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Filed pursuant to Rule 424(b)(1)
Registration No. 333-3632
PROSPECTUS
LOGO
OFFER TO EXCHANGE ITS 12 3/4% SENIOR DISCOUNT NOTES DUE 2006,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OF ITS OUTSTANDING 12 3/4% SENIOR DISCOUNT NOTES DUE 2006
The Exchange Offer will expire at 5:00 p.m., New York City time, on June 25,
1996, unless extended.
------------------------
American Communications Services, Inc. (the "Company" or "ACSI") hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying letter of transmittal (the "Letter of
Transmittal" and, together with this Prospectus, the "Exchange Offer"), to
exchange its 12 3/4% Senior Discount Notes due 2006 (the "New Notes") which have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to a Registration Statement of which this Prospectus is a part,
for an equal principal amount of its outstanding 12 3/4% Senior Discount Notes
due 2006 (the "Old Notes"), of which $120,000,000 aggregate principal amount is
outstanding as of the date hereof. The New Notes and the Old Notes are
collectively referred to herein as the "Notes."
The Company will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to 5:00 P.M., New York City time, on the
date the Exchange Offer expires (the "Expiration Date"), which will be June 25,
1996 (30 business days following the commencement of the Exchange Offer), unless
the Exchange Offer is extended. Tenders of Old Notes may be withdrawn at any
time prior to 5:00 P.M., New York City time, on the Expiration Date. The
Exchange Offer is not conditioned upon any minimum principal amount of Old Notes
being tendered for exchange. Old Notes may be tendered only in integral
multiples of $1,000. See "The Exchange Offer."
The New Notes will be obligations of the Company evidencing the same
indebtedness as the Old Notes and will be entitled to the benefits of the same
Indenture (as defined), which governs both the Old Notes and the New Notes. The
form and terms of the New Notes are generally the same as the form and terms of
the Old Notes, except that the New Notes do not contain terms with respect to
the interest rate step-up provisions and the New Notes have been registered
under the Securities Act and therefore will not bear legends restricting the
transfer thereof. See "Description of the New Notes."
Cash interest on the New Notes will be payable semi-annually on April 1 and
October 1, commencing October 1, 2001. The New Notes will mature on April 1,
2006, and will not be redeemable prior to April 1, 2001. On or after April 1,
2001, the New Notes will be redeemable at the Company's option, in whole or in
part, at the prices set forth herein plus accrued and unpaid interest, if any,
to the redemption date. In the event of a Change of Control (as defined herein),
the Company will be required to offer to repurchase all of the New Notes at a
price equal to 101% of the Accreted Value thereof plus accrued and unpaid
interest, if any, to the purchase date, although there can be no assurance that
the Company will have sufficient resources to effect such a repurchase.
The New Notes will be senior unsecured obligations of the Company that will
rank senior in right of payment to all subordinated indebtedness of the Company.
The New Notes will rank pari passu in right of payment to all existing and
future senior indebtedness of the Company. The New Notes will be effectively
subordinated to all existing and future liabilities and obligations of the
Company's subsidiaries (approximately $16 million as of December 31, 1995,
excluding intercompany indebtedness). The Indenture under which the New Notes
are to be issued will permit the Company and its subsidiaries to incur
additional indebtedness under certain circumstances. See "Description of the New
Notes."
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission"), as set forth in no-action letters issued to third
parties, the Company believes that the New Notes issued pursuant to the Exchange
Offer may be offered for resale, resold or otherwise transferred by holders
thereof (other than any holder that is an "affiliate" of the Company as defined
under Rule 405 of the Securities Act), provided that such New Notes are acquired
in the ordinary course of such holders' business and such holders are not
engaged in, and do not intend to engage in, a distribution of such New Notes and
have no arrangement with any person to participate in the distribution of such
New Notes. However, the staff of the Commission has not considered the Exchange
Offer in the context of a no-action letter and there can be no assurance that
the staff of the Commission would make a similar determination with respect to
the Exchange Offer as in such other circumstances. By tendering the Old Notes in
exchange for New Notes, each holder, other than a broker-dealer, will represent
to the Company that: (i) it is not an affiliate of the Company (as defined under
Rule 405 of the Securities Act); (ii) any New Notes to be received by it were
acquired in its ordinary business; and (iii) it is not engaged in, and does not
intend to engage in, a distribution of such New Notes and has no arrangement or
understanding to participate in a distribution of the New Notes. Each
broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of New Notes received in
exchange for Notes where such Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities. The Company has
agreed that, starting on the Expiration Date and ending on the close of business
one year after the Expiration Date, it will make this Prospectus available to
any broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
Prior to this Exchange Offer, there has been no public market for the Old
Notes or New Notes. If such a market were to develop, the New Notes could trade
at prices that may be higher or lower than their principal amount. The Company
does not intend to apply for listing or quotation of the New Notes on any
securities exchange or stock market. Therefore, there can be no assurance as to
the liquidity of any trading market for the New Notes or that an active public
market for the New Notes will develop. See "Risk Factors -- Lack of Public
Market."
Smith Barney Inc. and Bear, Stearns & Co. Inc. (the "Initial Purchasers")
have agreed that one or more of them will act as market-makers for the New
Notes. However, the Initial Purchasers are not obligated to so act and they may
discontinue any such market-making at any time without notice. The Company will
not receive any proceeds from this Exchange Offer. The Company has agreed to pay
the expenses of the Exchange Offer. No underwriter is being used in connection
with this Exchange Offer.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS OF
OLD NOTES WHO TENDER THEIR OLD NOTES IN THE EXCHANGE OFFER, SEE "RISK FACTORS"
BEGINNING ON PAGE 11 OF THIS PROSPECTUS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The date of this Prospectus is May 13, 1996.
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AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy and information statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy and information statements and other information may be inspected
and copied at the public reference facilities of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, or at its
regional offices located at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material can be obtained from the Commission by
mail at prescribed rates. Requests should be directed to the Commission's Public
Reference Section, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Company's common stock, $0.01 par value per share
(the "Common Stock"), is quoted on The Nasdaq Stock Market's SmallCap Market
("The Nasdaq SmallCap Market"). Material filed by the Company can be inspected
at the offices of the National Association of Securities Dealers, Inc., 1735 K
Street N.W., Washington, D.C. 20006.
The Company has filed with the Commission a registration statement on Form
S-4 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the New Notes
offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the New Notes offered
hereby, reference is made to the Registration Statement. This Prospectus
contains summaries of the material terms and provisions of certain documents
and, in each instance, reference is made to the copy of such document filed as
an exhibit to the Registration Statement. Copies of the Registration Statement
and the exhibits thereto may be inspected, without charge, at the offices of the
Commission, at the address set forth above.
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SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, included elsewhere in this Prospectus. Please refer
to "Glossary" for the definitions of certain capitalized terms used herein and
elsewhere in this Prospectus without definition.
American Communications Services, Inc. ("ACSI" or the "Company") is a
rapidly growing competitive local exchange carrier ("CLEC," and referred to as a
competitive access provider or "CAP" with respect to provision of dedicated
services) that constructs and operates digital fiber optic networks and offers
local telecommunications services to long distance companies (interexchange
carriers or "IXCs") and business and government end users in Tier II and Tier
III markets (200,000 to 2,000,000 in population) in the southern U.S. 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 local exchange company
("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 to
business and government end users, on a limited basis, high-speed data and
enhanced voice messaging services. Management believes that successful marketing
of these high-speed data and enhanced voice messaging services will not only
provide the Company with increased revenues, but also with an expanded end user
customer base and relevant marketing experience that can be leveraged into
offering local switched services. 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.
Currently, ACSI has eleven operational networks and nine additional
networks under construction, most of which are expected to be operational by the
third calendar quarter of 1996. The Company intends to have 30 networks in
service by mid-1997. To date, management believes that it has been able to
deploy 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.
ACSI NETWORKS
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<CAPTION>
TARGETED
TO BE
CURRENTLY OPERATIONAL BY
OPERATIONAL SEPTEMBER 30, 1996
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Albuquerque, NM Amarillo, TX
Columbia, SC Baton Rouge, LA
El Paso, TX Birmingham, AL
Fort Worth, TX Charleston, SC
Greenville, SC Columbus, GA
Lexington, KY Irving, TX
Little Rock, AR Jackson, MS
Louisville, KY Las Vegas, NV
Mobile, AL Spartanburg, SC
Montgomery, AL
Tucson, AZ
</TABLE>
Regulatory and competitive trends have stimulated dramatic growth in the
CLEC industry. Regulatory initiatives in the telecommunications industry
introduced to foster competition in the local exchange market have stimulated
demand for local services, the total market for which was approximately $93.0
billion in 1994.
COMPANY STRATEGY
The Company's objective is to become a leading provider of dedicated,
enhanced voice messaging, high-speed data and local switched services in its
targeted markets by implementing the following strategies:
Early Entry in Tier II and Tier III Markets in the Southern U.S. The
Company 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 enabling the Company to achieve market penetration
quickly. ACSI intends to focus its market entry in areas of the southern
U.S. because of attractive demographic
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trends and expected growth in demand for telecommunications services in
these regions. Between 1991 and 1995, one out of every three new jobs in
the U.S. was created in the southeast region of the U.S. Additionally,
between 1989 and 1994, the rate of access line growth in the southern
regions of the U.S. exceeded the national average by approximately two and
one-half times. 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 twelve
of the above-listed twenty markets.
