Common Stock, less the then fair value (as
determined in good faith by the Board of Directors of the Company, or if
requested by the Optionee, by a leading firm of investment bankers selected by
the Optionee and reasonably acceptable to the Company and whose reasonable fees
and expenses shall be paid by the Company or as otherwise agreed upon by the
Company and the Optionee), of the portion of the assets or evidences of
indebtedness so distributed or of such subscription rights, options or warrants,
or of such convertible or exchangeable securities, applicable to one share of
Common Stock. Such adjustment shall be made whenever any such distribution is
made, and shall become effective on the date of distribution retroactive to the
record date for the determination of shareholders entitled to receive such
distribution.
-6-
<PAGE>
(d) For the purpose of computation under (b) and (c) of this
paragraph G.1, the current market price per share of Common Stock at any date
shall be:
(x) from and after 30 trading days after consummation
of a Qualifying Offering (as such term is defined in the
Company's Certificate of Incorporation, as amended), the
average of the daily closing prices for the 30 consecutive
trading days immediately preceding such computation. The
closing price for each day shall be the last reported sales
price regular way or, in case no such reported sale takes
place on such day, the average of the closing bid and asked
prices regular way for such day, in each case on the principal
national securities exchange on which the shares of Common
Stock are listed or admitted to trading, or, if reported on
NASDAQ-National Market System, the last reported sales price,
or, if not so listed or admitted to trading or reported, the
average of the closing bid and asked prices of the Common
Stock in the over-the-counter market as reported by NASDAQ or
any comparable system; and
(y) on or prior to the expiration of the 30 trading
day period set forth in clause (x) above, the fair market
value per share of Common Stock determined by a leading firm
of investment bankers selected by the Optionee and reasonably
acceptable to the Company and whose reasonable fees and
expenses shall be paid by the Company.
-7-
<PAGE>
(e) No adjustment in the number of shares purchasable
hereunder shall be required unless such adjustment would require an increase or
decrease of at least one percent (1%) in the number of shares purchasable upon
the exercise of this option; provided, however, that any adjustments which by
reason of this paragraph (e) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
shall be made to the nearest one-thousandth of a share.
(f) Whenever the number of shares purchasable upon the
exercise of this option is adjusted, as herein provided, the Exercise Price
payable upon the exercise of this option shall be adjusted by multiplying such
Exercise Price immediately prior to such adjustment by a fraction, of which the
numerator shall be the number of shares purchasable upon the exercise of this
option immediately prior to such adjustment, and of which the denominator shall
be the number of shares purchasable immediately thereafter.
(g) No adjustment in the number of shares purchasable upon the
exercise of this option need be made under paragraphs (b) and (c) if the Company
issues or distributes to the Optionee the rights, options, warrants, or
convertible or exchangeable securities, or evidences of indebtedness or assets
referred to in those paragraphs which the Optionee would have been entitled to
receive had the option been exercised prior to the happening of such event or
the record date with respect thereto. No adjustment in the number of shares
purchasable upon the exercise of this option may be made for sale of shares
pursuant to a Company plan
-8-
<PAGE>
for reinvestment of dividends or interest. No adjustment need be made for a
change in the par value of the shares.
(h) The Company shall not, by amendment of its Certificate of
Incorporation or through any reorganization, recapitalization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities, rights,
options or warrants or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed under
this paragraph G.1 by the Company, but will at all times in good faith assist in
carrying out all of the provisions of this paragraph G.1 and in the taking of
such actions as may be necessary or appropriate in order to protect the rights
of the Optionee under this paragraph G.1 against impairment.
(i) For the purpose of this paragraph G.1, the term "shares of
Common Stock" shall mean (i) the class of stock designated as the common stock
of the Company at the date of this Certificate, or (ii) any other class of stock
resulting from successive changes or reclassification of such shares consisting
solely of changes in par value, or from par value to no par value. In the event
that at any time, as a result of an adjustment made pursuant to paragraph (a)
above, the Optionee shall become entitled to purchase any securities of the
Company other than shares of Common Stock, thereafter the number of such other
shares so purchasable upon exercise of this option, and the Exercise Price of
such shares, shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the
-9-
<PAGE>
provisions with respect to the shares contained in paragraphs (a) through (h),
inclusive, above, and the paragraphs G.2 through G.4, inclusive, with respect to
the shares, shall apply on like terms to any such other securities.
(j) Upon the expiration of any rights, options, warrants or
conversion or exchange privileges, if any thereof shall not have been exercised,
the Exercise Price and the number of shares shall, upon such expiration, be
readjusted and shall thereafter be such as it would have been had it been
originally adjusted (or had the original adjustment not been required, as the
case may be), as if (A) the only shares of Common Stock so issued were the
shares of Common Stock, if any, actually issued or sold upon the exercise of
such rights, options, warrants or conversion or exchange rights and (B) such
shares of Common Stock, if any, were issued or sold for the consideration
actually received by the Company upon such exercise plus the aggregate
consideration, if any, actually received by the Company for the issuance, sale
or grant of all such rights, options, warrants or conversion or exchange rights
whether or not exercised; provided, further, that no such readjustment shall
have the effect of increasing the Exercise Price or decreasing the number of
shares by an amount in excess of the amount of the adjustment initially made in
respect to the issuance, sale or grant of such rights, options, warrants or
conversion or exchange rights.
G.2. Notice of Adjustment. Whenever the number of shares or
the Exercise Price payable upon exercise of this option is
-10-
<PAGE>
adjusted, as herein provided, the Company shall promptly mail by first class,
postage prepaid, to the Optionee, notice of such adjustment or adjustments and a
certificate of a firm of independent public accountants selected by the Board of
Directors of the Company (who may be the regular accountants employed by the
Company) setting forth the number of shares and the Exercise Price payable upon
exercise of this option after such adjustment, setting forth a brief statement
of the facts requiring such adjustment and setting forth the computation by
which such adjustment was made.
G.3. No Adjustment for Dividends. Except as provided in
paragraph G.1, no adjustment in respect of any dividends shall be made during
the term of this option or upon the exercise of this option.
G.4. Preservation of Purchase Rights Upon Merger,
Consolidation, etc. In case of any consolidation of the Company with or merger
of the Company into another corporation or otherwise or in case of any sale,
transfer or lease to another corporation of all or substantially all the
property of the Company, the Company or such successor or purchasing
corporation, as the case may be, shall execute with the Optionee an agreement
that the Optionee shall have the right thereafter upon payment of the Exercise
Price in effect immediately prior to such action to purchase upon exercise of
this option the kind and amount of shares and other securities and property
which such holder would have owned or have been entitled to receive after the
happening of such consolidation, merger, sale, transfer or lease had this option
been exercised
-11-
<PAGE>
immediately prior to such action, provided that such agreement shall provide for
adjustments thereafter, which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this paragraph G. The provisions
of this paragraph G shall similarly apply to successive consolidations, mergers,
sales, transfers or leases.
H. Registration Rights. Optionee shall have the registration rights
with respect to this option as set forth in the Amended and Restated
Registration Rights Agreement dated as of June 30, 1995 and entered into by and
among the Company, the Optionee and the other executive officers of the Company
set forth therein.
AMERICAN COMMUNICATIONS SERVICES, INC.
By: /s/ RICHARD A. KOZAK
Richard A. Kozak
President and Chief Operating
Officer
Dated as of: As of June 30, 1995
ATTEST: /s/ RILEY M. MURPHY,
Riley M. Murphy, Secretary
-12-
<PAGE>
PURCHASE FORM
Date: _________
TO: Chief Financial Officer
The undersigned hereby irrevocably elects to exercise the attached
Non-Qualified Stock Option Certificate to the extent of options to
purchase _______ shares and hereby makes payment of $_____ in payment
of the purchase price thereof.
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name:____________________________________
Address:_________________________________
---------------------------------
---------------------
-13-
<PAGE>
AMERICAN COMMUNICATIONS SERVICES, INC.
NON-QUALIFIED STOCK OPTION CERTIFICATE
A. A STOCK OPTION for the purchase of a total of 50,000 shares
of the common stock, par value $0.01 (the "Common Stock"), of American
Communications Services, Inc. (the "Company") has been granted to Anthony J.
Pompliano (the "Optionee"), pursuant to subparagraph 5(c)(ii)(A) of a Third
Amended and Restated Employment Agreement dated as of June 30, 1995 between the
Optionee and the Company (the "Employment Agreement"). This option shall be
governed by the Employment Agreement and, except as otherwise specifically set
forth herein, the provisions of the Employment Agreement shall control in the
event of any conflict between the terms set forth herein and the provisions of
the Employment Agreement. Unless otherwise defined herein, all initially
capitalized terms used herein shall have the same meaning as set forth in the
Employment Agreement.
B. The exercise price of this option is $2.25 per share (the
"Exercise Price").
C. This option may not be exercised if the issuance of shares
of Common Stock of the Company upon such exercise would constitute a violation
of any applicable Federal or state securities or other law or regulation. The
Optionee, as a condition to his exercise of this option, shall (i) represent to
the Company that the shares of Common Stock of the Company that he acquires upon
exercise of this option are being acquired by him for investment and not with a
view to distribution or resale, and that
-1-
<PAGE>
he will not sell or otherwise transfer such shares unless such shares are then
registered under a currently effective registration statement under the
Securities Act of 1933, as amended (the "Act"), or counsel for the Company is
then of the opinion that such registration is not required under the Act or any
other applicable law, regulation, or rule of any governmental agency and (ii) if
the shares of Common Stock underlying this option are not registered under the
Act, acknowledge that the certificate evidencing such shares may be stamped with
a restrictive legend and such shares will be "restricted securities" as defined
in Rule 144 promulgated under the Act.
D. This option may not be transferred in any manner otherwise
than by will or the laws of descent and distribution, and may be exercised
during the lifetime of the Optionee only by the Optionee. The terms of this
option shall be binding upon the executors, administrators, heirs, successors,
and assigns of the Optionee.
E. The option shall vest and be exercisable in its entirety as
of the date hereof, and to the extent not exercised prior to such date, shall
terminate and be of no further effect as of 5:00 p.m. New York City time on
October 20, 1999.
F. The rights represented by this option may be exercised by
the Optionee by delivery of:
a. the exercise form annexed hereto (the "Exercise Form") duly
executed and specifying the number of shares to be purchased, to the Company at
the offices of the Company located at
-2-
<PAGE>
131 National Business Parkway, Suite 100, Annapolis Junction, Maryland 20701 (or
such other office or agency of the Company as it may designate by notice to the
Optionee at the address of such Optionee appearing on the books of the Company)
during normal business hours on any day other than a Saturday, Sunday or day on
which national banks are authorized to close in the City of New York, State of
New York (a "Business Day").
b. Payment to the Company, for the account of the Company, by
cash or by certified or bank cashier's check or wire transfer, of the Exercise
Price for the number of shares specified in the Exercise Form in lawful money of
the United States of America.
The Company agrees that such shares shall be deemed to be
issued to the Optionee as the record owner of such shares as of the commencement
of business on the date on which this option shall have been surrendered and
payment made for the shares as aforesaid. Certificates for the shares specified
in the Exercise Form shall be delivered to the Optionee as promptly as
practicable, and in any event within ten (10) days thereafter. If this option
shall have been exercised only in part, the Company shall, at the time of
delivery of the certificate or certificates delivered to the Optionee, deliver a
new option evidencing the right to purchase the remaining shares issuable under
this option, which new option shall in all other respects be identical to this
option. No adjustment shall be made on shares issuable on exercise of this
option for any cash dividends paid or payable to holders of record of Common
Stock
-3-
<PAGE>
out of consolidated earnings or earned surplus prior to the date as of which the
Optionee shall be deemed to be the record-holder of such shares.
G. Certain Adjustments.
G.1 The number of shares purchasable upon the exercise of this
option and the Exercise Price shall be subject to adjustment as follows:
(a) In case the Company shall (i) pay a dividend in shares of
Common Stock or make a distribution in shares of Common Stock, (ii) subdivide
its outstanding shares of Common Stock (including, without limitation, by way of
stock splits and the like), (iii) combine its outstanding shares of Common Stock
into a smaller number of shares of Common Stock or (iv) issue by
reclassification of its shares of Common Stock other securities of the Company
(including any such reclassification in connection with a consolidation or
merger in which the Company is the surviving corporation), the number of shares
purchasable upon exercise of this option immediately prior thereto shall be
adjusted so that the Optionee shall be entitled to receive the kind and number
of shares or other securities of the Company which he would have owned or have
been entitled to receive after the happening of any of the events described
above had this option been exercised immediately prior to the happening of such
event or any record date with respect thereto. An adjustment made pursuant to
this paragraph (a) shall become effective immediately after the effective date
of each
-4-
<PAGE>
such event retroactive to the record date, if any, for such event, without
amendment or modification required to this document.
(b) In case the Company shall issue rights, options or
warrants to all or substantially all holders of its outstanding Common Stock,
without any charge to such holders, entitling them to subscribe for or purchase
shares of Common Stock at a price per share which is lower at the record date
mentioned below than the then current market price per share of Common Stock (as
defined in paragraph (d) below), the number of shares thereafter purchasable
upon the exercise of this option shall be determined by multiplying the number
of shares theretofore purchasable upon exercise of this option by a fraction, of
which the numerator shall be the number of shares of Common Stock outstanding on
the date of issuance of such rights, options or warrants plus the number of
additional shares of Common Stock offered for subscription or purchase, and of
which the denominator shall be the number of shares of Common Stock outstanding
on the date of issuance of such rights, options or warrants plus the number of
shares which the aggregate offering price of the total number of shares of
Common Stock so offered would purchase at the current market price per share of
Common Stock at such record date. Such adjustment shall be made whenever such
rights, options or warrants are issued, and shall become effective immediately
after the record date for the determination of stockholders entitled to receive
such rights, options or warrants.
-5-
<PAGE>
(c) In case the Company shall distribute to all or
substantially all holders of its shares of Common Stock evidences of its
indebtedness or assets (excluding cash dividends or distributions payable out of
consolidated earnings or earned surplus and dividends or distributions referred
to in paragraph (a) above) or rights, options or warrants, or convertible or
exchangeable securities containing the right to subscribe for or purchase shares
of Common Stock (excluding those referred to in paragraph (b) above), then in
each case the number of shares thereafter purchasable upon the exercise of this
option shall be determined by multiplying the number of shares theretofore
purchasable upon the exercise of this option by a fraction, of which the
numerator shall be the then current market price per share of Common Stock (as
defined in paragraph (d) below) on the date of such distribution, and of which
the denominator shall be the then current market price per share of Common
Stock, less the then fair value (as determined in good faith by the Board of
Directors of the Company, or if requested by the Optionee, by a leading firm of
investment bankers selected by the Optionee and reasonably acceptable to the
Company and whose reasonable fees and expenses shall be paid by the Company or
as otherwise agreed upon by the Company and the Optionee), of the portion of the
assets or evidences of indebtedness so distributed or of such subscription
rights, options or warrants, or of such convertible or exchangeable securities,
applicable to one share of Common Stock. Such adjustment shall be made whenever
any such distribution is made,
-6-
<PAGE>
and shall become effective on the date of distribution retroactive to the record
date for the determination of shareholders entitled to receive such
distribution.
(d) For the purpose of computation under (b) and (c) of this
paragraph G.1, the current market price per share of Common Stock at any date
shall be:
(x) from and after 30 trading days after consummation
of a Qualifying Offering (as such term is defined in the
Company's Certificate of Incorporation, as amended), the
average of the daily closing prices for the 30 consecutive
trading days immediately preceding such computation. The
closing price for each day shall be the last reported sales
price regular way or, in case no such reported sale takes
place on such day, the average of the closing bid and asked
prices regular way for such day, in each case on the principal
national securities exchange on which the shares of Common
Stock are listed or admitted to trading, or, if reported on
NASDAQ-National Market System, the last reported sales price,
or, if not so listed or admitted to trading or reported, the
average of the closing bid and asked prices of the Common
Stock in the over-the-counter market as reported by NASDAQ or
any comparable system; and
(y) on or prior to the expiration of the 30 trading
day period set forth in clause (x) above, the fair market
value per share of Common Stock determined by a leading
-7-
<PAGE>
firm of investment bankers selected by the Optionee and
reasonably acceptable to the Company and whose reasonable
fees and expenses shall be paid by the Company.
(e) No adjustment in the number of shares purchasable
hereunder shall be required unless such adjustment would require an increase or
decrease of at least one percent (1%) in the number of shares purchasable upon
the exercise of this option; provided, however, that any adjustments which by
reason of this paragraph (e) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
shall be made to the nearest one-thousandth of a share.
(f) Whenever the number of shares purchasable upon the
exercise of this option is adjusted, as herein provided, the Exercise Price
payable upon the exercise of this option shall be adjusted by multiplying such
Exercise Price immediately prior to such adjustment by a fraction, of which the
numerator shall be the number of shares purchasable upon the exercise of this
option immediately prior to such adjustment, and of which the denominator shall
be the number of shares purchasable immediately thereafter.
(g) No adjustment in the number of shares purchasable upon the
exercise of this option need be made under paragraphs (b) and (c) if the Company
issues or distributes to the Optionee the rights, options, warrants, or
convertible or exchangeable securities, or evidences of indebtedness or assets
referred to in those paragraphs which the Optionee would have been entitled to
receive had the option been exercised prior to the happening of
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<PAGE>
such event or the record date with respect thereto. No adjustment in the number
of shares purchasable upon the exercise of this option may be made for sale of
shares pursuant to a Company plan for reinvestment of dividends or interest. No
adjustment need be made for a change in the par value of the shares.
(h) The Company shall not, by amendment of its Certificate of
Incorporation or through any reorganization, recapitalization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities, rights,
options or warrants or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed under
this paragraph G.1 by the Company, but will at all times in good faith assist in
carrying out all of the provisions of this paragraph G.1 and in the taking of
such actions as may be necessary or appropriate in order to protect the rights
of the Optionee under this paragraph G.1 against impairment.
(i) For the purpose of this paragraph G.1, the term "shares of
Common Stock" shall mean (i) the class of stock designated as the common stock
of the Company at the date of this Certificate, or (ii) any other class of stock
resulting from successive changes or reclassification of such shares consisting
solely of changes in par value, or from par value to no par value. In the event
that at any time, as a result of an adjustment made pursuant to paragraph (a)
above, the Optionee shall become entitled to purchase any securities of the
Company other than shares of Common Stock, thereafter the number of such other
shares so
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<PAGE>
purchasable upon exercise of this option, and the Exercise Price of such shares,
shall be subject to adjustment from time to time in a manner and on terms as
nearly equivalent as practicable to the provisions with respect to the shares
contained in paragraphs (a) through (h), inclusive, above, and the paragraphs
G.2 through G.4, inclusive, with respect to the shares, shall apply on like
terms to any such other securities.
(j) Upon the expiration of any rights, options, warrants or
conversion or exchange privileges, if any thereof shall not have been exercised,
the Exercise Price and the number of shares shall, upon such expiration, be
readjusted and shall thereafter be such as it would have been had it been
originally adjusted (or had the original adjustment not been required, as the
case may be), as if (A) the only shares of Common Stock so issued were the
shares of Common Stock, if any, actually issued or sold upon the exercise of
such rights, options, warrants or conversion or exchange rights and (B) such
shares of Common Stock, if any, were issued or sold for the consideration
actually received by the Company upon such exercise plus the aggregate
consideration, if any, actually received by the Company for the issuance, sale
or grant of all such rights, options, warrants or conversion or exchange rights
whether or not exercised; provided, further, that no such readjustment shall
have the effect of increasing the Exercise Price or decreasing the number of
shares by an amount in excess of the amount of the adjustment initially made in
respect to the issuance,
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<PAGE>
sale or grant of such rights, options, warrants or conversion or exchange
rights.
G.2. Notice of Adjustment. Whenever the number of shares or
the Exercise Price payable upon exercise of this option is adjusted, as herein
provided, the Company shall promptly mail by first class, postage prepaid, to
the Optionee, notice of such adjustment or adjustments and a certificate of a
firm of independent public accountants selected by the Board of Directors of the
Company (who may be the regular accountants employed by the Company) setting
forth the number of shares and the Exercise Price payable upon exercise of this
option after such adjustment, setting forth a brief statement of the facts
requiring such adjustment and setting forth the computation by which such
adjustment was made.
G.3. No Adjustment for Dividends. Except as provided in
paragraph G.1, no adjustment in respect of any dividends shall be made during
the term of this option or upon the exercise of this option.
G.4. Preservation of Purchase Rights Upon Merger,
Consolidation, etc. In case of any consolidation of the Company with or merger
of the Company into another corporation or otherwise or in case of any sale,
transfer or lease to another corporation of all or substantially all the
property of the Company, the Company or such successor or purchasing
corporation, as the case may be, shall execute with the Optionee an agreement
that the Optionee shall have the right thereafter upon payment of the Exercise
Price in effect immediately prior to such action to purchase upon
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<PAGE>
exercise of this option the kind and amount of shares and other securities and
property which such holder would have owned or have been entitled to receive
after the happening of such consolidation, merger, sale, transfer or lease had
this option been exercised immediately prior to such action, provided that such
agreement shall provide for adjustments thereafter, which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
paragraph G. The provisions of this paragraph G shall similarly apply to
successive consolidations, mergers, sales, transfers or leases.
H. Registration Rights. Optionee shall have the registration
rights with respect to this option as set forth in the Amended and Restated
Registration Rights Agreement dated as of June 30, 1995 and entered into by and
among the Company, the Optionee and the other executive officers of the Company
set forth therein.
AMERICAN COMMUNICATIONS SERVICES, INC.
By: /s/ RICHARD A. KOZAK
Richard A. Kozak
President and Chief Operating
Officer
Dated as of: As of June 30, 1995
ATTEST: /s/ RILEY M. MURPHY,
Riley M. Murphy, Secretary
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<PAGE>
PURCHASE FORM
Date: _________
TO: Chief Financial Officer
The undersigned hereby irrevocably elects to exercise the attached
Non-Qualified Stock Option Certificate to the extent of options to
purchase _______ shares and hereby makes payment of $_____ in payment
of the purchase price thereof.
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name:____________________________________
Address:_________________________________
---------------------------------
---------------------
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<PAGE>
AMERICAN COMMUNICATIONS SERVICES, INC.
NON-QUALIFIED STOCK OPTION CERTIFICATE
A. A STOCK OPTION for the purchase of a total of 1,349,899
shares of the common stock, par value $0.01 (the "Common Stock"), of American
Communications Services, Inc. (the "Company") has been granted to Anthony J.
Pompliano (the "Optionee"), pursuant to subparagraph 5(c)(i) of a Third Amended
and Restated Employment Agreement dated as of June 30, 1995 between the Optionee
and the Company (the "Employment Agreement"). This option shall be governed by
the Employment Agreement and, except as otherwise specifically set forth herein,
the provisions of the Employment Agreement shall control in the event of any
conflict between the terms set forth herein and the provisions of the Employment
Agreement. Unless otherwise defined herein, all initially capitalized terms used
herein shall have the same meaning as set forth in the Employment Agreement.
B. The exercise price of this option is $0.875 per
share (the "Exercise Price").
C. This option may not be exercised if the issuance of shares
of Common Stock of the Company upon such exercise would constitute a violation
of any applicable Federal or state securities or other law or regulation. The
Optionee, as a condition to his exercise of this option, shall (i) represent to
the Company that the shares of Common Stock of the Company that he acquires upon
exercise of this option are being acquired by him for investment and not with a
view to distribution or resale, and that
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<PAGE>
he will not sell or otherwise transfer such shares unless such shares are then
registered under a currently effective registration statement under the
Securities Act of 1933, as amended (the "Act"), or counsel for the Company is
then of the opinion that such registration is not required under the Act or any
other applicable law, regulation, or rule of any governmental agency and (ii) if
the shares of Common Stock underlying this option are not registered under the
Act, acknowledge that the certificate evidencing such shares may be stamped with
a restrictive legend and such shares will be "restricted securities" as defined
in Rule 144 promulgated under the Act.
D. This option may not be transferred in any manner otherwise
than by will or the laws of descent and distribution, and may be exercised
during the lifetime of the Optionee only by the Optionee. The terms of this
option shall be binding upon the executors, administrators, heirs, successors,
and assigns of the Optionee.
E. The option shall be exercisable as follows:
(i) The option shall not be exercisable, and to the
extent not exercised prior to such date, shall terminate and be of no further
effect as of 5:00 p.m. New York City time on the respective expiration dates set
forth below.
(ii) The option shall be exercisable as to 449,967 shares
commencing as of August 24, 1993 and shall expire on August 23, 2000.
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<PAGE>
(iii) The option shall be exercisable as to an additional
449,966 shares commencing on January 1, 1995 and shall expire on December 31,
2000.
(iv) The option shall be exercisable as to the remaining
449,966 shares commencing on the sooner of (1) the time the Company's seventh
(7th) competitive access network becomes operational, or (ii) August 23, 1996
and shall expire on the day immediately preceding the fifth (5th) anniversary of
such vesting date.
F. Notwithstanding the foregoing, the option shall not become
exercisable as to a tranche of shares if Optionee is terminated For Cause (as
defined in paragraph 11 of the Employment Agreement) prior to the date the
option becomes exercisable as to such shares as set forth in paragraph E hereof.
G. Subject to the provisions of paragraphs E and F, the rights
represented by this option may be exercised by the Optionee by delivery of:
a. the exercise form annexed hereto (the "Exercise Form") duly
executed and specifying the number of shares to be purchased, to the Company at
the offices of the Company located at 131 National Business Parkway, Suite 100,
Annapolis Junction, Maryland 20701 (or such other office or agency of the
Company as it may designate by notice to the Optionee at the address of such
Optionee appearing on the books of the Company) during normal business hours on
any day other than a Saturday, Sunday or day on
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<PAGE>
which national banks are authorized to close in the City of New York, State of
New York (a "Business Day").
b. Payment to the Company, for the account of the Company, by
cash or by certified or bank cashier's check or wire transfer, of the Exercise
Price for the number of shares specified in the Exercise Form in lawful money of
the United States of America.
The Company agrees that such shares shall be deemed to be
issued to the Optionee as the record owner of such shares as of the commencement
of business on the date on which this option shall have been surrendered and
payment made for the shares as aforesaid. Certificates for the shares specified
in the Exercise Form shall be delivered to the Optionee as promptly as
practicable, and in any event within ten (10) days thereafter. If this option
shall have been exercised only in part, the Company shall, at the time of
delivery of the certificate or certificates delivered to the Optionee, deliver a
new option evidencing the right to purchase the remaining shares issuable under
this option, which new option shall in all other respects be identical to this
option. No adjustment shall be made on shares issuable on exercise of this
option for any cash dividends paid or payable to holders of record of Common
Stock out of consolidated earnings or earned surplus prior to the date as of
which the Optionee shall be deemed to be the record-holder of such shares.
H. Certain Adjustments.
--------------------
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<PAGE>
H.1. The number of shares purchasable upon the exercise of
this option and the Exercise Price shall be subject to adjustment as follows:
(a) In case the Company shall (i) pay a dividend in shares of
Common Stock or make a distribution in shares of Common Stock, (ii) subdivide
its outstanding shares of Common Stock (including, without limitation, by way of
stock splits and the like), (iii) combine its outstanding shares of Common Stock
into a smaller number of shares of Common Stock or (iv) issue by
reclassification of its shares of Common Stock other securities of the Company
(including any such reclassification in connection with a consolidation or
merger in which the Company is the surviving corporation), the number of shares
purchasable upon exercise of this option immediately prior thereto shall be
adjusted so that the Optionee shall be entitled to receive the kind and number
of shares or other securities of the Company which he would have owned or have
been entitled to receive after the happening of any of the events described
above had this option been exercised immediately prior to the happening of such
event or any record date with respect thereto. An adjustment made pursuant to
this paragraph (a) shall become effective immediately after the effective date
of each such event retroactive to the record date, if any, for such event,
without amendment or modification required to this document.
(b) In case the Company shall issue rights, options or
warrants to all or substantially all holders of its outstanding Common Stock,
without any charge to such holders, entitling them to
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<PAGE>
subscribe for or purchase shares of Common Stock at a price per share which is
lower at the record date mentioned below than the then current market price per
share of Common Stock (as defined in paragraph (d) below), the number of shares
thereafter purchasable upon the exercise of this option shall be determined by
multiplying the number of shares theretofore purchasable upon exercise of this
option by a fraction, of which the numerator shall be the number of shares of
Common Stock outstanding on the date of issuance of such rights, options or
warrants plus the number of additional shares of Common Stock offered for
subscription or purchase, and of which the denominator shall be the number of
shares of Common Stock outstanding on the date of issuance of such rights,
options or warrants plus the number of shares which the aggregate offering price
of the total number of shares of Common Stock so offered would purchase at the
current market price per share of Common Stock at such record date. Such
adjustment shall be made whenever such rights, options or warrants are issued,
and shall become effective immediately after the record date for the
determination of stockholders entitled to receive such rights, options or
warrants.
(c) In case the Company shall distribute to all or
substantially all holders of its shares of Common Stock evidences of its
indebtedness or assets (excluding cash dividends or distributions payable out of
consolidated earnings or earned surplus and dividends or distributions referred
to in paragraph (a) above) or rights, options or warrants, or convertible or
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<PAGE>
exchangeable securities containing the right to subscribe for or purchase shares
of Common Stock (excluding those referred to in paragraph (b) above), then in
each case the number of shares thereafter purchasable upon the exercise of this
option shall be determined by multiplying the number of shares theretofore
purchasable upon the exercise of this option by a fraction, of which the
numerator shall be the then current market price per share of Common Stock (as
defined in paragraph (d) below) on the date of such distribution, and of which
the denominator shall be the then current market price per share of Common
Stock, less the then fair value (as determined in good faith by the Board of
Directors of the Company, or if requested by the Optionee, by a leading firm of
investment bankers selected by the Optionee and reasonably acceptable to the
Company and whose reasonable fees and expenses shall be paid by the Company or
as otherwise agreed upon by the Company and the Optionee), of the portion of the
assets or evidences of indebtedness so distributed or of such subscription
rights, options or warrants, or of such convertible or exchangeable securities,
applicable to one share of Common Stock. Such adjustment shall be made whenever
any such distribution is made, and shall become effective on the date of
distribution retroactive to the record date for the determination of
shareholders entitled to receive such distribution.
(d) For the purpose of computation under paragraphs (b) and
(c) of this paragraph H.1, the current market price per share of Common Stock at
any date shall be:
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<PAGE>
(x) from and after 30 trading days after consummation
of a Qualifying Offering (as such term is defined in the
Company's Certificate of Incorporation, as amended), the
average of the daily closing prices for the 30 consecutive
trading days immediately preceding such computation. The
closing price for each day shall be the last reported sales
price regular way or, in case no such reported sale takes
place on such day, the average of the closing bid and asked
prices regular way for such day, in each case on the principal
national securities exchange on which the shares of Common
Stock are listed or admitted to trading, or, if reported on
NASDAQ-National Market System, the last reported sales price,
or, if not so listed or admitted to trading or reported, the
average of the closing bid and asked prices of the Common
Stock in the over-the-counter market as reported by NASDAQ or
any comparable system; and
(y) on or prior to the expiration of the 30 trading
day period set forth in clause (x) above, the fair market
value per share of Common Stock determined by a leading firm
of investment bankers selected by the Optionee and reasonably
acceptable to the Company and whose reasonable fees and
expenses shall be paid by the Company.
(e) No adjustment in the number of shares
purchasable hereunder shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the number of
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<PAGE>
shares purchasable upon the exercise of this option; provided, however, that any
adjustments which by reason of this paragraph (e) are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations shall be made to the nearest one-thousandth of a share.
(f) Whenever the number of shares purchasable upon the
exercise of this option is adjusted, as herein provided, the Exercise Price
payable upon the exercise of this option shall be adjusted by multiplying such
Exercise Price immediately prior to such adjustment by a fraction, of which the
numerator shall be the number of shares purchasable upon the exercise of this
option immediately prior to such adjustment, and of which the denominator shall
be the number of shares purchasable immediately thereafter.
(g) No adjustment in the number of shares purchasable upon the
exercise of this option need be made under paragraphs (b) and (c) if the Company
issues or distributes to the Optionee the rights, options, warrants, or
convertible or exchangeable securities, or evidences of indebtedness or assets
referred to in those paragraphs which the Optionee would have been entitled to
receive had the option been exercised prior to the happening of such event or
the record date with respect thereto. No adjustment in the number of shares
purchasable upon the exercise of this option may be made for sale of shares
pursuant to a Company plan for reinvestment of dividends or interest. No
adjustment need be made for a change in the par value of the shares.
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<PAGE>
(h) The Company shall not, by amendment of its Certificate of
Incorporation or through any reorganization, recapitalization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities, rights,
options or warrants or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed under
this paragraph H.1 by the Company, but will at all times in good faith assist in
carrying out all of the provisions of this paragraph H.1 and in the taking of
such actions as may be necessary or appropriate in order to protect the rights
of the Optionee under this paragraph H.1 against impairment.
(i) For the purpose of this paragraph H.1, the term "shares of
Common Stock" shall mean (i) the class of stock designated as the common stock
of the Company at the date of this Certificate, or (ii) any other class of stock
resulting from successive changes or reclassification of such shares consisting
solely of changes in par value, or from par value to no par value. In the event
that at any time, as a result of an adjustment made pursuant to paragraph (a)
above, the Optionee shall become entitled to purchase any securities of the
Company other than shares of Common Stock, thereafter the number of such other
shares so purchasable upon exercise of this option, and the Exercise Price of
such shares, shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
shares contained in paragraphs (a) through (h), inclusive, above, and the
paragraphs H.2 through H.4,
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<PAGE>
inclusive, with respect to the shares, shall apply on like terms to any such
other securities.
(j) Upon the expiration of any rights, options, warrants or
conversion or exchange privileges, if any thereof shall not have been exercised,
the Exercise Price and the number of shares shall, upon such expiration, be
readjusted and shall thereafter be such as it would have been had it been
originally adjusted (or had the original adjustment not been required, as the
case may be), as if (A) the only shares of Common Stock so issued were the
shares of Common Stock, if any, actually issued or sold upon the exercise of
such rights, options, warrants or conversion or exchange rights and (B) such
shares of Common Stock, if any, were issued or sold for the consideration
actually received by the Company upon such exercise plus the aggregate
consideration, if any, actually received by the Company for the issuance, sale
or grant of all such rights, options, warrants or conversion or exchange rights
whether or not exercised; provided, further, that no such readjustment shall
have the effect of increasing the Exercise Price or decreasing the number of
shares by an amount in excess of the amount of the adjustment initially made in
respect to the issuance, sale or grant of such rights, options, warrants or
conversion or exchange rights.
H.2. Notice of Adjustment. Whenever the number of shares
or the Exercise Price payable upon exercise of this option is
adjusted, as herein provided, the Company shall promptly mail by
first class, postage prepaid, to the Optionee, notice of such
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<PAGE>
adjustment or adjustments and a certificate of a firm of independent public
accountants selected by the Board of Directors of the Company (who may be the
regular accountants employed by the Company) setting forth the number of shares
and the Exercise Price payable upon exercise of this option after such
adjustment, setting forth a brief statement of the facts requiring such
adjustment and setting forth the computation by which such adjustment was made.
H.3. No Adjustment for Dividends. Except as provided in
paragraph H.1, no adjustment in respect of any dividends shall be made during
the term of this option or upon the exercise of this option.
H.4. Preservation of Purchase Rights Upon Merger,
Consolidation, etc. In case of any consolidation of the Company with or merger
of the Company into another corporation or otherwise or in case of any sale,
transfer or lease to another corporation of all or substantially all the
property of the Company, the Company or such successor or purchasing
corporation, as the case may be, shall execute with the Optionee an agreement
that the Optionee shall have the right thereafter upon payment of the Exercise
Price in effect immediately prior to such action to purchase upon exercise of
this option the kind and amount of shares and other securities and property
which such holder would have owned or have been entitled to receive after the
happening of such consolidation, merger, sale, transfer or lease had this option
been exercised immediately prior to such action, provided that such agreement
shall provide for adjustments thereafter, which shall be as nearly
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<PAGE>
equivalent as may be practicable to the adjustments provided for in this
paragraph H. The provisions of this paragraph H shall similarly apply to
successive consolidations, mergers, sales, transfers or leases.
I. Registration Rights. Optionee shall have the registration rights
with respect to this option as set forth in the Amended and Restated
Registration Rights Agreement dated as of June 30, 1995 and entered into by and
among the Company, the Optionee and the other executive officers of the Company
set forth therein.
AMERICAN COMMUNICATIONS SERVICES, INC.
By: /s/ RICHARD A. KOZAK
Richard A. Kozak
President and Chief Operating
Officer
Dated as of: As of June 30, 1995
ATTEST: /s/ RILEY M. MURPHY,
Riley M. Murphy, Secretary
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<PAGE>
PURCHASE FORM
Date: _________
TO: Chief Financial Officer
The undersigned hereby irrevocably elects to exercise the attached
Non-Qualified Stock Option Certificate to the extent of options to
purchase _______ shares and hereby makes payment of $_____ in payment
of the purchase price thereof.
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name:____________________________________
Address:_________________________________
---------------------------------
---------------------
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<PAGE>
AMERICAN COMMUNICATIONS SERVICES, INC.
NON-QUALIFIED STOCK OPTION CERTIFICATE
A. A STOCK OPTION for the purchase of a total of 350,000
shares of the common stock, par value $0.01 (the "Common Stock"), of American
Communications Services, Inc. (the "Company") has been granted to Anthony J.
Pompliano (the "Optionee"), pursuant to subparagraph 5(c)(iii) of a Third
Amended and Restated Employment Agreement dated as of June 30, 1995 between the
Optionee and the Company (the "Employment Agreement"). This option shall be
governed by the Employment Agreement and, except as otherwise specifically set
forth herein, the provisions of the Employment Agreement shall control in the
event of any conflict between the terms set forth herein and the provisions of
the Employment Agreement. Unless otherwise defined herein, all initially
capitalized terms used herein shall have the same meaning as set forth in the
Employment Agreement.
B. The per share exercise price of this option is as set forth
below in paragraph E (the "Exercise Price").
C. This option may not be exercised if the issuance of shares
of Common Stock of the Company upon such exercise would constitute a violation
of any applicable Federal or state securities or other law or regulation. The
Optionee, as a condition to his exercise of this option, shall (i) represent to
the Company that the shares of Common Stock of the Company that he acquires upon
exercise of this option are being acquired by him for investment and not with a
view to distribution or resale, and that
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<PAGE>
he will not sell or otherwise transfer such shares unless such shares are then
registered under a currently effective registration statement under the
Securities Act of 1933, as amended (the "Act"), or counsel for the Company is
then of the opinion that such registration is not required under the Act or any
other applicable law, regulation, or rule of any governmental agency and (ii) if
the shares of Common Stock underlying this option are not registered under the
Act, acknowledge that the certificate evidencing such shares may be stamped with
a restrictive legend and such shares will be "restricted securities" as defined
in Rule 144 promulgated under the Act.
D. This option may not be transferred in any manner otherwise
than by will or the laws of descent and distribution, and may be exercised
during the lifetime of the Optionee only by the Optionee. The terms of this
option shall be binding upon the executors, administrators, heirs, successors,
and assigns of the Optionee.
E. This option shall vest and become exercisable as to all
shares set forth below (each group of shares set forth below referred to herein
as a "tranche") on August 24, 2001 if Optionee shall then be employed by the
Company; provided, however, that this option immediately shall vest and become
exercisable provided that Optionee is then employed by the Company (i) as to
each tranche of shares upon the occurrence of the events described below; and
(ii) as to all of the tranches of shares upon a Change in Control, whichever is
the first to occur. This option shall be exercisable
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<PAGE>
at the per share exercise price set forth below, and to the extent not exercised
shall terminate and be of no further effect with respect to each tranche of
shares as of 5:00 p.m. New York City time five (5) years from the date on which
the option first became exercisable as to such tranche of shares.
<TABLE>
<CAPTION>
Number of Shares Event Per Share Exercise Price
- ---------------- ----- ------------------------
<C> <C> <C>
100,000 Prior to June 30, 1996 the Company executes an effective $ 2.25
agreement with a major strategic partner/investor as approved
by the Board of Directors.
125,000 Such options shall vest upon the attainment of certain $ 2.80
performance goals determined by the compensation committee
of the board of directors relating to the Company's annual
plan approved by the board of directors for the fiscal year
ending June 30 ("Fiscal 1997"), 1997, such as the level of
appreciation of the publicly-traded price (as defined in
paragraph 5(h) of the Employment Agreement) of the Common
Stock during Fiscal 1997 and the consummation of strategic
business combinations, and other performance goals deemed
important by the compensation committee. The performance
goals for Fiscal 1997 shall be determined by the compensation
committee no later than June 30, 1996.
125,000 Such options shall vest upon the attainment of certain $ 2.80
performance goals determined by the compensation committee
of the board of directors relating to the Company's annual
plan approved by the board of directors for the fiscal year
ending June 30, 1998 (Fiscal 1998), such as the level of
appreciation of the publicly-traded price (as defined in
paragrpah 5(h) of the Employment Agreement) of the Common
Stock during Fiscal 1998 and the consummation of strategic
business combinations, and other performance goals deemed
important by the compensation committee. The performance
goals for fiscal 1998 shall be determined by the compensation
committee no later than June 30, 1997.
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</TABLE>
<PAGE>
F. Notwithstanding the foregoing, this option shall not become
exercisable as to a tranche of shares if Optionee voluntarily leaves the
Company's employ or if Optionee is terminated For Cause (as defined in paragraph
11 of the Employment Agreement) prior to the date the option becomes exercisable
as to such shares as set forth in paragraph E hereof.
G. Subject to the provisions of paragraphs E and F, the rights
represented by this option may be exercised by the Optionee by delivery of:
a. the exercise form annexed hereto (the "Exercise Form") duly
executed and specifying the number of shares to be purchased, to the Company at
the offices of the Company located at 131 National Business Parkway, Suite 100,
Annapolis Junction, Maryland 20701 (or such other office or agency of the
Company as it may designate by notice to the Optionee at the address of such
Optionee appearing on the books of the Company) during normal business hours on
any day other than a Saturday, Sunday or day on which national banks are
authorized to close in the City of New York, State of New York (a "Business
Day").
b. Payment to the Company, for the account of the Company, by
cash or by certified or bank cashier's check or wire transfer, of the Exercise
Price for the number of shares specified in the Exercise Form in lawful money of
the United States of America.
The Company agrees that such shares shall be deemed to be
issued to the Optionee as the record owner of such shares as of the
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<PAGE>
commencement of business on the date on which this option shall have been
surrendered and payment made for the shares as aforesaid. Certificates for the
shares specified in the Exercise Form shall be delivered to the Optionee as
promptly as practicable, and in any event within ten (10) days thereafter. If
this option shall have been exercised only in part, the Company shall, at the
time of delivery of the certificate or certificates delivered to the Optionee,
deliver a new option evidencing the right to purchase the remaining shares
issuable under this option, which new option shall in all other respects be
identical to this option. No adjustment shall be made on shares issuable on
exercise of this option for any cash dividends paid or payable to holders of
record of Common Stock out of consolidated earnings or earned surplus prior to
the date as of which the Optionee shall be deemed to be the record-holder of
such shares.
H. Certain Adjustments.
--------------------
H.1. The number of shares purchasable upon the exercise of
this option and the Exercise Price shall be subject to adjustment as follows:
(a) In case the Company shall (i) pay a dividend in shares of
Common Stock or make a distribution in shares of Common Stock, (ii) subdivide
its outstanding shares of Common Stock (including, without limitation, by way of
stock splits and the like), (iii) combine its outstanding shares of Common Stock
into a smaller number of shares of Common Stock or (iv) issue by
reclassification of its shares of Common Stock other securities of
-5-
<PAGE>
the Company (including any such reclassification in connection with a
consolidation or merger in which the Company is the surviving corporation), the
number of shares purchasable upon exercise of this option immediately prior
thereto shall be adjusted so that the Optionee shall be entitled to receive the
kind and number of shares or other securities of the Company which he would have
owned or have been entitled to receive after the happening of any of the events
described above had this option been exercised immediately prior to the
happening of such event or any record date with respect thereto. An adjustment
made pursuant to this paragraph (a) shall become effective immediately after the
effective date of each such event retroactive to the record date, if any, for
such event, without amendment or modification required to this document.
(b) In case the Company shall issue rights, options or
warrants to all or substantially all holders of its outstanding Common Stock,
without any charge to such holders, entitling them to subscribe for or purchase
shares of Common Stock at a price per share which is lower at the record date
mentioned below than the then current market price per share of Common Stock (as
defined in paragraph (d) below), the number of shares thereafter purchasable
upon the exercise of this option shall be determined by multiplying the number
of shares theretofore purchasable upon exercise of this option by a fraction, of
which the numerator shall be the number of shares of Common Stock outstanding on
the date of issuance of such rights, options or warrants plus the number of
additional shares of Common Stock offered for subscription or purchase, and of
which the
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<PAGE>
denominator shall be the number of shares of Common Stock outstanding on the
date of issuance of such rights, options or warrants plus the number of shares
which the aggregate offering price of the total number of shares of Common Stock
so offered would purchase at the current market price per share of Common Stock
at such record date. Such adjustment shall be made whenever such rights, options
or warrants are issued, and shall become effective immediately after the record
date for the determination of stockholders entitled to receive such rights,
options or warrants.
(c) In case the Company shall distribute to all or
substantially all holders of its shares of Common Stock evidences of its
indebtedness or assets (excluding cash dividends or distributions payable out of
consolidated earnings or earned surplus and dividends or distributions referred
to in paragraph (a) above) or rights, options or warrants, or convertible or
exchangeable securities containing the right to subscribe for or purchase shares
of Common Stock (excluding those referred to in paragraph (b) above), then in
each case the number of shares thereafter purchasable upon the exercise of this
option shall be determined by multiplying the number of shares theretofore
purchasable upon the exercise of this option by a fraction, of which the
numerator shall be the then current market price per share of Common Stock (as
defined in paragraph (d) below) on the date of such distribution, and of which
the denominator shall be the then current market price per share of Common
Stock, less the
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<PAGE>
then fair value (as determined in good faith by the Board of Directors of the
Company, or if requested by the Optionee, by a leading firm of investment
bankers selected by the Optionee and reasonably acceptable to the Company and
whose reasonable fees and expenses shall be paid by the Company or as otherwise
agreed upon by the Company and the Optionee), of the portion of the assets or
evidences of indebtedness so distributed or of such subscription rights, options
or warrants, or of such convertible or exchangeable securities, applicable to
one share of Common Stock. Such adjustment shall be made whenever any such
distribution is made, and shall become effective on the date of distribution
retroactive to the record date for the determination of shareholders entitled to
receive such distribution.
(d) For the purpose of computation under paragraphs (b) and
(c) of this paragraph H.1, the current market price per share of Common Stock at
any date shall be:
(x) from and after 30 trading days after consummation
of a Qualifying Offering (as such term is defined in the
Company's Certificate of Incorporation, as amended), the
average of the daily closing prices for the 30 consecutive
trading days immediately preceding such computation. The
closing price for each day shall be the last reported sales
price regular way or, in case no such reported sale takes
place on such day, the average of the closing bid and asked
prices regular way for such day, in each case on the principal
national securities exchange
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<PAGE>
on which the shares of Common Stock are listed or admitted to
trading, or, if reported on NASDAQ-National Market System, the
last reported sales price, or, if not so listed or admitted to
trading or reported, the average of the closing bid and asked
prices of the Common Stock in the over-the-counter market as
reported by NASDAQ or any comparable system; and
(y) on or prior to the expiration of the 30 trading
day period set forth in clause (x) above, the fair market
value per share of Common Stock determined by a leading firm
of investment bankers selected by the Optionee and reasonably
acceptable to the Company and whose reasonable fees and
expenses shall be paid by the Company. (e) No adjustment in
the number of shares purchasable
hereunder shall be required unless such adjustment would require an increase or
decrease of at least one percent (1%) in the number of shares purchasable upon
the exercise of this option; provided, however, that any adjustments which by
reason of this paragraph (e) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
shall be made to the nearest one-thousandth of a share.
(f) Whenever the number of shares purchasable upon the
exercise of this option is adjusted, as herein provided, the Exercise Price
payable upon the exercise of this option shall be adjusted by multiplying such
Exercise Price immediately prior to such adjustment by a fraction, of which the
numerator shall be the
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<PAGE>
number of shares purchasable upon the exercise of this option immediately prior
to such adjustment, and of which the denominator shall be the number of shares
purchasable immediately thereafter.
(g) No adjustment in the number of shares purchasable upon the
exercise of this option need be made under paragraphs (b) and (c) if the Company
issues or distributes to the Optionee the rights, options, warrants, or
convertible or exchangeable securities, or evidences of indebtedness or assets
referred to in those paragraphs which the Optionee would have been entitled to
receive had the option been exercised prior to the happening of such event or
the record date with respect thereto. No adjustment in the number of shares
purchasable upon the exercise of this option may be made for sale of shares
pursuant to a Company plan for reinvestment of dividends or interest. No
adjustment need be made for a change in the par value of the shares.
(h) The Company shall not, by amendment of its Certificate of
Incorporation or through any reorganization, recapitalization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities, rights,
options or warrants or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed under
this paragraph H.1 by the Company, but will at all times in good faith assist in
carrying out all of the provisions of this paragraph H.1 and in the taking of
such actions as may be necessary or appropriate in order to protect the rights
of the Optionee under this paragraph H.1 against impairment.
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<PAGE>
(i) For the purpose of this paragraph H.1, the term "shares of
Common Stock" shall mean (i) the class of stock designated as the common stock
of the Company at the date of this Certificate, or (ii) any other class of stock
resulting from successive changes or reclassification of such shares consisting
solely of changes in par value, or from par value to no par value. In the event
that at any time, as a result of an adjustment made pursuant to paragraph (a)
above, the Optionee shall become entitled to purchase any securities of the
Company other than shares of Common Stock, thereafter the number of such other
shares so purchasable upon exercise of this option, and the Exercise Price of
such shares, shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
shares contained in paragraphs (a) through (h), inclusive, above, and the
paragraphs H.2 through H.4, inclusive, with respect to the shares, shall apply
on like terms to any such other securities.
(j) Upon the expiration of any rights, options, warrants or
conversion or exchange privileges, if any thereof shall not have been exercised,
the Exercise Price and the number of shares shall, upon such expiration, be
readjusted and shall thereafter be such as it would have been had it been
originally adjusted (or had the original adjustment not been required, as the
case may be), as if (A) the only shares of Common Stock so issued were the
shares of Common Stock, if any, actually issued or sold upon the exercise of
such rights, options, warrants or conversion or exchange rights and
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<PAGE>
(B) such shares of Common Stock, if any, were issued or sold for the
consideration actually received by the Company upon such exercise plus the
aggregate consideration, if any, actually received by the Company for the
issuance, sale or grant of all such rights, options, warrants or conversion or
exchange rights whether or not exercised; provided, further, that no such
readjustment shall have the effect of increasing the Exercise Price or
decreasing the number of shares by an amount in excess of the amount of the
adjustment initially made in respect to the issuance, sale or grant of such
rights, options, warrants or conversion or exchange rights.
H.2. Notice of Adjustment. Whenever the number of shares or
the Exercise Price payable upon exercise of this option is adjusted, as herein
provided, the Company shall promptly mail by first class, postage prepaid, to
the Optionee, notice of such adjustment or adjustments and a certificate of a
firm of independent public accountants selected by the Board of Directors of the
Company (who may be the regular accountants employed by the Company) setting
forth the number of shares and the Exercise Price payable upon exercise of this
option after such adjustment, setting forth a brief statement of the facts
requiring such adjustment and setting forth the computation by which such
adjustment was made.
H.3. No Adjustment for Dividends. Except as provided in
paragraph H.1, no adjustment in respect of any dividends shall be
made during the term of this option or upon the exercise of this
option.
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<PAGE>
H.4. Preservation of Purchase Rights Upon Merger,
Consolidation, etc. In case of any consolidation of the Company with or merger
of the Company into another corporation or otherwise or in case of any sale,
transfer or lease to another corporation of all or substantially all the
property of the Company, the Company or such successor or purchasing
corporation, as the case may be, shall execute with the Optionee an agreement
that the Optionee shall have the right thereafter upon payment of the Exercise
Price in effect immediately prior to such action to purchase upon exercise of
this option the kind and amount of shares and other securities and property
which such holder would have owned or have been entitled to receive after the
happening of such consolidation, merger, sale, transfer or lease had this option
been exercised immediately prior to such action, provided that such agreement
shall provide for adjustments thereafter, which shall be as nearly equivalent as
may be practicable to the adjustments provided for in this paragraph H. The
provisions of this paragraph H shall similarly apply to successive
consolidations, mergers, sales, transfers or leases.
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<PAGE>
I. Registration Rights. Optionee shall have the registration rights
with respect to this option as set forth in the Amended and Restated
Registration Rights Agreement dated as of June 30, 1995 and entered into by and
among the Company, the Optionee and the other executive officers of the Company
set forth therein.
AMERICAN COMMUNICATIONS SERVICES, INC.
By: /s/ RICHARD A. KOZAK
Richard A. Kozak
President and Chief Operating
Officer
Dated as of: As of June 30, 1995
ATTEST: /s/ RILEY M. MURPHY,
Riley M. Murphy, Secretary
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<PAGE>
PURCHASE FORM
Date: _________
TO: Chief Financial Officer
The undersigned hereby irrevocably elects to exercise the attached
Non-Qualified Stock Option Certificate to the extent of options to
purchase _______ shares and hereby makes payment of $_____ in payment
of the purchase price thereof.
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name:____________________________________
Address:_________________________________
---------------------------------
---------------------
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February 4, 1996
Mr. Harry J. D'Andrea
5904 Maiden Lane
Bethesda, MD 20817
Dear Harry:
I am pleased to offer you employment with American
Communications Services, Inc. (ACSI) in the position of Chief Financial Officer
for the Company. The position will report to me at ACSI's headquarters office in
Annapolis Junction, MD and based on your acceptance of this offer, your
employment will take effect on Monday, February 5. As the Chief Financial
Officer, you will be responsible for maintaining the Company's financial books
and records and fulfilling all financial reporting requirements to lenders,
shareholders, regulatory and government agencies, and ACSI senior management, as
well as ensuring the integrity of the Company's financial systems and controls.
Your compensation will consist of a base salary of $150,000
per year paid in accordance with the Company's standard payroll practices and
subject to the usual and customary federal and state tax withholding and other
employment taxes as required by law. You will receive an annual salary review in
accordance with the Company's practice for senior executives and approval by the
Board of Directors' Compensation Committee. You will also be eligible for a
performance bonus of $50,000 less required deductions during the first year of
employment which will be paid upon achievement of specific performance
objectives that will be established in conjunction with KPMG Peat Marwick by
February 15, 1996.
In addition to the foregoing compensation, you will be issued
options to purchase up to 80,000 shares of the Company's common stock. The
options will vest on an "earn-out" basis at the rate of 20,000 shares upon
completion of your first year of employment with Company, and 20,000 shares per
year upon completion
<PAGE>
of your second, third and fourth year of employment with the Company. The
exercise price of the Stock Options will be $4.25 a share and shall be
exercisable for five years after the date on which the options vest. The Company
will add these options to its S-8 Registration Statement. During your first year
of employment, the Company will award you options for up to 20,000 additional
shares of stock which will vest upon completion of specific performance
objectives that will be established in conjunction with KPMG Peat Marwick by
February 15, 1996. The exercise price for these options will be $4.25 a share
and shall be exercisable for a period of five years after the date of vesting.
The Company will also add these shares to its S-8 Registration Statement.
You will be entitled to participate in the Company's fringe
benefit plans, including but not limited to the Company's medical and dental
insurance, life insurance, stock option plan, vacation and other benefit plans
which may be adopted or amended by the Company from time to time during your
employment with the Company.
As an executive officer of the Company, your performance and
evaluation is subject to review by the Board of Directors' Compensation and
Audit Committees based on recommendations by the President and Chief Executive
Officer. Notwithstanding, the Company reserves the right to terminate employment
at any time in its sole discretion without cause. However, if your employment is
terminated without cause, you (or your estate) will be entitled to exercise the
80,000 stock options granted to you in accordance with the terms of these
options. In addition, in the event of termination without cause prior to
completion of your first year of employment, you will receive your then current
base monthly salary and health and medical coverage at the Company's expense for
three months from the date of such termination, or if subsequent to completion
of your first year of employment, you will receive your then current base
monthly salary and health and medical benefits coverage at the Company's expense
for six months from the date of such termination.
Finally, as an executive officer of the Company, your
employment will be subject to the attached Confidentiality Agreement,
Non-Competition and Non-Solicitation Agreement, and Directors' and Officers
Questionnaire which you are requested to
review and complete.
Harry, we at ACSI believe that this offer of employment with
our Company is an exciting, challenging and rewarding opportunity for you. It is
an opportunity where you can bring your talent and experience to bear in helping
the Company meet (and hopefully exceed) its business objectives. It is also an
opportunity for you to establish a track record in the dynamic
telecommunications industry and with Wall Street as a member of a
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<PAGE>
successful high growth company. We hope you will accept our offer
and join us in building the future of telecommunications.
Sincerely,
/s/ RICHARD A. KOZAK
Richard A. Kozak
Attachments
cc: Anthony J. Pompliano, Sr.
I accept this offer of employment:
/s/ HARRY J. D'ANDREA 2/7/96
Harry J. D'Andrea Date
-3-
MASTER AMENDMENT
TO
LOAN AND SECURITY AGREEMENTS
THIS MASTER AMENDMENT TO LOAN AND SECURITY AGREEMENTS ("Master
Amendment") is entered into as of November 30, 1995 among American Communication
Services of Louisville, Inc., a Delaware corporation ("Louisville"), American
Communication Services of Fort Worth, Inc., a Delaware corporation ("Fort
Worth"), American Communication Services of Columbia, Inc., a Delaware
corporation ("Columbia"), American Communication Services of Greenville, Inc., a
Delaware corporation ("Greenville"), and American Communication Services of El
Paso, Inc. ("E1 Paso"), and collectively with Louisville, Fort Worth, Columbia
and Greenville, the "ACSI Borrower Subsidiaries") and AT&T Credit Corporation
("Lender").
WITNESSETH:
WHEREAS, each of the ACSI Borrower Subsidiaries is party to a Loan and
Security Agreement with the Lender; specifically described as follows:
(i) Louisville and the Lender are parties to that certain Loan and
Security Agreement dated as of October 17, 1994, as amended by that certain
Amendment No. 1 dated as of June 26, 1995 (as the same may from time to time be
further amended, modified, supplemented or restated, the "Louisville Loan
Agreement");
(ii) Fort Worth and the Lender are parties to that certain Loan and
Security Agreement dated as of February 28, 1995, (as the same may from time to
time be further amended, modified, supplemented or restated, the "Fort Worth
Loan Agreement");
(iii) Columbia, Greenville and the Lender are parties to that certain
Loan and Security Agreement dated as of June 30, 1995 (as the same may from time
to time be further amended, modified, supplemented or restated, the "Columbia
and Greenville Loan Agreement"); and
(iv) El Paso and the Lender are parties to that certain Loan and
Security Agreement dated as of September 8, 1995 (as the same may from time to
time be further amended, modified, supplemented or restated, the "El Paso Loan
Agreement", and collectively with the Louisville Loan Agreement, the Fort Worth
Loan Agreement and the Columbia and Greenville Loan Agreement, the "Loan
Agreements");
WHEREAS, Greenville and Columbia have requested the Lender to amend the
Columbia and Greenville Loan Agreement to expand the definition of "Permitted
Liens";
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<PAGE>
WHEREAS, the Lender has requested that the ACSI Borrower Subsidiaries
enter into amendments to the Loan Agreements on the terms and conditions set
forth herein and the ACSI Borrower Subsidiaries have agreed to do so; and
NOW, THEREFORE, in consideration of the premises set forth above, the
terms and conditions contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
ACSI Borrower Subsidiaries, and the Lender have agreed to amend the Loan
Agreements as set forth below. Capitalized terms used in this Master Amendment
which are not otherwise defined herein, shall have the meanings given such terms
in the respective Loan Agreement for each ACSI Borrower Subsidiaries as
applicable.
1. Amendments to Loan Agreements. Effective as of the date hereof and
subject to the satisfaction of the conditions precedent set forth in Section 2
below, on and after the date hereof, the parties hereto agree as follows:
1.1 The definition of "Cash Flow in Section 1.01 of each of
the Loan Agreements except the El Paso Loan Agreement is hereby deleted and
replaced as follows:
(a) In the Louisville Loan Agreement and the Fort
Worth Loan Agreement, with the following definition:
"Cash Flow" shall mean for any period of the Borrower, (i) Net
Income, plus (ii) non-cash charges deducted in the calculation of Net Income,
plus (iii) Headquarters Expenses, plus (iv) actual payments of interest on the
Loans and actual amounts paid with respect to other Debt for such period.
(b) In the Columbia and Greenville Loan Agreement,
with the following definition:
"Cash Flow" shall mean for any period of any Person, (i) Net
Income, plus (ii) non-cash charges deducted in the calculation of Net Income,
plus (iii) Headquarters Expenses, plus (iv) actual payments of interest on the
Loans and actual amounts paid with respect to other Debt for such period.
1.2 The definition of "Fixed Charges" in Section 1.01 of each
of the Loan Agreements except the El Paso Loan Agreement is hereby deleted and
replaced with the following:
(a) In the Louisville Loan Agreement, the Fort Worth
Loan Agreement, and the El Paso Loan Agreement with the following definition:
"Fixed Charges" shall mean, with respect to any
fiscal period of Borrower, the sum of the following amounts
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<PAGE>
calculated at the end of such period: (i) scheduled payments of principal,
interest, rent and other amounts payable with respect to Debt (other than those
required to be made with respect to the Loans) during such period, plus (ii)
fees payable by the Borrower to the Lender (excluding fees and expenses accrued,
incurred or paid on or prior to the Effective Date) plus (iii) scheduled
quarterly principal and interest payments required to be made during such period
with respect to the Loans and solely with respect to calculating the Fixed
Charge Coverage Ratio in clause (v) of Section 6.04, the accrued Deferral
Amounts and accrued Deferrable Interest Arrearages.
(b) In the Columbia and Greenville Loan Agreement,
with the following definition:
"Fixed Charges" shall mean, with respect to any
fiscal period of either Borrower, the sum of the following amounts calculated at
the end of such period: (i) scheduled payments of principal, interest, rent and
other amounts payable with respect to Debt (other than those required to be made
with respect to the Loans) during such period, plus (ii) fees payable by the
Borrower to the Lender (excluding fees and expenses accrued, incurred or paid on
or prior to the Effective Date) plus (iii) scheduled quarterly principal and
interest payments required to be made during such period with respect to the
Loans and solely with respect to calculating the Fixed Charge Coverage Ratio in
clause (v) of Section 6.04, the accrued Deferral Amounts and accrued Deferrable
Interest Arrearages.
1.3 Section 1.01 of each of the Loan Agreements except the El
Paso Loan Agreement is amended by deleting the definition of "Fixed Rate" and
Variable Rate" in their entirety and replacing with the following respective
definitions:
"Fixed Rate" shall mean, with respect to (i) each
Loan which originally bore interest at a fixed rate, a rate equal to the average
of the "ask yields" of United States Treasury Notes trading closest to par and
maturing in the month seven years from the month of the making of such Loan, as
quoted in the Eastern Edition of The Wall Street Journal (or any successor
publication) on a date two (2) Business Days prior to the date of the making of
such Loan (or if there is no United States Treasury Note maturing in such month,
an interpolation by Lender (evidence of which is provided to the Borrower) of
the "ask yields" of United States Treasury Notes trading closest to par and
maturing in the month closest but prior to, and in the month closest but
subsequent to, the month seven years from the month of the making of such Loan,
as quoted in the Eastern Edition of The Wall Street Journal (or any successor
publication) on the date two (2) Business Days prior to the date of the making
of such Loan), plus in either case, the Applicable Margin and (ii) each Variable
Rate Loan converted to a Fixed Rate Loan pursuant to the provisions of Section
2.05, a rate
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<PAGE>
equal to the average of the "ask yields" of United States Treasury Notes trading
closest to par and maturing in the month seven years from the month in which the
Conversion Date occurs, as quoted in the Eastern Edition of The Wall Street
Journal (or any successor publication) on the date two (2) Business Days prior
to the Conversion Date (or if there is no United States Treasury Note maturing
in such month, an interpolation of the "ask yields" by Lender (evidence of which
is provided to the Borrower) of United States Treasury Notes maturing in the
month closest but prior to, and in the month closest but subsequent to, seven
years after the month in which the Conversion Date occurs, as quoted in the
Eastern Edition of The Wall Street Journal (or any successor publication) on the
date two (2) Business Days prior to the Conversion Date), plus in either case,
the Applicable Margin.
"Variable Rate" shall mean with respect to each Loan which
bears interest at a variable rate, the average offering rate by commercial paper
dealers for three month commercial paper of major corporations as quoted in the
Eastern Edition of The Wall Street Journal (or its successor publication) (i) in
effect two (2) Business Days prior to the date of the making of such Loan with
respect to the period commencing on such date and ending on the last day of the
calendar quarter in which such date occurs, and (ii) in effect two (2) Business
Days prior to the first day of each subsequent calendar quarter with respect to
the period commencing on such first day and ending on the last day of such
subsequent calendar quarter, plus, in each case, the Applicable Margin.
1.4 Section 1.01 of each of the Loan Agreements except the El
Paso Loan Agreement is hereby amended to delete the definitions of the "Fixed
Rate Note" and the "Variable Rate Note".
1.5 Section 1.01 is hereby amended in all of the Loan
Agreements to add the following definition (to be inserted
alphabetically):
"Default" shall mean an event which with the giving
of notice or passage of time or both would constitute an Event of
Default.
1.6 Section 6.01 of the Columbia and Greenville Loan Agreement
is amended to delete the word "and" at the end of clause (iv) thereof, to add
the word "and" at the end of clause (v) thereof and to add the following clause
(vi) thereto:
(vi) the rights of MPX Systems, Inc., a South
Carolina corporation ("MPX"), pursuant to that certain License Agreement entered
into on July 26, 1995 between MPX and columbia.