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 are billed to
IXCs for services provided for the benefit of their customers. IXCs
generally choose the access provider of 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, 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. Recently, the Company signed
agreements with AT&T Corp. ("AT&T") and one other IXC pursuant to which the
Company expects AT&T and such other IXC to use the Company as a supplier of
dedicated special access services in many of the Company's markets. 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.
Aggressive Bottom-Line Approach to Network Deployment. The Company
rapidly deploys its networks and markets its services in order to achieve
operating cash flow breakeven (i.e., positive EBITDA before overhead
allocations) quickly. 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 phase and commencement of commercial service in a market
within 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 will extend the reach of its network
outside the central business district in response to customer demand. ACSI
anticipates that each operating subsidiary will achieve EBITDA breakeven
results, prior to overhead allocations, within ten to fifteen months after
initiation of service. In its most mature markets, Louisville and Little
Rock, the Company achieved such EBITDA breakeven results in nine months
after initiation of service.
Expanding Customer Base through High-Speed Data and Enhanced Voice
Messaging Service Offerings. ACSI currently provides dedicated services
and is developing and has begun offering on a limited basis a wide range of
high-speed data and enhanced voice messaging services.
- High-Speed Data Services. The Company is developing and has begun
offering high-speed data services, including Internet services, and
plans to offer frame relay and ATM services to businesses,
government entities, IXCs and Information Services Providers
("ISPs") in targeted markets. The Company has begun offering a total
solution capability to its customers, including high-speed data,
voice and multi-media capabilities as well as facilities management,
expert sales support, consulting and Customer Premises Equipment
("CPE"). The Company believes that this strategy will differentiate
ACSI from its competitors.
- Enhanced Voice Messaging Services. 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. Management believes that the market for enhanced
voicemail services in 1993 was approximately $1.25 billion, that
such market is underserved and that, with the availability of
enhanced voice messaging services such as the Company's, the market
has the potential for growth as customers become more accustomed to
use of these services.
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Cost-Effective Entry into Local Switched Services. The market for
local switched services in the U.S., which was approximately $89.0 billion
in 1994, represents a significant growth opportunity for the Company.
Following receipt of regulatory approval and when cost-effective, the
Company intends to begin offering local switched services in certain of its
markets beginning in late 1996 by installing its own switches or obtaining
switch capacity from third parties. Given the size and regional
concentration of ACSI's markets, the Company plans to deploy a hubbed
switching strategy whereby one switch can serve multiple markets via remote
switching modules. This strategy justifies the switch investment in Tier II
and Tier III markets by reducing capital costs and operating expenses. The
Company's enhanced voice messaging customers are expected to provide an
additional customer base to whom switched services can be marketed.
The senior management of ACSI pioneered the development of many of the
first fiber optic networks in Tier I markets in the U.S. and has substantial
experience in rapidly building cost-effective networks. The Company's Chairman,
Anthony J. Pompliano, is the co-founder and former President and Chief Executive
Officer of MFS Communications, Inc. ("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, Teleport Communications
Group, MCI Communications Corporation ("MCI") and other telecommunications
companies.
RECENT DEVELOPMENTS
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 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. 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, this legislation has also granted certain advantages to the LECs
and has increased local competition by IXCs, cable television operators
("CATVs") and public utility companies. See "Risk Factors -- Competition" and
"Business -- Regulation."
During February 1996, the Company entered into service agreements with AT&T
and one other major IXC, under which the Company expects AT&T and such other IXC
to use the Company as a supplier of dedicated special access services in many of
the Company's markets. The Company currently is providing certain services under
these agreements in a number of the Company's markets, and the Company expects
to add additional services in these markets and to add additional markets as may
be mutually agreed by the Company and AT&T or such other IXC, as the case may
be, subject to, among other things, satisfactory completion of all quality,
service and network validation tests with respect to provision of such services
in each additional market. There can be no assurance that such service
agreements will be extended to cover additional markets or services.
From September 30, 1995, to March 8, 1996, the Company increased the number
of its operational networks from five to eleven, began construction on networks
in eight markets in addition to the one already under construction, increased
route miles from 92 to 157, increased buildings connected or ready to connect
from 79 to 128 and increased its employee base from 100 to 140. Since November
1995, the Company has filed for certification to offer switched local services
in a total of four states.
ACSI is a Delaware corporation. The Company's principal executive offices
are located at 131 National Business Parkway, Suite 100, Annapolis Junction,
Maryland 20701, and its telephone number is (301) 617-4200.
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THE EXCHANGE OFFER
Registration Agreement... The Old Notes were sold by the Company on March 26, 1996, to the
Initial Purchasers, which placed the Old Notes with institutional
investors (the "Private Placement"). In connection therewith, the
Company executed and delivered for the benefit of the holders of
the Old Notes the Registration Agreement (as defined) providing,
among other things, for the Exchange Offer.
The Exchange Offer....... New Notes are being offered in exchange for an equal principal
amount of Old Notes. As of the date hereof, $120,000,000 aggregate
principal amount of Old Notes are outstanding. Since the New Notes
will be recorded in the Company's accounting records at the same
carrying value as the Old Notes, no gain or loss will be
recognized by the Company upon the consummation of the Exchange
Offer. See "The Exchange Offer -- Accounting Treatment." Holders
of the Old Notes do not have appraisal or dissenter's rights in
connection with the Exchange Offer under the Delaware General
Corporation Law, the governing law of the state of incorporation
of the Company.
Based on interpretations by the staff of the Commission, as set
forth in no-action letters issued to third parties, the Company
believes that holders of Old Notes (other than any holder who is
an "affiliate" of the Company within the meaning of Rule 405 under
the Securities Act) who exchange their Old Notes for New Notes
pursuant to the Exchange Offer may offer such New Notes for
resale, resell such New Notes and otherwise transfer such New
Notes without compliance with the registration and prospectus
delivery provisions of the Securities Act; provided such New Notes
are acquired in the ordinary course of the holder's business and
such holders are not engaged in, and do not intend to engage in, a
distribution of such New Notes and have no arrangement or
understanding with any person to participate in a distribution of
such New Notes. The staff of the Commission has not considered the
Exchange Offer in the context of a no-action letter and there can
be no assurance that the staff of the Commission would make a
similar determination with respect to the Exchange Offer. Each
broker-dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. See
"Plan of Distribution." To comply with the securities laws of
certain jurisdictions, it may be necessary to qualify for sale or
register the New Notes prior to offering or selling such New
Notes. The Company has agreed, pursuant to the Registration
Agreement and subject to certain specified limitations therein, to
register or qualify the New Notes for offer or sale under the
securities or "blue sky" laws of such jurisdictions as may be
necessary to permit the holders of New Notes to trade the New
Notes without any restrictions or limitations under the securities
laws of the several states of the United States. If a holder of
Old Notes does not exchange such Old Notes for New Notes pursuant
to the Exchange Offer, such Old Notes will continue to be subject
to the restrictions on transfer contained in the legend thereon.
In general, the Old Notes may not be offered or sold, unless
registered under the Securities Act, except pursuant to an
exemption from, or in a transaction not subject to, the Securities
Act and applicable state securities laws. See "Risk
Factors -- Consequences of Failure to Exchange" and "Description
of the New Notes -- Exchange Offer; Registration Rights."
Expiration Date.......... 5:00 p.m., New York City time, on June 25, 1996 (30 days following
the commencement of the Exchange Offer), unless the Exchange Offer
is extended, in which case the term "Expiration Date" means the
latest date and time to which the Exchange Offer is extended.
</TABLE>
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<TABLE>
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Conditions to the
Exchange Offer......... The Exchange Offer is subject to certain customary conditions,
which may be waived by the Company. See "The Exchange
Offer -- Conditions." Except for the requirements of applicable
Federal and state securities laws, there are no Federal or state
regulatory requirements to be complied with or obtained by the
Company in connection with the Exchange Offer. NO VOTE OF THE
COMPANY'S SECURITYHOLDERS IS REQUIRED TO EFFECT THE EXCHANGE OFFER
AND NO SUCH VOTE (OR PROXY THEREFOR) IS BEING SOUGHT HEREBY.
Procedures for Tendering
Old Notes.............. Each holder of Old Notes wishing to accept the Exchange Offer must
complete, sign and date the Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions contained herein and
therein, and mail or otherwise deliver such Letter of Transmittal,
or such facsimile, together with the Old Notes to be exchanged and
any other required documentation to the Exchange Agent (as
defined) at the address set forth herein and therein. See "The
Exchange Offer -- Procedures for Tendering."
Withdrawal Rights........ Tenders of Old Notes may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date. To withdraw a
tender of Old Notes, a written or facsimile transmission notice of
withdrawal must be received by the Exchange Agent at its address
set forth below under "Exchange Agent" prior to 5:00 p.m., New
York City time, on the Expiration Date.
Acceptance of Old Notes
and Delivery of New
Notes.................. Subject to certain conditions, the Company will accept for
exchange any and all Old Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City time, on the
Expiration Date. The New Notes issued pursuant to the Exchange
Offer will be delivered promptly following the Expiration Date.
See "The Exchange Offer -- Terms of the Exchange Offer."
Certain Tax
Considerations......... The exchange of New Notes for Old Notes should not be a sale or
exchange or otherwise a taxable event for Federal income tax
purposes. See "Certain Federal Income Tax Considerations."
Exchange Agent........... Chemical Bank is serving as exchange agent (the "Exchange Agent")
in connection with the Exchange Offer.
Use of Proceeds.......... There will be no proceeds to the Company from the Exchange Offer.
The net proceeds to the Company from the Private Placement were
approximately $61.8 million (after deduction of discounts and
estimated offering expenses). The Company will continue using such
proceeds, in addition to net proceeds of approximately $96.8
million (after deduction of discounts and estimated offering
expenses) that it received from the sale of its 13% Senior
Discount Notes due 2005 (the "2005 Notes") and net proceeds of
approximately $4.7 million (after deduction of estimated offering
expenses) that it received from the sale of its Series B-4
Preferred Stock to ING Equity Partners L.P.I. ("ING") and the
exercise by ING of warrants to purchase 214,286 shares of Common
Stock, towards the completion of its 30-city network plan,
including development and construction of fiber optic networks,
development and introduction of new services including enhanced
voice-messaging, high-speed data and local switched services, for
expansion of the Company's existing networks, and to fund negative
cash flow until breakeven. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
</TABLE>
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SUMMARY OF TERMS OF NEW NOTES
The Exchange Offer relates to the exchange of up to $120,000,000 aggregate
principal amount of Old Notes for up to an equal aggregate principal amount of
New Notes. The New Notes will be obligations of the Company evidencing the same
indebtedness as the Old Notes, and will be entitled to the benefits of the same
Indenture. The form and terms of the New Notes are generally the same as the
form and terms of the Old Notes, except that the New Notes do not contain terms
with respect to the interest rate step-up provisions and the New Notes have been
registered under the Securities Act and therefore will not bear legends
restricting the transfer thereof. See "Description of the New Notes."
COMPARISON WITH OLD NOTES
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Freely Transferable...... Generally, the New Notes will be freely transferable under the
Securities Act by holders who are not affiliates of the Company.
The New Notes otherwise will be substantially identical in all
material respects (including interest rate and maturity) to the
Old Notes (except with respect to the interest rate step- up
provisions). See "The Exchange Offer -- Terms of the Exchange
Offer."
Registration Rights...... The holders of Old Notes currently are entitled to certain
registration rights pursuant to a registration rights agreement
(the "Registration Agreement") dated as of March 21, 1996, between
the Company and the Initial Purchasers. However, upon consummation
of the Exchange Offer, subject to certain exceptions, holders of
Old Notes who do not exchange their Old Notes for New Notes in the
Exchange Offer will no longer be entitled to registration rights
and will not be able to offer or sell their Old Notes, unless such
old Notes are subsequently registered under the Securities Act
(which, subject to certain limited exceptions, the Company will
have no obligation to do), except pursuant to an exemption from,
or in a transaction not subject to, the Securities Act and
applicable state securities laws. See "Risk Factors --
Consequences of Failure to Exchange."
THE NEW NOTES
TERMS OF THE NEW NOTES
Maturity Date............ April 1, 2006.
Yield.................... 12 3/4% per annum, computed on a semi-annual bond equivalent basis
and calculated from March 21, 1996.
Interest................. The New Notes will accrete at a rate of approximately 12 3/4%,
compounded semi-annually, to an aggregate principal amount of
$120,000,000 by April 1, 2001. Cash interest will not accrue on
the New Notes prior to April 1, 2001. Thereafter, interest on the
New Notes will accrue at the rate of 12 3/4% per annum and will be
payable in cash semi-annually on April 1 and October 1, commencing
October 1, 2001. See "Description of the New Notes -- Principal,
Maturity and Interest."
Original Issue For federal income tax purposes, the Old Notes were issued with
Discount............... "original issue discount" equal to the difference between the
issue price of the Old Notes and the sum of all cash payments
(whether denominated as principal or interest) to be made thereon.
Each holder of a New Note must include in gross income for federal
income tax purposes a portion of such original issue discount for
each day during each taxable year in which a New Note is held even
though cash interest does not begin to accrue until April 1, 2001,
and no cash interest payments will be received prior to October 1,
2001. See "Certain Federal Income Tax Considerations."
Security................. None.
</TABLE>
8
<PAGE> 9
<TABLE>
<S> <C>
Ranking.................. The New Notes are general unsubordinated and unsecured obligations
of ACSI and will rank pari passu with all other unsubordinated and
unsecured indebtedness of ACSI. As a holding company that conducts
virtually all of its business through subsidiaries, ACSI currently
has no source of operating cash flow other than from dividends and
distributions from its subsidiaries. ACSI's subsidiaries will have
no obligation to pay amounts due on the New Notes and will not
guarantee the New Notes. Therefore, the New Notes will be
effectively subordinated to all liabilities of ACSI's
subsidiaries, including trade payables. Any rights of ACSI and its
creditors, including the holders of the New Notes, to participate
in the assets of any of ACSI's subsidiaries upon any liquidation
or reorganization of any such subsidiary will be subject to the
prior claims of that subsidiary's creditors (including trade
creditors). See "Risk Factors -- Holding Company Structure; Source
of Repayment of New Notes; Effective Subordination of New Notes to
Indebtedness of Subsidiaries" and "Description of Certain
Indebtedness."
Sinking Fund............. None.
Optional Redemption...... The New Notes will be redeemable, at the option of ACSI at any
time, in whole or in part, on or after April 1, 2001, at the
redemption prices set forth herein, plus accrued and unpaid
interest, if any, to the date of redemption. See "Description of
the New Notes -- Optional Redemption."
Change of Control........ Upon a Change of Control, each holder of the New Notes will have
the right to require ACSI to repurchase all or any part of such
holder's New Notes at 101% of the Accreted Value thereof, or, in
the case of any such repurchase on or after April 1, 2001, 101% of
the principal amount thereof, plus accrued and unpaid interest, if
any, thereon, to the date of repurchase. There can be no assurance
that ACSI will have the financial resources necessary to
repurchase the New Notes upon a Change of Control. See "Risk
Factors -- Effect of Substantial Leverage and Additional Financing
on Ability to Repay New Notes," "-- Control by the Preferred
Stockholders" and "Description of the New Notes -- Repurchase at
the Option of Holders upon a Change of Control."
Certain Covenants........ The Indenture will contain certain covenants which, among other
things, will restrict the ability of ACSI and certain of its
subsidiaries to incur additional indebtedness, pay dividends or
make distributions in respect of ACSI's capital stock or make
certain other restricted payments, create restrictions on the
ability of certain subsidiaries to make distributions on their
capital stock, create liens, enter into transactions with
affiliates or related persons, sell assets, or consolidate, merge
or sell all or substantially all of their assets. These covenants
are subject to important exceptions and qualifications. See
"Description of the New Notes -- Certain Covenants."
For additional information concerning the New Notes, see "Description of the New Notes."
</TABLE>
RISK FACTORS
See "Risk Factors" for certain factors that should be considered by holders
of Old Notes before tendering their Old Notes in the Exchange Offer.
9
<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following summary consolidated financial and operating data was derived
from, and should be read in conjunction with, the Consolidated Financial
Statements of the Company and the related notes thereto, and Management's
Discussion and Analysis of Financial Condition and Results of Operations,
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, FISCAL YEAR ENDED JUNE 30,
----------------------------- ---------------------------
1995 1994 1995 1994
----------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues.............................. $ 988,877 $ 8,246 $ 388,887 $ 0
Operating expenses.................... 7,966,463 2,507,957 14,797,021 2,986,975
Income (loss) from operations......... (6,977,586) (2,499,711) (14,408,134) (2,986,975)
Interest and other income............. 777,504 95,810 217,525 5,155
Interest and other expense............ (2,834,914) (129,003) (170,095) (332,997)
Debt conversion expense............... -- (579,985) (385,000) (681,250)
Net income (loss) before minority
interest............................ (9,034,996) (3,112,889) (14,745,704) (3,996,067)
Minority interest(1).................. 155,861 11,660 48,055 0
Net income (loss)..................... (8,879,135) (3,101,229) (14,697,649) (3,996,067)
Net income (loss) per common share.... $ (1.82) $ (0.81) $ (3.30) $ (1.77)
Weighted average shares outstanding... 5,900,606 3,835,214 4,771,689 2,283,695
OTHER DATA:
EBITDA(2)............................. $(6,059,068) $ (2,465,972) $(13,862,268) $(2,985,008)
Depreciation & amortization........... 762,657 22,079 497,811 1,967
Capital expenditures.................. 17,657,193 6,090,069 15,302,757 519,945
Ratio of earnings to fixed
charges(3).......................... -- --
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents............. $57,348,301 $ 6,870,922 $20,350,791 $3,270,397
Total assets.......................... 147,934,515 14,676,144 37,626,965 4,605,659
Long-term liabilities................. 110,735,843 19,062 4,723,070 0
Redeemable stock, options and
warrants............................ 2,659,579 1,724,907 2,930,778 1,116,276
Stockholders' equity (deficit)........ 26,308,049 9,538,761 22,141,217 (3,265,757)
</TABLE>
------------------
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
-------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30,
1995 1995 1995
------------ ------------- ----------
(UNAUDITED)
<S> <C> <C> <C>
NETWORK AND SELECTED STATISTICAL DATA(4)
(END OF PERIOD):
Total markets (in operation or under
construction)................................... 17 12 10
Networks in operation............................. 9 5 5
Networks under construction....................... 8 7 5
Route miles....................................... 136 92 43
Fiber miles....................................... 5,957 4,373 1,754
Buildings connected............................... 100 79 36
VGE circuits in service........................... 82,055 50,303 31,920
Employees......................................... 113 100 74
</TABLE>
- ---------------
(1) As of June 30, 1995, minority interest represents a 7.25% ownership of AT&T
Credit Corporation in the Company's subsidiaries that operate its networks
in Louisville and Fort Worth. As of December 31, 1995, minority interest
also includes the 7.25% ownership of AT&T Credit Corporation in the
Company's subsidiaries in Greenville, Columbia and El Paso. See "Description
of Certain Indebtedness."