2. Conditions of Effectiveness of this Master Amendment. This Master
Amendment shall become effective and be deemed
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<PAGE>
effective on the date first above written subject to the Lender's receipt of
each of the following:
(i) five (5) originals of this Master Amendment,
duly executed by the ACSI Borrower Subsidiaries and the Lender; and
(ii) five (5) originals of the Master Reaffirmation
of Parent Pledge and Support Agreements attached as Exhibit A
hereto.
3. Further Assurances. The ACSI Borrower Subsidiaries hereby agree from
time to time, as and when requested by the Lender, to execute and deliver or
cause to be executed and delivered, all such documents, instruments and
agreements and to take or cause to be taken such further or other action as the
Lender may deem necessary or desirable in order to carry out the intent and
purposes of this Master Amendment, the Loan Agreements or the other Loan
Documents.
4. Representations and Warranties of the ACSI Borrower Subsidiaries.
The ACSI Borrower Subsidiaries hereby represent and warrant that this Master
Amendment and their respective Loan Agreement as previously executed and as
amended hereby, constitute legal, valid and binding obligations of the
respective ACSI Borrower Subsidiary and are enforceable against the respective
ACSI Borrower Subsidiary in accordance with their terms.
5. Reference to the Effect on the Agreement.
(a) Upon the effectiveness of Section 1 hereof, on and after
the date hereof, each reference in the Loan Agreement to "this agreement,"
"hereunder," "hereof," "herein" or words of like import shall mean and be a
reference to the respective Loan Agreement as amended hereby.
(b) Except as specifically set forth above, each of the Loan
Agreements, and all other documents, instruments and agreements executed and/or
delivered in connection therewith, shall remain in full force and effect, and
are hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this Master
Amendment shall not, except as expressly provided herein, operate as a waiver of
any right, power or remedy of the Lender, nor constitute a waiver of any
provision of the Loan Agreements, or any other documents, instruments and
agreements executed and/or delivered in connection therewith.
6. Headings. Section headings in this Master Amendment are included
herein for convenience of reference only and shall not constitute a part of this
Master Amendment for any other purpose.
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<PAGE>
7. Counterparts; Facsimile Signatures. This Master Amendment may be
executed by one or more of the parties to the Master Amendment on any number of
separate counterparts and all of said counterparts taken together shall be
deemed to constitute one and the same instrument. Each of the parties hereto
agrees that a signature transmitted by facsimile transmission shall be effective
to bind the party so transmitting its signature.
8. Entire Agreement. This Master Amendment, taken together with the
respective Loan Agreements and all of the other respective Loan Documents,
embodies the entire agreement and understanding of the parties hereto and
supersedes all prior agreements and understandings, written and oral, relating
to the subject matter hereof.
9. Applicable Law; Severability. This Master Amendment shall be
governed by, and construed in accordance with, the internal laws (as opposed to
the conflict of laws provisions) and decisions of the State of New Jersey.
Whenever possible, each provision of this Master Amendment shall be interpreted
in such manner as to be effective and valid under applicable law, but, if any
provision of this Master Amendment shall be held to be prohibited or invalid
under applicable law, such provision shall be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Master Amendment.
IN WITNESS WHEREOF, this Master Amendment has been duly executed as of
the date set forth above.
AMERICAN COMMUNICATION SERVICES
OF LOUISVILLE, INC.
/s/ RICHARD A. KOZAK
Name: Richard A. Kozak
Title: President & Chief
Executive Officer
AMERICAN COMMUNICATION SERVICES
OF FORT WORTH, INC.
/s/ RICHARD A. KOZAK
Name: Richard A. Kozak
Title: President & Chief
Executive Officer
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<PAGE>
AMERICAN COMMUNICATION SERVICES
OF COLUMBIA, INC.
/s/ RICHARD A. KOZAK
Name: Richard A. Kozak
Title: President & Chief
Executive Officer
AMERICAN COMMUNICATION SERVICES
OF GREENVILLE, INC.
/s/ RICHARD A. KOZAK
Name: Richard A. Kozak
Title: President & Chief
Executive Officer
AMERICAN COMMUNICATION SERVICES
OF LOUISVILLE, INC.
/s/ RICHARD A. KOZAK
Name: Richard A. Kozak
Title: President & Chief
Executive Officer
AMERICAN COMMUNICATION SERVICES
OF EL PASO, INC.
/s/ RICHARD A. KOZAK
Name: Richard A. Kozak
Title: President & Chief
Executive Officer
AT&T CREDIT CORPORATION
By:----------------------------
Name: Edward F. Gromek
Title: Vice President
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<PAGE>
IN WITNESS WHEREOF, this Master Amendment has been duly executed as of the
date set forth above.
AMERICAN COMMUNICATION SERVICES
OF LOUISVILLE, INC.
By:----------------------------
Name:--------------------------
Title:-------------------------
AMERICAN COMMUNICATION SERVICES
OF FORT WORTH, INC.
By:----------------------------
Name:--------------------------
Title:-------------------------
AMERICAN COMMUNICATION SERVICES
OF COLUMBIA, INC.
By:----------------------------
Name:--------------------------
Title:-------------------------
AMERICAN COMMUNICATION SERVICES
OF GREENVILLE, INC.
By:----------------------------
Name:--------------------------
Title:-------------------------
AMERICAN COMMUNICATION SERVICES
OF EL PASO, INC.
By:----------------------------
Name:--------------------------
Title:-------------------------
AT&T CREDIT CORPORATION
/s/ EDWARD F. GROMEK
Name: Edward F. Gromek
Title: Vice President
-8-
<PAGE>
EXHIBIT A
MASTER REAFFIRMATION OF
PARENT PLEDGE AND SUPPORT AGREEMENTS
This MASTER REAFFIRMATION OF PARENT PLEDGE AND SUPPORT AGREEMENTS (this
"Reaffirmation") is executed as of this 30th day of November, 1995 by American
Communications Services, Inc., a Delaware corporation (the "Parent"), in favor
of AT&T Credit Corporation, a Delaware corporation ("Lender").
WITNESSETH:
WHEREAS, American Communications Services of Louisville, Inc.,
American Communication Services of Fort Worth, Inc. and American Communication
Services of Columbia, Inc., American Communication Services of Greenville, Inc.,
and American Communication Services of El Paso, Inc. (each a Delaware
corporation), entered into those certain Loan and Security Agreements each dated
respectively as of October 16, 1994, February 28, 1995, June 30, 1995 and
September 9, 1995 (collectively, as so amended and as further amended, restated
or modified. the "Loan Agreements") with Lender;
WHEREAS, to induce Lender to enter into the Loan Agreement, Parent
executed and delivered those certain Parent Pledge and Support Agreements each
dated as of October 16, 1994, February 28, 1995, June 30, 1995 and September 9,
1995 (collectively, as so amended and as further amended, restated or modified,
the "Pledge Agreements") in favor of the Lender;
WHEREAS, the parties to the Loan Agreements are entering into that
certain Master Amendment (the "Amendment") of even date herewith; and
WHEREAS, it is a condition precedent to the effectiveness of the
Amendment that Parent execute and deliver this Reaffirmation:
NOW, THEREFORE, for and in consideration of the foregoing and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Parent hereby agrees as follows:
1. Reaffirmation of Pledge Agreement. The Parent acknowledges that it
has reviewed the Amendment and reaffirms that the Pledge Agreements shall
continue in full force and effect in accordance with their respective terms
notwithstanding the execution and delivery of the Amendment.
2. Governing Law and Jurisdiction. This Reaffirmation shall be
construed in accordance with and governed by the internal laws of the State of
New Jersey, without giving effect to any conflicts of laws principles.
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<PAGE>
3. Execution in Counterparts. This Reaffirmation may be executed in
any number of counterparts, each of which shall be an original, but all of which
shall together constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Reaffirmation
to be duly executed by their duly authorized representatives as of the day and
year first written above.
AMERICAN COMMUNICATIONS
SERVICES, INC.
By:----------------------------
Name:--------------------------
Title:-------------------------
Acknowledged and agreed to
as of the day and year first
written above.
AT&T CREDIT CORPORATION
By:----------------------------
Name:--------------------------
Title:-------------------------
-2-
MASTER REAFFIRMATION OF
PARENT PLEDGE AND SUPPORT AGREEMENTS
This MASTER REAFFIRMATION OF PARENT PLEDGE AND SUPPORT AGREEMENTS (this
"Reaffirmation") is executed as of this 30th day of November, 1995 by American
Communications Services, Inc., a Delaware corporation (the "Parent"), in favor
of AT&T Credit Corporation, a Delaware corporation ("Lender").
WITNESSETH:
WHEREAS, American Communications Services of Louisville, Inc., American
Communication Services of Fort Worth, Inc. and American Communication Services
of Columbia, Inc., American Communication Services of Greenville, Inc., and
American Communication Services of El Paso, Inc. (each a Delaware corporation),
entered into those certain Loan and Security Agreements each dated respectively
as of October 16, 1994, February 28, 1995, June 30, 1995 and September 9, 1995
(collectively, as so amended and as further amended, restated or modified, the
"Loan Agreements") with Lender;
WHEREAS, to induce Lender to enter into the Loan Agreement, Parent
executed and delivered those certain Parent Pledge and Support Agreements each
dated as of October 16, 1994, February 28, 1995, June 30, 1995 and September 9,
1995 (collectively, as so amended and as further amended, restated or modified
the "Pledge Agreements") in favor of the Lender;
WHEREAS, the parties to the Loan Agreements are entering into that
certain Master Amendment (the "Amendment") of even date herewith; and
WHEREAS, it is a condition precedent to the effectiveness of the
Amendment that Parent execute and deliver this Reaffirmation;
NOW, THEREFORE, for and in consideration of the foregoing and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Parent hereby agrees as follows:
1. Reaffirmation of Pledge Agreement. The Parent acknowledges that it
has reviewed the Amendment and reaffirms that the Pledge Agreements shall
continue in full force and effect in accordance with their respective terms
notwithstanding the execution and delivery of the Amendment.
2. Governing Law and Jurisdiction. This Reaffirmation shall be
construed in accordance with and governed by the internal laws of the State of
New Jersey, without giving effect to any conflicts of laws principles.
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<PAGE>
3. Execution in Counterparts. This Reaffirmation may be executed in
any number of counterparts, each of which shall be an original, but all of which
shall together constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Reaffirmation
to be duly executed by their duly authorized representatives as of the day and
year first written above.
AMERICAN COMMUNICATIONS
SERVICES, INC.
/s/ RICHARD A. KOZAK
Name: Richard A. Kozak
Title: President & Chief
Executive Officer
Acknowledged and agreed to
as of the day and year first
written above.
AT&T CREDIT CORPORATION
/s/ EDWARD F. GROMEK
Name: Edward F. Gromek
Title: Vice President
-2-
December 19, 1995
AT&T Credit Corporation
44 Whippany Road
Morristown, New Jersey 07962
Gentlemen:
AT&T Credit Corporation ("AT&T") is currently a party to Loan
and Security Agreements ("AT&T Loan Agreements") with various subsidiaries (the
"Funded Subsidiaries") of American Communications Services, Inc. The Funded
Subsidiaries which are the subject of this letter include American Communication
Services of Fort Worth, Inc. ("Fort Worth"), American Communication Services of
Greenville, Inc. ("Greenville"), American Communication Services of Columbia,
Inc. ("Columbia") and American Communication Services of El Paso, Inc. ("El
Paso").
Each AT&T Loan Agreement provides for a Capital Loan
Commitment Amount and an Equipment Loan Commitment Amount. It is the
understanding of the Funded Subsidiaries that AT&T is agreeable to an increase
in the Capital Loan Equipment Amount for each Funded Subsidiary with a
corresponding decrease in the Equipment Loan Equipment Amount for each Funded
Subsidiary. The Funded Subsidiaries and AT&T therefore hereby agree that the
Capital Loan Equipment Amount for each Funded Subsidiary shall equal 90% of the
respective aggregate Commitment Amount and that the Equipment Loan Commitment
Amount for each Funded Subsidiary shall equal 10% of the respective aggregate
Commitment Amount. Based upon an aggregate Commitment Amount for (i) Fort Worth
of $5,500,000, (ii) Greenville of $5,200,000, (iii) Columbia of $5,000,000 and
(iv) El Paso of $5,500,000, the Funded Subsidiaries and AT&T hereby agree that
the definitions shall be amended in each of the respective Loan Agreements to
read as follows:
1. Fort Worth: "Capital Loan Commitment Amount" shall mean the
lesser of (i) $4,950,000, inclusive of capitalized interest, if any, on the
Capital Loans and (ii) ninety percent (90%) of the outstanding principal balance
of all then outstanding Loans, inclusive of capitalized interest."
"Equipment Loan Commitment Amount" shall mean $550,000,
inclusive of capitalized interest, if any, on the Equipment Loans."
<PAGE>
AT&T Credit Corporation
December 19, 1995
2. Greenville: "ACS Greenville Capital Loan Commitment Amount" shall
mean the lesser of (i) $4,680,000, inclusive of capitalized interest, if any, on
the ACS Greenville Capital Loans and (ii) ninety percent (90%) of the
outstanding principal balance of all Loans made by Lender to ACS Greenville,
inclusive of capitalized interest."
"ACS Greenville Equipment Loan Commitment Amount" shall mean
$520,000, inclusive of capitalized interest, if any, on the ACS Greenville
Equipment Loans."
3. Columbia: "ACS Columbia Capital Loan Commitment Amount" shall
mean the lesser of (i) $4,500,000, inclusive of capitalized interest, if any, on
the ACS Columbia Capital Loans and (ii) ninety percent (90%) of the outstanding
principal balance of all Loans made by Lender to ACS Columbia, inclusive of
capitalized interest."
"ACS Columbia Equipment Loan Commitment Amount" shall mean
$500,000, inclusive of capitalized interest, if any, on the ACS Columbia
Equipment Loans."
4. El Paso: "Capital Loan Commitment Amount" shall mean the lesser of
(i) $4,950,000, inclusive of capitalized interest, if any, on the Capital Loans
and (ii) ninety percent (90%) of the outstanding principal balance of all then
outstanding Loans, inclusive of captialized interest."
"Equipment Loan Commitment Amount" shall mean $550,000,
inclusive of capitalized interest, if any, on the Equipment Loans."
Each of the Funded Subsidiaries and AT&T also agree that to
the extent (i) an amount previously borrowed by a Funded Subsidiary as an
Equipment Loan exceeds the stated amount for the respective Equipment Loan
Commitment Amount or (ii) an amount borrowed in the future by a Funded
Subsidiary as a Capital Loan exceeds the Capital Loan Commitment Amount, but
does not in either case cause the aggregate of the then outstanding respective
Capital Loans and Equipment Loans for that Funded Subsidiary to exceed the
aggregate Commitment Amount set forth above, such excess shall be treated as a
Capital Loan.
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<PAGE>
AT&T Credit Corporation
December 19, 1995
Greenville, Columbia and AT&T therefore also agree that
Section 2.08(f) of the respective Loan Agreement shall be amended so that it
shall read in its entirety as follows:
"If the aggregate principal balance (inclusive of capitalized
interest) of (i) either Borrower's Equipment Loans exceeds such Borrower's
Equipment Loan Commitment Amount or (ii) either Borrower's Capital Loans exceeds
such Borrower's Capital Loan Commitment Amount, but in either case does not
cause the aggregate of the then outstanding respective Capital Loans and
Equipment Loans for such Borrower to exceed the amount which is the aggregate of
such Borrower's Equipment Loan Commitment Amount and Capital Loan Commitment
Amount, such excess shall be treated as a Capital Loan. Otherwise, then in each
such case, such Borrower shall immediately repay to Lender, upon notice from
Lender, the amount by which the outstanding principal balance of the respective
Loan Balance exceeds its respective Commitment Amount, together with all accrued
and unpaid interest on such excess principal up to the date of repayment."
Fort Worth, El Paso and AT&T therefore also agree that Section
2.08(f) of the respective Loan Agreements shall be amended so that it shall read
in its entirety as follows:
"If the aggregate principal balance (inclusive of capitalized
interest) of (i) the Equipment Loans exceeds the Equipment Loan Commitment
Amount or (ii) the Capital Loans exceeds the Capital Loan Commitment Amount, but
in either case does not cause the aggregate of the then outstanding Capital
Loans and Equipment Loans to exceed the amount which is the aggregate of the
Equipment Loan Commitment Amount and Capital Loan Commitment Amount, such excess
shall be treated as a Capital Loan. Otherwise, then in each such case, Borrower
shall immediately repay to Lender, upon notice from Lender, the amount by which
the outstanding principal balance of the respective Loan Balance exceeds its
respective Commitment Amount, together with all accrued and unpaid interest on
such excess principal up to the date of repayment."
Each Funded Subsidiary and AT&T also agrees that the
respective amended definitions as set forth above shall be given retroactive
effect, such that the operation of the amended definitions shall not (i) cause
such Funded Subsidiary to be in violation of Section 4.02(b), Section 4.02(d) or
Section 6.02 of the respective Loan Agreement or (ii) cause an Event of Default
under Section 8.01(b) under the respective Loan Agreement.
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<PAGE>
Please sign where indicated below to indicate your
acknowledgment and agreement with the foregoing.
AMERICAN COMMUNICATION SERVICES
OF FORT WORTH, INC.
/s/ RICHARD A. KOZAK
Name: Richard A. Kozak
Title: President & Chief
Executive Officer
AMERICAN COMMUNICATION SERVICES
OF GREENVILLE, INC.
/s/ RICHARD A. KOZAK
Name: Richard A. Kozak
Title: President & Chief
Executive Officer
AMERICAN COMMUNICATION SERVICES
OF COLUMBIA, INC.
/s/ RICHARD A. KOZAK
Name: Richard A. Kozak
Title: President & Chief
Executive Officer
AMERICAN COMMUNICATION SERVICES
OF EL PASO, INC.
/s/ RICHARD A. KOZAK
Name: Richard A. Kozak
Title: President & Chief
Executive Officer
ACKNOWLEDGED AND AGREED
- -----------------------
AT&T CREDIT CORPORATION
By: __________________________
Name: ________________________
Title: _______________________
-4-
SECOND
MASTER AMENDMENT
TO
LOAN AND SECURITY AGREEMENTS, WAIVER
AND EQUIPMENT NOTES
MODIFICATION AGREEMENT
THIS SECOND MASTER AMENDMENT TO LOAN AND SECURITY AGREEMENTS, WAIVER
AND EQUIPMENT NOTES MODIFICATION AGREEMENT ("Master Amendment") is entered into
as of September 6, 1996 among American Communication Services of Louisville,
Inc., a Delaware corporation ("Louisville"), American Communication Services of
Fort Worth, Inc., a Delaware corporation ("Fort Worth"), American
Communication Services of Columbia, Inc., a Delaware corporation ("Columbia"),
American Communication Services of Greenville, Inc., a Delaware corporation
("Greenville"), and American Communication Services of El Paso, Inc. ("El Paso",
and collectively with Louisville, Fort Worth, Columbia and Greenville, the "ACSI
Borrower Subsidiaries") and AT&T Credit Corporation ("Lender").
WITNESSETH:
WHEREAS, each of the ACSI Borrower Subsidiaries is party to a Loan and
Security Agreement with the Lender; specifically described as follows:
(i) Louisville and the Lender are parties to that certain Loan
and Security Agreement dated as of October 17, 1994, as
amended by that certain Amendment No. 1 dated as of June 26,
1995 and that certain Master Amendment (the "First Master
Amendment") to Loan and Security Agreements dated as of
November 30, 1995 between Lender and the ACSI Borrower
Subsidiaries (as the same may from time to time be further
amended, modified, supplemented or restated, the "Louisville
Loan Agreement");
(ii) Fort Worth and the Lender are parties to that certain
Loan and Security Agreement dated as of February 28, 1995, as
amended by the First Master Amendment and that certain Letter
Amendment (the "Letter Amendment") dated as of December 19,
1995 between Lender and the ACSI Borrower Subsidiaries other
than Louisville (as the same may from time to time be further
amended, modified, supplemented or restated.
the "Fort Worth Loan Agreement");
(iii) Columbia, Greenville and the Lender are parties to that
certain Loan and Security Agreement dated as of June 30, 1995,
as amended by the First Master Amendment and the Letter
Amendment (as the same may from time to time be further
amended, modified, supplemented or restated, the "Columbia and
Greenville Loan Agreement"), and
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<PAGE>
(iv) El Paso and the Lender are parties to that certain Loan
and Security Agreement dated as of September 8, 1995, as
amended by the First Master Amendment and the Letter Amendment
(as the same may from time to time be further amended,
modified, supplemented or restated, the "El Paso Loan
Agreement", and collectively with the Louisville Loan
Agreement, the Fort Worth Loan Agreement and the Columbia and
Greenville Loan Agreement, the "Loan Agreements");
WHEREAS, the ACSI Borrower Subsidiaries have requested the Lender to
modify the Loan Agreements to increase the Capital Loan Commitment Amount and
decrease the Equipment Loan Commitment Amount in each of the respective Loan
Agreements and to substitute as Exhibit A a modified Business Plan for each of
the respective Loan Agreements,
WHEREAS, the Lender and the ACSI Borrower Subsidiaries have agreed to
amend the "Equipment Notes" to make a technical correction and to reflect the
reduced "Commitment Amount" for the "Equipment Loans" (as each quoted term is
defined in the respective Loan Agreements for each ACSI Subsidiary); and
WHEREAS, the Lender and the ACSI Borrower Subsidiaries have agreed to
amend the Loan Agreements on the terms and conditions set forth herein and
restate paragraph 2 of the Letter Amendment;
NOW, THEREFORE, in consideration of the premises set forth above, the
terms and conditions contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
ACSI Borrower Subsidiaries and the Lender have agreed to amend the Loan
Agreements and the Equipment Notes as set forth below. Capitalized terms used in
this Master Amendment which are not otherwise defined herein, shall have the
meanings given such terms in the respective Loan Agreement for each ACSI
Borrower Subsidiary as applicable.
1. Amendments to Loan Agreements. Effective as of the date hereof and
subject to the satisfaction of the conditions precedent set forth in Section 4
below, on and after the date hereof, the parties hereto agree as follows:
1.1 The definition of "Capital Loan Commitment Amount" in Section 1.01
of each of the Loan Agreements is hereby deleted and replaced as follows:
(a) In the Louisville Loan Agreement with the following definition:
"Capital Loan Commitment Amount" shall mean the lesser of (i)
$5,216,242.00 inclusive of capitalized interest, if any, on
the Capital Loans and (ii) ninety percent (90%) of the
outstanding principal balance of all then outstanding Loans,
inclusive of capitalized interest.
(b) In the Fort Worth Loan Agreement, with the following definition:
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<PAGE>
"Capital Loan Commitment Amount" shall mean the lesser of (i)
$6,665,024.00 inclusive of capitalized interest, if any, on
the Capital Loans and (ii) ninety percent (90%) of the
outstanding principal balance of all then outstanding Loans,
inclusive of capitalized interest."
(c) In the Columbia and Greenville Loan Agreement, with the
following definitions:
"ACS Columbia Capital Loan Commitment Amount" shall mean the
lesser of (i) $6,101,357.00 inclusive of capitalized interest,
if any, on the ACS Columbia Capital Loans and (ii) ninety
percent (90%) of the outstanding principal balance of all
Loans made by Lender to ACS Columbia, inclusive of capitalized
interest."
"ACS Greenville Capital Loan Commitment Amount" shall mean the
lesser of (i) $4,680,000, and (ii) ninety percent (90%) of the
outstanding principal balance of all loans made by Lender to
ACS Greenville, inclusive of capitalized interest. "
(d) In the El Paso Loan Agreement, with the following definition:
"Capital Loan Commitment Amount" shall mean the lesser of (i)
$5,529,387.00 inclusive of capitalized interest, if any, on
the Capital Loans and (ii) ninety percent (90%) of the
outstanding principal balance of all then outstanding Loans,
inclusive of capitalized interest."
1.2 The definition of "Capital Note" in Section 1.01 of each of the
Loan Agreements is hereby deleted and replaced with the following:
(a) In the Louisville Loan Agreement, the Fort Worth Loan Agreement,
and the El Paso Loan Agreement with the following definition:
"Capital Note" shall mean the promissory note of the Borrower,
substantially in the form of Exhibit C attached hereto and any
replacement or substitute therefor. "
(b) In the Columbia and Greenville Loan Agreement, with the
following definition:
"Capital Note" shall mean the promissory note of either
Borrower, substantially in the form of Exhibit C attached
hereto and any replacement or substitute therefor."
1.3 The definition of "Equipment Loan Commitment Amount" in Section
1.01 of each of the Loan Agreements is hereby deleted and replaced as follows:
(a) In the Louisville Loan Agreement with the following definition:
"Equipment Loan Commitment Amount" shall mean $579,582.00,
inclusive of capitalized interest, if any, on the Equipment
Loans."
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<PAGE>
(b) In the Fort Worth Loan Agreement with the following definition:
"Equipment Loan Commitment Amount" shall mean $740,558.00,
inclusive of capitalized interest, if any, on the Equipment
Loans."
(c) In the Columbia and Greenville Loan Agreement, with the
following definitions:
"ACS Columbia Equipment Loan Commitment Amount" shall mean
$677,928.00, inclusive of capitalized interest, if any, on the
ACS Columbia Equipment Loans."
"ACS Greenville Equipment Loan Commitment Amount" shall mean
$520,000.00, inclusive of capitalized interest, if any, on the
ACS Greenville Equipment Loans."
(d) In the El Paso Loan Agreement, with the following definition:
"Equipment Loan Commitment Amount" shall mean $614,376.00,
inclusive of capitalized interests, if any on the Equipment
Loans. "
1.4 Section 2.08(f) of the Louisville Loan Agreement is hereby amended
in its entirety to read as follows:
"If the aggregate principal balance (inclusive of capitalized
interest) of (i) the Equipment Loans exceeds the Equipment
Loan Commitment Amount or (ii) the Capital Loans exceeds the
Capital Loan Commitment Amount, but in either case does not
cause the aggregate of the then outstanding Capital Loans and
Equipment Loans to exceed the amount which is the aggregate of
the Equipment Loan Commitment Amount and Capital Loan
Commitment Amount, such excess shall be treated as a Capital
Loan. Otherwise, then in each such case, Borrower shall
immediately repay to Lender, upon notice from Lender, the
amount by which the outstanding principal balance of the
respective Loan Balance exceeds its respective Commitment
Amount, together with all accrued and unpaid interest on such
excess principal up to the date of repayment. "
1.5 Section 6.03 of each of the Loan Agreements is hereby amended to
add the following clause at the end thereof:
"and if no Default or Event of Default has then occurred and
is continuing, transfers occurring on or after June 1, 1996 of
Equipment and other equipment to Additional System Borrowers
and other subsidiaries of Parent owning and operating
alternate access communication systems, with book value not to
exceed (i) $250,000 in the aggregate, and (ii) when combined
with similar transfers made by Additional System Borrowers,
not to exceed $500,000 in the aggregate, provided that the
Person which receives such Equipment or other equipment shall
pay the Borrower which transferred such Equipment to it, cash
in the amount of the book value for such transferred Equipment
or equipment, within five Business Days of such transfer,
subject to accounting adjustments in
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<PAGE>
connection with the monthly closing of the books of the
Borrower, the Additional System Borrowers and such other
subsidiaries, which accounting adjustments shall be made not
later than forty-five (45) days after such fifth Business Day,
and provided further that the book value of all such transfers
by the Borrower and a description of the Equipment or
equipment transferred shall be noted on the monthly report
required to be delivered to the Lender pursuant to Section
5.06(i) for the month in which such transfer occurred."
1.6 Exhibits A and C to each of the respective Loan Agreements is
hereby deleted in their entirety and Exhibits A and C to this Master Amendment
respectively are hereby substituted therefor, specifically as follows:
(a) to the Louisville Loan Agreement, Exhibits A-1, and C-1 to this
Master Amendment shall replace Exhibits A and C to the Louisville Loan
Agreement, respectively.
(b) to the Fort Worth Loan Agreement, Exhibits A-2 and C-2 to this
Master Amendment shall replace Exhibits A and C to the Fort Worth Loan
Agreement, respectively.
(c) to the Columbia and Greenville Loan Agreement, Exhibits A-3 and C-3
to this Master Amendment shall replace Exhibits A and C to the Columbia and
Greenville Loan Agreement, respectively.
(d) to the El Paso Loan Agreement, Exhibits A-4 and C-4 to this Master
Amendment shall replace Exhibits A and C to the El Paso Loan Agreement,
respectively.
1.7 Section 6.01 of the El Paso Loan Agreement is amended to delete the
word "and" at the end of clause (iv), to add the word "and" at the end of clause
(v) thereof and to add the following clause (vi) thereto:
"(vi) the rights of El Paso Electric Company, a Texas
corporation ("El Paso Electric Company"), pursuant to that
certain License Agreement dated as of December 6, 1995 between
El Paso Electric Company and Borrower. "
2. Equipment Notes Modification. Each Equipment Note executed by the
respective ACSI Borrower Subsidiary is hereby amended (i) to delete the phrase
"as set forth on Schedule A attached hereto" at the end of the first sentence in
the second paragraph of the respective Equipment Note and to substitute the
following therefor: "as set forth in Section 2.06(b) of the Loan Agreement", and
(ii) to reduce the principal amount thereof to the amounts set forth as the
respective Equipment Loan Commitment Amounts in Section 1.3 above.
3. Waiver. Parent and each of ACSI Borrower Subsidiaries have advised
Lender that as of May 31, 1996, the ACSI Borrower Subsidiaries and other
operating subsidiaries of Parent had engaged in transfers and exchanges of
Equipment and other equipment, which transfers and exchanges of Equipment and
other equipment which were the property of the ACSI Borrower Subsidiaries had an
aggregate book value not in excess of $380,000. The Lender hereby waives any
Event of Default that
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<PAGE>
occurred under any of the Loan Agreements as a result of any of the
above-described transfers. Nothing contained in this Section 3 shall be
construed as waiving any other Event of Default or allowing any future transfers
of Equipment or other equipment not permitted by the terms of the respective
Loan Agreements.
4. Conditions of Effectiveness of this Master Amendment. This Master
Amendment shall become effective and be deemed effective on the date first above
written subject to the Lender's receipt of each of the following:
(i) five (5) originals of this Master Amendment, duly executed by
the ACSI Borrower Subsidiaries and the Lender; and
(ii) Substituted and Amended Capital Notes by each of the ACSI
Borrower Subsidiaries;
(iii) five (5) originals of the Master Reaffirmation of Parent
Pledge and Support Agreements attached as Annex A hereto; and
(iv) perfection of security interest in all new filing
jurisdictions where respective Systems are being expanded.
5. Further Assurances. The ACSI Borrower Subsidiaries hereby agree from
time to time, as and when requested by the Lender, to execute and deliver or
cause to be executed and delivered, all such documents, instruments and
agreements and to take or cause to be taken such further or other action as the
Lender may deem necessary or desirable in order to carry out the intent and
purposes of this Master Amendment, the Loan Agreements or the other Loan
Documents.
6. Representations and Warranties of the ACSI Borrower Subsidiaries.
The ACSI Borrower Subsidiaries hereby represent and warrant that this Master
Amendment and their respective Loan Agreement as previously executed and as
amended hereby, constitute legal, valid and binding obligations of the
respective ACSI Borrower Subsidiary and are enforceable against the respective
ACSI Borrower Subsidiary in accordance with their terms.
7. Reference to the Effect on the Agreement.
(a) Upon the effectiveness of Section 1 hereof, on and after the date
hereof, each reference in the Loan Agreement to "this Agreement," "hereunder,"
"hereof," "herein" or words of like import shall mean and be a reference to the
respective Loan Agreement as amended hereby.
(b) Except as specifically set forth above, each of the Loan Agreements
and the Equipment Notes, and all other documents, instruments and agreements
executed and/or delivered in connection therewith, shall remain in full force
and effect, and are hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this Master Amendment
shall not, except as expressly provided herein, operate as a waiver of any
right, power or remedy of the Lender, nor
-6-
<PAGE>
constitute a waiver of any provision of the Loan Agreements or the Equipment
Notes, or any other documents, instruments and agreements executed and/or
delivered in connection therewith.
8. Headings. Section headings in this Master Amendment are included
herein for convenience of reference only and shall not constitute a part of this
Master Amendment for any other purpose.
9. Counterparts: Facsimile Signatures. This Master Amendment may be
executed by one or more of the parties to the Master Amendment on any number of
separate counterparts and all of said counterparts taken together shall be
deemed to constitute one and the same instrument. Each of the parties hereto
agrees that a signature transmitted by facsimile transmission shall be effective
to bind the party so transmitting its signature.
10. Entire Agreement. This Master Amendment, taken together with the
respective Loan Agreements and all of the other respective Loan Documents,
embodies the entire agreement and understanding of the parties hereto and
supersedes all prior agreements and understandings, written and oral, relating
to the subject matter hereof.
11. Applicable Law, Severability. This Master Amendment shall be
governed by, and construed in accordance with, the internal laws (as opposed to
the conflict of laws provisions) and decisions of the State of New Jersey.
Whenever possible, each provision of this Master Amendment shall be interpreted
in such manner as to be effective and valid under applicable law, but, if any
provision of this Master Amendment shall be held to be prohibited or invalid
under applicable law, such provision shall be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Master Amendment.
[THE REMAINDER OF THIS PAGE INTENTIONALLY BLANK]
-7-
<PAGE>
IN WITNESS WHEREOF, this Master Amendment has been duly executed as of
the date set forth above.
AMERICAN COMMUNICATION
SERVICES OF LOUISVILLE, INC.
/s/ RICHARD A. KOZAK
Name: Richard A. Kozak
Title: President & Chief Executive Officer
AMERICAN COMMUNICATION
SERVICES OF FORT WORTH. INC.
/s/ RICHARD A. KOZAK
Name: Richard A. Kozak
Title: President & Chief Executive Officer
AMERICAN COMMUNICATION
SERVICES OF COLUMBIA, INC.
/s/ RICHARD A. KOZAK
Name: Richard A. Kozak
Title: President & Chief Executive Officer
AMERICAN COMMUNICATION
SERVICES OF GREENVILLE, INC.
/s/ RICHARD A. KOZAK
Name: Richard A. Kozak
Title: President & Chief Executive Officer
AMERICAN COMMUNICATION
SERVICES OF EL PASO, INC.
/s/ RICHARD A. KOZAK
Name: Richard A. Kozak
Title: President & Chief Executive Officer
AT&T CREDIT CORPORATION
/s/ EDWARD W. ANDREWS, JR.
Name: Edward W. Andrews, Jr.
Title: President
-8-
<PAGE>
EXHIBIT A
to
SECOND MASTER AMENDMENT TO
LOAN AGREEMENTS
A-1 Exhibit A to Louisville Loan Agreement
A-2 Exhibit A to Fort Worth Loan Agreement
A-3 Exhibit A to Columbia and Greenville Loan Agreement
A-4 Exhibit A to El Paso Loan Agreement
-1-
<PAGE>
EXHIBIT A-1
to
SECOND MASTER AMENDMENT TO
LOAN AGREEMENTS
EXHIBIT A
BUSINESS PLAN
Attached.
-2-
<PAGE>
EXHIBIT A-2
to
SECOND MASTER AMENDMENT TO
LOAN AGREEMENTS
EXHIBIT A
BUSINESS PLAN
Attached.
-3-
<PAGE>
EXHIBIT A-3
to
SECOND MASTER AMENDMENT TO
LOAN AGREEMENTS
EXHIBIT A
BUSINESS PLAN
Attached.
-4-
<PAGE>
EXHIBIT A-4
to
SECOND MASTER AMENDMENT TO
LOAN AGREEMENTS
BUSINESS PLAN
Attached.
EXHIBIT A
-5-
<PAGE>
EXHIBIT C
to
SECOND MASTER AMENDMENT TO
LOAN AGREEMENTS
C-1 Exhibit C to Louisville Loan Agreement
C-2 Exhibit C to Fort Worth Loan Agreement
C-3 Exhibit C to Columbia and Greenville Loan Agreement
C-4 Exhibit C to El Paso Loan Agreement
-6-
<PAGE>
ANNEX A
SECOND
MASTER REAFFIRMATION OF
PARENT PLEDGE AND SUPPORT AGREEMENTS
This SECOND MASTER REAFFIRMATION OF PARENT PLEDGE AND SUPPORT
AGREEMENTS (this "Reaffirmation") is executed as of this 6th day of September,
1996 by American Communications Services, Inc., a Delaware corporation (the
"Parent"), in favor of AT&T Credit Corporation, a Delaware corporation
("Lender").
WITNESSETH
WHEREAS, American Communications Services of Louisville, Inc.,
American Communication Services of Fort Worth, Inc., American Communication
Services of Columbia, Inc. and American Communication Services of Greenville,
Inc., and American Communication Services of El Paso, Inc. (each a Delaware
corporation), entered into those certain Loan and Security Agreements each
dated respectively as of October 16, 1994, February 28, 1995, June 30, 1995 and
September 9, 1995, as amended (collectively, as so amended and as further
amended, restated or modified. the "Loan Agreements") with Lender;
WHEREAS, to induce Lender to enter into the Loan Agreement, Parent
executed and delivered those certain Parent Pledge and Support Agreements each
dated as of October 16, 1994, February 28, 1995, June 30, 1995 and September 9,
1995, as amended (collectively, as so amended and as further amended, restated
or modified, the "Pledge Agreements") in favor of the Lender;
WHEREAS, the parties to the Loan Agreements are entering into that
certain Second Master Amendment to Loan and Security Agreements, Waiver and
Equipment Notes Modification Agreement (the "Amendment") of even date herewith;
and
WHEREAS, it is a condition precedent to the effectiveness of the
Amendment that Parent execute and deliver this Reaffirmation;
NOW, THEREFORE, for and in consideration of the foregoing and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Parent hereby agrees as follows:
1. Reaffirmation of Pledge Agreements. The Parent acknowledges that it
has received and reviewed the Amendment and reaffirms that (a) the pledge of the
"Pledged Stock" as defined in the respective Pledge Agreements and the liens and
security interest granted therein and (b) the Pledge Agreements and the liens
and security interest granted therein shall continue in full force and effect in
accordance with their respective terms notwithstanding the execution and
delivery of the Amendment.
2. Governing Law and Jurisdiction. This Reaffirmation shall be
construed in accordance with and governed by the internal laws of the State of
New Jersey, without giving effect to any conflicts of laws principles.
<PAGE>
3. Execution in Counterparts. This Reaffirmation may be executed in any
number of counterparts, each of which shall be an original, but all of which
shall together constitute one and the same agreement.
[THE REMAINDER OF THIS PAGE INTENTIONALLY BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Reaffirmation
to be duly executed by their duly authorized representatives as of the day and
year first written above.
AMERICAN COMMUNICATIONS SERVICES, INC.
By:
Name:
Title:
Acknowledged and agreed to as of the day and year first written above.
AT&T CREDIT CORPORATION
By:
Name:
Title:
<PAGE>
EXHIBIT C
FORM OF
SUBSTITUTED AND AMENDED CAPITAL NOTE
$ Morristown, New Jersey
[DATE]
FOR VALUE RECEIVED, the undersigned, AMERICAN COMMUNICATION SERVICES OF
LOUISVILLE, INC., a Delaware corporation (the "Borrower"), hereby
unconditionally promises to pay to the order of AT&T CREDIT CORPORATION, a
Delaware corporation (the "Lender"), at its office at 44 Whippany Road,
Morristown, New Jersey 07962-1983, or at such other place as the holder of this
Substituted and Amended Capital Note may from time to time designate in writing,
in lawful money of the United States of America and in immediately available
funds, the lesser of (i) the principal sum of AND NO/100 DOLLARS ($ ), and (ii)
the unpaid amount of all "Capital Loans" (referred to below), together with
interest on the principal balance remaining from time to time unpaid at the rate
provided below from the date such principal is advanced until payment in full
thereof. This Substituted and Amended Capital Note is referred to in and was
executed and delivered pursuant to Section 2.04 of that certain Loan and
Security Agreement dated as of October 17, 1994, as amended (as so amended and
restated, and further amended, restated and supplemented or modified from time
to time, the "Loan Agreement") by and between the Borrower and the Lender (the
"Loan Agreement"), to which reference is hereby made for a statement of the
terms and conditions under which the Capital Loans evidenced hereby are being
made and are to be repaid. All terms which are capitalized and used herein
(which are not otherwise specifically defined herein) and which are defined in
the Loan Agreement shall be used in this Substituted and Amended Capital Note as
defined in the Loan Agreement.
The principal indebtedness evidenced hereby shall be payable in
twenty-eight (28) consecutive quarterly installments, as set forth in Section
2.06(b) of the Loan Agreement. The principal amount hereof may be prepaid only
in accordance with the terms of the Loan Agreement.
Borrower further promises to pay interest on the outstanding unpaid
principal amount hereof which remains unpaid from the date hereof until payment
in full hereof at the rates described in the Loan Agreement, payable quarterly
in arrears on the Payment Dates and subject to capitalization of the interest
payable prior to the Commitment Termination Date in accordance with the
provisions of Section 2.06 of the Loan Agreement, and calculated on the basis of
a 360-day year comprised of twelve 30 day months, compounded monthly; provided,
however, that if the Borrower shall default in the payment of the principal or
interest hereof, the Borrower promises to, on demand, pay interest on the entire
unpaid principal amount hereof at a rate equal to four percent (4%) per annum
above the rate of interest that would otherwise be applicable, from the date
such payment is due to the date of actual payment, and if any other Event of
Default occurs and is continuing, the Borrower promises to, on demand, pay
interest on the entire unpaid principal amount hereof at a rate equal to two
percent (2%) per annum above the rate of interest that would otherwise be
applicable, until such Event of Default is cured.
If payment hereunder becomes due and payable on a Saturday, Sunday, or
legal holiday, under the laws of the State of New Jersey, the due date thereof
shall be extended to the next succeeding Business Day, and interest shall be
payable thereon during such extension at the rate specified above.
<PAGE>
Checks, drafts or similar items of payment received by the Lender shall not
constitute payment, but credit therefor shall, solely for the purpose of
computing interest earned by the Lender, be given on the date the same is
honored by the Lender's depository bank and final settlement thereof is
reflected by irrevocable credit to the Lender's account in such bank. In no
contingency or event whatsoever shall interest charged hereunder, however such
interest may be characterized or computed, exceed the highest rate permissible
under any law which a court of competent jurisdiction shall, in a final
determination, deem applicable hereto. In the event that such a court determines
that the Lender has received interest hereunder in excess of the highest rate
applicable hereto, the Lender shall promptly refund such excess interest to
Borrower.
The unpaid balance of the indebtedness hitherto evidenced by that
certain Capital Note dated October 17, 1994 in the original principal amount of
$2,214,000 (the "Former Note") made by the Borrower and delivered to the Lender
remains outstanding as of the date hereof and shall continue to be secured
pursuant to the terms of the Loan Documents. The principal balance of this
Substituted and Amended Capital Note includes the indebtedness hitherto
evidenced by the Former Note and to the extent such indebtedness is included in
the principal balance of this Substituted and Amended Capital Note, the
Substituted and Amended Capital Note (i) merely reevidences the indebtedness
hitherto evidenced by the Former Note, (ii) is given in substitution for, and
not as payment of the Former Note, and (iii) is in no way intended to constitute
a novation of the Former Note.
Except as otherwise agreed in the Loan Agreement, payments received by
the Lender from the Borrower on this Substituted and Amended Capital Note shall
be applied first to the payment of interest which is due and payable and only
thereafter to the outstanding principal balance.
Presentment, protest and notice of nonpayment are hereby waived by the
Borrower.
This Substituted and Amended Capital Note shall be interpreted and the
rights and liabilities of the parties hereto determined in accordance with the
internal laws (as opposed to conflicts of law provisions) and decisions of the
State of New Jersey. Whenever possible each provision of this Substituted and
Amended Capital Note shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Substituted and Amended
Capital Note shall be prohibited by or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining provisions
of this Substituted and Amended Capital Note. Whenever in this Substituted and
Amended Capital Note reference is made to the Lender or Borrower, such reference
is made to include, as applicable, a reference to their respective successors
and assigns. The provisions of this Substituted and Amended Capital Note shall
be binding upon and inure to the benefit of said successors and assigns.
Borrower's successors and assigns shall include, without limitation, a receiver,
trustee or debtor in possession of or for the Borrower.
AMERICAN COMMUNICATION SERVICES
OF LOUISVILLE, INC.
By:
Its:
<PAGE>
EXHIBIT C
SUBSTITUTED AND AMENDED CAPITAL NOTE
Morristown, New Jersey
$ [DATE]
FOR VALUE RECEIVED, the undersigned, AMERICAN COMMUNICATION SERVICES OF
FORT WORTH, INC., a Delaware corporation (the "Borrower"), hereby
unconditionally promises to pay to the order of AT&T CREDIT CORPORATION, a
Delaware corporation (the "Lender"), at its office at 44 Whippany Road,
Morristown, New Jersey 07962-1983, or at such other place as the holder of this
Substituted and Amended Capital Note may from time to time designate in writing,
in lawful money of the United States of America and in immediately available
funds, the lesser of (i) the principal sum of AND NO/100 DOLLARS ($ ), and (ii)
the unpaid amount of all "Capital Loans" (referred to below), together with
interest on the principal balance remaining from time to time unpaid at the rate
provided below from the date such principal is advanced until payment in full
thereof. This Substituted and Amended Capital Note is referred to in and was
executed and delivered pursuant to Section 2.04 of that certain Loan and
Security Agreement dated as of February 28, 1995, as amended (as so amended and
restated, and further amended, restated and supplemented or modified from time
to time, the "Loan Agreement") by and between the Borrower and the Lender (the
"Loan Agreement"), to which reference is hereby made for a statement of the
terms and conditions under which the Capital Loans evidenced hereby are being
made and are to be repaid. All terms which are capitalized and used herein
(which are not otherwise specifically defined herein) and which are defined in
the Loan Agreement shall be used in this Substituted and Amended Capital Note as
defined in the Loan Agreement.
The principal indebtedness evidenced hereby shall be payable in
twenty-eight (28) consecutive quarterly installments, as set forth in Section
2.06(b) of the Loan Agreement. The principal amount hereof may be prepaid only
in accordance with the terms of the Loan Agreement.
Borrower further promises to pay interest on the outstanding unpaid
principal amount hereof which remains unpaid from the date hereof until payment
in full hereof at the rates described in the Loan Agreement, payable quarterly
in arrears on the Payment Dates and subject to capitalization of the interest
payable prior to the Commitment Termination Date in accordance with the
provisions of Section 2.06 of the Loan Agreement, and calculated on the basis of
a 360-day year comprised of twelve 30 day months, compounded monthly; provided,
however, that if the Borrower shall default in the payment of the principal or
interest hereof, the Borrower promises to, on demand, pay interest on the entire
unpaid principal amount hereof at a rate equal to four percent (4%) per annum
above the rate of interest that would otherwise be applicable, from the date
such payment is due to the date of actual payment, and if any other Event of
Default occurs and is continuing, the Borrower promises to, on demand, pay
interest on the entire unpaid principal amount hereof at a rate equal to two
percent (2%) per annum above the rate of interest that would otherwise be
applicable, until such Event of Default is cured.
If payment hereunder becomes due and payable on a Saturday, Sunday, or
legal holiday, under the laws of the State of New Jersey, the due date thereof
shall be extended to the next succeeding Business Day, and interest shall be
payable thereon during such extension at the rate specified above. Checks,
drafts or similar items of payment received by the Lender shall not constitute
payment, but credit therefor shall, solely for the purpose of computing interest
earned by the Lender, be given on the
<PAGE>
date the same is honored by the Lender's depository bank and final settlement
thereof is reflected by irrevocable credit to the Lender's account in such bank.
In no contingency or event whatsoever shall interest charged hereunder, however
such interest may be characterized or computed, exceed the highest rate
permissible under any law which a court of competent jurisdiction shall, in a
final determination, deem applicable hereto. In the event that such a court
determines that the Lender has received interest hereunder in excess of the
highest rate applicable hereto, the Lender shall promptly refund such excess
interest to Borrower.
The unpaid balance of the indebtedness hitherto evidenced by that
certain Capital Note dated May 1, 1995 in the original principal amount of
$2,970,000 (the "Former Note") made by the Borrower and delivered to the Lender
remains outstanding as of the date hereof and shall continue to be secured
pursuant to the terms of the Loan Documents. The principal balance of this
Substituted and Amended Capital Note includes the indebtedness hitherto
evidenced by the Former Note and to the extent such indebtedness is included in
the principal balance of this Substituted and Amended Capital Note, the
Substituted and Amended Capital Note (i) merely reevidences the indebtedness
hitherto evidenced by the Former Note, (ii) is given in substitution for, and
not as payment of the Former Note, and (iii) is in no way intended to constitute
a novation of the Former Note.
Except as otherwise agreed in the Loan Agreement, payments received by
the Lender from the Borrower on this Substituted and Amended Capital Note shall
be applied first to the payment of interest which is due and payable and only
thereafter to the outstanding principal balance.
Presentment, protest and notice of nonpayment are hereby waived by the
Borrower.
This Substituted and Amended Capital Note shall be interpreted and the
rights and liabilities of the parties hereto determined in accordance with the
internal laws (as opposed to conflicts of law provisions) and decisions of the
State of New Jersey. Whenever possible each provision of this Substituted and
Amended Capital Note shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Substituted and Amended
Capital Note shall be prohibited by or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining provisions
of this Substituted and Amended Capital Note. Whenever in this Substituted and
Amended Capital Note reference is made to the Lender or Borrower, such reference
is made to include, as applicable, a reference to their respective successors
and assigns. The provisions of this Substituted and Amended Capital Note shall
be binding upon and inure to the benefit of said successors and assigns.
Borrower's successors and assigns shall include, without limitation, a receiver,
trustee or debtor in possession of or for the Borrower.
AMERICAN COMMUNICATION SERVICES
OF FORT WORTH, INC.
By:
Its:
<PAGE>
EXHIBIT C
SUBSTITUTED AND AMENDED CAPITAL NOTE
Morristown, New Jersey
$ [DATE]
FOR VALUE RECEIVED, the undersigned, AMERICAN COMMUNICATION SERVICES OF
COLUMBIA, INC., a Delaware corporation (the "Borrower"), hereby unconditionally
promises to pay to the order of AT&T CREDIT CORPORATION, a Delaware corporation
(the "Lender"), at its office at 44 Whippany Road, Morristown, New Jersey
07962-1983, or at such other place as the holder of this Substituted and Amended
Capital Note may from time to time designate in writing, in lawful money of the
United States of America and in immediately available funds, the lesser of (i)
the principal sum of
AND NO/100 DOLLARS ($ ), and (ii) the unpaid amount of all "Capital
Loans" (referred to below), together with interest on the principal balance
remaining from time to time unpaid at the rate provided below from the date such
principal is advanced until payment in full thereof. This Substituted and
Amended Capital Note is referred to in and was executed and delivered pursuant
to Section 2.04 of that certain Loan and Security Agreement dated as of June 30,
1995, as amended (as so amended and restated, and further amended, restated and
supplemented or modified from time to time, the "Loan Agreement") by and among
the Borrower, American Communication Services of Greenville, Inc., and the
Lender (the "Loan Agreement"), to which reference is hereby made for a statement
of the terms and conditions under which the Capital Loans evidenced hereby are
being made and are to be repaid. All terms which are capitalized and used herein
(which are not otherwise specifically defined herein) and which are defined in
the Loan Agreement shall be used in this Substituted and Amended Capital Note as
defined in the Loan Agreement.
The principal indebtedness evidenced hereby shall be payable in
twenty-eight (28) consecutive quarterly installments, as set forth in Section
2.06(b) of the Loan Agreement. The principal amount hereof may be prepaid only
in accordance with the terms of the Loan Agreement.
Borrower further promises to pay interest on the outstanding unpaid
principal amount hereof which remains unpaid from the date hereof until payment
in full hereof at the rates described in the Loan Agreement, payable quarterly
in arrears on the Payment Dates and subject to capitalization of the interest
payable prior to the Commitment Termination Date in accordance with the
provisions of Section 2.06 of the Loan Agreement, and calculated on the basis of
a 360-day year comprised of twelve 30 day months, compounded monthly; provided,
however, that if the Borrower shall default in the payment of the principal or
interest hereof, the Borrower promises to, on demand, pay interest on the entire
unpaid principal amount hereof at a rate equal to four percent (4%) per annum
above the rate of interest that would otherwise be applicable, from the date
such payment is due to the date of actual payment, and if any other Event of
Default occurs and is continuing, the Borrower promises to, on demand, pay
interest on the entire unpaid.
Whenever in this Substituted and Amended Capital Note reference is made
to the Lender or Borrower, such reference is made to include, as applicable, a
reference to their respective successors
<PAGE>
and assigns. The provisions of this Substituted and Amended Capital Note shall
be binding upon and inure to the benefit of said successors and assigns.
Borrower's successors and assigns shall include, without limitation, a receiver,
trustee or debtor in possession of or for the Borrower.
AMERICAN COMMUNICATION SERVICES
OF COLUMBIA, INC.
By:
Its:
<PAGE>
EXHIBIT C
SUBSTITUTED AND AMENDED CAPITAL NOTE
$ [DATE]
FOR VALUE RECEIVED, the undersigned, AMERICAN COMMUNICATION SERVICES OF
GREENVILLE, INC., a Delaware corporation (the "Borrower"), hereby
unconditionally promises to pay to the order of AT&T CREDIT CORPORATION, a
Delaware corporation (the "Lender"), at its office at 44 Whippany Road,
Morristown, New Jersey 07962- 1983, or at such other place as the holder of this
Substituted and Amended Capital Note may from time to time designate in writing,
in lawful money of the United States of America and in immediately available
funds, the lesser of (i) the principal sum of
AND NO/100 DOLLARS ($ ), and (ii) the unpaid amount of all "Capital
Loans" (referred to below), together with interest on the principal balance
remaining from time to time unpaid at the rate provided below from the date such
principal is advanced until payment in full thereof. This Substituted and
Amended Capital Note is referred to in and was executed and delivered pursuant
to Section 2.04 of that certain Loan and Security Agreement dated as of June 30,
1995, as amended (as so amended and restated, and further amended, restated and
supplemented or modified from time to time, the "Loan Agreement") by and among
the Borrower, American Communication Services of Columbia, Inc., and the Lender
(the "Loan Agreement"), to which reference is hereby made for a statement of the
terms and conditions under which the Capital Loans evidenced hereby are being
made and are to be repaid. All terms which are capitalized and used herein
(which are not otherwise specifically defined herein) and which are defined in
the Loan Agreement shall be used in this Substituted and Amended Capital Note as
defined in the Loan Agreement.
The principal indebtedness evidenced hereby shall be payable in
twenty-eight (28) consecutive quarterly installments, as set forth in Section
2.06(b) of the Loan Agreement. The principal amount hereof may be prepaid only
in accordance with the terms of the Loan Agreement.
Borrower further promises to pay interest on the outstanding unpaid
principal amount hereof which remains unpaid from the date hereof until payment
in full hereof at the rates described in the Loan Agreement, payable quarterly
in arrears on the Payment Dates and subject to capitalization of the interest
payable prior to the Commitment Termination Date in accordance with the
provisions of Section 2.06 of the Loan Agreement, and calculated on the basis of
a 360-day year comprised of twelve 30 day months, compounded monthly; provided,
however, that if the Borrower shall default in the payment of the principal or
interest hereof, the Borrower promises to, on demand, pay interest on the entire
unpaid principal amount hereof at a rate equal to four percent (4%) per annum
above the rate of interest that would otherwise be applicable, from the date
such payment is due to the date of actual payment, and if any other Event of
Default occurs and is continuing, the Borrower promises to, on demand, pay
interest on the entire unpaid principal amount hereof at a rate equal to two
percent (2%) per annum above the rate of interest that would otherwise be
applicable, until such Event of Default is cured.
If payment hereunder becomes due and payable on a Saturday, Sunday, or
legal holiday, under the laws of the State of New Jersey, the due date thereof
shall be extended to the next succeeding
<PAGE>
Business Day, and interest shall be payable thereon during such extension at the
rate specified above. Checks, drafts or similar items of payment received by the
Lender shall not constitute payment, but credit therefor shall, solely for the
purpose of computing interest earned by the Lender, be given on the date the
same is honored by the Lender's depository bank and final settlement thereof is
reflected by irrevocable credit to the Lender's account in such bank. In no
contingency or event whatsoever shall interest charged hereunder, however such
interest may be characterized or computed, exceed the highest rate permissible
under any law which a court of competent jurisdiction shall, in a final
determination, deem applicable hereto. In the event that such a court determines
that the Lender has received interest hereunder in excess of the highest rate
applicable hereto, the Lender shall promptly refund such excess interest to
Borrower.
The unpaid balance of the indebtedness hitherto evidenced by that
certain Capital Note dated July 21, 1995 in the original amount of $2,808,000
(the "Former Note") made by the Borrower and delivered to the Lender remains
outstanding as of the date hereof and shall continue to be secured pursuant to
the terms of the Loan Documents. The principal balance of this Substituted and
Amended Capital Note includes the indebtedness hitherto evidenced by the Former
Note and to the extent such indebtedness is included in the principal balance of
this Substituted and Amended Capital Note, the Substituted and Amended Capital
Note (i) merely reevidences the indebtedness hitherto evidenced by the Former
Note, (ii) is given in substitution for, and not as payment of the Former Note,
and (iii) is in no way intended to constitute a novation of the Former Note.
Except as otherwise agreed in the Loan Agreement, payments received by
the Lender from the Borrower on this Substituted and Amended Capital Note shall
be applied first to the payment of interest which is due and payable and only
thereafter to the outstanding principal balance.
Presentment, protest and notice of nonpayment are hereby waived by the
Borrower.
This Substituted and Amended Capital Note shall be interpreted and the
rights and liabilities of the parties hereto determined in accordance with the
internal laws (as opposed to conflicts of law provisions) and decisions of the
State of New Jersey. Whenever possible each provision of this Substituted and
Amended Capital Note shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Substituted and Amended
Capital Note shall be prohibited by or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining provisions
of this Substituted and Amended Capital Note.
Whenever in this Substituted and Amended Capital Note reference is made
to the Lender or Borrower;:such reference is made to include, as applicable, a
reference to their respective successors and assigns. The provisions of this
Substituted and Amended Capital Note shall be binding upon and inure to the
benefit of said successors and assigns. Borrower's successors and assigns shall
include, without limitation, a receiver, trustee or debtor in possession of or
for the Borrower.
AMERICAN COMMUNICATION SERVICES
OF GREENVILLE, INC.
By:
Its:
<PAGE>
EXHIBIT C
SUBSTITUTED AND AMENDED CAPITAL NOTE
Morristown, New Jersey
$ [DATE]
FOR VALUE RECEIVED, the undersigned, AMERICAN COMMUNICATION SERVICES OF
EL PASO, INC., a Delaware corporation (the "Borrower"), hereby unconditionally
promises to pay to the order of AT&T CREDIT CORPORATION, a Delaware corporation
(the "Lender"), at its office at 44 Whippany Road, Morristown, New Jersey
07962-1983, or at such other place as the holder of this Substituted and Amended
Capital Note may from time to time designate in writing, in lawful money of the
United States of America and in immediately available funds, the lesser of (i)
the principal sum of AND NO/100 DOLLARS ($ ), and (ii) the unpaid amount of all
"Capital Loans" (referred to below), together with interest on the principal
balance remaining from time to time unpaid at the rate provided below from the
date such principal is advanced until payment in full thereof. This Substituted
and Amended Capital Note is referred to in and was executed and delivered
pursuant to Section 2.04 of that certain Loan and Security Agreement dated as of
September 8, 1995, as amended (as so amended and restated, and further amended,
restated and supplemented or modified from time to time, the "Loan Agreement")
by and between the Borrower and the Lender, to which reference is hereby made
for a statement of the terms and conditions under which the Capital Loans
evidenced hereby are being made and are to be repaid. All terms which are
capitalized and used herein (which are not otherwise specifically defined
herein) and which are defined in the Loan Agreement shall be used in this
Substituted and Amended Capital Note as defined in the Loan Agreement.
The principal indebtedness evidenced hereby shall be payable in
twenty-eight (28) consecutive quarterly installments, as set forth in Section
2.06(b) of the Loan Agreement. The principal amount hereof may be prepaid only
in accordance with the terms of the Loan Agreement.
Borrower further promises to pay interest on the outstanding unpaid
principal amount hereof which remains unpaid from the date hereof until payment
in full hereof at the rates described in the Loan Agreement, payable quarterly
in arrears on the Payment Dates and subject to capitalization of the interest
payable prior to the Commitment Termination Date in accordance with the
provisions of Section 2.06 of the Loan Agreement, and calculated on the basis of
a 360-day year comprised of twelve 30 day months, compounded monthly; provided,
however, that if the Borrower shall default in the payment of the principal or
interest hereof, the Borrower promises to, on demand, pay interest on the entire
unpaid principal amount hereof at a rate equal to four percent (4%) per annum
above the rate of interest that would otherwise be applicable, from the date
such payment is due to the date of actual payment, and if any other Event of
Default occurs and is continuing, the Borrower promises to, on demand, pay
interest on the entire unpaid principal amount hereof at a rate equal to two
percent (2%) per annum above the rate of interest that would otherwise be
applicable, until such Event of Default is cured.
If payment hereunder becomes due and payable on a Saturday, Sunday, or
legal holiday, under the laws of the State of New Jersey, the due date thereof
shall be extended to the next succeeding Business Day, and interest shall be
payable thereon during such extension at the rate specified above. Checks,
drafts or similar items of payment received by the Lender shall not constitute
payment, but
<PAGE>
credit therefor shall, solely for the purpose of computing interest earned by
the Lender, be given on the date the same is honored by the Lender's depository
bank and final settlement thereof is reflected by irrevocable credit to the
Lender's account in such bank. In no contingency or event whatsoever shall
interest charged hereunder, however such interest may be characterized or
computed, exceed the highest rate permissible under any law which a court of
competent jurisdiction shall, in a final determination, deem applicable hereto.
In the event that such a court determines that the Lender has received interest
hereunder in excess of the highest rate applicable hereto, the Lender shall
promptly refund such excess interest to Borrower.
The unpaid balance of the indebtedness hitherto evidenced by that
certain Capital Note dated September 29, 1995 in the original principal amount
of $4,125,000 (the "Former Note") made by the Borrower and delivered to the
Lender remains outstanding as of the date hereof and shall continue to be
secured pursuant to the terms of the Loan Documents. The principal balance of
this Substituted and Amended Capital Note includes the indebtedness hitherto
evidenced by the Former Note and to the extent such indebtedness is included in
the principal balance of this Substituted and Amended Capital Note, the
Substituted and Amended Capital Note (i) merely reevidences the indebtedness
hitherto evidenced by the Former Note, (ii) is given in substitution for, and
not as payment of the Former Note, and (iii) is in no way intended to constitute
a novation of the Former Note.
Except as otherwise agreed in the Loan Agreement, payments received by
the Lender from the Borrower on this Substituted and Amended Capital Note shall
be applied first to the payment of interest which is due and payable and only
thereafter to the outstanding principal balance.
Presentment, protest and notice of nonpayment are hereby waived by the
Borrower.
This Substituted and Amended Capital Note shall be interpreted and the
rights and liabilities of the parties hereto determined in accordance with the
internal laws (as opposed to conflicts of law provisions) and decisions of the
State of New Jersey. Whenever possible each provision of this Substituted and
Amended Capital Note shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Substituted and Amended
Capital Note shall be prohibited by or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining provisions
of this Substituted and Amended Capital Note. Whenever in this Substituted and
Amended Capital Note reference is made to the Lender or Borrower, such reference
is made to include, as applicable, a reference to their respective successors
and assigns. The provisions of this Substituted and Amended Capital Note shall
be binding upon and inure to the benefit of said successors and assigns.
Borrower's successors and assigns shall include, without limitation, a receiver,
trustee or debtor in possession of or for the Borrower.
AMERICAN COMMUNICATION SERVICES
OF EL PASO, INC.
By:
Its:
<PAGE>
SUBSTITUTED AND AMENDED CAPITAL NOTE
$5,216,242.00 Morristown, New Jersey
September 6, 1996
FOR VALUE RECEIVED, the undersigned, AMERICAN COMMUNICATION SERVICES OF
LOUISVILLE, INC., a Delaware corporation (the "Borrower"), hereby
unconditionally promises to pay to the order of AT&T CREDIT CORPORATION, a
Delaware corporation (the "Lender"), at its office at 44 Whippany Road,
Morristown, New Jersey 07962-1983, or at such other place as the holder of this
Substituted and Amended Capital Note may from time to time designate in writing,
in lawful money of the United States of America and in immediately available
funds, the lesser of (i) the principal sum of FIVE MILLION TWO HUNDRED SIXTEEN
THOUSAND TWO HUNDRED FORTY-TWO AND NO/100 DOLLARS ($5,216,242.00), and (ii) the
unpaid amount of all "Capital Loans" (referred to below), together with interest
on the principal balance remaining from time to time unpaid at the rate provided
below from the date such principal is advanced until payment in full thereof.
This Substituted and Amended Capital Note is referred to in and was executed and
delivered pursuant to Section 2.04 of that certain Loan and Security Agreement
dated as of October 17, 1994, as amended (as so amended and restated, and
further amended, restated and supplemented or modified from time to time, the
"Loan Agreement") by and between the Borrower and the Lender (the "Loan
Agreement"), to which reference is hereby made for a statement of the terms and
conditions under which the Capital Loans evidenced hereby are being made and are
to be repaid. All terms which are capitalized and used herein (which are not
otherwise specifically defined herein) and which are defined in the Loan
Agreement shall be used in this Substituted and Amended Capital Note as defined
in the Loan Agreement.
The principal indebtedness evidenced hereby shall be payable in
twenty-eight (28) consecutive quarterly installments, as set forth in Section
2.06(b) of the Loan Agreement. The principal amount hereof may be prepaid only
in accordance with the terms of the Loan Agreement.
Borrower further promises to pay interest on the outstanding unpaid
principal amount hereof which remains unpaid from the date hereof until payment
in full hereof at the rates described in the Loan Agreement, payable quarterly
in arrears on the Payment Dates and subject to capitalization of the interest
payable prior to the Commitment Termination Date in accordance with the
provisions of Section 2.06 of the Loan Agreement, and calculated on the basis of
a 360-day year comprised of twelve 30 day months, compounded monthly; provided,
however, that if the Borrower shall default in the payment of the principal or
interest hereof, the Borrower promises to, on demand, pay interest on the entire
unpaid principal amount hereof at a rate equal to four percent (4%) per annum
above the rate of interest that would otherwise be applicable, from the date
such payment is due to the date of actual payment, and if any other Event of
Default occurs and is continuing, the Borrower promises to, on demand, pay
interest on the entire unpaid principal amount hereof at a rate equal to two
percent (2%) per annum above the rate of interest that would otherwise be
applicable, until such Event of Default is cured.