(2) EBITDA consists of net income (loss) before net interest, income taxes,
depreciation and amortization. It is a measure commonly used in the
telecommunications industry and is presented to assist in understanding the
Company's operating results. However, it is not intended to represent cash
flow or results of operations in accordance with generally accepted
accounting principles.
(3) Earnings include income (loss) before income taxes plus fixed charges less
capitalized interest. Fixed charges include interest and one-third of rent
expense (representing the estimated interest component of operating leases).
The dollar amount of the deficiency in earnings to fixed charges was $15.3
million and $4.0 million for the years ended June 30, 1995, and 1994,
respectively, and $9.0 million and $3.2 million for the six months ended
December 31, 1995, and 1994, respectively.
(4) Network and Selected Statistical Data are derived from ACSI's records.
10
<PAGE> 11
RISK FACTORS
Holders of Old Notes should carefully consider the following risk factors,
as well as other information set forth in this Prospectus, before tendering
their Old Notes in the Exchange Offer. The risk factors set forth below (other
than "Consequences of Failure to Exchange") are generally applicable to the Old
Notes as well as the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register the Old Notes under the Securities Act. Based on
interpretations by the staff of the Commission, as set forth in no-action
letters to third parties, the Company believes that the New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold or otherwise transferred by holders thereof (other than any such
holder that is an "affiliate" of the issuer within the meaning of Rule 405 under
the Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act provided that such New Notes are
acquired in the ordinary course of such holders' business and such holders are
not engaged in, and do not intend to engage in, a distribution of such New Notes
and have no arrangement or understanding with any person to participate in the
distribution of such New Notes. The staff of the Commission has not considered
the Exchange Offer in the context of a no-action letter and there can be no
assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer. Each broker-dealer that receives New Notes
for its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes. The Letter
of Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of one year after the Expiration Date, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution." However, to comply with the securities laws of certain
jurisdictions, if applicable, the New Notes may not be offered or sold unless
they have been registered or qualified for sale in such jurisdictions or an
exemption from registration or qualification is available and is complied with.
To the extent that Old Notes are tendered and accepted in the Exchange Offer,
the trading market for untendered and tendered but unaccepted Old Notes could be
adversely affected.
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, 1995, and December 31, 1995,
the Company had accumulated deficits of $20.7 million, and $29.6 million,
respectively. Currently, although the Company has begun to generate revenues in
ten markets and has commenced operations in an additional market, it has not yet
commenced operations or 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. Additionally, the Company's
previous independent auditors expressed concerns during periods prior to
December 1994 regarding the Company's ability to continue as a going concern.
See "Change in Independent Public Accountants." 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
11
<PAGE> 12
have established a sufficient revenue-generating customer base. The Company will
also incur losses during the initial start-up phases of its enhanced voice
messaging, high-speed data and local switched 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 obligations with respect to the
Notes and from pursuing its strategies for growth.
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 under the AT&T Credit
Facility (as defined herein)) and operating expenses with the proceeds from
sales of its equity and debt securities. With the issuance of the Notes, the
Company will be required to satisfy substantially higher periodic cash debt
service obligations. Commencing October 1, 2001, cash interest on the Notes will
be payable semi-annually at the rate of 12 3/4% per annum (approximately $15.3
million per year). The full accreted principal amount of the New Notes of $120
million will become due on April 1, 2006. With respect to the Company's 13%
Senior Discount Notes due 2005 (sometimes referred to herein as the "2005
Notes"), commencing May 1, 2001, cash interest will be payable semi-annually at
the rate of 13% per annum (approximately $24.7 million per year). The full
accreted value of the 2005 Notes of $190 million will become due on November 1,
2005. In addition, the Company is required to accrue dividends on its 9% Series
A-1, Series B-1, Series B-2, Series B-3 and Series B-4 convertible preferred
stock, par value $1.00 per share (individually, the "Series A-1 Preferred
Stock," "Series B-1 Preferred Stock," "Series B-2 Preferred Stock," "Series B-3
Preferred Stock" and "Series B-4 Preferred Stock" and, collectively, the
"Preferred Stock"), which will be payable cumulatively beginning January 1,
1998, or earlier upon conversion into Common Stock. As of December 31, 1995,
accrued dividends on all series of Preferred Stock were approximately $2.9
million. Conversion of Preferred Stock may occur any time at the holder's
option, or automatically upon the consummation of an underwritten public
offering of the Company's Common Stock with gross proceeds of at least $15.0
million, a price per share of at least $5.00 and the result of which is the
inclusion of the Common Stock in the NASDAQ National Market System or listing of
the Common Stock on the New York Stock Exchange (a "Qualifying Offering"). The
Company expects that conversion of the Preferred Stock will occur if the
Company's contemplated underwritten public offering (the timing of which is
currently uncertain) of approximately five million shares of Common Stock is
consummated, which offering will be made, if at all, only by means of a
prospectus. See "-- Control by the Preferred Stockholders" and "Description of
Preferred Stock -- Conversion Rights."
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 New Notes and other debt or to make the required dividend payments on
its Preferred Stock. 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 New Notes and its other debt
or required dividend payments on its Preferred Stock. See "Description of
Preferred Stock" and "Description of Certain Indebtedness."
EFFECT OF SUBSTANTIAL LEVERAGE AND ADDITIONAL FINANCING ON ABILITY TO REPAY NEW
NOTES
As of December 31, 1995, the Company (through its subsidiaries) had
approximately $12.4 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 $31.2
million. Borrowings under the AT&T Credit Facility may be used to fund the
construction and operation of only six of the Company's 30 contemplated
networks. As of December 31, 1995, after giving pro forma effect on a
consolidated basis to the completion of the offering of the Old Notes, the
Company would have had approximately $175.3 million of outstanding long term
indebtedness. As of December 31, 1995, the total liabilities of the Company's
subsidiaries (after the elimination of loans and advances by the Company to its
subsidiaries) were approximately $16.0 million. Accretion of the New Notes and
the 2005 Notes will cause an increase in consolidated indebtedness of $150
million by April 1, 2001.
It is expected that the Company and its subsidiaries will incur additional
indebtedness, including increasing its borrowings under the AT&T Credit Facility
to the full amount. The Indenture under which the New Notes are to be issued
permits the Company and its subsidiaries to incur additional indebtedness,
subject
12
<PAGE> 13
to certain limitations, as more fully described under "Description of the New
Notes -- Certain Covenants -- Limitation on Indebtedness." Subject to the terms
of the Indenture, additional indebtedness of ACSI's subsidiaries may be secured
by the assets of ACSI and its subsidiaries and may be guaranteed by the Company.
See "Description of the New Notes -- Certain Covenants -- Limitation on Liens."
The level of the Company's indebtedness and its other obligations could
have important consequences to holders of the New Notes, including the
following: (i) the debt service requirements of the Company's existing
indebtedness and any additional indebtedness could make it difficult for the
Company to make payments on the New Notes; (ii) the ability of the Company to
obtain any necessary financing in the future for working capital, capital
expenditures, debt service requirements or other purposes may be limited; (iii)
any cash flow from the operations of certain of the Company's subsidiaries may
need to be dedicated to debt service payments and might not be available for
other purposes; (iv) the Company's level of indebtedness could limit its
flexibility in planning for, or reacting to, changes in its business; (v) the
Company is more highly leveraged than most of its competitors, which may place
it at a competitive disadvantage; and (vi) the Company's high degree of
indebtedness will make it more vulnerable to a downturn in its business.