If payment hereunder becomes due and payable on a Saturday, Sunday, or
legal holiday, under the laws of the State of New Jersey, the due date thereof
shall be extended to the next succeeding Business Day, and interest shall be
payable thereon during such extension at the rate specified above. Checks,
drafts or similar items of payment received by the Lender shall not constitute
payment, but credit therefor shall, solely for the purpose of computing interest
earned by the Lender, be given on the
<PAGE>
date the same is honored by the Lender's depository bank and final settlement
thereof is reflected by irrevocable credit to the Lender's account in such bank.
In no contingency or event whatsoever shall interest charged hereunder, however
such interest may be characterized or computed, exceed the highest rate
permissible under any law which a court of competent jurisdiction shall, in a
final determination, deem applicable hereto. In the event that such a court
determines that the Lender has received interest hereunder in excess of the
highest rate applicable hereto, the Lender shall promptly refund such excess
interest to Borrower.
The unpaid balance of the indebtedness hitherto evidenced by that
certain Capital Note dated October 17, 1994 in the original principal amount of
$2,214,000 (the "Former Note") made by the Borrower and delivered to the Lender
remains outstanding as of the date hereof and shall continue to be secured
pursuant to the terms of the Loan Documents. The principal balance of this
Substituted and Amended Capital Note includes the indebtedness hitherto
evidenced by the Former Note and to the extent such indebtedness is included in
the principal balance of this Substituted and Amended Capital Note, the
Substituted and Amended Capital Note (i) merely reevidences the indebtedness
hitherto evidenced by the Former Note, (ii) is given in substitution for, and
not as payment of the Former Note, and (iii) is in no way intended to constitute
a novation of the Former Note.
Except as otherwise agreed in the Loan Agreement, payments received by
the Lender from the Borrower on this Substituted and Amended Capital Note shall
be applied first to the payment of interest which is due and payable and only
thereafter to the outstanding principal balance.
Presentment, protest and notice of nonpayment are hereby waived by the
Borrower.
This Substituted and Amended Capital Note shall be interpreted and the
rights and liabilities of the parties hereto determined in accordance with the
internal laws (as opposed to conflicts of law provisions) and decisions of the
State of New Jersey. Whenever possible each provision of this Substituted and
Amended Capital Note shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Substituted and Amended
Capital Note shall be prohibited by or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining provisions
of this Substituted and Amended Capital Note. Whenever in this Substituted and
Amended Capital Note reference is made to the Lender or Borrower, such reference
is made to include, as applicable, a reference to their respective successors
and assigns. The provisions of this Substituted and Amended Capital Note shall
be binding upon and inure to the benefit of said successors and assigns.
Borrower's successors and assigns shall include, without limitation, a receiver,
trustee or debtor in possession of or for the Borrower.
AMERICAN COMMUNICATION SERVICES
OF LOUISVILLE, INC.
/s/ RICHARD A. KOZAK
Its: President & CEO
<PAGE>
SUBSTITUTED AND AMENDED CAPITAL NOTE
$6,665,024.00 September 6, 1996
FOR VALUE RECEIVED, the undersigned, AMERICAN COMMUNICATION SERVICES OF
FORT WORTH, INC., a Delaware corporation (the "Borrower"), hereby
unconditionally promises to pay to the order of AT&T CREDIT CORPORATION, a
Delaware corporation (the "Lender"), at its office at 44 Whippany Road,
Morristown, New Jersey 07962-1983, or at such other place as the holder of this
Substituted and Amended Capital Note may from time to time designate in writing,
in lawful money of the United States of America and in immediately available
funds, the lesser of (i) the principal sum of SIX MILLION SIX HUNDRED SIXTY-FIVE
THOUSAND TWENTY-FOUR AND NO/100 DOLLARS ($6,665,024.00), and (ii) the unpaid
amount of all "Capital Loans" (referred to below), together with interest on the
principal balance remaining from time to time unpaid at the rate provided below
from the date such principal is advanced until payment in full thereof. This
Substituted and Amended Capital Note is referred to in and was executed and
delivered pursuant to Section 2.04 of that certain Loan and Security Agreement
dated as of February 28, 1995, as amended (as so amended and restated, and
further amended, restated and supplemented or modified from time to time, the
"Loan Agreement") by and between the Borrower and the Lender (the "Loan
Agreement"), to which reference is hereby made for a statement of the terms and
conditions under which the Capital Loans evidenced hereby are being made and are
to be repaid. All terms which are capitalized and used herein (which are not
otherwise specifically defined herein) and which are defined in the Loan
Agreement shall be used in this Substituted and Amended Capital Note as defined
in the Loan Agreement.
The principal indebtedness evidenced hereby shall be payable in
twenty-eight (28) consecutive quarterly installments, as set forth in Section
2.06(b) of the Loan Agreement. The principal amount hereof may be prepaid only
in accordance with the terms of the Loan Agreement.
Borrower further promises to pay interest on the outstanding unpaid
principal amount hereof which remains unpaid from the date hereof until payment
in full hereof at the rates described in the Loan Agreement, payable quarterly
in arrears on the Payment Dates and subject to capitalization of the interest
payable prior to the Commitment Termination Date in accordance with the
provisions of Section 2.06 of the Loan Agreement, and calculated on the basis of
a 360-day year comprised of twelve 30 day months, compounded monthly; provided,
however, that if the Borrower shall default in the payment of the principal or
interest hereof, the Borrower promises to, on demand, pay interest on the entire
unpaid principal amount hereof at a rate equal to four percent (4%) per annum
above the rate of interest that would otherwise be applicable, from the date
such payment is due to the date of actual payment, and if any other Event of
Default occurs and is continuing, the Borrower promises to, on demand, pay
interest on the entire unpaid principal amount hereof at a rate equal to two
percent (2%) per annum above the rate of interest that would otherwise be
applicable, until such Event of Default is cured.
If payment hereunder becomes due and payable on a Saturday, Sunday, or
legal holiday, under the laws of the State of New Jersey, the due date thereof
shall be extended to the next succeeding Business Day, and interest shall be
payable thereon during such extension at the rate specified above. Checks,
drafts or similar items of payment received by the Lender shall not constitute
payment, but credit therefor shall, solely for the purpose of computing interest
earned by the Lender, be given on the
<PAGE>
date the same is honored by the Lender's depository bank and final settlement
thereof is reflected by irrevocable credit to the Lender's account in such bank.
In no contingency or event whatsoever shall interest charged hereunder, however
such interest may be characterized or computed, exceed the highest rate
permissible under any law which a court of competent jurisdiction shall, in a
final determination, deem applicable hereto. In the event that such a court
determines that the Lender has received interest hereunder in excess of the
highest rate applicable hereto, the Lender shall promptly refund such excess
interest to Borrower.
The unpaid balance of the indebtedness hitherto evidenced by that
certain Capital Note dated May 1, 1995 in the original principal amount of
$2,970,000 (the "Former Note") made by the Borrower and delivered to the Lender
remains outstanding as of the date hereof and shall continue to be secured
pursuant to the terms of the Loan Documents. The principal balance of this
Substituted and Amended Capital Note includes the indebtedness hitherto
evidenced by the Former Note and to the extent such indebtedness is included in
the principal balance of this Substituted and Amended Capital Note, the
Substituted and Amended Capital Note (i) merely reevidences the indebtedness
hitherto evidenced by the Former Note, (ii) is given in substitution for, and
not as payment of the Former Note, and (iii) is in no way intended to constitute
a novation of the Former Note.
Except as otherwise agreed in the Loan Agreement, payments received by
the Lender from the Borrower on this Substituted and Amended Capital Note shall
be applied first to the payment of interest which is due and payable and only
thereafter to the outstanding principal balance.
Presentment, protest and notice of nonpayment are hereby--waived by the
Borrower.
This Substituted and Amended Capital Note shall be interpreted and the
rights and liabilities of the parties hereto determined in accordance with the
internal laws (as opposed to conflicts of law provisions) and decisions of the
State of New Jersey. Whenever possible each provision of this Substituted and
Amended Capital Note shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Substituted and Amended
Capital Note shall be prohibited by or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining provisions
of this Substituted and Amended Capital Note. Whenever in this Substituted and
Amended Capital Note reference is made to the Lender or Borrower, such reference
is made to include, as applicable, a reference to their respective successors
and assigns. The provisions of this Substituted and Amended Capital Note shall
be binding upon and inure to the benefit of said successors and assigns.
Borrower's successors and assigns shall include, without limitation, a receiver,
trustee or debtor in possession of or for the Borrower.
AMERICAN COMMUNICATION SERVICES
OF FORT WORTH, INC.
/s/ RICHARD A. KOZAK
Its: President & CEO
<PAGE>
SUBSTITUTED AND AMENDED CAPITAL NOTE
$6,101,357.00 September 6, 1996
FOR VALUE RECEIVED, the undersigned, AMERICAN COMMUNICATION SERVICES OF
COLUMBIA, INC., a Delaware corporation (the "Borrower"), hereby unconditionally
promises to pay to the order of AT&T CREDIT CORPORATION, a Delaware corporation
(the "Lender"), at its office at 44 Whippany Road, Morristown, New Jersey 07962-
1983, or at such other place as the holder of this Substituted and Amended
Capital Note may from time to time designate in writing, in lawful money of the
United States of America and in immediately available funds, the lesser of (i)
the principal sum of SIX MILLION ONE HUNDRED ONE THOUSAND THREE HUNDRED
FIFTY-SEVEN AND NO/100 DOLLARS ($6,101,357.00), and (ii) the unpaid amount of
all "Capital Loans" (referred to below), together with interest on the principal
balance remaining from time to time unpaid at the rate provided below from the
date such principal is advanced until payment in full thereof. This Substituted
and Amended Capital Note is referred to in and was executed and delivered
pursuant to Section 2.04 of that certain Loan and Security Agreement dated as of
June 30, 1995, as amended (as so amended and restated, and further amended,
restated and supplemented or modified from time to time, the "Loan Agreement")
by and among the Borrower, American Communication Services of Greenville, Inc.,
and the Lender (the "Loan Agreement"), to which reference is hereby made for a
statement of the terms and conditions under which the Capital Loans evidenced
hereby are being made and are to be repaid. All terms which are capitalized and
used herein (which are not otherwise specifically defined herein) and which are
defined in the Loan Agreement shall be used in this Substituted and Amended
Capital Note as defined in the Loan Agreement.
The principal indebtedness evidenced hereby shall be payable in
twenty-eight (28) consecutive quarterly installments, as set forth in Section
2.06(b) of the Loan Agreement. The principal amount hereof may be prepaid only
in accordance with the terms of the Loan Agreement.
Borrower further promises to pay interest on the outstanding unpaid
principal amount hereof which remains unpaid from the date hereof until payment
in full hereof at the rates described in the Loan Agreement, payable quarterly
in arrears on the Payment Dates and subject to capitalization of the interest
payable prior to the Commitment Termination Date in accordance with the
provisions of Section 2.06 of the Loan Agreement, and calculated on the basis of
a 360-day year comprised of twelve 30 day months, compounded monthly; provided,
however, that if the Borrower shall default in the payment of the principal or
interest hereof, the Borrower promises to, on demand, pay interest on the entire
unpaid principal amount hereof at a rate equal to four percent (4%) per annum
above the rate of interest that would otherwise be applicable, from the date
such payment is due to the date of actual payment, and if any other Event of
Default occurs and is continuing, the Borrower promises to, on demand, pay
interest on the entire unpaid principal amount hereof at a rate equal to two
percent (2%) per annum above the rate of interest that would otherwise be
applicable, until such Event of Default is cured.
If payment hereunder becomes due and payable on a Saturday, Sunday, or
legal holiday, under the laws of the State of New Jersey, the due date thereof
shall be extended to the next succeeding Business Day, and interest shall be
payable thereon during such extension at the rate specified above. Checks,
drafts or similar items of payment received by the Lender shall not constitute
payment, but credit therefor shall, solely for the purpose of computing interest
earned by the Lender, be given on the
<PAGE>
date the same is honored by the Lender's depository bank and final settlement
thereof is reflected by irrevocable credit to the Lender's account in such bank.
In no contingency or event whatsoever shall interest charged hereunder, however
such interest may be characterized or computed, exceed the highest rate
permissible under any law which a court of competent jurisdiction shall, in a
final determination, deem applicable hereto. In the event that such a court
determines that the Lender has received interest hereunder in excess of the
highest rate applicable hereto, the Lender shall promptly refund such excess
interest to Borrower.
The unpaid balance of the indebtedness hitherto evidenced by that
certain Capital Note dated July 21, 1995 in the original amount of $2,700,000
(the "Former Note") made by the Borrower and delivered to the Lender remains
outstanding as of the date hereof and shall continue to be secured pursuant to
the terms of the Loan Documents. The principal balance of this Substituted and
Amended Capital Note includes the indebtedness hitherto evidenced by the Former
Note and to the extent such indebtedness is included in the principal balance of
this Substituted and Amended Capital Note, the Substituted and Amended Capital
Note (i) merely reevidences the indebtedness hitherto evidenced by the Former
Note, (ii) is given in substitution for, and not as payment of the Former Note,
and (iii) is in no way intended to constitute a novation of the Former Note.
Except as otherwise agreed in the Loan Agreement, payments received by
the Lender from the Borrower on this Substituted and Amended Capital Note shall
be applied first to the payment of interest which is due and payable and only
thereafter to the outstanding principal balance.
Presentment, protest and notice of nonpayment are hereby waived by the
Borrower.
This Substituted and Amended Capital Note shall be interpreted and the
rights and liabilities of the parties hereto determined in accordance with the
internal laws (as opposed to conflicts of law provisions) and decisions of the
State of New Jersey. Whenever possible each provision of this Substituted and
Amended Capital Note shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Substituted and Amended
Capital Note shall be prohibited by or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining provisions
of this Substituted and Amended Capital Note.
Whenever in this Substituted and Amended Capital Note reference is made
to the Lender or Borrower, such reference is made to include, as applicable, a
reference to their respective successors and assigns. The provisions of this
Substituted and Amended Capital Note shall be binding upon and inure to the
benefit of said successors and assigns. Borrower's successors and assigns shall
include, without limitation, a receiver, trustee or debtor in possession of or
for the Borrower.
AMERICAN COMMUNICATION SERVICES
OF COLUMBIA, INC.
/s/ RICHARD A. KOZAK
Its: President & CEO
<PAGE>
SUBSTITUTED AND AMENDED CAPITAL NOTE
$4,680,000.00 September 6, 1996
FOR VALUE RECEIVED, the undersigned, AMERICAN COMMUNICATION SERVICES OF
GREENVILLE, INC., a Delaware corporation (the "Borrower"), hereby
unconditionally promises to pay to the order of AT&T CREDIT CORPORATION, a
Delaware corporation (the "Lender"), at its office at 44 Whippany Road,
Morristown, New Jersey 07962-1983, or at such other place as the holder of this
Substituted and Amended Capital Note may from time to time designate in writing,
in lawful money of the United States of America and in immediately available
funds, the lesser of (i) the principal sum of FOUR MILLION SIX HUNDRED EIGHTY
THOUSAND AND NO/100 DOLLARS ($4,680,000.00), and (ii) the unpaid amount of all
"Capital Loans" (referred to below), together with interest on the principal
balance remaining from time to time unpaid at the rate provided below from the
date such principal is advanced until payment in full thereof. This Substituted
and Amended Capital Note is referred to in and was executed and delivered
pursuant to Section 2.04 of that certain Loan and Security Agreement dated as of
June 30, 1995, as amended (as so amended and restated, and further amended,
restated and supplemented or modified from time to time, the "Loan Agreement")
by and among the Borrower, American Communication Services of Columbia, Inc.,
and the Lender (the "Loan Agreement"), to which reference is hereby made for a
statement of the terms and conditions under which the Capital Loans evidenced
hereby are being made and are to be repaid. All terms which are capitalized and
used herein (which are not otherwise specifically defined herein) and which are
defined in the Loan Agreement shall be used in this Substituted and Amended
Capital Note as defined in the Loan Agreement.
The principal indebtedness evidenced hereby shall be payable in
twenty-eight (28) consecutive quarterly installments, as set forth in Section
2.06(b) of the Loan Agreement. The principal amount hereof may be prepaid only
in accordance with the terms of the Loan Agreement.
Borrower further promises to pay interest on the outstanding unpaid
principal amount hereof which remains unpaid from the date hereof until payment
in full hereof at the rates described in the Loan Agreement, payable quarterly
in arrears on the Payment Dates and subject to capitalization of the interest
payable prior to the Commitment Termination Date in accordance with the
provisions of Section 2.06 of the Loan Agreement, and calculated on the basis of
a 360-day year comprised of twelve 30 day months, compounded monthly; provided,
however, that if the Borrower shall default in the payment of the principal or
interest hereof, the Borrower promises to, on demand, pay interest on the entire
unpaid principal amount hereof at a rate equal to four percent (4%) per annum
above the rate of interest that would otherwise be applicable, from the date
such payment is due to the date of actual payment, and if any other Event of
Default occurs and is continuing, the Borrower promises to, on demand, pay
interest on the entire unpaid principal amount hereof at a rate equal to two
percent (2%) per annum above the rate of interest that would otherwise be
applicable, until such Event of Default is cured.
If payment hereunder becomes due and payable on a Saturday, Sunday, or
legal holiday, under the laws of the State of New Jersey, the due date thereof
shall be extended to the next succeeding Business Day, and interest shall be
payable thereon during such extension at the rate specified above. Checks,
drafts or similar items of payment received by the Lender shall not constitute
payment, but
<PAGE>
credit therefor shall, solely for the purpose of computing interest earned by
the Lender, be given on the date the same is honored by the Lender's depository
bank and final settlement thereof is reflected by irrevocable credit to the
Lender's account in such bank. In no contingency or event whatsoever shall
interest charged hereunder, however such interest may be characterized or
computed, exceed the highest rate permissible under any law which a court of
competent jurisdiction shall, in a final determination, deem applicable hereto.
In the event that such a court determines that the Lender has received interest
hereunder in excess of the highest rate applicable hereto, the Lender shall
promptly refund such excess interest to Borrower.
The unpaid balance of the indebtedness hitherto evidenced by that
certain Capital Note dated July 21, 1995 in the original amount of $2,808,000
(the "Former Note") made by the Borrower and delivered to the Lender remains
outstanding as of the date hereof and shall continue to be secured pursuant to
the terms of the Loan Documents. The principal balance of this Substituted and
Amended Capital Note includes the indebtedness hitherto evidenced by the Former
Note and to the extent such indebtedness is included in the principal balance of
this Substituted and Amended Capital Note, the Substituted and Amended Capital
Note (i) merely reevidences the indebtedness hitherto evidenced by the Former
Note, (ii) is given in substitution for, and not as payment of the Former Note,
and (iii) is in no way intended to constitute a novation of the Former Note.
Except as otherwise agreed in the Loan Agreement, payments received by
the Lender from the Borrower on this Substituted and Amended Capital Note shall
be applied first to the payment of interest which is due and payable and only
thereafter to the outstanding principal balance.
Presentment, protest and notice of nonpayment are hereby waived by the
Borrower.
This Substituted and Amended Capital Note shall be interpreted and the
rights and liabilities of the parties hereto determined in accordance with the
internal laws (as opposed to conflicts of law provisions) and decisions of the
State of New Jersey. Whenever possible each provision of this Substituted and
Amended Capital Note shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Substituted and Amended
Capital Note shall be prohibited by or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining provisions
of this Substituted and Amended Capital Note. Whenever in this Substituted and
Amended Capital Note reference is made to the Lender or Borrower, such reference
is made to include, as applicable, a reference to their respective successors
and assigns. The provisions of this Substituted and Amended Capital Note shall
be binding upon and inure to the benefit of said successors and assigns.
Borrower's successors and assigns shall include, without limitation, a receiver,
trustee or debtor in possession of or for the Borrower.
AMERICAN COMMUNICATION SERVICES
OF GREENVILLE, INC.
/s/ RICHARD A. KOZAK
Its: President & CEO
<PAGE>
SUBSTITUTED AND AMENDED CAPITAL NOTE
$5,529,387.00 September 6, 1996
FOR VALUE RECEIVED, the undersigned, AMERICAN COMMUNICATION SERVICES OF
EL PASO, INC., a Delaware corporation (the "Borrower"), hereby unconditionally
promises to pay to the order of AT&T CREDIT CORPORATION, a Delaware corporation
(the "Lender"), at its office at 44 Whippany Road, Morristown, New Jersey
07962-1983, or at such other place as the holder of this Substituted and Amended
Capital Note may from time to time designate in writing, in lawful money of the
United States of America and in immediately available funds, the lesser of (i)
the principal sum of FIVE MILLION FIVE HUNDRED TWENTY-NINE THOUSAND THREE
HUNDRED EIGHTY-SEVEN AND NO/100 DOLLARS ($5,529,387.00), and (ii) the unpaid
amount of all "Capital Loans" (referred to below), together with interest on the
principal balance remaining from time to time unpaid at the rate provided below
from the date such principal is advanced until payment in full thereof. This
Substituted and Amended Capital Note is referred to in and was executed and
delivered pursuant to Section 2.04 of that certain Loan and Security Agreement
dated as of September 8, 1995, as amended (as so amended and restated, and
further amended, restated and supplemented or modified from time to time, the
"Loan Agreement") by and between the Borrower and the Lender, to which reference
is hereby made for a statement of the terms and conditions under which the
Capital Loans evidenced hereby are being made and are to be repaid. All terms
which are capitalized and used herein (which are not otherwise specifically
defined herein) and which are defined in the Loan Agreement shall be used in
this Substituted and Amended Capital Note as defined in the Loan Agreement.
The principal indebtedness evidenced hereby shall be payable in
twenty-eight (28) consecutive quarterly installments, as set forth in Section
2.06(b) of the Loan Agreement. The principal amount hereof may be prepaid only
in accordance with the terms of the Loan Agreement.
Borrower further promises to pay interest on the outstanding unpaid
principal amount hereof which remains unpaid from the date hereof until payment
in full hereof at the rates described in the Loan Agreement, payable quarterly
in arrears on the Payment Dates and subject to capitalization of the interest
payable prior to the Commitment Termination Date in accordance with the
provisions of Section 2.06 of the Loan Agreement, and calculated on the basis of
a 360-day year comprised of twelve 30 day months, compounded monthly; provided,
however, that if the Borrower shall default in the payment of the principal or
interest hereof, the Borrower promises to, on demand, pay interest on the entire
unpaid principal amount hereof at a rate equal to four percent (4%) per annum
above the rate of interest that would otherwise be applicable, from the date
such payment is due to the date of actual payment, and if any other Event of
Default occurs and is continuing, the Borrower promises to, on demand, pay
interest on the entire unpaid principal amount hereof at a rate equal to two
percent (2%) per annum above the rate of interest that would otherwise be
applicable, until such Event of Default is cured.
If payment hereunder becomes due and payable on a Saturday, Sunday, or
legal holiday, under the laws of the State of New Jersey, the due date thereof
shall be extended to the next succeeding Business Day, and interest shall be
payable thereon during such extension at the rate specified above. Checks,
drafts or similar items of payment received by the Lender shall not constitute
payment, but credit therefor shall, solely for the purpose of computing interest
earned by the Lender, be given on the
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date the same is honored by the Lender's depository bank and final settlement
thereof is reflected by irrevocable credit to the Lender's account in such bank.
In no contingency or event whatsoever shall interest charged hereunder, however
such interest may be characterized or computed, exceed the highest rate
permissible under any law which a court of competent jurisdiction shall, in a
final determination, deem applicable hereto. In the event that such a court
determines that the Lender has received interest hereunder in excess of the
highest rate applicable hereto, the Lender shall promptly refund such excess
interest to Borrower.
The unpaid balance of the indebtedness hitherto evidenced by that
certain Capital Note dated September 29, 1995 in the original principal amount
of $4,125,000 (the "Former Note") made by the Borrower and delivered to the
Lender remains outstanding as of the date hereof and shall continue to be
secured pursuant to the terms of the Loan Documents. The principal balance of
this Substituted and Amended Capital Note includes the indebtedness hitherto
evidenced by the Former Note and to the extent such indebtedness is included in
the principal balance of this Substituted and Amended Capital Note, the
Substituted and Amended Capital Note (i) merely reevidences the indebtedness
hitherto evidenced by the Former Note, (ii) is given in substitution for, and
not as payment of the Former Note, and (iii) is in no way intended to constitute
a novation of the Former Note.
Except as otherwise agreed in the Loan Agreement, payments received by
the Lender from the Borrower on this Substituted and Amended Capital Note shall
be applied first to the payment of interest which is due and payable and only
thereafter to the outstanding principal balance.
Presentment, protest and notice of nonpayment are hereby waived by the
Borrower.
This Substituted and Amended Capital Note shall be interpreted and the
rights and liabilities of the parties hereto determined in accordance with the
internal laws (as opposed to conflicts of law provisions) and decisions of the
State of New Jersey. Whenever possible each provision of this Substituted and
Amended Capital Note shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Substituted and Amended
Capital Note shall be prohibited by or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining provisions
of this Substituted and Amended Capital Note. Whenever in this Substituted and
Amended Capital Note reference is made to the Lender or Borrower, such reference
is made to include, as applicable, a reference to their respective successors
and assigns. The provisions of this Substituted and Amended Capital Note shall
be binding upon and inure to the benefit of said successors and assigns.
Borrower's successors and assigns shall include, without limitation, a receiver,
trustee or debtor in possession of or for the Borrower.
AMERICAN COMMUNICATION SERVICES
OF EL PASO, INC.
/s/ RICHARD A. KOZAK
Its: President & CEO
SECOND
MASTER REAFFIRMATION OF
PARENT PLEDGE AND SUPPORT AGREEMENTS
This SECOND MASTER REAFFIRMATION OF PARENT PLEDGE AND SUPPORT
AGREEMENTS (this "Reaffirmation") is executed as of this 6th day of September,
1996 by American Communications Services, Inc., a Delaware corporation (the
"Parent"), in favor of AT&T Credit Corporation, a Delaware corporation
("Lender").
WITNESSETH
WHEREAS, American Communications Services of Louisville, Inc.,
American Communication Services of Fort Worth, Inc., American Communication
Services of Columbia, Inc. and American Communication Services of Greenville,
Inc., and American Communication Services of El Paso, Inc. (each a Delaware
corporation), entered into those certain Loan and Security Agreements each dated
respectively as of October 16, 1994, February 28, 1995, June 30, 1995 and
September 9, 1995, as amended (collectively, as so amended and as further
amended, restated or modified, the "Loan Agreements") with Lender;
WHEREAS, to induce Lender to enter into the Loan Agreement,
Parent executed and delivered those certain Parent Pledge and Support Agreements
each dated as of October 16, 1994, February 28, 1995, June 30, 1995 and
September 9, 1995, as amended (collectively, as so amended and as further
amended, restated or modified, the "Pledge Agreements") in favor of the Lender;
WHEREAS, the parties to the Loan Agreements are entering into
that certain Second Master Amendment to Loan and Security Agreements, Waiver and
Equipment Notes Modification Agreement (the "Amendment") of even date herewith;
and
WHEREAS, it is a condition precedent to the effectiveness of
the Amendment that Parent execute and deliver this Reaffirmation;
NOW, THEREFORE, for and in consideration of the foregoing and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the Parent hereby agrees as follows:
1. Reaffirmation of Pledge Agreements. The Parent acknowledges
that it has received and reviewed the Amendment and reaffirms that (a) the
pledge of the "Pledged Stock" as defined in the respective Pledge Agreements and
the liens and security interest granted therein and (b) the Pledge Agreements
and the liens and security interest granted therein shall continue in full force
and effect in accordance with their respective terms notwithstanding the
execution and delivery of the Amendment.
2. Governing Law and Jurisdiction. This Reaffirmation shall
be construed in accordance with and governed by the internal laws of the State
of New Jersey, without giving effect to any conflicts of laws principles.
<PAGE>
3. Execution in Counterparts. This Reaffirmation may be
executed in any number of counterparts, each of which shall be an original, but
all of which shall together constitute one and the same agreement.
[THE REMAINDER OF THIS PAGE INTENTIONALLY BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Reaffirmation to be duly executed by their duly authorized representatives as of
the day and year first written above.
AMERICAN COMMUNICATIONS SERVICES, INC.
By: /s/ RICHARD A. KOZAK
Name: Richard A. Kozak
Title: President & Chief Executive Officer
Acknowledged and agreed to as of the day and year first written above.
AT&T CREDIT CORPORATION
By: /s/ EDWARD W. ANDREWS, JR.
Name: Edward W. Andrews, Jr.
Title: President
226889.01 GABBAY, ALAN M. CH September 30, 1996 (7:19AM)
MASTER EQUIPMENT LEASE AGREEMENT
LESSEE: American Communications LESSOR: AT&T Credit Corporation
Services, Inc.
Street Address: 131 National Business Address: 44 Whippany Road
Parkway, Suite 100 Morristown, NJ 07962-1983
City, State, Zip: Annapolis Junction, Lease Number: 960823
Maryland 20701
1. AGREEMENT. Lessor agrees to lease to Lessee and Lessee
agrees to lease from Lessor the equipment (Equipment) described in any schedule
(Schedule) that incorporates this Master Equipment Lease Agreement (Agreement)
by reference. The Equipment to be leased under the Schedules shall be up to
eight Network Systems 5ESS Systems with total purchase prices not to exceed
$11,700,000 in the aggregate, subject to upward adjustment by Lessor in its
discretion. A Schedule shall incorporate this Agreement by reference by listing
the above-referenced Lease Number thereon. Such lease shall be governed by the
terms and conditions of this Agreement, as well as by the terms and conditions
set forth in the applicable Schedule. Each Schedule shall constitute an
agreement separate and distinct from this Agreement and any other Schedule. In
the event of a conflict between the provisions of this Agreement and a Schedule,
the provisions of the Schedule shall govern.
2. ASSIGNMENT OF PURCHASE DOCUMENTS; TRANSACTION COSTS. (a)
Lessee shall execute and deliver to Lessor a writing acceptable to Lessor
whereby Lessee: (1) confirms Lessor's title to, and ownership of, the Equipment
described in the applicable Schedule and (2) assigns all of Lessee's rights and
interest in and to any purchase order, contract or other documents
(collectively, Purchase Documents) relating thereto that Lessee has entered into
with Lucent Technologies Inc. (Seller) solely as such rights and interest relate
to such Equipment. By executing the applicable Schedule, Lessee represents and
warrants (i) that Lessee has reviewed, approved and received a copy of the
applicable Purchase Documents, (ii) that Lessee may have rights under the
Purchase Documents and (iii) that Lessee may contact Seller for a description of
such rights.
(b) If any funding of the purchase price of any item of
Equipment occurs on any "Funding Date" (as defined in Section 4 below), Lessor
will be responsible for and provide the funds to pay transaction expenses
(Transaction Expenses), including the reasonable attorneys' fees and expenses of
counsel to Lessor and the Lessee and the fees and expenses of Lessee's financial
advisor, solely to the extent that the Transaction Expenses do not exceed those
set forth in the Pricing Assumptions on Appendix A hereto. Lessee shall be
responsible for and provide the funds to pay Transaction Expenses in excess of
such amount and shall pay all Transaction Expenses if no funding of the purchase
price of items of Equipment occurs prior to October 31, 1996 (other than as a
result of a breach of this Agreement by Lessor) or if Lessee decides not to
proceed with the transactions contemplated herein as a result of any event
described in Section 4(iv) or 4(v).
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3. DELIVERY; ACCEPTANCE. Lessee shall cause the Equipment to
be delivered to Lessee and installed at the Equipment Location (as specified in
the applicable Schedule) and Lessee shall promptly begin acceptance testing
pursuant to agreed upon test plans and procedures with Seller to determine
whether the Equipment meets acceptance criteria. Final acceptance shall be
deemed to occur upon the earliest of the following (Final Acceptance Date): (i)
successful completion of acceptance testing; (ii) the end of the forty-fifth day
following the date installation is completed, unless, prior to such date,
acceptance testing has disclosed the existence of any material defect affecting
the ability of the Equipment to perform as warranted by Seller, at which time
the testing period will be suspended, with testing to resume upon correction of
the material defect; (iii) Lessee's failure to commence acceptance testing
within five working days after the date installation is completed; (iv) Lessee's
failure after commencement of acceptance testing to continue acceptance testing
in accordance with the acceptance procedures agreed upon with the Seller; or (v)
Lessee's written acknowledgment of acceptance of the Equipment. At Lessor's
option, if the Equipment has not been accepted within 180 days after delivery of
the Equipment to the Equipment Location, the Equipment shall be deemed to have
suffered an "Event of Loss" (as defined in Section 13 below). Lessee shall
evidence its final acceptance of the Equipment by executing and delivering to
Lessor an acceptance certificate (Acceptance Certificate) in the form of Exhibit
D attached hereto, which shall establish Lessee's irrevocable acceptance of such
Equipment.
4. CONDITIONS PRECEDENT; PURCHASE OF EQUIPMENT. Lessor shall
have no obligation to purchase items of Equipment from Seller unless on the date
of the execution and delivery of the Schedule relating thereto all of the
following conditions shall be satisfied: (i) no "Event of Default" (as defined
in Section 19) exists; (ii) no event has occurred and is continuing that with
notice or the lapse of time or both would constitute an Event of Default
("Potential Default"); (iii) on or prior to the date of the execution of the
initial Schedule, Lessee's counsel has delivered to Lessor opinion letters in
form and substance satisfactory to Lessor with respect to the transactions
contemplated herein; (iv) on or prior to the date of the execution of the
initial Schedule, no change in law shall have occurred that, in the reasonable
judgment of Lessor or Lessee renders the transactions contemplated herein
uneconomic; (v) Lessor shall have received certificates of insurance
demonstrating compliance by Lessee with the requirements of Section 8; (vi) on
or prior to the date of the execution of the initial Schedule, Lessor shall have
received a certificate of the Secretary of the Lessee as to the incumbency of
the officers of the Lessee, the due authorization of the transactions
contemplated by this Agreement, and the accuracy of Lessee's by-laws, a copy of
which shall be attached thereto; (vii) Lessee shall have executed and delivered
to Lessor appropriate Uniform Commercial Code Financing Statements to be filed
for precautionary purposes with respect to the Equipment Location; (viii) Lessee
shall have delivered to Lessor landlord waivers in form and substance
satisfactory to Lessor with respect to the Equipment Location; (ix) Seller shall
have consented in writing to the assignment of the Purchase Documents to Lessor;
(x) Lessee shall have executed and delivered to Lessor the Schedule and
Commencement Certificate in the form of Exhibit C attached hereto ("Commencement
Certificate") relating to the items of Equipment to be purchased by Lessor from
Seller, which Commencement Certificate shall be dated as of the date such
Equipment is delivered by Seller to Lessee (Commencement Date); and (xi) on or
prior to the date of the execution of the initial Schedule, Seller shall execute
in favor of Lessee a Confirmation Agreement in form and substance satisfactory
to Lessee. Upon satisfaction of all the conditions precedent, Lessor shall be
obligated to purchase the Equipment from Seller in accordance with the terms of
the Purchase Documents, including the payment to Seller for each item of
Equipment, of thirty-seven and one-half percent (37.5%) of the purchase price
thereof thirty days after shipment, thirty-seven and one-half percent (37.5%) of
the purchase price thereof thirty
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days after the date installation thereof is completed, and twenty-five percent
(25%) of the purchase price thereof thirty days after the Final Acceptance Date
(each of the above payment dates being a "Funding Date") and to lease the
Equipment to Lessee.
5. TERM. The initial term of each Schedule (Initial Term)
shall begin on the Commencement Date (regardless of whether the Final Acceptance
Date has occurred) and shall continue for the period specified in such Schedule.
Any renewal term of a Schedule (Renewal Term) shall begin on the expiration of,
as applicable, the Initial Term or any preceding Renewal Term (collectively,
Term). The then current Initial Term or the Renewal Term is sometimes referred
to hereinafter as the Applicable Term.
6. RENT; LATE CHARGES. Lessee shall pay Lessor the periodic
Rental Payments specified in the applicable Schedule quarterly in arrears
beginning three months after the applicable Commencement Date, regardless of
whether Lessee has received notice that such Rental Payments are due.
Additionally, if pursuant to this Agreement or the applicable Schedule the term
is extended or a renewal option exercised, Lessee shall also pay all Rental
Payments required with respect thereto. All Rental Payments will be sent to
Lessor's above-referenced address, or to such other address as specified by
Lessor in writing. The Rental Payments are based on the methodology and
assumptions set forth in Appendix A (the "Pricing Assumptions") subject to
adjustment as set forth in Section 7. Lessee agrees to pay Lessor interest on
any Rental Payment (or other amount due hereunder) that is not paid within ten
days of its due date at the rate of 1 1/2% per month on any such amounts (or
such lesser rate as is the maximum rate allowable under applicable law). Also,
in the event that more than one Schedule is entered into hereunder, the parties
will use their best efforts to implement a common billing date for all
Schedules.
7. TAX INDEMNITY; ADJUSTMENTS. (a) This Agreement has been
entered into on the basis of the following Tax Assumptions:
(1) the Federal rate of income tax on Lessor's taxable income will be
35% and the assumed state tax rate on Lessor's taxable income will be 7% (the
"State Rate");
(2) Lessor will have sufficient taxable income to utilize all
deductions arising hereunder;
(3) Lessor will be entitled, for Federal income tax purposes, to
depreciation deductions with respect to each item of Equipment, computed on the
basis that the Equipment is "5-year property" within the meaning of section
168(e) of the Internal Revenue Code of 1986, as amended and in effect on the
date hereof (the "Code") by using the 200% declining balance method, switching
to the straight-line method for the first taxable year of Lessor for which such
method yields a larger allowance, by assuming the salvage value is zero, by
using a 5-year recovery period and a half-year convention, and by assuming a
full first tax year ("Depreciation Deductions");
(4) the initial tax basis of the Equipment for purposes of computing
Depreciation Deductions will be equal to the Total Purchase Prices thereof set
forth on the Schedules;
<PAGE>
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(5) Lessor will be entitled to amortize the Transaction Expenses on a
straight-line basis over a period not longer than the initial Terms for the
Schedules (the "Amortization Deductions");
(6) at all times during any Applicable Term, Lessor will be treated as
the owner and lessor of the Equipment for Federal and state income tax purposes,
Lessee, as the lessee thereof, and the lease as a "true lease";
(7) Lessor will be entitled to claim depreciation and amortization
deductions for state income tax purposes to the same extent and at the same time
as the Depreciation Deductions and the Amortization Deductions are deducted for
Federal income tax purposes (the "State Tax Deductions");
(8) Lessor will not at any time during any Applicable Term be required
to include in its gross income for Federal, state, local or foreign income tax
purposes any amounts attributable to the Equipment or the transactions and
activities contemplated by this Agreement other than: (i) Rental Payments, in
the amounts and at the times accrued in accordance with the terms of the
Schedules, (ii) Stipulated Loss Value or Termination Value, in each case reduced
as appropriate by Lessor's adjusted tax basis in the Equipment, (iii) any amount
to the extent offset by deductions (other than Depreciation Deductions,
Amortization Deductions or State Tax Deductions) of the same character in the
taxable year of Lessor in which such amounts are included in income, (iv) any
amount paid by Lessee pursuant to the exercise of any purchase option to the
extent the amount exceeds Lessor's adjusted tax basis in the Equipment, and (v)
any other amounts to the extent such amounts are calculated so as to include an
indemnification for taxes payable by Lessor as a consequence of the receipt or
accrual thereof (the inclusion in Lessor's gross income of any amount not
described in clauses (i) through (v) being hereinafter referred to as an "Income
Inclusion");
(9) in each of Lessor's tax years during any Applicable Term, one
hundred percent of the aggregate income, gain, loss and deductions with respect
to the transactions contemplated by this Agreement will be treated as derived
from, or allocable to, sources within the United States of America within the
meaning of section 861 of the Code; and
(10) Lessor is an accrual basis calendar year taxpayer.
(b) Lessee represents and warrants that during the Applicable Term of
each Schedule:
(1) assuming that Lessor is and will remain the owner of, and is and
will remain in a trade or business with respect to, the Equipment, the Equipment
in the hands of Lessor, after delivery and acceptance under Section 3 of the
Agreement, will have been "placed in service" within the meaning of sections 167
and 168 of the Code and will not require additions or modifications to make it
suitable for its intended use;
(2) the initial tax basis of the Equipment for purposes of computing
Depreciation Deductions will be equal to the Total Purchase Prices thereof set
forth on the Schedules;
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(3) the factual information about the Equipment provided in writing to
Lessor by Lessee or any officer, employee, agent, servant or affiliate of Lessee
was accurate upon delivery and on the Commencement Date for the initial
Schedule;
(4) on the applicable Funding Date, no member of the Lessee Group (as
defined in Revenue Procedure 75-21, 1975-1 C.B. 715, as modified by Revenue
Procedure 79-48, 1979-2 C.B. 529) of which Lessee is a member will have, nor
will it acquire at any time during any Applicable Term, any investment in any
item of Equipment within the meaning of Section 4(4) of Revenue Procedure 75-21,
1975-1 C.B. 715, as modified by Revenue Procedure 79-48, 1979-2 C.B. 529, that
is not permitted thereunder;
(5) neither Lessee, any sublessee of any item of Equipment or any other
person using or possessing an item of Equipment, including any trustee,
receiver, liquidator, or debtor in possession (other than the Lessor, or a
person acting through the Lessor) or any affiliate, transferee, agent,
sublessee, employee, successor or assign of any of the forgoing (a "Lessee
Person") will claim depreciation deductions as owner of the Equipment for
Federal and state income tax purposes unless the Internal Revenue Service has
made a final determination that Lessor is not the owner of the Equipment for
Federal income tax purposes (except as to severable modifications not financed
by Lessor);
(6) the Equipment will not constitute "tax-exempt use property" as
defined in section 168(h) of the Code solely as a result of the status of (i)
Lessee or (ii) any assignee or sublessee of Lessee's interest in the Equipment
(other then Lessor, any affiliate of Lessor, or any person claiming use of any
item of Equipment by or through Lessor);
(7) the Equipment will not be utilized in foreign service beyond that
which is permitted under section 861(c) of the Code to meet one hundred percent
United States source requirements;
(8) assuming that Lessor is treated as the owner of the Equipment for
Federal income tax purposes, such Equipment will qualify for 5-year Depreciation
Deductions;
(9) the Equipment will not be "limited use property" (as defined in
Revenue Procedure 75-28, 1975-1 C.B. 752 and Revenue Procedure 76-30, 1976-2
C.B. 647), and no Lessee Person will make any improvement, modification, or
addition to any item of Equipment to cause such Equipment to become limited use
property;
(10) no Lessee Person will use any item of Equipment in a way that will
cause the Equipment to be deemed used predominantly outside the United States of
America; and
(11) no Lessee Person shall at any time during any Applicable Term
either abandon any item of Equipment or cease to use any item of Equipment in
its normal business activities (except during temporary periods of non-use which
are normal in Lessee's business).
(c) (1) If as a result of (i) any act or omission (other than an act or
omission which is expressly required by the terms of this Agreement), (ii) the
failure of any Lessee Person to take any action required under the terms of this
Agreement (other than an omission which is expressly required by the terms of
<PAGE>
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this Agreement), (iii) the breach or inaccuracy of any representation, covenant
or warranty contained in Section 7(b), or (iv) any replacement, modification,
substitution or improvement of the Equipment whether or not required or
permitted, Lessor shall lose the right to claim or shall not claim (as the
result of advice by independent tax counsel, selected by Lessor, to the effect
that there is no substantial authority (as defined in Treasury Regulation
Section 1.6662-4(d)) for such claim), shall suffer a disallowance of, or shall
be required to recapture, all or any portion of any tax benefit with respect to
any item of Equipment, or shall be required to make an Income Inclusion (any
such event hereinafter referred to as a "Tax Loss"), then Lessee shall indemnify
Lessor for such Tax Loss as provided in Sections 7(c)(2) and (3) hereof. It
shall be conclusively presumed that Lessor shall have suffered a loss of State
Tax Deductions at the State Rate in the event Lessor suffers a loss of
Depreciation Deductions or Amortization Deductions.
(2) In the event Lessor shall suffer a Tax Loss as described in Section
7(c)(1), Lessee shall pay to Lessor as an indemnity, on the next succeeding
Payment Date after written notice to Lessee by Lessor of such Tax Loss such
amount or amounts as, in the reasonable opinion of Lessor, shall cause Lessor's
net after-tax cash flows and net after-tax yield (the "Net Economic Return") to
equal the Net Economic Return that would have been realized by Lessor if such
Tax Loss had not occurred, and shall be based upon the same assumptions,
specifically including the assumptions set forth in Section 7(a) hereof (except
as such assumptions should be modified as a result of such Tax Loss) and pricing
analysis used by Lessor in determining the amount of the periodic Rental
Payments, and such amount or amounts shall take into account any subsequent or
offsetting tax benefits realized or to be realized by Lessor as a result of such
Tax Loss; provided, however, that if all Applicable Terms under the Schedules
shall have expired prior to the time any such payment would be due, all such
payments shall be payable by Lessee in a lump sum not later than 30 days after
written demand by Lessor.
(3) The accuracy of the calculation set forth in Section 7(c)(2) shall
be subject to verification, upon the request of Lessee, by an accounting firm
selected by Lessor and approved by Lessee, which approval shall not be
unreasonably withheld. In order to enable such accountants to verify such
calculations, Lessor shall provide to such accountants (for their own
confidential use and not to be disclosed to Lessee or any other person and
subject to the execution of a satisfactory confidentiality agreement) all
information reasonably necessary for such verification, including any computer
analyses used by Lessor to calculate such amount or amounts. Such accountants'
determination shall be binding upon Lessor and Lessee. The cost of such
verification shall be borne by Lessee unless it is determined that the actual
amount payable deviates by more than 10% from the amount originally determined
by Lessor, in which case such costs will be borne by Lessor.
(d) Notwithstanding anything to the contrary set forth in Section 7(c),
Lessor shall not be entitled to any payment under Section 7(c) in respect of any
Tax Loss arising as a direct result of one or more of the following events:
(1) an amendment to, or change in, the Code, any Regulation thereunder,
any published Revenue Ruling or other document of the Treasury or the Internal
Revenue Service, any applicable state statutes, regulations, or similar
documents, or the rate of tax under the laws of the United States or of any
state on the taxable income of corporations, which is promulgated or enacted
after the Commencement Date;
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(2) the imposition of the provisions of the alternative minimum tax
pursuant to section 55 of the Code or any other minimum tax or alternative
minimum tax under applicable state or local income tax laws;
(3) a claim or determination that the lease is not a "true lease" for
tax purposes or that Lessor is not the owner or lessor of any item of Equipment,
other than as a direct result of a breach of any of Lessee's representations,
covenants or warranties under this Agreement, or as a direct result of any act
or omission of Lessee (other than an act or omission which is expressly required
by the terms of this Agreement);
(4) the failure of Lessor to claim in a timely or proper manner any
Depreciation Deductions or Amortization Deductions (unless Lessor obtains an
opinion of independent tax counsel, selected by Lessor, to the effect that
substantial authority, as defined in Treas. Reg. Section 1.6662-4(d), to so
claim does not exist);
(5) a failure of Lessor to have sufficient taxable income to utilize
the Depreciation Deductions or Amortization Deductions or the inability of
Lessor to utilize such Deductions;
(6) a sale, transfer or other disposition by Lessor of any interest in
any item of Equipment other than a sale or other transfer pursuant to Lessor's
exercise of remedies following an Event of Default;
(7) any claim or assessment of Lessor for the environmental tax
imposed by section 57 of the Code to which Lessor is subject from time to time;
(8) the application of section 465, 467 or 469 of the Code;
(9) any tax election made by Lessor or any status of Lessor that is
inconsistent with the Tax Assumptions; or
(10) a claim or determination that Lessor is not holding the Equipment
in the ordinary course of a trade or business or that Lessor did not enter into
the transaction for profit.
(e) If, by reason of any indemnity payment made by Lessee to Lessor
pursuant to this Section 7, Lessor subsequently realizes a Federal, state or
local income tax benefit not previously taken into account in computing the
amount of such indemnity payment (and provided that no Event of Default shall
have occurred and be continuing and that Lessee shall have made all payments
then due and owing to Lessor under this Agreement), Lessor shall pay to Lessee
an amount equal to the sum of (1) the actual reduction in Federal, state and
local income taxes realized by Lessor and attributable to such tax benefit, and
(2) the actual reduction in Federal, state and local income taxes realized by
Lessor as a result of its payment pursuant to this Section 7(e); provided,
however, that Lessor shall not be obligated to make any payment pursuant to this
Section 7(e) in excess of the amount of all prior indemnity payments from Lessee
to Lessor pursuant to this Section 7, less all prior payments from Lessor to
Lessee pursuant to this Section 7(e).
<PAGE>
- 8 -
(f) In the event a claim shall be made by the Internal Revenue Service
which, if successful, would result in a Tax Loss under circumstances which would
require Lessee to indemnify Lessor for such Tax Loss, Lessor hereby agrees to
notify Lessee promptly in writing of such claim, to forebear payment of the tax
claimed for at least 30 days after such notice, to give to Lessee any relevant
information requested by it relating to such claim which may be particularly
within the knowledge of Lessor, other than Lessor's tax returns, and, if Lessee
shall request, within 30 days after such notice, that such claim be contested,
to take such action in connection with contesting such claim as Lessee shall
reasonably request in writing from time to time, but only if Lessee shall,
contemporaneously with such initial request, have (1) acknowledged its
obligation to indemnify Lessor for such claim pursuant to this Section 7 in the
event that the contest is unsuccessful, (2) made provision for Lessor's
indemnification in a manner reasonably satisfactory to Lessor for any liability
or loss which Lessor may from time to time incur as a result of contesting such
claim, and reimbursement, on an After-Tax Basis (as defined below), for all
costs and expenses including (without limitation) reasonable legal fees and
expenses, which Lessor may incur in connection with contesting such claim, and
(3) furnished Lessor with an opinion of independent tax counsel, reasonably
satisfactory to Lessor, to the effect that there is substantial authority within
the meaning of Treas. Reg. ss.1.6662-4(d) in favor of the allowance of the item
proposed to be adjusted. Lessor shall make reasonable efforts to advise Lessee
of all action taken or proposed to be taken by the Internal Revenue Service and
of all action proposed to be taken by Lessor, and shall consider in good faith
any suggestions of Lessee relating to the conduct of any contest hereunder and
shall use its best efforts to permit Lessee upon request reasonable opportunity
to review the content of documentation, protests, memoranda of fact and law,
briefs, and stipulations of fact, each relating exclusively to a proposed
adjustment in the income taxes of Lessor for which Lessee would be required to
indemnify Lessor pursuant to this Section 7. In no event shall Lessor be
required to contest any claim if an Event of Default shall have occurred and be
continuing, nor shall Lessor be required, whether or not an Event of Default has
occurred and is continuing, to continue any contest of any claim beyond the
level of administrative proceedings with the Internal Revenue Service unless the
amount of the indemnity payment Lessee would be obligated to make hereunder with
respect to the claim being contested shall exceed $100,000, in which case Lessor
shall not be required to continue such contest beyond a Federal court of primary
jurisdiction; provided, however, that if Lessor prevails in a Federal court of
primary jurisdiction and the Internal Revenue Service files an appeal, Lessor
shall make reasonable efforts to sustain the decision of the Federal Court of
primary jurisdiction. Lessor shall not be required to contest any claim if the
subject matter thereof shall be of a continuing nature and shall have previously
been decided adversely in a contest conducted pursuant to this Agreement.
Notwithstanding anything to the contrary in this Section 7(f), Lessor need not
initiate or continue any contest of a claim with respect to which it has waived
in writing its right to any indemnity under Section 7(c) of this Agreement. In
the event that Lessor is obligated hereunder to proceed to a Federal court of
primary jurisdiction and a decision is made to pay the tax and sue for a refund,
Lessee shall make Lessor an interest-free loan in the amount of such tax and, to
the extent attributable to a disallowance for which Lessee is obligated to
indemnify Lessor under this Section 7, related interest, fines, penalties and
additions to tax.
(g) Economic Factors Adjustment. In addition, the amount of
each periodic Rental Payment remaining to be paid during the Applicable Term,
the Stipulated Loss Value Factors, the early buyout amount and the Termination
Value Factors described in the Schedules (collectively, the Economic Factors)
(and for any adjustments set forth in (i) below, the EBO Date (as defined in
Section
<PAGE>
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18(a)) will also be adjusted) may be adjusted upwards or downwards, as the case
may be to preserve the Lessor's Net Economic Return, through both the EBO Date,
and the expiration of the Initial Term, as initially anticipated by the Lessor
in approving the transactions contemplated by this Agreement in the event that
(i) with respect to any Schedule, on or prior to its Commencement Date, the
Pricing Assumptions described on Appendix A hereto (other than that the Lessor
is the owner of the Equipment for federal or state tax purposes) are other than
as originally assumed; or (ii) the actual amount and timing of the Transaction
Expenses are different than as assumed in the Pricing Assumptions.
(h) Purchase Price Adjustment. The Total Purchase Price (as
specified in the applicable Schedule) and Rental Payment set forth in each
Schedule are estimates, and if the final invoice from Seller specifies a Total
Purchase Price (including taxes, delivery, installation and other charges) that
is greater or less than such estimated Total Purchase Price, Lessee hereby
authorizes Lessor to adjust the Total Purchase Price and Rental Payment on the
applicable Schedule to reflect the final invoice amount (Final Invoice Amount).
However, if the Final Invoice Amount exceeds the estimated Total Purchase Price
by more than 10%, Lessor will notify Lessee and obtain Lessee's prior written
approval of the aforementioned adjustments; provided, however that such written
approval shall not be required when such adjustments are caused by Equipment
changes or system reconfigurations requested or caused by Lessee. All references
in this Agreement and in any Schedule to Total Purchase Price and Rental Payment
shall mean the estimates thereof specified in the applicable Schedule, as
adjusted pursuant to this Section 7.
(i) Interest Rate Adjustment. On the first Funding Date with
respect to each Schedule the Lessor will adjust the Lessee's implicit interest
rate (upwards or downwards) with respect to the Equipment being funded on such
date by eighty-five percent (85%) of any change in the ask yield for U.S.
Treasury Notes maturing in the month and year closest to four years after the
applicable Funding Date) equal to or greater than fifteen (15) basis points from
6.7% per annum and maintain a similar rental pattern, as set forth in the
Eastern Edition of The Wall Street Journal two business days prior to such
Funding Date.
(j) FAS 13. No adjustment to the Economic Factors shall be
permitted to cause the lease of any Equipment hereunder not to be treated with
respect to the Lessee as an operating lease under Financial Accounting Standard
13.
8. INSURANCE. At its own expense, Lessee shall provide and
maintain, with carriers rated A or better by A.M. Best, with respect to the
Equipment, commercial general liability and property insurance in such amounts,
against such risks and with such deductibles as are typical in the industry for
telecommunications lease transactions, and as are acceptable to Lessor. In no
event shall the amount of property insurance coverage for the Equipment be less
than the Stipulated Loss Value of the Equipment. Self-insurance shall be
permitted only with the prior written approval of Lessor. Lessor shall be named
as an additional insured on all liability insurance policies. Each property
insurance policy shall contain the insurer's agreement to give Lessor 30 days'
prior written notice before cancellation or material change thereof, and shall
name Lessor as loss payee with respect to any aggregate claim thereunder in
excess of $500,000. Each property insurance policy shall also provide that as to
the Lessor insurance shall not be invalidated by any act, omission or breach by
Lessee. Any proceeds of property insurance carried and paid for by Lessee in
excess of the Stipulated
<PAGE>
- 10 -
Loss Value of the Equipment shall be for the benefit of the Lessee. Each
commercial general liability insurance policy shall name Lessor as an additional
insured. Lessee shall deliver to Lessor the insurance policies or copies thereof
or certificates of such insurance on or before the Commencement Date of the
applicable Schedule, and/or before renewal.
9. TAXES. (a) Lessee shall reimburse, protect, save and keep
harmless Lessor, its affiliates and their directors, officers, employees, agents
and representatives, on an After-Tax Basis (as defined below), against (or pay
directly, but only if instructed by Lessor) all taxes, fees, duties,
governmental charges and assessments, of any nature whatsoever, including
interest, fines, additions to tax, and penalties thereon, imposed by any taxing
authority with respect to the Equipment, on its purchase, ownership, delivery,
possession, transportation, operation, rental, return to Lessor or its purchase
by Lessee, transfer of title, registration, or otherwise with respect to or in
connection with the transactions contemplated by this Agreement, including, but
not limited to, sales and use taxes, property taxes and all license and
registration fees (collectively, "Taxes"). Lessee shall reimburse Lessor for
(or, with Lessor's consent, directly pay) these Taxes pursuant to this Section 9
whether they are imposed upon Lessor, any other indemnified person, Lessee, the
Equipment or this Agreement. Lessee shall not be required to reimburse Lessor
pursuant to this Section 9 for the following: (1) taxes based upon, measured by,
or with respect to net or gross income, receipts, minimum tax, capital,
franchise or net worth imposed by the United States of America or by any state,
local or foreign jurisdiction (other than sales, use, property, rental, lease,
ad valorem or value-added taxes (other than a value-added tax that replaces a
tax imposed on net or gross income)); (2) taxes on items of tax preference or
any minimum tax; (3) taxes resulting from Lessor's disposition (whether
voluntary or involuntary) of the Equipment or of any interest therein (other
than taxes resulting from a transfer or disposition after an Event of Default
has occurred and while such Event of Default is continuing, or in connection
with a Loss, or from any replacement of the Equipment by Lessee, or from any
voluntary termination of this Agreement by Lessee); (4) taxes resulting from
either the willful misconduct or gross negligence of Lessor or from the breach
of Lessor's representations, warranties or obligations under this Agreement; (5)
taxes which arise out of or are caused by any act or omission of Lessor where
such act or omission is expressly prohibited by this Agreement; (6) taxes
related to the Equipment in respect of any period after the expiration or early
termination of the Applicable Term relating thereto and return of the Equipment
in accordance with Section 18 hereof; and (7) taxes imposed against a transferee
or assignee, if any, of Lessor to the extent of the excess of such taxes over
the amount of taxes which would have been imposed had there not been such an
assignment or transfer.
(b) Notwithstanding Section 9(a) above, Lessee's obligation to pay,
reimburse or hold harmless Lessor for Taxes in the nature of or in lieu of
sales, use, transfer or similar types of Taxes, including interest, fines,
additions to tax and penalties, if any, thereon (collectively, "Sales Tax"),
arising out of Lessor's acquisition and leasing of the Equipment, or any
replacement of the Equipment by Lessee, shall be conditioned upon Lessor's
delivering to the Seller (in the case of Lessor's acquisition of the Equipment)
and to Lessee (in the case of any replacement by Lessee) such properly completed
and validly executed resale certificates or similar documents as may timely be
reasonably requested in writing by Lessee, within 10 business days of such
request. Lessor shall register for Sales Tax purposes with the taxing
authorities in all applicable jurisdictions as necessary to permit Lessor to
perform its obligations under this Section 9(b).
<PAGE>
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(c) Where required by an applicable jurisdiction, Lessee shall pay to
Lessor Sales Tax on that portion of the total amount of each Rental Payment
allocable to each item of Equipment calculated at the tax rate applicable to the
jurisdiction in which each respective item of Equipment is located on the
Commencement Date. Lessor shall report and remit such Sales Tax as required by
the applicable jurisdiction. In the event that Sales Tax is imposed by any state
taxing authority attributable to the Rental Payments, in excess of that paid by
Lessee to Lessor pursuant to this Section 9(c), Lessee shall reimburse Lessor
(or pay directly, but only if instructed by Lessor), on an After-Tax Basis, for
all such additional taxes, including, interest, fines, additions to tax and
penalties thereon.
(d) Unless otherwise required by law, upon commencement of the
Applicable Term, Lessee shall be responsible for reporting the Equipment for ad
valorem property tax purposes where applicable and Lessor shall not include the
Equipment in any ad valorem or other similar tax returns filed by Lessor.
(e) If any claim is made against Lessor, by commencement of proceedings
against Lessor or otherwise, for Taxes, including interest, fines, additions to
tax, and penalties thereon for which Lessee would have a reimbursement or
payment obligation pursuant to this Section 9, Lessor shall as soon as
reasonably practical notify Lessee of such claim in writing; provided, however,
that Lessor's failure to provide such notice shall not reduce Lessee's
obligations under this Section 9 except to the extent that such failure
materially prejudices Lessee's ability to pursue its contest rights hereunder.
Lessee may, at its expense, in good faith and by appropriate administrative or
legal proceedings, contest or defend an asserted claim or liability for which it
is indemnifying Lessor under this Section 9, so long as (1) no Event of Default
shall have occurred and be continuing, and (2) in the reasonable opinion of
Lessor, such contest or defense is being diligently conducted by persons
reasonably satisfactory to Lessor. To the extent permitted by law, any contest
or defense conducted pursuant to this Section 9(e) may be conducted by Lessee
either in its own name or, if required by the applicable jurisdiction, in
Lessor's name. Lessee shall reimburse Lessor, on an After-Tax Basis, for all
costs and expenses, including (without limitation) reasonable legal fees and
expenses, which Lessor may incur in connection with such contest or defense.
Lessor agrees to offer its good faith cooperation and assistance, at no cost or
expense to Lessor, in Lessee's conduct of such contest or defense.
(f) "After-Tax Basis" shall mean an amount which, after deduction of
all Taxes (without respect to any exclusion provided in Section 9(a) hereof)
imposed by any and all jurisdictions that are required to be paid by the
recipient in respect of the receipt or accrual of such amount, and after
consideration of any current deduction, credit or other tax benefit realized by
the recipient and attributable to the indemnified Tax, cost or expense, is equal
to the amount required to be indemnified against on an After-Tax Basis.
10. REPAIRS; USE; LOCATION; LABELS. Lessee shall: (a) at its
own expense, keep the Equipment in good repair, condition and working order and
maintained in accordance with the manufacturer's recommended engineering and
maintenance standards; (b) use the Equipment lawfully and exclusively in
connection with its business operations and for the purpose for which the
Equipment was designed and intended; and (c) not move the Equipment from the
Equipment Location (i) to any location outside the United States of America or
(ii) without providing Lessor with at least ten days prior written notice
thereof, payment of any filing fees and taxes for filing Uniform Commercial Code
<PAGE>
- 12 -
Financing Statements, and landlord waivers substantially in the form of Exhibit
D hereto with respect to any such location, to any other location within the
United States of America. If Lessor supplies Lessee with labels stating that the
Equipment is owned by Lessor, Lessee shall affix such labels to the Equipment
pursuant to Lessor's instructions.
11. MAINTENANCE; ALTERATIONS; INSPECTION. At its own expense,
Lessee shall: (a) maintain the Equipment in the same condition as when
delivered, subject only to ordinary wear and tear, and in good operating order
and appearance, and consistent with Seller's specifications as set forth in the
Purchase Documents, and shall properly handle and dispose of batteries and other
hazardous materials; (b) make all alterations or additions to the Equipment that
may be required or supplied by the Seller or legally necessary, including
upgrading the Equipment at no expense to Lessor with Seller's then current
generic software release not later than one year after the initial release of
such software, which software shall remain the property of the Lessor unless
Lessee acquires the Equipment pursuant to Section 13 or Section 18(a)(1),(2) or
(4); and (c) make no other alterations or additions to the Equipment (except for
alterations or additions that will not decrease or impair the fair market-value,
useful life, condition, performance or residual value of any item of Equipment,
or that will not cause such item of Equipment to become "limited use property"
(as defined in Rev. Proc. 75-28). Any modifications, alterations or additions
that Lessee makes to the Equipment shall become Lessor's property and shall also
be deemed to be Equipment unless such modifications, alterations or additions
are readily removable without damage to the Equipment. Upon request, Lessor, or
any party designated by Lessor, shall have the right to inspect the Equipment
and Lessee's records at any reasonable time upon reasonable notice or upon the
occurrence and during the continuance of an Event of Default, at any time
without notice.
12. PERSONAL PROPERTY; LIENS AND ENCUMBRANCES; TITLE;
SUBSTITUTION. The Equipment shall at all times remain personal property,
notwithstanding that the Equipment, or any part thereof, may be (or becomes)
affixed or attached to real property or any improvements thereon. Except for the
interest of Lessor, Lessee shall keep the Equipment free and clear of all
levies, liens and encumbrances of any nature whatsoever. Except as expressly set
forth in this Agreement, the Equipment shall at all times remain the property of
Lessor and Lessee shall have no right, title or interest therein. Lessee shall
have the right, for any valid business reason in the Lessee's reasonable
opinion, to substitute any item of Equipment with a similar piece of equipment
having a fair market value, residual value, utility and remaining useful life at
least equal to the replaced item of Equipment's fair market value, residual
value, utility and remaining useful life, assuming the replaced item of
Equipment was in the condition required by this Agreement. Prior to such
substitution, Lessee will, with respect to a substitution for items of Equipment
with an aggregate original cost in excess of $50,000, (i) furnish Lessor with a
full warranty bill of sale and an assignment of warranties with respect to the
replacement item of Equipment, (ii) cause a Schedule supplement, subjecting such
replacement item of Equipment to the applicable Schedule, duly executed by
Lessee, to be delivered to Lessor for execution and, upon such execution, to be
filed for recordation if requested by Lessor, (iii) furnish Lessor with an
opinion of Lessee's counsel, to the effect that (x) the bill of sale referred to
in clause (i) above constitutes an effective instrument for the conveyance of
title to the replacement item of Equipment to Lessor, (y) legal title to the
replacement item of Equipment has been delivered to Lessor, free and clear of
all liens, and (z) all filings, recordings and other action necessary or
appropriate to perfect and protect Lessor's interest in the replacement item of
Equipment have been
<PAGE>
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accomplished, and (iv) indemnify in accordance with the tax indemnity provisions
of Section 7 and the provisions of Section 9, Lessor for any risk of adverse tax
consequences as a result of or relating to such substitution.