HOLDING COMPANY STRUCTURE; SOURCE OF REPAYMENT OF NEW NOTES; EFFECTIVE
SUBORDINATION OF NEW NOTES TO
INDEBTEDNESS OF SUBSIDIARIES
As a holding company that conducts virtually all of its business through
subsidiaries, ACSI has no source of operating cash flow other than from
dividends and distributions from its subsidiaries. In order to pay cash interest
on the New Notes or the principal amount of the New Notes at maturity, or to
redeem or repurchase the New Notes, ACSI will be required to obtain
distributions from its subsidiaries, refinance its indebtedness, raise funds in
a public or private equity or debt offering, or sell some or all of its or its
subsidiaries' assets. However, the Indenture and the indenture for the 2005
Notes limit the Company's ability to incur additional indebtedness and the AT&T
Credit Facility imposes restrictions on the ability of those five 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, the Indenture and
the indenture for the 2005 Notes also impose restrictions on the ability of such
subsidiaries to raise capital by incurring additional indebtedness. These
factors could limit ACSI's ability to meet its obligations with respect to the
New Notes.
If ACSI is required to conduct an offering of its capital stock or to
refinance the New Notes, its ability to do so on acceptable terms, if at all,
will be affected by several factors, including financial market conditions and
the value and performance of the Company at the time of such offering or
refinancing, which in turn may be affected by many factors, including economic
and industry cycles. There can be no assurance that an offering of ACSI's
capital stock or a refinancing of the New Notes can or will be completed on
satisfactory terms, that they would be sufficient to enable ACSI to make any
payments with respect to the New Notes if required, or that they would be
permitted by the terms of the debt instruments of ACSI and its subsidiaries then
in effect.
The New Notes will be senior obligations only of ACSI, will be pari passu
in right of payment with certain other indebtedness of ACSI and will not be
secured by any assets. ACSI's subsidiaries will have no obligation to pay
amounts due on the New Notes and will not guarantee the New Notes. Therefore,
the New Notes will be effectively subordinated to all liabilities of ACSI's
subsidiaries, including trade payables. As of December 31, 1995, the total
liabilities of the Company's subsidiaries (after the elimination of loans and
advances by the Company to its subsidiaries) were approximately $16.0 million.
Of that amount, approximately $12.4 million in indebtedness was secured by first
priority liens in favor of AT&T on all the assets of the borrowing subsidiaries
and a pledge of the stock of such subsidiaries. See "Description of Certain
Indebtedness." Any rights of ACSI and its creditors, including the holders of
the New Notes, to participate in the assets of any of ACSI's subsidiaries upon
any liquidation or reorganization of any such subsidiary will be subject to the
prior claims of that subsidiary's creditors, including trade creditors.
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 Federal
Communications Commission ("FCC") authorization for construction or
installation. However, the Company must file tariffs stating its rates, terms
and conditions
13
<PAGE> 14
of service for interstate and international traffic. 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 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 a material adverse effect on the
Company's business, results of operations and financial condition. Moreover, the
Telecommunications Act has increased local competition by IXCs, 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 CATV 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. See "-- Competition,"
"Business -- Regulation" and "-- Competition."
COMPETITION
The Company operates in a highly competitive environment. The Company's
competitors are predominantly LECs, other CLECs and CATVs, and may potentially
include microwave carriers, satellite carriers, teleports, public utilities,
wireless telecommunications providers, IXCs 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 as a
result of the Telecommunications Act. For example, AT&T has announced agreements
with five CLECs, including the Company, which allow business customers in 70
cities to connect with AT&T's network for certain services as an alternative to
access provided by the LECs. 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 may have a material adverse effect on the Company. See
"Business -- Competition."
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. See
"Business -- Regulation." For example, the Interconnection Decisions issued by
the Federal Communications Commission (the "FCC") and the Telecommunications
Act, which 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. See
"Business -- Competition."
CERTAIN FINANCIAL AND OPERATING RESTRICTIONS
The Indenture, the indenture for the 2005 Notes, the AT&T Credit Facility
and the terms of the Company's Preferred Stock 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
14
<PAGE> 15
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 borrowings or result in a default thereunder. See
"Description of the New Notes -- Certain Covenants," "Description of Certain
Indebtedness" and "Description of Preferred Stock."
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 enhanced voice messaging,
high speed data and local switched services, will require substantial capital
expenditures. The Company's ability to fund these expenditures is dependent upon
the Company's raising substantial financing. Beginning with the development and
construction of the Company's first network in early 1994, the Company has
estimated the total capital requirements for implementation of its 30-city
business plan to be approximately $250 to $275 million through the end of
calendar year 1998. Prior to the Company's private offering on November 14, 1995
(the "November 1995 Private Placement") of 190,000 units (the "Units")
consisting of $190,000,000 principal amount of 2005 Notes and warrants to
purchase 2,432,000 shares of Common Stock at a price of $7.15 per share (the
"Warrants"), the Company obtained approximately $77 million in gross proceeds
from financings and financing commitments and, as of March 8, 1996, the Company
has raised or obtained commitments totaling approximately $178.7 million in such
financings, that has been or will be applied towards the development and initial
construction of its first networks and to support its general corporate
development, network services and national sales functions. The Company will
continue using the net proceeds of approximately $96.8 million (after deduction
of discounts and estimated offering expenses, which includes payment of the GKM
Settlement Expenses (as defined herein) on December 28, 1995) from the November
1995 Private Placement, the net proceeds of approximately $4.7 million (after
deduction of estimated offering expenses) from the sale to ING Equity Partners,
L.P.I. ("ING") of its Series B-4 Preferred Stock and the exercise by ING of
warrants to purchase 214,286 shares of Common Stock and the net proceeds of the
offering of the Old Notes, towards the completion of the Company's 30-city
business plan including the development and construction of fiber optic
networks, the development and introduction of new services including enhanced
voice messaging, high-speed data and local switched services, for expansion of
the Company's existing networks and to fund negative operating cash flow until
breakeven. The Company has announced that it is contemplating filing a
registration statement relating to a possible underwritten public offering of
approximately five million shares of Common Stock for the purpose of raising
additional funds toward the completion of the Company's 30-city business plan
and the implementation of its data and switched services businesses, which
offering will be made, if at all, only by means of a prospectus. The timing of
such offering is currently uncertain. The consummation of any such offering will
be subject to certain contingencies, and there can be no assurance that such
public offering will be consummated or that any other financing will be
available to the Company on favorable terms, if at all. To meet its remaining
capital requirements, ACSI will consider the sale of additional debt or equity
securities or increases in existing credit facilities. 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 is not currently negotiating any particular
transaction. Any acquisitions 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 a
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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
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
15
<PAGE> 16
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 herein) requiring the Company
to offer to purchase all outstanding New Notes, Old Notes and 2005 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 New Notes, Old Notes and 2005
Notes tendered or at a time when the Company is prohibited from purchasing the
New Notes, Old Notes or 2005 Notes, an Event of Default (as defined herein)
could occur under the Indenture and the indenture for the 2005 Notes. See
"Description of the New Notes -- Repurchase at the Option of Holders upon a
Change of Control." 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.
RAPID EXPANSION OF OPERATIONS
ACSI plans to continue to expand its business rapidly. The Company
currently has completed construction of fiber optic networks in the central
business districts of eleven of its target markets and anticipates completing
construction of networks of all 30 contemplated target markets by mid-1997. 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 expand as intended or manage its intended growth effectively. Any
failure to do so may have a material adverse effect on the Company's business,
results of operations and financial condition.
ACSI also 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 when cost effective, plans to offer local switched 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
successfully develop or market them, or that the Company will be able to operate
and maintain these services profitably.
DEPENDENCE ON A SMALL NUMBER OF MAJOR CUSTOMERS
The Company receives a significant portion of its revenues from a small
number of major customers, particularly the IXCs that service the Company's
markets. For the fiscal year ended June 30, 1995, and for the six months ended
December 31, 1995, approximately 85%, and 65%, respectively, of the Company's
revenues were attributable to access services provided to three of the largest
IXCs, including services for the benefit of their customers. In addition, the
Company recently signed agreements with AT&T and one other IXC pursuant to which
the Company expects AT&T and such other IXC to use the Company as a supplier of
dedicated special access services in many of the Company's markets. Accordingly,
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 condition. 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. See "-- Competition,"
"Business -- Competition" and "-- Regulation."
16
<PAGE> 17
LIMITED OPERATING REVENUES; LIMITED MARKETING AND OPERATING EFFORTS
Currently, although the Company has begun to generate operating revenues in
ten markets and has commenced operations in an additional market, 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 adequately handle future marketing and sales requirements. 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 Company will be able to secure customers for the commercial
use of its proposed networks or access to such 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
effect of technological change 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.
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 optics 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 have required 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. In addition, as of December 31, 1995, the Company
had posted $2,146,375 of performance bonds and letters of credit and expects to
post additional bonds or letters of credit in the future. As of December 31,
1995, the Company had been required to pledge $1,252,000 in cash collateral to
obtain these bonds and letters of credit, and may be required to pledge
substantial collateral to obtain the bonds or letters of credit in the future.
See "Business -- Network Development -- Rights-of-Way" and "-- Regulation."
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 of the Company also depends upon its ability to hire and retain
qualified operating, marketing, 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. See "Management."
17
<PAGE> 18
CONTROL BY THE PREFERRED STOCKHOLDERS
The holders of the Company's Preferred Stock currently have the right to
elect three of the Company's seven directors. See "Description of Preferred
Stock" and "Management." As of December 31, 1995, The Huff Alternative Income
Fund, L.P. ("Huff") owned 74.4% of the outstanding Series A-1 Preferred Stock
and Huff and its affiliates owned 98.5% of the outstanding Series B-2 Preferred
Stock. Together with its ownership of Common Stock, Huff and its affiliates
controlled 46.4% of the then-outstanding voting stock. As of the same date, ING
owned 100% of the outstanding Series B-1 Preferred Stock and 100% of the
outstanding Series B-4 Preferred Stock. Together with its ownership of Common
Stock, ING controlled 25.1% of the then-outstanding voting stock of the Company.
Finally, Apex Investment Fund II, L.P. ("Apex") and its affiliates owned 19.1%
of the outstanding Series A-1 Preferred Stock and 84.0% of the outstanding
Series B-3 Preferred Stock as of December 31, 1995, and together with its
ownership of Common Stock, controlled 11.9% of the then-outstanding voting
stock. See "Principal Stockholders," "Management" and "Description of Preferred
Stock." A sale by one or more of these principal stockholders to third parties
could constitute a Change of Control requiring the Company to offer to purchase
all outstanding New Notes, Old Notes and 2005 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 New Notes, Old Notes and 2005 Notes tendered or
at a time when the Company is prohibited from purchasing the New Notes, Old
Notes or 2005 Notes, an Event of Default could occur under the Indenture and the
indenture for the 2005 Notes. See "Description of the New Notes -- Repurchase at
the Option of Holders upon a Change of Control."
Except with respect to the election of directors, the Preferred Stock and
Common Stock vote together as a single class, and each share of Preferred Stock
has that number of votes equal to the number of shares of Common Stock into
which it is then convertible. As of January 31, 1996, the outstanding Preferred
Stock represented 72.7% of the outstanding voting stock. As a result, holders of
the Preferred Stock can determine the outcome of any stockholder vote and
effectively control the Company.
In response to voting rights issues raised by the Nasdaq Stock Market staff
concerning the Company's governance structure, the Company amended its
Certificate of Incorporation, which amendments were approved by the stockholders
of the Company on January 26, 1996, and entered into a Supplemental Governance
Agreement with certain holders of the Preferred Stock on February 26, 1996 (the
"Supplemental Governance Agreement") to restructure its Board of Directors such
that the holders of the Company's Common Stock elect four directors and the
holders of the Company's Preferred Stock elect three directors. Although the
Supplemental Governance Agreement would terminate upon any conversion of the
Preferred Stock, upon any such conversion, the holders of the Preferred Stock
would own a sufficient amount of the Common Stock to control the election of
directors. See "Principal Stockholders" and "Management."
ORIGINAL ISSUE DISCOUNT
The Old Notes were issued at a substantial discount from their principal
amount at maturity. Cash payments of interest on the New Notes will not be paid
prior to October 1, 2001. However, original issue discount (i.e., the difference
between the "stated redemption price at maturity" of the New Notes and the issue
price of the Old Notes (which will be treated as the issue price of the New
Notes)) will accrue from the issue date of the Old Notes and will be includable
as interest income periodically (including for periods ending prior to April 1,
2001) in a holder's gross income for Federal income tax purposes in advance of
receipt of the cash payments to which the income is attributable. See "Certain
Federal Income Tax Considerations -- Taxation of the New Notes -- Original Issue
Discount." Similar results may apply under state tax laws. Furthermore, the New
Notes may be subject to the applicable high yield discount obligation rules, in
which case ACSI would not be able to deduct the original issue discount
attributable to the New Notes until paid in cash or property or, in certain
circumstances, at all. The New Notes will be subject to these rules if their
yield to maturity equals or exceeds the Treasury-based interest rate in effect
for March 1996 (5.98%, compounded semi-annually) plus five percentage points,
and the New Notes are issued with significant original issue discount. See
"Certain Federal Income Tax Considerations -- Taxation of the New
Notes -- Certain Federal Income Tax Considerations to ACSI and to Corporate
Holders." If these high yield discount obligation rules apply, ACSI's after tax
cash flow, if any, would be less than if such original issue discount were
deductible
18
<PAGE> 19
when accrued. If a bankruptcy case were commenced by or against ACSI under the
United States Bankruptcy Code after the issuance of the New Notes, the claim of
a holder of the New Notes with respect to the principal amount thereof may be
limited to an amount equal to the sum of (i) the initial offering price and (ii)
that portion of the original issue discount that is not deemed to constitute
"unmatured interest" for purposes of the United States Bankruptcy Code. Any
original issue discount that had not amortized as of the date of any such
bankruptcy filing would constitute "unmatured interest."
LACK OF PUBLIC MARKET
The New Notes will be new securities for which there is currently no
market. ACSI does not intend to apply for listing of the New Notes on any
securities exchange or to seek approval for quotation through any automated
quotation system. There can be no assurance as to the development or liquidity
of any market for the New Notes. If an active market does not develop, the
market price and liquidity of the New Notes will be adversely affected. Many
possible events could adversely affect the development or liquidity of any
market for such securities. For example, the Commission has broad discretion to
determine whether to declare any registration statement effective, and for a
variety of reasons may delay or deny the effectiveness of any registration
statement filed by the Company. Although the Initial Purchasers have informed
the Company that each of them currently intends to make a market in the New
Notes, they are not obligated to do so and any such market-making may be
discontinued at any time without notice. In addition, such market-making
activity may be limited during the Exchange Offer and the pendency of any shelf
registration statement.
19
<PAGE> 20
USE OF PROCEEDS
There will be no cash proceeds to the Company from the issuance of the New
Notes pursuant to the Exchange Offer. The Company will continue using the net
proceeds of approximately $61.8 million, $96.8 million and $4.7 million (after
deduction in each case of discounts and estimated offering expenses) from the
Private Placement, the November 1995 Private Placement and the sale to ING of
its Series B-4 Preferred Stock and the exercise by ING of warrants to purchase
214,286 shares of Common Stock, respectively, towards the completion of the
Company's 30-city business plan, including the development and construction of
fiber optic networks, development and introduction of new services including
enhanced voice messaging, high-speed data and local switched services, for
expansion of the Company's existing networks and to fund negative operating cash
flow until breakeven. Beginning with the development and construction of the
Company's first network in early 1994, the Company has estimated the total
capital requirements for implementation of its 30-city business plan to be
approximately $250 to $275 million through the end of calendar year 1998.
In connection with the sale of the Old Notes, the Company obtained consents
from the holders of the 2005 Notes, and, when the Old Notes were issued, such
holders of the 2005 Notes who submitted timely consents received payment for
such consents of $2.40 per $1,000 principal amount of 2005 Notes, with respect
to which such consents were delivered, upon the closing of the offering of the
Old Notes.
Including the November 1995 Private Placement, the Company has obtained
approximately $178.7 million in gross proceeds from financings and financing
commitments that has been or will be applied towards the development and initial
construction of its first networks and to support its general corporate
development, network services and sales functions. The Company has announced
that it is contemplating filing a registration statement relating to a possible
underwritten public offering of approximately five million shares of Common
Stock for the purpose of raising additional funds toward the completion of the
Company's 30-city business plan and the implementation of its data and switched
services businesses, which offering will be made, if at all, only by means of a
prospectus. The timing of such offering is currently uncertain. The consummation
of any such offering will be subject to certain contingencies, and there can be
no assurance that such public offering will be consummated or that any other
financing will be available to the Company on favorable terms, if at all. To
meet its remaining capital requirements, ACSI will consider the sale of
additional debt or equity securities or increases in existing credit facilities.
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 is not currently negotiating any
particular transaction. Any acquisitions are likely to require additional equity
or debt financing, which the Company will seek to obtain.
Pending such uses, the Company intends to invest the net proceeds from the
Private Placement in short-term U.S. government securities.