13. RISK OF LOSS. As between Lessor and Lessee, Lessee shall
bear the entire risk of loss, theft, destruction or damage to the Equipment from
any cause whatsoever or requisition of the Equipment by any governmental entity
or the taking of title to the Equipment by eminent domain or otherwise. Lessee
shall advise Lessor in writing within 10 days of any such occurrence. Except as
provided below, no such occurrence shall relieve Lessee of the obligation to pay
Lessor Rental Payments and all other amounts owed hereunder. In the event of any
such occurrence, Lessee may if such occurrence has not materially impaired the
Equipment (in Lessor's reasonable judgment) place the Equipment in good
condition and repair reasonably satisfactory to Lessor and continue making
Rental Payments. An item of Equipment shall be deemed to have suffered an Event
of Loss if (a) such item of Equipment suffers an actual or constructive total
loss or insurance proceeds are received on that basis with respect to such item
of Equipment; (b) such item of Equipment is lost or stolen for a period
exceeding one hundred and twenty (120) days; (c) such item of Equipment is
damaged beyond economic repair or is permanently unfit for commercial use for
its intended purpose; (d) title to such item of Equipment is taken or such item
of Equipment requisitioned for use by any governmental authority for a period
extending beyond the earlier of 270 days or the remainder of the Applicable
Term. Upon the occurrence of any Event of Loss, Lessee may elect either to pay
the Stipulated Loss Value of the affected item of Equipment as set forth on the
Schedule or replace the item of Equipment in accordance with the substitution
procedures described in Section 12. Any Stipulated Loss Value payment shall
occur on the next Rental Payment Date. Upon Lessor's full receipt of such
Stipulated Loss Value and any other amounts owing hereunder or under the
applicable Schedule with respect to such item of Equipment: (y) the applicable
Schedule shall terminate, and except as provided in Section 25, Lessee shall be
relieved of all obligations under the applicable Schedule; and (z) Lessor shall
transfer all of its interest in the affected items of Equipment to Lessee "AS
IS, WHERE IS," and without any warranty, express or implied from Lessor, other
than the absence of any liens or claims by, through, or under Lessor. If Lessee
elects to substitute Equipment, then upon completion of all the substitution
procedures set forth in Section 12, Lessor shall release to Lessee any property
insurance payments received by Lessor in connection with such Event of Loss.
14. NON-CANCELABLE NET LEASE. ALL LEASES HEREUNDER SHALL BE
NON-CANCELABLE NET LEASES, AND LESSEE AGREES THAT IT HAS AN UNCONDITIONAL
OBLIGATION TO PAY ALL RENTAL PAYMENTS AND OTHER AMOUNTS WHEN DUE ON OR PRIOR TO
THE TERMINATION OF THE LEASES. LESSEE IS NOT ENTITLED TO ABATE OR REDUCE RENTAL
PAYMENTS OR ANY OTHER AMOUNTS DUE, OR TO SET OFF ANY CHARGES AGAINST THOSE
AMOUNTS. LESSEE IS NOT ENTITLED TO RECOUPMENTS, CROSS-CLAIMS, COUNTERCLAIMS OR
ANY OTHER DEFENSES TO ANY RENTAL PAYMENTS OR OTHER AMOUNTS DUE HEREUNDER,
WHETHER THOSE DEFENSES ARISE OUT OF CLAIMS BY LESSEE AGAINST LESSOR, SELLER,
THIS AGREEMENT, ANY SCHEDULE OR OTHERWISE. NEITHER DEFECTS IN EQUIPMENT, DAMAGE
TO IT, NOR ITS LOSS, DESTRUCTION OR LATE DELIVERY SHALL TERMINATE THIS AGREEMENT
OR ANY SCHEDULE, OR AFFECT LESSEE'S OBLIGATIONS HEREUNDER. UNLESS LESSEE'S
OBLIGATION TO
<PAGE>
- 14 -
PAY RENTAL PAYMENTS AND OTHER AMOUNTS HAS BEEN TERMINATED PURSUANT TO THE
EXPRESS TERMS OF THIS AGREEMENT, ALL RENTAL PAYMENTS AND OTHER AMOUNTS SHALL
CONTINUE TO BE DUE AND PAYABLE HEREUNDER.
15. LESSOR DISCLAIMERS; LIMITATION OF REMEDIES. IT IS
SPECIFICALLY UNDERSTOOD AND AGREED THAT: (A) LESSOR SHALL NOT BE DEEMED TO HAVE
MADE ANY REPRESENTATION, WARRANTY OR PROMISE MADE BY SELLER, NEITHER SELLER NOR
LESSOR SHALL ACT AS, OR BE DEEMED TO BE, AN AGENT OF THE OTHER, AND LESSOR SHALL
NOT BE BOUND BY, OR LIABLE FOR, ANY REPRESENTATION OR PROMISE MADE BY SELLER
(EVEN IF LESSOR IS AFFILIATED WITH SELLER); (B) LESSOR SHALL NOT BE LIABLE FOR
ANY FAILURE OF ANY EQUIPMENT OR ANY DELAY IN ITS DELIVERY OR INSTALLATION; (C)
LESSOR SHALL NOT BE LIABLE FOR ANY BREACH OF ANY WARRANTY THAT SELLER MAY HAVE
MADE; (D) LESSEE HAS SELECTED ALL EQUIPMENT WITHOUT LESSOR'S ASSISTANCE; (E)
LESSOR IS NOT A MANUFACTURER OF ANY EQUIPMENT; AND (F) LESSOR HAS NOT MADE AND
DOES NOT NOW MAKE ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, WITH
RESPECT TO THE DESIGN, COMPLIANCE WITH SPECIFICATIONS, OPERATION, OR CONDITION
OF ANY EQUIPMENT (OR ANY PART THEREOF), THE MERCHANTABILITY OR FITNESS OF
EQUIPMENT FOR A PARTICULAR PURPOSE, OR ISSUES REGARDING PATENT INFRINGEMENT,
TITLE AND THE LIKE. IT IS FURTHER AGREED THAT LESSOR SHALL HAVE NO LIABILITY TO
LESSEE, LESSEE'S CUSTOMERS, OR ANY THIRD PARTIES FOR ANY DIRECT, INDIRECT,
SPECIAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF THIS AGREEMENT OR ANY SCHEDULE
OR CONCERNING ANY EQUIPMENT, OR FOR ANY DAMAGES BASED ON STRICT OR ABSOLUTE TORT
LIABILITY OR LESSOR'S NEGLIGENCE; PROVIDED, HOWEVER, THAT NOTHING IN THIS
AGREEMENT SHALL DEPRIVE LESSEE OF ANY RIGHTS IT MAY HAVE AGAINST ANY PERSON
OTHER THAN LESSOR. LESSEE SHALL LOOK SOLELY TO SELLER FOR ANY AND ALL CLAIMS AND
WARRANTIES RELATING TO THE EQUIPMENT. Lessor hereby assigns to Lessee for the
Term
of the applicable Schedule the right to enforce, provided Lessor has not
exercised any of its remedies under Section 20, and such enforcement is pursued
in Lessee's name, any representations, warranties and agreements made by Seller
pursuant to the Purchase Documents, and Lessee may retain any recovery resulting
from any such enforcement efforts. TO THE EXTENT PERMITTED BY APPLICABLE LAW,
LESSEE WAIVES ANY AND ALL RIGHTS AND REMEDIES CONFERRED UPON A LESSEE BY ARTICLE
2A OF THE UCC AND ANY RIGHTS NOW OR HEREAFTER CONFERRED BY STATUTE OR OTHERWISE
THAT MAY LIMIT OR MODIFY LESSOR'S RIGHTS AS DESCRIBED IN THIS SECTION OR OTHER
SECTIONS OF THIS AGREEMENT.
16. LESSEE REPRESENTATIONS AND WARRANTIES. Lessee represents,
warrants and covenants to Lessor on the date of the execution and delivery of
this Agreement and on each Commencement Date that: (a) Lessee is a corporation
duly organized, validly existing and in good standing under the laws of
Delaware, has all requisite corporate power and authority to own its property
and assets and to carry on its business as now conducted, is qualified to do
business in every jurisdiction where such qualification or registration is
required, except where the failure so to qualify would not
<PAGE>
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materially adversely affect the financial condition of Lessee, and has the
corporate power and authority to execute, deliver and perform its obligations
under this Agreement, all Schedules and all other related documents or
instruments (collectively, Fundamental Agreements) to which it is or will be a
party; (b) this Agreement and each other Fundamental Agreement to which it its a
party have been duly authorized by all necessary corporate action, and have
been, or prior to the applicable Commencement Date will have been, duly executed
and delivered by it, and neither the execution and delivery thereof, nor the
consummation of the transactions on its part contemplated hereby and thereby,
nor compliance by it with any of the terms and provisions hereof or thereof, (i)
requires any approval of its stockholders or approval or consent of any trustee
or holders of any indebtedness or obligations of Lessee, except for such
approvals and consents as have been duly obtained, and are in full force and
effect, (ii) contravenes, as to Lessee, any existing law, or (iii) in any way
contravenes its governing corporate documents or by-laws; (c) this Agreement and
each other Fundamental Agreement to which it is a party are, or upon due
execution and delivery thereof by all other parties thereto will be, its legal,
valid and binding obligation, enforceable against it in accordance with its
terms, except as may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to or limiting creditors' rights generally
or by equitable principles relating to enforceability; (d) the execution and
delivery by Lessee of each Fundamental Agreement to which it is a party, the
consummation of the transactions contemplated thereby and its compliance with
the terms thereof do not require the consent or the approval or authorization
of, or filing, except as contemplated in the Fundamental Agreements,
registration or qualification with, any governmental authority on the part of
Lessee as a condition to such execution, delivery and compliance, except such as
have been made or obtained and are in full force and effect; (e) Lessee has
delivered to Lessor copies of (i) the consolidated balance sheet of Lessee and
its consolidated subsidiaries as of June 30, 1995, and related consolidated
statements of operations and stockholders' equity for the fiscal year then
ended, accompanied by the report of KPMG Peat Marwick, independent auditors; and
(ii) the unaudited consolidated balance sheet of Lessee and its consolidated
subsidiaries as of March 31, 1996, and the related unaudited consolidated
statements of operations and stockholders' equity for the nine-month period then
ended, and in the case of the statements referred to in clause (i), such
statements fairly present, in accordance with generally accepted accounting
principles, the financial position of Lessee and its consolidated subsidiaries
as of such date and, in the case of the statements referred to in clause (ii),
have been prepared on a basis consistent with that employed in the preparation
of the financial statements referred to in clause (i), and in the opinion of
management of Lessee reflect all adjustments necessary for a fair presentation
of the results for the interim period presented, and since June 30, 1995, there
has been no material adverse change in the condition (financial or otherwise),
operations, properties or prospects of the Lessee (Material Adverse Change); (f)
except as set forth in Schedule 16, there are no actions, suits or proceedings
at law or in equity pending or, in the case of actions or proceedings by a
governmental authority, to the knowledge of Lessee, threatened against or
affecting Lessee or any business, property or rights of Lessee (A) which involve
any Fundamental Agreement or the transactions contemplated thereby or (B) as to
which there is a reasonable possibility of an adverse determination and which,
if adversely determined, would reasonably be expected, individually or in the
aggregate, to result in a Material Adverse Change or in the inability of Lessee
to perform its obligations under any Fundamental Agreement to which it is a
party, or adversely affect the value of the Equipment in any material respect;
(g) Lessee has filed or caused to be filed all federal, state and local tax
returns required to have been filed by it and has paid or caused to be paid all
taxes as shown on such returns or on any assessment received by it to the extent
that such taxes have become due, except such taxes the amount, applicability
<PAGE>
- 16 -
or validity of which are being contested in good faith by appropriate
proceedings and with respect to which Lessee shall have set aside on its books
adequate reserves as are required by generally accepted accounting principles;
(h) as of any Commencement Date, the chief executive office of Lessee shall be
located at the address set forth on the cover page hereof or such other location
that an officer of Lessee has certified to Lessor in writing; (i) ALL EQUIPMENT
IS LEASED FOR BUSINESS PURPOSES ONLY, AND NOT FOR PERSONAL, FAMILY OR HOUSEHOLD
PURPOSES; and (k) all Equipment is tangible personal property and shall not
become a fixture or real property under Lessee's use thereof.
17. GENERAL INDEMNITY. Lessee shall indemnify, hold harmless,
and, if so requested by Lessor, defend Lessor against all claims (Claims)
directly or indirectly arising out of or connected with the Equipment or any
Fundamental Agreement but not Claims arising solely from the gross negligence or
willful misconduct of the Lessor. Claims refers to all losses, liabilities,
damages, penalties, expenses (including legal fees and costs), claims, actions,
and suits, whether in contract or in tort, whether caused by Lessor's negligence
or otherwise, and whether based on a theory of strict liability of Lessor or
otherwise, and includes, but is not limited to, matters regarding: (a) the
selection, manufacture, purchase, acceptance, rejection, ownership, delivery,
lease, possession, maintenance, use, condition, return or operation of the
Equipment; (b) any latent defects or other defects in any Equipment, whether or
not discoverable by Lessor or by Lessee; (c) any patent, trademark, or copyright
infringement; and (d) the condition of any Equipment arising or existing during
Lessee's use.
18. OPTIONS; SURRENDER. (a) Options. Lessee shall have the
options specified below. Upon payment of the amount described in clauses (1),
(2) or (3) below and any other amounts owing with respect to the items of
Equipment subject to such options under this Agreement or the applicable
Schedules (other than future Rental Payments), and return of the Equipment to
Lessor if the Termination Option is exercised, the applicable Schedule shall
terminate, and except as provided in Section 25, Lessee shall be relieved of all
obligations under the applicable Schedule, and if the Early Buyout Option or the
Fair Market Value Purchase Option has been exercised, Lessor shall transfer all
of its interest in the affected items of Equipment to Lessee "AS IS, WHERE IS,"
and without any warranty, express or implied from Lessor, other than the absence
of any liens or claims by, through, or under Lessor.
(1) Early Buyout Option. Provided that no Event of Default or
Potential Default has then occurred and is continuing, Lessee shall have the
option to purchase all, but not less than all of the items of Equipment
constituting an individual 5ESS switch on the date (EBO Date) and for a purchase
price specified by Lessor in the applicable Schedule for such items of
Equipment. Such option will be exercisable upon irrevocable written notice to
Lessor from Lessee given at least ninety (90) days prior to the applicable EBO
Date.
(2) Fair Market Value Purchase Option. Provided that no Event
of Default or Potential Default has then occurred and is continuing, Lessee
shall have the option to purchase all, but not less than all, of the items of
Equipment constituting an individual 5ESS switch at the end of the applicable
Term for its then Fair Market Value, which shall mean the cash purchase price
which would be obtained in an arm's-length transaction between an informed and
willing buyer and an informed and willing seller, under no compulsion to sell,
excluding any value attributable to improvements which may
<PAGE>
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be removed by Lessee pursuant to Section 11, without consideration of Lessee's
purchase or renewal options and on an uninstalled basis, but assuming (other
than in the case of an exercise of remedies hereunder) that such item of
Equipment was in the condition required hereunder, together with any other
payments then due and owing under the applicable Schedule. The Fair Market Value
shall be subject to a cap ("FMV Cap") set forth in the applicable Schedule.
Lessee shall provide Lessor with at least 180 days prior written notice of its
intent to purchase Equipment for Fair Market Value. Such notice shall be
irrevocable unless the Fair Market Value is more than fifteen percent (15%)
above any estimate thereof provided by Lessee in such written notice and Lessee
notifies Lessor in writing not later than five days after the determination of
Fair Market Value of its decision to revoke exercise of the Fair Market Value
purchase option. If Lessor and Lessee cannot agree on such Fair Market Value,
the Fair Market Value shall be determined by an independent appraiser selected
by Lessor and Lessee, provided, however, that if Lessor and Lessee are unable to
agree upon an independent appraiser, each shall select an independent appraiser,
and such independent appraiser shall select a third independent appraiser which
shall determine the Fair Market Value. Lessee shall be responsible for and shall
pay all costs and expenses associated with any appraisal.
(3) Termination Option. Provided that no Event of Default or
Potential Default has then occurred and is continuing, Lessee will have the
right, upon provision of 180 days irrevocable written notice, to terminate a
Schedule with respect to all, but not less than all, of the items of Equipment
constituting an individual 5ESS switch on any Rental Payment Date occurring on
or after the third anniversary of the Commencement Date for such items of
Equipment if Lessee determines in good faith (and, upon request, provides an
officer's certificate to such effect), without discriminating among items of
Equipment or other similar equipment owned or leased by Lessee, that such items
of Equipment have become obsolete or surplus to its needs. If requested by
Lessor, Lessee will use commercially reasonable efforts to sell the applicable
items of Equipment to an unrelated third party but the failure to consummate
such a sale shall not relieve Lessee of any payment obligations set forth in the
next sentence. Upon such a termination, Lessee will pay to Lessor an amount
equal to any deficiency between the Termination Value for such items of
Equipment, determined as set forth on the applicable Schedule, and the net cash
proceeds of any sale of such items of Equipment received by Lessor from Lessee
and shall surrender the affected items of Equipment to Lessor in accordance with
the provisions of Section 18(b).
(4) Renewal Option. Provided that no Event of Default or
Potential Default has then occurred and is continuing, Lessee shall have the
option upon provision of irrevocable written notice delivered at least 120 days
prior to the expiration of the Applicable Term and upon execution of appropriate
documentation, to renew any Schedule with respect to all, but not less than all,
of the items of Equipment constituting an individual 5ESS switch for a Renewal
Term of not less than one year or the remainder of the useful life of such items
of Equipment, whichever period is shorter, for the then Fair Market Rental Value
of such items of Equipment, payable quarterly in arrears. Fair Market Rental
Value shall mean with respect to an item of Equipment, the cash rental which
would be obtained in an arm's-length transaction between an informed and willing
lessee (other than a lessee in current possession) and an informed and willing
lessor, under no compulsion to lease, excluding any value attributable to
improvements that Lessee is permitted to remove pursuant to Section 11, and on
an uninstalled basis, but assuming (other than in the case of an exercise of
remedies hereunder) that such
<PAGE>
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item of Equipment was in the condition required hereunder. Fair Market Rental
Value shall be determined in the same manner as Fair Market Value, at the sole
cost and expense of Lessee.
(b) Surrender. Unless Lessee exercises one of the options set
forth in Section 18(a)(1), (2) or (4), or acquires the Equipment pursuant to
Section 13 hereof, Lessee shall at its expense, reinstall, inspect, test and
properly pack the Equipment, and return the Equipment at the expiration of the
Term in the condition and with the software required by Section 11, free of all
liens and rights of others, by delivering it on board such common carrier as
Lessor may specify with freight prepaid to not more than two (2) locations
within the continental United States of America specified by Lessor and
reasonably acceptable to Lessee. If Lessee so agrees, Lessor and its agents
shall have the right to enter upon any premises where Equipment may be located
to perform any of Lessee's tasks noted above in this Section 18, and Lessee
shall reimburse Lessor for all costs and expenses Lessor incurs in fulfilling
such tasks. Lessee agrees that the Equipment, when returned to Lessor, shall be
in the same condition as when delivered to Lessee, reasonable wear and tear
excepted. (If the Equipment is not in such condition, Lessee shall be liable for
all costs and expenses Lessor incurs to place the Equipment in such condition.)
If requested by Lessor, Lessee, at its sole risk and expense, shall store the
Equipment at any of the two above described locations for a period not to exceed
sixty (60) days, during which period the Equipment shall be subject to all of
the terms and conditions hereof, except for the obligation to make Rental
Payments. At Lessor's risk and expense, Lessor shall be entitled to require
Lessee to store the Equipment at such locations for an additional period of
ninety (90) days.
19. EVENTS OF DEFAULT. Any of the following shall constitute
an Event of Default under this Agreement and all Schedules: (a) Lessee fails to
pay any Rental Payment, Stipulated Loss Value payment, early buyout amount or
Termination Value payment within five days after its due date; or (b) Lessee
fails to pay any other amount payable to Lessor hereunder within fifteen (15)
days after its due date; or (c) any representation or warranty made by the
Lessee in any Fundamental Agreement shall prove to have been untrue when made in
any material respect; or (d) Lessee fails to maintain in full force and effect
any insurance required by Section 8; or (e) a loss by Lessor of title to the
Equipment occurs (other than as a result of action or inaction by Lessor); or
(f) Lessee fails to perform or observe any other covenant, condition or
agreement to be performed or observed by Lessee hereunder or in any other
Fundamental Agreement, and Lessee fails to cure any such breach within thirty
(30) days after notice thereof; provided, however, that if such failure is not
likely to result in the forfeiture or loss of title to any item of Equipment and
is capable of cure but cannot be cured by payment of money or by diligent
efforts within such thirty (30) day period but such diligent efforts shall be
properly commenced within the cure period and Lessee is diligently pursuing, and
shall continue to pursue diligently, remedy of such failure, the cure period
shall be extended for an additional period of time as may be necessary to cure,
not to exceed an additional 150 days or to extend beyond the then Applicable
Term; or (g) Lessee makes an assignment for the benefit of creditors, whether
voluntary or involuntary; or (h) a proceeding under any bankruptcy,
reorganization, arrangement of debts, insolvency or receivership law is filed by
or against Lessee or Lessee takes any action to authorize any of the foregoing
matters and with respect to any such proceeding filed against Lessee, either
such proceeding remains undismissed or unstayed for a period of sixty (60) days
or the relief sought in such proceeding is granted; or (i) Lessee becomes
insolvent or fails generally to pay its debts as they become due; or (j) the
Equipment is levied against, seized or attached (other than by a commercial
creditor of Lessor), or Lessee seeks to effectuate a bulk sale of Lessee's
inventory or assets; or (k) Lessee voluntarily or
<PAGE>
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involuntarily dissolves or is dissolved, or terminates or is terminated; or (l)
any final judgments, decrees, writs of execution, attachments or garnishments or
any liens or any other legal processes shall be issued or levied against Lessee
or any of its assets in amounts which in the aggregate would result in a
Material Adverse Change with respect to Lessee.
20. REMEDIES. If an Event of Default occurs, Lessor may, in
its sole discretion, exercise one or more of the following remedies: (a)
terminate this Agreement or any or all Schedules; or (b) take possession of, or
render unusable, any Equipment wherever the Equipment may be located, without
demand or notice, without any court order or other process of law and without
liability to Lessee for any damages occasioned by such action, and no such
action shall constitute a termination of any Schedule; or (c) require Lessee to
deliver the Equipment at a location designated by Lessor; or (d) declare the
Stipulated Loss Value (as calculated by Lessor as of the date of the Event of
Default) for each applicable Schedule due and payable as liquidated damages for
loss of a bargain and not as a penalty and in lieu of any further Rental
Payments under the applicable Schedule; or (e) proceed by court action to
enforce performance by Lessee of any Schedule and/or to recover all damages and
expenses incurred by Lessor by reason of any Event of Default; or (f) terminate
any other Fundamental Agreement that Lessor may have with Lessee; or (g)
exercise any other right or remedy available to Lessor at law or in equity.
Also, Lessee shall pay Lessor all costs and expenses (including legal fees and
costs and fees of collection agencies) incurred by Lessor in enforcing any of
the terms, conditions or provisions of this Agreement. Upon repossession or
surrender of any Equipment, Lessor shall lease, sell or otherwise dispose of the
Equipment in a commercially reasonable manner, with or without notice and at
public or private sale, and apply the net proceeds thereof (after deducting all
expenses (including legal fees and costs) incurred in connection therewith) to
the amounts owed to Lessor hereunder; provided, however, that Lessee shall
remain liable to Lessor for any deficiency that remains after any sale or lease
of such Equipment. Lessee agrees that with respect to any notice of a sale
required by law to be given, ten days' notice shall constitute reasonable
notice. These remedies are cumulative of every other right or remedy given
hereunder or now or hereafter existing at law or in equity or by statute or
otherwise, and may be enforced concurrently therewith or from time to time.
21. LESSOR'S PERFORMANCE OF LESSEE'S OBLIGATIONS. If Lessee
fails to perform any of its obligations hereunder, Lessor may perform any act or
make any payment that Lessor deems reasonably necessary for the maintenance and
preservation of the Equipment and Lessor's interests therein; provided, however,
that the performance of any act or payment by Lessor shall not be deemed a
waiver of, or release Lessee from, the obligation at issue. All sums so paid by
Lessor, together with expenses (including legal fees and costs) incurred by
Lessor in connection therewith, shall be paid to Lessor by Lessee immediately
upon demand.
22. COVENANTS. (a) Reporting Requirements. Lessee shall
furnish to Lessor:
(1) as soon as available and in any event within fifty (50)
days after the end of each of the first three fiscal quarters of each
fiscal year of Lessee, consolidated balance sheets of the Lessee and
its subsidiaries as of the end of such fiscal quarter and consolidated
statements of operations of Lessee and its subsidiaries for such fiscal
quarter and for the period commencing at the end of the previous fiscal
year and ending with the end of such fiscal quarter, all in
<PAGE>
- 20 -
accordance with generally accepted accounting principles, certified by
the chief financial officer of Lessee;
(2) as soon as available and in any event within 120 days
after the end of each fiscal year of Lessee, a copy of the annual audit
report for such fiscal year for Lessee and its subsidiaries, including
therein consolidated balance sheets of Lessee and its subsidiaries as
of the end of such fiscal year and consolidated statements of
operations of Lessee and its subsidiaries for such fiscal year, all in
accordance with generally accepted accounting principles, in each case
certified (without qualification) by nationally recognized independent
public accountants, to the effect that, in making the examination
necessary for the signing of such annual report by such accountants,
they have not become aware of any Event of Default or Potential Default
that has occurred and is continuing, or, if they have become aware of
such Event of Default or Potential Default, describing such Event of
Default or Potential Default and the steps, if any, being taken to cure
it;
(3) as soon as possible and in any event within five (5) days,
in the case of an Event of Default, and ten (10) days, in the case of a
Potential Default, after an officer of Lessee shall have obtained
knowledge thereof, notice of the occurrence of such Event of Default or
Potential Default, and a statement of the chief financial officer of
Lessee setting forth details of such Event of Default or Potential
Default and the action which Lessee has taken and proposes to take with
respect thereto;
(4) prompt written notice of the filing or commencement of, or
any notice of intention of any individual or entity to file or
commence, any action, suit or proceeding, whether at law or in equity
or by or before any governmental authority against Lessee as to which
there is a reasonable possibility of an adverse determination and
which, if adversely determined, could result in a Material Adverse
Change or in the inability of Lessee to perform its obligations under
any Fundamental Agreement;
(5) as soon as possible and in any event within five (5) days
after receipt thereof, copies of any material notices received by
Lessee from Seller relating to noncompliance with any of the Purchase
Documents; and
(6) such other information respecting the condition or
operations, financial or otherwise, of Lessee or any of its
subsidiaries or the Equipment as Lessor may from time to time
reasonably request; provided, however, that any information which the
Lessee regards as valuable and confidential and identified in writing
as such by the Lessee (the "Confidential Information") will be used by
the Lessor solely for purposes of the transactions contemplated by this
Agreement and the other Fundamental Agreements and will be kept
confidential by Lessor and Lessor will not disclose any of the
Confidential Information to any person or entity; provided, further,
that such confidentiality obligation shall not apply to (i) any
information disclosed to persons or entities employed by or expected to
become engaged in evaluating, approving, structuring, auditing or
administering lease transactions hereunder who agree to comply with
this confidentiality provision, including, without limitation, the
Lessor's representatives, attorneys, advisors, accountants, and rating
agencies, (ii) any information which
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is or becomes available to the Lessor from a source other than the
Lessee or its subsidiaries (iii) any information which is or becomes
available to the public other than as a result of disclosure by Lessor
or its above-described representatives or agents, (iv) any information
required or requested by any governmental agency or representative
thereof or pursuant to legal process, or (v) any information in
connection with the exercise of any remedy under this Agreement; and
provided, further, that nothing herein shall prevent Lessor from
disclosing such information to any bona fide assignee, or prospective
assignee, or any of their respective representatives that have agreed
to comply with this confidentiality provision in connection with the
contemplated assignment of any Schedule hereunder.
.
(b) Merger or Consolidation. Lessee shall not merge into or
consolidate with any other entity unless (i) the surviving or successor entity
expressly assumes in writing all of the obligations of Lessee hereunder, under
the Schedules and under the other Fundamental Agreements, (ii) the surviving or
successor entity has a net worth determined in accordance with generally
accepted accounting principles, after giving effect to such consolidation or
merger at least equal to that of Lessee prior to such consolidation or merger,
(iii) no Event of Default or Potential Default shall occur or exist after giving
effect to such merger or consolidation, and (iv) at the sole cost and expense of
the surviving or successor entity, the surviving or successor entity shall have
executed, delivered and recorded all Uniform Commercial Code Financing
Statements and made such other filings or recordings requested by Lessor to
protect Lessor's ownership interest in the Equipment.
(c) Sale of Assets. Lessee shall not sell, lease, transfer or
otherwise dispose of a substantial portion of its assets for less than the fair
market value or fair market rental value, thereof, as applicable, as determined
by the board of directors of Lessee in good faith and certified in writing to
Lessor that such determination was made in the best business judgment of such
board of directors.
(d) Corporate and Franchise Existence. Lessee shall preserve
and maintain its corporate existence, rights, franchises and privileges in its
jurisdiction of its organization, and in all other jurisdictions in which such
qualification is necessary in view of its business and operations and property
and preserve, protect and keep in full force and effect its rights, licenses,
permits, franchises, authorizations, patents, trademarks, copyrights and
tradenames material to its business and to the use of the Equipment.
(e) Compliance with Laws, Etc. Lessee shall comply with all
laws and regulations applicable to it and to the Equipment and all material
contractual obligations applicable to it and to the Equipment.
(f) Obligations and Taxes. Lessee shall pay all of its
indebtedness and obligations promptly and in accordance with their terms and pay
and discharge promptly all taxes, assessments and governmental charges or levies
imposed upon it or upon its income or profits or in respect of its property,
before the same shall become in default, as well as all lawful claims for labor,
materials and supplies or otherwise which, if unpaid, might become a lien upon
such properties or any part thereof; provided, however, that Lessee shall not be
required to pay and discharge or to cause to be paid and discharged any such
tax, assessment, charge, levy or claim so long as the validity or amount thereof
shall be contested in good faith by appropriate proceedings diligently pursued,
and Lessee shall set aside
<PAGE>
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on its books such reserves as are required by generally accepted accounting
principles with respect to any such tax, assessment, charge, levy or claim so
contested.
23. ASSIGNMENT BY LESSOR. Lessor shall have the unqualified
right to assign, pledge, transfer, mortgage or otherwise convey any of its
interests hereunder or in any Schedule, in whole but not in part, without notice
to, or consent of, Lessee to (1) any Permitted Assignee, and (2) if an Event of
Default has occurred and Lessor is exercising any of its remedies hereunder, to
any person or entity. A Permitted Assignee shall be (1) any subsidiary or
affiliate of Lessor, or (2) an institutional lender or investor (i) whose
business includes loans or leases to telecommunications companies or the
purchase of securities of telecommunications companies, (ii) which, in the event
Lessor's obligations to Lessee are being assumed by such Permitted Assignee, has
a tangible net worth determined in accordance with generally accepted accounting
principles of at least $50,000,000 or provides a guaranty in form and substance
satisfactory to Lessee of all of its obligations to Lessee by an entity having
such tangible net worth, and (iii) which is not a competitor of either (1)
Lessee in the telecommunications market for the provision of competitive local
exchange services or (2) any telecommunications long distance or inter-exchange
carrier (solely with respect to the market for provision of long distance or
telecommunications services) which is a customer of Lessee, which customer
accounted for more than five percent (5%) of Lessee's consolidated revenues in
its then most recent four fiscal quarters. If a Permitted Assignee does not
assume Lessor's obligations to Lessee with respect to the items of Equipment or
Schedule being assigned to such Permitted Assignee, then Lessor shall continue
to remain liable to Lessee for the performance of such obligations. If any
Schedule is assigned, Lessee shall: (a) unless otherwise specified by the Lessor
and the Permitted Assignee specified by Lessor, pay all amounts due under the
applicable Schedule to such Permitted Assignee, notwithstanding any defense,
setoff or counterclaim whatsoever that Lessee may have against Lessor or
Permitted Assignee; (b) not permit the applicable Schedule to be amended or the
terms thereof waived without the prior written consent of the Permitted
Assignee; (c) not require the Permitted Assignee to perform any obligations of
Lessor, other than those that are expressly assumed in writing by such Permitted
Assignee; and (d) execute such acknowledgments thereto as may be requested by
Lessor. It is further agreed that: (x) each Permitted Assignee shall be entitled
to all of Lessor's rights, powers and privileges under the applicable Schedule,
to the extent assigned; (y) any Permitted Assignee may reassign its rights and
interests under the applicable Schedule to another Permitted Assignee with the
same force and effect as the assignment described herein; and (z) any payments
received by the Permitted Assignee from Lessee with respect to the assigned
portion of the Schedule shall, to the extent thereof, discharge the obligations
of Lessee to Lessor with respect to the assigned portion of the Schedule.