20
<PAGE> 21
CAPITALIZATION
The following table sets forth the total cash and cash equivalents and
capitalization of the Company as of December 31, 1995, and as adjusted, to give
effect to the sale of the Old Notes, which resulted in net proceeds to the
Company of approximately $61.8 million (after deduction of discounts and
estimated offering expenses). See "Use of Proceeds." This table should be read
in conjunction with the consolidated financial statements and related notes
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1995
----------------------
(UNAUDITED)
AS
(IN THOUSANDS) ACTUAL ADJUSTED(1)
-------- --------
<S> <C> <C>
Cash and cash equivalents and marketable securities.................... $107,175 $168,615
======== ========
Long term liabilities
12 3/4% Senior Discount Notes due 2006............................ -- 64,571
13% Senior Discount Notes due 2005................................ 95,420 95,420
Notes payable(2).................................................. 12,390 12,390
Dividends payable................................................. 2,925 2,925
-------- --------
Total long term liabilities.................................. 110,735 175,306
Redeemable stock, options & warrants................................... 2,660 2,660
Minority interest...................................................... 417 417
Stockholders' equity (deficit):
9% Series A-1 convertible preferred stock, par value $1.00 per
share,
186,664 shares issued and outstanding........................... 187 187
9% Series B convertible preferred stock, par value $1.00 per
share, 277,500 shares issued and outstanding..................... 278 278
Common Stock, par value $0.01 per share, 30,000,000 shares
authorized, 6,518,723 shares issued and outstanding at December
31, 1995(3)(4)................................................... 65 65
Additional paid-in capital........................................ 55,400 55,400
Accumulated deficit............................................... (29,620) (29,620)
-------- --------
Total stockholders' equity................................... 26,308 26,308
-------- --------
Total capitalization.................................... $140,120 $204,691
======== ========
</TABLE>
- ---------------
(1) Reflects the effects of the sale of $64.6 million of the Old Notes in the
Private Placement completed in March 1996, the receipt of the estimated net
proceeds therefrom and payment of the consent fee in the amount of $366,360.
(2) Consists of the AT&T Credit Facility totalling $31.2 million, of which
approximately $12.4 million had been drawn as of December 31, 1995.
(3) Excludes 6,876,637, 3,798,605 and 17,377,274 shares reserved for issuance
upon exercise of options and warrants and upon conversion of Preferred
Stock, respectively, outstanding at December 31, 1995. As of January 26,
1996, the Company has authorized 75,000,000 shares of Common Stock.
(4) The aggregate proceeds from the exercise of all warrants and options
outstanding at December 31, 1995, would be approximately $33,739,000.
21
<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial information presented below is derived
from, and should be read in conjunction with, the Consolidated Financial
Statements of the Company and the related notes thereto, and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED FISCAL YEAR ENDED JUNE 30,
DECEMBER 31,
-------------------------- --------------------------
1995 1994 1995 1994
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ 988,877 $ 8,246 $ 388,887 $ 0
Operating expenses.......................................... 7,966,463 2,507,957 14,797,021 2,986,975
Income (loss) from operations............................... (6,977,586) (2,499,711) (14,408,134) (2,986,975)
Interest and other income................................... 777,504 95,810 217,525 5,155
Interest and other expense.................................. (2,834,914) (129,003) (170,095) (332,997)
Debt conversion expense..................................... -- (579,985) (385,000) (681,250)
Net income (loss) before minority
interest.................................................. (9,034,996) (3,112,889) (14,745,704) (3,996,067)
Minority interest(1)........................................ 155,861 11,660 48,055 0
Net income (loss)........................................... (8,879,135) (3,101,229) (14,697,649) (3,996,067)
Net income (loss) per common share.......................... $ (1.82) $ (0.81) $ (3.30) $ (1.77)
Weighted average shares outstanding......................... 5,900,606 3,835,214 4,771,689 2,283,695
OTHER DATA:
EBITDA(2)................................................... $ (6,059,068) $(2,465,972) $(13,862,268) $(2,985,008)
Depreciation & amortization................................. 762,657 22,079 497,811 1,967
Capital expenditures........................................ 17,657,193 6,090,069 15,302,757 519,945
Ratio of earnings to fixed charges(3)....................... -- -- -- --
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents................................... $ 57,348,301 $ 6,870,922 $ 20,350,791 $ 3,270,397
Total assets................................................ 147,934,515 14,676,144 37,626,965 4,605,659
Long-term liabilities....................................... 110,735,843 19,062 4,723,070 0
Redeemable stock, options and warrants...................... 2,659,579 1,724,907 2,930,778 1,116,276
Stockholders' equity (deficit).............................. 26,308,049 9,538,761 22,141,217 (3,265,757)
</TABLE>
- ---------------
(1) As of June 30, 1995, minority interest represents a 7.25% ownership of AT&T
Credit Corporation in the Company's subsidiaries that operate its networks
in Louisville and Fort Worth. As of December 31, 1995, minority interest
also includes the 7.25% ownership of AT&T Credit Corporation in the
Company's subsidiaries in Greenville, Columbia and El Paso. See "Description
of Certain Indebtedness."
(2) EBITDA consists of net income (loss) before net interest, income taxes,
depreciation and amortization. It is a measure commonly used in the
telecommunications industry and is presented to assist in understanding the
Company's operating results. However, it is not intended to represent cash
flow or results of operations in accordance with generally accepted
accounting principles.
(3) Earnings include income (loss) before income taxes plus fixed charges less
capitalized interest. Fixed charges include interest and one-third of rent
expense (representing the estimated interest component of operating leases).
The dollar amount of the deficiency in earnings to fixed charges was $15.3
million and $4.0 million for the years ended June 30, 1995, and 1994,
respectively, and $9.0 million and $3.2 million for the six months ended
December 31, 1995, and 1994, respectively.
22
<PAGE> 23
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
General
In connection with the sale of the Old Notes pursuant to a Purchase
Agreement dated as of March 21, 1996, between the Company and the Initial
Purchasers, the Initial Purchasers and their assignees became entitled to the
benefits of the Registration Agreement.
Under the Registration Agreement, the Company is obligated to (i) file the
Registration Statement of which this Prospectus is a part for a registered
exchange offer with respect to an issue of new notes identical in all material
respects to the Old Notes within 90 days after March 26, 1996, the date the Old
Notes were issued (the "Issue Date"), and (ii) use its best efforts to cause the
Registration Statement to become effective within 150 days after the Issue Date.
The Exchange Offer being made hereby if commenced and consummated within such
applicable time periods will satisfy those requirements under the Registration
Agreement. See "Description of the New Notes -- Exchange Offer; Registration
Rights."
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal (which together constitute the Exchange Offer),
the Company will accept for exchange all Old Notes validly tendered and not
withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date. The
Company will issue New Notes in exchange for an equal principal amount of
outstanding Old Notes accepted in the Exchange Offer.
As of the date of this Prospectus, $120,000,000 aggregate principal amount
of Old Notes was outstanding. This Prospectus, together with the Letter of
Transmittal, is being sent to all registered holders as of May 13, 1996. The
Company's obligation to accept Old Notes for exchange pursuant to the Exchange
Offer is subject to certain conditions as set forth herein under
"-- Conditions."
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Old Notes for the purposes of receiving the New Notes from the Company and
delivering New Notes to such holders.
In the event the Exchange Offer is consummated, subject to certain limited
exceptions, the Company will not be required to register the Old Notes. In such
event, holders of Old Notes seeking liquidity in their investment would have to
rely on exemptions to registration requirements under the U.S. securities laws.
See "Risk Factors -- Consequences of Failure to Exchange."
Expiration Date; Extensions; Amendments
The term "Expiration Date" shall mean June 25, 1996 (30 business days
following the commencement of the Exchange Offer), unless the Company, in its
sole discretion, extends the Exchange Offer, in which case the term "Expiration
Date" shall mean the latest date to which the Exchange Offer is extended.
Notwithstanding any extension of the Exchange Offer, if the Exchange Offer is
not consummated by August 23, 1996, Special Interest will accrue. See
"-- Acceptance of Old Notes for Exchange; Delivery of New Notes."
In order to extend the Expiration Date, the Company will notify the
Exchange Agent of any extension by oral or written notice and will mail to the
record holders of Old Notes an announcement thereof, each prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
Expiration Date. Such announcement may state that the Company is extending the
Exchange Offer for a specified period of time.
The Company reserves the right (i) to delay accepting any Old Notes, to
extend the Exchange Offer or to terminate the Exchange Offer and not accept Old
Notes not previously accepted if any of the conditions set forth herein under
"-- Conditions" shall have occurred and shall not have been waived by the
Company, by giving oral or written notice of such delay, extension or
termination to the Exchange Agent, or (ii) to amend the terms of the Exchange
Offer in any manner deemed by it to be advantageous to the holders of the Old
Notes. Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof. If the
Exchange Offer is amended in a manner determined by the Company to constitute a
material change, the Company will promptly disclose such amendment in a manner
23
<PAGE> 24
reasonably calculated to inform the holders of the Old Notes of such amendment
and the Company will extend the Exchange Offer for a period of five to 10
business days, depending upon the significance of the amendment and the manner
of disclosure to holders of the Old Notes, if the Exchange Offer would otherwise
expire during such five to 10 business day period.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to an appropriate news agency.
NO VOTE OF THE COMPANY'S SECURITY HOLDERS IS REQUIRED UNDER APPLICABLE LAW
TO EFFECT THE EXCHANGE OFFER AND NO SUCH VOTE (OR PROXY THEREFOR) IS BEING
SOUGHT HEREBY.
Holders of Old Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer under the Delaware General Corporation Law,
the state in which the Company is incorporated.