24. ASSIGNMENT OR SUBLEASE BY LESSEE. WITHOUT LESSOR'S PRIOR
WRITTEN CONSENT, LESSEE SHALL NOT ASSIGN THIS AGREEMENT OR ANY SCHEDULE OR
ASSIGN ITS RIGHTS IN OR SUBLET THE EQUIPMENT OR ANY INTEREST THEREIN; provided,
however, that as long as no Event of Default or Potential Default has occurred
and is continuing, Lessee may sublease or assign a Schedule to an affiliate,
joint venture or a wholly-owned subsidiary of Lessee that is an entity duly
organized under the laws of one of the states of the United States of America or
the District of Columbia and is not the subject of a bankruptcy proceeding if on
or prior to the date of such sublease or assignment: (a) Lessee and such
sublessee or assignee execute and deliver to Lessor a writing (to be provided by
Lessor if an assignment or in the
<PAGE>
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form of Exhibit A hereto if a sublease) whereby the sublessee or assignee agrees
to assume joint and several liability with Lessee for the full and prompt
payment, observance and performance when due of all of the obligations of the
Lessee under such Schedule; (b) no such assignment or sublease causes the
affected items of Equipment to be "tax-exempt use property" as such term is
defined in Section 168(h) of the Code; (c) the term of any such sublease does
not extend beyond the then Applicable Term; (d) any such sublease shall be
subject and subordinate to this Agreement and any applicable Schedule and shall
be consistent with the provisions hereof and thereof; (e) any such sublease
shall prohibit further subleasing; (f) Lessee at its sole cost and expense makes
all filings and recordations requested by Lessor to protect Lessor's ownership
interest in the affected items of Equipment; and (g) Lessee shall provide Lessor
with a landlord waiver substantially in the form of Exhibit B attached hereto
with respect to each new Equipment Location. In no event, however, shall any
such sublease or assignment discharge or diminish any of Lessee's obligations to
Lessor under such Schedule. So long as no Event of Default exists and sublessees
are not in default of their sublease obligations, sublessees shall be entitled
to quiet enjoyment of the items of Equipment they have subleased. Lessor
acknowledges that any resale of capacity to customers of Lessee or any of
Lessee's affiliates with respect to any Equipment or partitioning of Equipment
by provision of dedicated use thereof to customers of Lessee or Lessee's
affiliates shall not constitute an assignment or a sublease of a Schedule or any
Equipment. Lessee covenants and agrees that any such resale or partitioning will
be expressly subject to and subordinate to the terms of this Agreement.
25. SURVIVAL; QUIET ENJOYMENT. All representations, warranties
and covenants made by Lessee hereunder shall survive the termination of this
Agreement and shall remain in full force and effect. All of Lessor's rights,
privileges, and indemnities, to the extent they are fairly attributable to
events or conditions occurring or existing on or prior to the termination of
this Agreement, shall survive such termination and be enforceable by Lessor and
any successors and assigns. So long as no Event of Default exists, neither
Lessor nor any Permitted Assignee will interfere with Lessee's quiet enjoyment
of the Equipment.
26. TRUE LEASE; FILING FEES; FURTHER ASSURANCES; NOTICES.
Lessor and Lessee intend the transactions described herein and in any Schedule
to be a true lease, and Lessee hereby authorizes Lessor to file financing
statements to give public notice of Lessor's ownership of the Equipment. If any
such transaction is deemed by a court of competent jurisdiction to be a lease
intended for security, to secure payment and performance of Lessee's obligations
under this Agreement and any Schedule, Lessee grants Lessor and its assigns a
purchase money security interest in the Equipment and in all attachments,
accessories, additions, substitutions, products, replacements, rentals and
proceeds (including insurance proceeds) (collectively, Collateral). Lessee shall
execute and timely deliver to Lessor financing statements or any other documents
Lessor deems necessary to perfect or protect Lessor's security interest in the
Collateral. If Lessee fails to execute any such document, Lessor or Lessor's
agent is hereby authorized to file any of the foregoing signed only by Lessor or
by Lessor's agent. Lessor or Lessor's agent may file as a financing statement
any Fundamental Agreement Lessor deems necessary to perfect or protect Lessor's
security interest in the Collateral, and Lessee agrees that a carbon,
photographic or other reproduction of any Fundamental Agreement or any financing
statement is sufficient as a financing statement. Lessee will promptly reimburse
Lessor for any filing or recordation fees or expenses (including lien search
fees, legal fees and costs) incurred by Lessor in perfecting or protecting its
interests in the Equipment and under this Agreement. Lessee shall promptly
<PAGE>
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execute and deliver to Lessor such documents and take such further action as
Lessor may from time to time reasonably request in order to carry out the intent
and purpose of this Agreement and to protect the rights and remedies of Lessor
created or intended to be created hereunder. All notices under this Agreement
shall be sent to the respective party at its address set forth on the front page
of this Agreement or on the applicable Schedule or at such other address as the
parties may provide to each other in writing from time to time. Any such notice
mailed to said address shall be effective when deposited in the United States
mail, duly addressed and with first class postage prepaid.
27. WAIVER OF JURY TRIAL; SUCCESSORS. LESSEE AND LESSOR EACH
IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY LAWSUIT, PROCEEDING,
COUNTERCLAIM OR ANY OTHER LITIGATION OR PROCEEDING UPON, ARISING OUT OF, OR
RELATED TO THIS AGREEMENT, ANY OTHER FUNDAMENTAL AGREEMENT, OR THE DEALINGS OR
RELATIONSHIP BETWEEN OR AMONG LESSOR, LESSEE, SELLER OR ANY OTHER PERSON. This
Agreement and all Schedules inure to the benefit of and are binding upon the
permitted successors or assigns of Lessor and Lessee.
28. NO WAIVER; LESSOR APPROVAL. Any failure of Lessor to
require strict performance by Lessee, or any written waiver by Lessor of any
provision hereof, shall not constitute consent or waiver of any other breach of
the same or any other provision hereof. Neither this Agreement nor any other
Fundamental Agreement shall be binding upon Lessor unless and until executed by
Lessor.
29. CAPTIONS; COUNTERPARTS; LESSOR'S AFFILIATES. The captions
contained in this Agreement are for convenience only and shall not affect the
interpretation of this Agreement. Only one counterpart of the Schedule shall be
marked "Original" (Original), and all other counterparts thereof shall be marked
as, and shall be, duplicates. To the extent that any Schedule constitutes
chattel paper (as such term is defined in the Uniform Commercial Code in effect
in any applicable jurisdiction), no security interest in such Schedule may be
created through the transfer or possession of any counterpart other than the
Original. Lessee understands and agrees that AT&T Capital Corporation or any
affiliate or subsidiary thereof may, as lessor, execute Schedules under this
Agreement, in which event the terms and conditions of the applicable Schedule
and this Agreement as it relates to the lessor under such Schedule shall be
binding upon and shall inure to the benefit of such entity executing such
Schedule as lessor, as well as any successors or assigns of such entity.
30. CHOICE OF LAW; INTEGRATION; ENTIRE AGREEMENT. EACH
LEASE UNDER THIS AGREEMENT SHALL BE GOVERNED BY THE INTERNAL LAWS (AS OPPOSED TO
CONFLICTS OF LAW PROVISIONS) OF THE STATE OF NEW JERSEY (STATE). If any
provision of this Agreement or such Schedule shall be prohibited by or invalid
under that law, such provision shall be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement or such Schedule.
Lessor and Lessee consent to the jurisdiction of any local, state or Federal
court located within the State, and waive any objection relating to improper
venue or forum non conveniens to the conduct of any proceeding in any such
court. This Agreement and all other Fundamental Agreements executed by both
Lessor and Lessee constitute the entire agreement between Lessor and Lessee
relating to the leasing of the Equipment, and supersede all prior agreements
relating
<PAGE>
- 25 -
thereto, whether written or oral, and may not be amended or modified except in a
writing signed by the parties hereto.
<PAGE>
AMERICAN COMMUNICATIONS AT&T CREDIT CORPORATION
SERVICES, INC.
/s/ RICHARD A. KOZAK
By: Richard A. Kozak
(Lessee Authorized Signature) (Lessor Authorized Signature)
/s/ RICHARD A. KOZAK /s/ EDWARD F. GROMEK
C.E.O and President
(Type/Print Name) (Type/Print Name)
- ------------------------------------- -----------------------------------
C.E.O. and President -----------------------------------
(Title) (Title)
- ------------------------------------- -----------------------------------
August 26, 1996 -----------------------------------
(Date) (Date)
<TABLE>
<CAPTION>
American Communications Services, Inc.
Exhibit 11.1 - Computation of Per Share Earnings (Loss)
Years Ended
Net Loss June 30, 1996 June 30, 1995
---------- ------------- -------------
<C> <C> <C>
1 Net Loss $ 26,782,044 $ 14,697,649
2 Less: Preferred Stock Accretion 3,871,328 1,070,985
--------- ---------
3 Net Loss to Common Stockholders 30,653,372 15,768,634
4 Add: Effect on Interest expense 2,301,864 170,095
Add: Convertible Preferred Dividends Saved 3,871,328 1,070,985
5 Net Loss to Common Stockholders, Anti-Dilutive $ 24,480,180 $ 14,527,554
============ ============
Basis
Average Shares Outstanding
--------------------------
6 Weighted Average Number of Common Shares 6,185,459 4,771,689
Outstanding
7 Net additional shares assuming stock options and 9,133,070 4,078,907
warrants exercised and proceeds used first to
purchase treasury shares to 20% of shares
outstanding at year end, the balance to reduce long-
term debt
8 Additional shares assuming conversion of preferred 17,377,278 5,264,492
---------- ---------
shares
9 Weighted average number of common and common 32,695,807 14,115,088
========== ==========
equivalent shares outstanding
Per Share Amounts
-----------------
10 Net loss per common share as presented in $ 4.96 $ 3.30
======== ========
statement of operations (3 / 6)
11 Net loss per share as antidilutive basis (5 / 9) $ 0.75 $ 1.03
======== ========
</TABLE>
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
All subsidiaries do business under their respective names listed below.
JURISDICTION OF
NAME INCORPORATION
===================== ===========
American Communication Services of Columbia, Inc. Delaware
American Communication Services of Fort Worth, Inc. Delaware
American Communication Services of Greenville, Inc. Delaware
American Communication Services of Little Rock, Inc. Delaware
American Communication Services of Louisville, Inc. Delaware
American Communication Services of Albuquerque, Inc. Delaware
American Communication Services of Charleston, Inc. Delaware
American Communication Services of Chattanooga, Inc. Delaware
American Communication Services of El Paso, Inc. Delaware
American Communication Services of Lexington, Inc. Delaware
American Communication Services of Pima County, Inc. Delaware
American Communication Services of Birmingham, Inc. Delaware
American Communication Services of Mobile, Inc. Delaware
American Communication Services of Austin, Inc. Delaware
American Communication Services of Knoxville, Inc. Delaware
American Communication Services of Louisiana, Inc. Delaware
ACSI Advanced Technologies, Inc. Maryland
American Communication Services of Irving, Inc. Maryland
American Communication Services of Montgomery, Inc. Maryland
American Communication Services of Amarillo, Inc. Maryland
American Communication Services of Baton Rouge, Inc. Maryland
American Communication Services of Jackson, Inc. Maryland
American Communication Services of Spartanburg, Inc. Maryland
American Communication Services of Columbus, Inc. Maryland
American Communication Services of Las Vegas, Inc. Maryland
American Communication Services of Maryland, Inc. Maryland
American Communication Services of Corpus Christi, Inc. Maryland
American Communication Services of Colorado Springs, Inc. Maryland
American Communication Services of Jacksonville, Inc. Maryland
American Communication Services of Kansas City, Inc. Maryland
American Communication Services of Rio Rancho, Inc. Maryland
American Communication Services of Shreveport, Inc. Maryland
American Communication Services of Tulsa, Inc. Maryland
Exhibit 23.1
Accountants' Consent
The Board of Directors
American Communications Services, Inc.:
We consent to incorporation by reference in the registration statement (No.
33-99964) on Form S-8 and the registration statement (No. 333-2008) on Form S-3
of American Communications Services, Inc. of our report dated September 27,
1996, relating to the consolidated balance sheets of American Communications
Services, Inc. as of June 30, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
years then ended, which report appears in the June 30, 1996 annual report on
Form 10-KSB of American Communications Services, Inc.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Washington, DC
September 30, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000932140
<NAME> American Communications Services, Inc.
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> $ 136,458,133
<SECURITIES> 0
<RECEIVABLES> 924,770
<ALLOWANCES> (189,510)
<INVENTORY> 1,003,465
<CURRENT-ASSETS> 138,196,858
<PP&E> 80,147,964
<DEPRECIATION> (3,408,698)
<TOTAL-ASSETS> 223,599,891
<CURRENT-LIABILITIES> 23,231,109
<BONDS> 189,071,674
186,664
277,500
<COMMON> 65,837
<OTHER-SE> 10,767,107
<TOTAL-LIABILITY-AND-EQUITY> 223,599,891
<SALES> 0
<TOTAL-REVENUES> 3,415,137
<CGS> 5,264,570
<TOTAL-COSTS> 13,282,835
<OTHER-EXPENSES> 1,404,538
<LOSS-PROVISION> 180,940
<INTEREST-EXPENSE> 10,476,904
<INCOME-PRETAX> (27,194,650)
<INCOME-TAX> 0
<INCOME-CONTINUING> (27,782,044)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,782,044)
<EPS-PRIMARY> (4.96)
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 99.1
CERTAIN FACTORS TO CONSIDER IN CONNECTION
WITH FORWARD LOOKING STATEMENTS
Historical and Anticipated Future Losses; Negative Cash Flow. The Company
has never been profitable and has never generated positive cash flow from
consolidated operations. As of June 30, 1996 the Company had an accumulated
deficit of $47.5 million. Currently, although the Company has begun to generate
revenue in 18 markets, it has not yet generated revenues in any other markets.
Until December 1994, when it recorded its first operating revenues, the Company
was considered a development stage Company for accounting purposes. There can be
no assurance that the Company will achieve or sustain profitability or positive
cash flow from operations in the future.
The Company has incurred significant net operating losses and negative cash
flow to date in connection with establishing its fiber optic networks. Losses
and negative cash flow will continue while the Company concentrates on the
development and construction of additional fiber optic networks and until its
networks have established a sufficient revenue-generating customer base. The
Company will also incur losses during the initial start-up phases of its local
switched voice, enhanced voice messaging and high-speed data services. There can
be no assurance that an adequate revenue base will be established or that these
services will generate positive cash flow. Continued losses and negative cash
flow may prevent the Company from meeting its debt obligations and pursuing its
strategies for growth.
Rapid Expansion of Operations; Implementation of Growth Strategy. ASCI
plans to continue to expand its business rapidly. The Company currently has
commenced service in 18 of its target markets, and its goal is to have begun
service in all 50 contemplated target markets by the end of the calendar year
1998. The Company's ability to manage its rapid expansion effectively will
require it to continue to implement and improve its operating, financial and
accounting systems, to attract and hire qualified personnel in each market, and
to expand, train and manage its employee base. Delays in constructing any
network may require the Company to scale back the number of other networks it
expects to build within a given time frame. There can be no assurance that the
Company will be able to implement its growth strategy or manage its expanded
operations effectively. Any failure to do so may have a material adverse effect
on the Company's business, results of operations and financial condition.
As part of its strategy, ACSI plans to expand the range of services that it
offers. The Company is developing and has begun offering on a limited basis
high-speed data and enhanced voice messaging services and, upon receipt of
requisite regulatory approvals and where cost effective, plans to offer local
switched voice services in certain of its markets beginning in late 1996. These
are services that the Company has not previously offered. There can be no
assurance that a market will develop for these services, that the Company's
implementation will be technically or economically feasible, that the Company
will be able to develop or market them successfully, or that the Company will be
able to operate and maintain these services profitably.
- 1 -
<PAGE>
Substantial Leverage, Future Cash Obligations. Since inception, the
Company's consolidated cash flow from operations has been negative. As a result,
the Company has been required to pay its fixed charges (including interest on
existing indebtedness) and operating expenses with the proceeds from sales of
its debt and equity securities. As of June 30, 1996, the Company (through its
subsidiaries) had approximately $15.0 million in debt outstanding under a
secured credit facility (the "AT&T Credit Facility") with AT&T Credit
Corporation, a subsidiary of AT&T. The maximum potential borrowings under the
AT&T Credit Facility is approximately $31.3 million. Borrowings under the AT&T
Credit Facility may be used to fund the construction and operation of only six
of the Company's 50 contemplated networks. With the issuance of $190.0 million
principal amount of the Company's 13% Senior Discount Notes due 2005 (the "2005
Notes") and the issuance of $120.0 million principal amount of the Company's 12
3/4% Senior Discount Notes due 2006 (the "2006 Notes," and collectively with the
2005 Notes, the "Notes"), the Company will be required to satisfy substantially
higher periodic cash debt service obligations in the future. Commencing in the
year 2001, cash interest on the 2005 Notes and 2006 Notes will be payable
semi-annually at the rate of 13% per annum (approximately $24.7 million per
year) and 12 3/4% per annum (approximately $15.3 million per year),
respectively. The full accredited, value of the 2005 Notes and 2006 Notes of
$190.0 million and $120.0 million, respectively, will become due on November 1,
2005 and April 1, 2006, respectively. As of June 30, 1996, the Company had
approximately $184.4 million of outstanding long-term indebtedness. It is
expected that the Company and it subsidiaries will incur additional
indebtedness, including increasing its borrowings under the AT&T Credit Facility
to the maximum amount, which would be possible provided the Company can
successfully raise additional equity capital. Many factors, some of which are
beyond the Company's control, will affect its performance and, therefore, its
ability to meet its ongoing obligations to repay the Notes and its other debt.
There can be no assurance that the Company will be able to generate sufficient
cash flow or otherwise obtain funds in the future to cover interest and
principal payments associated with the Notes and its other debt.
Certain Financial and Operating Restrictions. The Indenture dated November
14, 1995 pursuant to which the 2005 Notes were issued and the Indenture dated
March 21, 1996 pursuant to which the 2006 Notes were issued (collectively, the
"Indentures") and the AT&T Credit Facility, impose operating and financial
restrictions on the Company and its subsidiaries. These restrictions affect, and
in certain cases significantly limit or prohibit, among other things, the
ability of the Company or its subsidiaries to incur additional indebtedness or
create liens on its assets, pay dividends, sell assets, engage in mergers or
acquisitions or make investments. Failure to comply with any of these
restrictions could limit the availability of borrowing or result in a default
thereunder.
Significant Future Capital Requirements. The Company's continued
development, construction, expansion, operation and potential acquisition of
fiber optic networks, as well as the further development and introduction of new
services, including local switched voice, enhanced voice messaging and high
speed data services, will require substantial capable expenditures. The
Company's ability to fund these expenditures is dependent upon the Company's
raising substantial financing. To date, the Company has raised approximately
$202.6 million in debt and equity financing and obtained approximately $31.2
million in financing commitments from the AT&T Credit Facility. The Company has
estimated that from July 1, 1996 through the end of the calendar year 1998,
capital requirements for implementation of the Company's 50 city business plan,
including the development and construction of fiber optic networks, the
deployment of a broadband inter-city data communications network and development
and introduction of new services, such as local switched voice,
- 2 -
<PAGE>
enhanced voice messaging and high-speed data services, and for expansion of the
Company's existing networks, are approximately $410.9 million. At June 30, 1996,
the Company had approximately $132.7 million of cash and cash equivalents
available for the completion of its planned networks. To meet its additional
remaining capital requirements, the Company may sell additional equity for debt
securities or increase its existing credit facility. Before incurring additional
indebtedness, the Company may be required to seek such additional equity
financing to maintain balance sheet and liquidity ratios required under certain
of its debt instruments. In addition, the Company in the past has considered and
expects to continue to consider potential acquisitions or other strategic
arrangements that may fit the Company's strategic plan. Although the Company has
had discussions concerning such potential acquisitions or arrangements, to date
no agreements have been reached with regard to any particular transaction. Any
such acquisitions or strategic arrangements that the Company might consider are
likely to require additional equity or debt financing, which the Company will
seek to obtain as required. Failure to raise sufficient capital could compel the
Company to delay or abandon some or all of its plans or expenditures, which
could have material adverse effect on its business, results of operations and
financial condition. Also, the terms of any debt or equity capital raised by the
Company in the future could restrict the Company's operational flexibility and
ability to raise additional capital and thereby adversely affect the Company's
business, results of operations and financial condition.
Business Combinations; Strategic Investments. The Company from time to time
engages in preliminary discussions with (i) potential strategic investors (i.e.
investors in the same or related business) who have expressed an interest in
making an investment in or acquiring the Company and (ii) potential business
partners looking toward formation of business combinations or strategic
alliances that would expand the reach of the Company's networks or services. In
addition to providing additional growth capital, the Company believes that an
alliance with an appropriate strategic investor or business partner could
provide operating synergies to, and enhance the competitive position of, both
ACSI and such strategic investor/business partner within the rapidly
consolidating telecommunications industry. There can be no assurance that any
agreement with any potential strategic investor or business partner will be
reached on terms acceptable to the Company nor does the Company believe that any
such investment, business combination or strategic alliance is necessary for
successful consummation of its strategic plan. An investment, business
combination or strategic alliance could constitute a Change of Control (as
defined in the Indentures) requiring the Company to offer to purchase all
outstanding Notes. In the event that such a Change of Control occurs at a time
when the Company does not have sufficient available funds to purchase all Notes
tendered or a time when the Company is prohibited from purchasing the Notes, an
Event of Default (as defined in the Indentures) could occur under the
Indentures. However, the Company currently has no agreement, arrangement or
understanding with any potential strategic investor or potential business
partner with respect to any acquisition, business combination or strategic
alliance.
Effect of Regulation. As a common carrier, the Company is subject to
substantial federal, state and local regulation. The Company's fiber optic
networks do not require authorization from the Federal Communications Commission
for construction or installation. However, the Company must file tariffs stating
its rates, terms and conditions of service for interstate traffic, although the
FCC has proposed adopting rules which would preclude IXCs from filing tariffs
and is considering a request that the proposed rules also be applicable to
CLECs. State regulatory agencies regulate intrastate communications, while local
authorities control the Company's access to and use of municipal rights-of-way.
The Telecommunications Act preempted all state and local legal requirements
which prohibit or have the effect of prohibiting any entity from providing any
- 3 -
<PAGE>
intrastate telecommunications service. However, many states continue to require
telecommunications carriers to obtain a certificate, license, permit or similar
approval before providing services. Thus, the Company's ability to provide
additional intrastate services is dependent upon its receipt of requisite state
regulatory approval. The inability to obtain the approvals necessary to provide
intrastate switched services could have material adverse effect on the Company's
business, results of operations and financial condition. Moreover, the
Telecommunications Act has increased local competition by IXCs, cable television
service providers ("CATVs") and public utility companies, which may have a
material adverse effect on the Company. In addition, the Telecommunications Act
has granted important benefits to the LECs, including providing LECs substantial
new pricing flexibility, restoring the ability of RBOCs to provide long distance
services and allowing RBOCs to provide certain cable television services. These
changes will tend to enhance the competitive position of the LECs, which may
materially adversely affect the Company. Furthermore, no assurance can be given
that court decisions or changes in current or future federal or state
legislation or regulations would not materially adversely affect the Company.
Internet-related services are not currently subject to direct regulation by
the FCC or any other U.S. agency other than regulation applicable to businesses
generally. The FCC recently requested comments on a petition filed by the
America's Carriers Telecommunication Association which requests that the FCC
regulate certain voice transmissions over the Internet as telecommunications
services. Changes in the regulatory environment relating to the
telecommunications or Internet-related services industry could have an adverse
effect on the Company's Internet-related services business. The
Telecommunications Act may permit telecommunications companies, RBOCs or others
to increase the scope or reduce the cost of their Internet access services. The
Company cannot predict the effect that the Telecommunications Act or any further
legislation, regulation or regulatory changes may have on its business
Competition. The Company operates in a highly competitive environment for
all of its services. An increasing trend toward strategic business alliances in
the telecommunications industry may create significant new competition for ACSI.
Dedicated and Switched Voice Services. The Company's competitors in this
market are predominantly LECs, other CLECs and CATVs and may potentially include
microwave carriers, satellite carriers, teleports, public utilities, wireless
telecommunications providers, IXCs, integrated communications providers and
private networks built by large end users. With the passage of the
Telecommunications Act and the entry of RBOCs into the long distance market, the
Company believes that IXCs may construct their own local facilities and/or
resell local services in order to compete with the bundled local and long
distance services to be offered by the LECs and a result of the
Telecommunications Act. Given that a substantial portion of the Company's
revenues are billed to IXCs for services provided for the benefit of their
customers, such action could have a material adverse effect on the Company.
Currently, the Company does not have a significant market share in any
market. Most of the Company's actual and potential competitors have
substantially greater financial, technical and marketing resources than the
Company. In particular, LECs have long-standing relationships with their
customers, have the potential to subsidize access services with monopoly service
revenue and benefit from certain existing federal, state and local regulations
that the Company believes, in certain respects, favor LECs over the Company. For
example, the interconnection decisions issued by the FCC in 1992 and 1993 and
the Telecommunications Act, which
- 4 -
<PAGE>
allow CLECs to interconnect with LECs' facilities, have been accompanied by
increased pricing flexibility and partially relaxed regulatory oversight of
LECs. The Company expects that LECs will offer time and volume discounts to
customers, which will further increase competition for the Company and other
CLECs and which could significantly adversely affect the Company's future
dedicated services revenues. Moreover, some LECs impose reconfiguration charges
on customers seeking to shift their traffic from LEC facilities to CLEC
facilities, which may have an adverse effect on a CLEC's ability to attract
these customers.
The Company expects that other CLECs may operate in most, if not all, of
the markets targeted by the Company and many of these markets may not be able to
support multiple CLECs. Additionally, delays in constructing any network could
adversely affect the Company's competitive position in markets where another CAP
or CLEC has a network under construction or can provide services on an
already-existing network. There can be no assurance that the Company will be
able to achieve or maintain an adequate market share, maintain construction
schedules or compete effectively in any of its markets.
Data Services. The market for data communications services, including IP
switching, is extremely competitive. The are no substantial barriers to entry,
and the Company expects that competition will intensify in the future. The
Company believes that its ability to compete successfully depends on a number of
factors, including market presence; the ability to execute a rapid expansion
strategy; the capacity, reliability and security of this network infrastructure;
ease of access to and navigation of the Internet; the pricing policies of its
competitors and suppliers; the timing of the introduction of new products and
services by the Company and its competitors; the Company's ability to support
industry standards; and industry and general economic trends. The Company's
success in this matter will depend heavily upon its ability to provide high
quality Internet connectively and value-added Internet services at competitive
prices.
Dependence on a Small Number of Major Customers. The Company receives a
significant portion of its revenue from a small number of major customers,
particularly the IXCs that serve the Company's markets. For the fiscal year
ended June 30, 1996, approximately 60% of the Company's revenues were
attributable to dedicated access services provided to four of the largest IXCs,
respectively, including services provided for the benefit of their customers.
The Company is, and expects to continue to be, dependent upon such customers,
and the loss of any one of them could have a material adverse effect on the
Company's business, results of operations and financial conditions.
Additionally, customers who account for significant portions of the Company's
revenues may have the ability to negotiate prices for the Company's services
that are more favorable to the customer and that result in lower profit margins
for the Company. The Telecommunications Act may also encourage IXCs to construct
their own local facilities and/or resell the local services of ACSI's
competitors, which may materially adversely affect the Company.
Limited Operating Revenues; Limited Marketing and Operating Efforts.
Although the Company has begun to generate operating revenues in 18 markets, it
has not yet commenced operations or generated revenue in its other targeted
markets. The Company will be required to expand its marketing efforts to attract
customers as its networks are being built in each market. Additional staffing
will be required to manage future administrative, operating, marketing and sales
functions effectively. Failure to obtain significant and widespread commercial
and public acceptance of its networks and access to certain buildings in a
market could jeopardize the Company's ability to remain in business in that
market. There can be no assurance that the
- 5 -
<PAGE>
Company will be able to secure customers for the commercial use of its proposed
networks or access to buildings in each market.
Impact of Technological Change. The telecommunications industry is subject
to rapid and significant technological change that could materially affect the
continued use of fiber optic cable or the electronics utilized in the Company's
networks. Although the affect of technological changes, including changes
related to the emerging wireline and wireless transmission and switching
technologies, on the future business of the Company cannot be predicted, it
could have a material adverse effect on the Company's business, results of
operations and financial condition.
The market for the Company's telecommunications products and services is
characterized by rapidly changing technology, evolving industry standards,
emerging competition and frequent new product and service introductions. There
can be so assurance that the Company will successfully identify new product and
service opportunities and develop and bring new products and services to market.
The Company is also at risk from fundamental changes in the way
telecommunications services are marketed and delivered. The Company's data
communications service strategy assumes that the TCP/IP, frame relay and ATM
protocols, utilizing fiber optic or cooper-based telecommunications
infrastructures, will continue to be the primary protocols and transport
infrastructures for data communications services. The Company's pursuit of
necessary technological advances may require substantial time and expense, and
there can be no assurance that the Company will succeed in adapting its
telecommunications services business to alternate access devices, conduits and
protocols.
Dependence on Rights-of-Way and Other Third Party Agreements. The Company
must obtain easements, rights-of-way, franchises and licenses (collectively,
"local approvals") from various private parties, actual and potential
competitors and local governments in order to construct and maintain its fiber
optic networks. The Company has obtained the local approvals necessary to
construct and operate its networks in the central business districts of all of
the markets in which the Company's digital fiber optic networks are presently
operating or are under construction. The Company does not yet have all of the
local approvals required to implement its business plan in prospective new
markets, and there can be no assurance that the Company will be able to obtain
and maintain local approvals on acceptable terms or that other CLECs will not
obtain similar local approvals that will allow them to compete against the
Company or enter a market before the Company. Some of the agreements for local
approvals obtained by the Company may be short-term, or revocable at will, and
there can be no assurance that the Company will have continued access to
existing rights-of-way and franchises after their expiration. If any of these
agreements were terminated or could not be renewed and the Company was forced to
remove its fiber from the streets or abandon its network in place, such
termination would be likely to have a materially adverse effect on the Company's
business, results of operations and financial condition.
As a condition to allowing use of rights-of-way or granting franchises to
the Company, certain local governments require the Company to post performance
bonds or letters of credit and to pay ongoing fees based upon the gross revenues
generated by, or linear footage of, the applicable network. In many markets,
LECs are not required to pay such fees or pay substantially less than those paid
by the Company which may put the Company at a competitive disadvantage in its
markets.
- 6 -
<PAGE>
Potential Liability of Internet Access Providers. The law governing the
liability of on-line services providers and Internet access providers for
participating in the hosting or transmission of objectionable materials or
information currently is unsettled. Under the terms of the Telecommunications
Act, both civil and criminal penalties can be imposed for the use of interactive
computer services for the transmission of certain indecent or obscene
communications. While this provision has been stayed by a federal court while
its constitutionality is being considered, many states have adopted or are
considering adopting similar requirements. In addition, several private lawsuits
have been filed seeking to hold Internet access providers accountable for
information which they transmit. In one such case pending in the United States
District Court for the Northern District of California, i.e. Religious
Technology Center v. NETCOM On-Line Communications Services, Inc., the court
ruled that an Internet access provider can potentially be held liable for the
copyright infringement committed by its subscribers. While the outcome of these
activities is uncertain, the ultimate imposition of potential liability on
Internet access providers for information which they host, distribute or
transport could materially change the way they must conduct business. To avoid
undue exposure to such liability, Internet access providers will be compelled to
engage in burdensome investigation of subscriber materials or even discontinue
offering the service all together.
Dependence Upon Network Infrastructure, Risk of System Failure; Security
Risks. The Company's success in marketing its services to business and
government users requires that the Company provide superior reliability,
capacity and security via its network infrastructure. The Company's networks are
subject to physical damage, power loss, capacity limitations, software defects,
breaches of security (by computer virus, break-ins or otherwise) and other
factors, certain of which may cause, interruptions in service or reduced
capacity for the customers. Interruptions in service, capacity limitations or
security breaches could have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence Upon Suppliers; Sole and Limited Sources of Supply. The Company
relies on other companies to supply certain key components of its network
infrastructure, including telecommunications services and networking equipment,
which, in the quantities and quality demanded by the Company, are available only
from sole or limited sources. The Company is also dependent upon IECs to provide
telecommunications services to the Company and its customers. The Company has
from time to time experienced delays in receiving telecommunications services,
and there can be no assurance that the Company will be able to obtain such
services on the scale and within the time frames required by the Company at an
affordable cost, or at all. Any failure to obtain such services or additional
capacity on a timely basis at an affordable cost, or at all, would have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company also is dependent on its suppliers' ability
to provide necessary products and components that comply with various Internet
and telecommunications standards, inter- operate with products and components
from other vendors and function as intended when installed as part of the
network infrastructure. Any failure of the Company's sole or limited source
suppliers to provide products or components that comply with Internet standards,
interoperate with other products or components used by the Company in its
network infrastructure or by its customers or fulfill their intended function as
part of the network infrastructure could have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence on Key Personnel. The Company is currently managed by a small
number of key management and operating personnel, whose efforts will largely
determine the Company's success. The success
- 7 -
<PAGE>
of the Company also depends upon its ability to hire and retain qualified
operating, marketing and financial and technical personnel. Competition for
qualified personnel in the telecommunications industry is intense and,
accordingly, there can be no assurance that the Company will be able to continue
to hire or retain necessary personnel. The loss of key management personnel,
particularly Anthony J. Pompliano, the Company's Chairman, or Richard A. Kozak,
its President and Chief Executive Officer, would likely have a material adverse
effect on the Company.
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