INTEREST ON THE NEW NOTES
The New 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. Cash interest
will not accrue on the New Notes prior to April 1, 2001. Thereafter, interest on
the New Notes will accrue at the rate of 12 3/4% per annum and will be payable
in cash semi-annually on April 1 and October 1, commencing October 1, 2001.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with any other
required documents, to the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date. In addition, either (i) certificates for such Old
Notes must be received by the Exchange Agent along with the Letter of
Transmittal, (ii) a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Old Notes, if such procedure is available, into the
Exchange Agent's account at The Depository Trust Company (the "Book-Entry
Transfer Facility") pursuant to the procedure for book-entry transfer described
below, must be received by the Exchange Agent prior to the Expiration Date or
(iii) the holder must comply with the guaranteed delivery procedures described
below. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY
IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD
BE SENT TO THE COMPANY. To be tendered effectively, the Old Notes, Letter of
Transmittal and all other required documents must be received by the Exchange
Agent prior to 5:00 p.m., New York City time, on the Expiration Date. Delivery
of all documents must be made to the Exchange Agent at its address set forth
below. Holders may also request their respective brokers, dealers, commercial
banks, trust companies or nominees to effect such tender for such holders.
The tender by a holder of Old Notes will constitute an agreement between
such holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered holder.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder promptly and instruct such
registered holder to tender on his behalf. If such beneficial owner wishes to
tender on his own behalf, such beneficial owner must, prior to completing and
executing the Letter of Transmittal and delivering his Old Notes, either make
appropriate arrangements to register ownership of the Old Notes in such owner's
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<PAGE> 25
name or obtain a properly completed bond power from the registered holder. The
transfer of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by any member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.
or a commercial bank or trust company having an office or correspondent in the
U.S. (an "Eligible Institution") unless the Old Notes tendered pursuant thereto
are tendered (i) by a registered holder who has not completed the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions" on the Letter
of Transmittal or (ii) for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantee must be by an
Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by bond powers and a proxy which authorizes such person
to tender the Old Notes on behalf of the registered holder, in each case as the
name of the registered holder or holders appears on the Old Notes.
If the Letter of Transmittal or any Old Notes bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
person should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and withdrawal of the tendered Old Notes will be determined by the
Company in its sole discretion, which determination will be final and binding.
The Company reserves the absolute right to reject any and all Old Notes not
properly tendered or any Old Notes which, if accepted by the Company, would, in
the opinion of counsel for the Company, be unlawful. The Company also reserves
the right to waive any irregularities or conditions of tender as to particular
Old Notes. The Company's interpretation of the terms and conditions of the
Exchange Offer (including the instructions in the Letter of Transmittal) will be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of Old Notes must be cured within such time as the
Company shall determine. None of the Company, the Exchange Agent or any other
person shall be under any duty to give notification of defects or irregularities
with respect to tenders of Old Notes, nor shall any of them incur any liability
for failure to give such notification. Tenders of Old Notes will not be deemed
to have been made until such irregularities have been cured or waived. Any Old
Notes received by the Exchange Agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned without cost to such holder by the Exchange Agent to the tendering
holders of Old Notes, unless otherwise provided in the Letter of Transmittal, as
soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion, subject
to the provisions of the Indenture, to (i) purchase or make offers for any Old
Notes that remain outstanding subsequent to the Expiration Date or, as set forth
under "-- Conditions," to terminate the Exchange Offer in accordance with the
terms of the Registration Agreement and (ii) to the extent permitted by
applicable law, purchase Old Notes in the open market, in privately negotiated
transactions or otherwise. The terms of any such purchases or offers could
differ from the terms of the Exchange Offer.
By tendering, each holder will represent to the Company that: (i) it is not
an affiliate of the Company (as defined under Rule 405 of the Securities Act);
(ii) any New Notes to be received by it were acquired in the ordinary course of
its business; and (iii) at the time of commencement of the Exchange Offer, it
was not engaged in, and did not intend to engage in, a distribution of such New
Notes and had no arrangement or understanding with any person to participate in
the distribution (within the meaning of the Securities Act) of the New Notes. If
a holder of Old Notes is an affiliate of the Company, and is engaged in or
intends to engage in a distribution of the New Notes or has any arrangement or
understanding with respect to the distribution of the New Notes to be acquired
pursuant to the Exchange Offer, such holder could not rely on the applicable
interpretations of the staff of the Commission and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transaction. Each broker or dealer that
receives New Notes for its own account in exchange for Old Notes, where such Old
Notes were acquired
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<PAGE> 26
by such broker or dealer as a result of market-making activities, or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See "Plan of Distribution."
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of the
Old Notes. See "-- Conditions" below. For purposes of the Exchange Offer, the
Company shall be deemed to have accepted validly tendered Old Notes for exchange
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent.
For each Old Note accepted for exchange, the holder of such Old Notes will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. If (i) the Registration Statement of which this Prospectus is a part
(the "Exchange Offer Registration Statement") is not declared effective on or
prior to August 23, 1996, or (ii) neither the Exchange Offer is consummated nor
the Note Shelf Registration Statement (as hereinafter defined) is declared
effective on or prior to September 22, 1996, interest will accrue on the Old
Notes from and including (X) August 24, 1996, in the case of clause (i) above
and (Y) September 23, 1996, in the case of clause (ii) above. In each case, each
such additional interest ("Special Interest") will be payable in cash
semi-annually in arrears each April 1 and October 1, commencing October 1, 1996,
at a rate per annum equal to 0.5% of the Accreted Value of the Old Notes
(determined daily). The aggregate amount of Special Interest payable pursuant to
the above provisions will in no event exceed 1.5% per annum of the Accreted
Value (determined daily). Upon the effectiveness of the Exchange Offer
Registration Statement, the consummation of the Exchange Offer or the
effectiveness of a Note Shelf Registration Statement, Special Interest payable
on the Old Notes from the date of such filing, effectiveness or consummation, as
the case may be, will cease to accrue and all accrued and unpaid interest as of
the occurrence of such events shall be paid to the holders of the New Notes
exchanged for such Old Notes.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Old Notes are not
accepted for any reason set forth in the terms and conditions of the Exchange
Offer or if Old Notes are submitted for a greater principal amount than the
holder desires to exchange, such unaccepted or nonexchanged Old Notes will be
returned without expense to the tendering holder thereof (or, in the case of Old
Notes tendered by book-entry transfer procedures described below, such
nonexchanged Old Notes will be credited to an account maintained with such
Book-Entry Transfer Facility) as promptly as practicable after the expiration or
termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof
with any required signature guarantees and any other required documents must, in
any case, be transmitted to and received by the Exchange Agent at one of the
addresses set forth below under "-- Exchange Agent" on or prior to the
Expiration Date or the guaranteed delivery procedures described below must be
complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes,
and the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedures for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution,
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<PAGE> 27
(ii) prior to the Expiration Date, the Exchange Agent received from such
Eligible Institution a properly completed and duly executed Letter of
Transmittal (or a facsimile thereof) and Notice of Guaranteed Delivery,
substantially in the form provided by the Company (by facsimile transmission,
mail or hand delivery), setting forth the name and address of the holder of Old
Notes and the amount of Old Notes tendered, stating that the tender is being
made thereby and guaranteeing that within five New York Stock Exchange ("NYSE")
trading days after the date of execution of the Notice of Guaranteed Delivery,
the certificates for all physically tendered Old Notes, in proper form for
transfer, or a Book-Entry Confirmation, as the case may be, and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent and (iii) the certificates for all
physically tendered Old Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, and all other documents required by the Letter
of Transmittal are received by the Exchange Agent within five NYSE trading days
after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL OF TENDERS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Old Notes to be withdrawn, identify the Old Notes to
be withdrawn (including the principal amount of such Old Notes) and (where
certificates for Old Notes have been transmitted) specify the name in which such
Old Notes are registered, if different from that of the withdrawing holder. If
certificates for Old Notes have been delivered or otherwise identified to the
Exchange Agent, then, prior to the release of such certificates, the withdrawing
holder must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless such holder is an Eligible Institution. If Old Notes
have been tendered pursuant to the procedure for book-entry transfer described
above, any notice of withdrawal must specify the name and number of the account
at the Book-Entry Transfer Facility to be credited with the withdrawn Old Notes
and otherwise comply with the procedures of such facility. All questions as to
the validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company, whose determination shall be final and
binding on all parties. Any Old Notes so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the Exchange Offer. Any Old
Notes which have been tendered for exchange but which are not exchanged for any
reason will be returned to the holder thereof without cost to such holder (or,
in the case of Old Notes tendered by book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry
transfer procedures described above, such Old Notes will be credited to an
account maintained with such Book-Entry Transfer Facility for the Old Notes) as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following one
of the procedures described under "-- Procedures for Tendering" above at any
time on or prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or to issue New Notes in exchange for, any
Old Notes and may terminate or amend the Exchange Offer as provided herein
before the acceptance of such Old Notes, if because of any change in law, or
applicable interpretations thereof by the Commission, the Company determines
that it is not permitted to effect the Exchange Offer, and the Company has no
obligation to, and will not knowingly, accept tenders of Old Notes from
affiliates of the Company (within the meaning of Rule 405 under the Securities
Act) or from any other holder or holders who are not eligible to participate in
the Exchange Offer under applicable law or interpretations thereof by the
Commission, or if the New Notes to be received by such holder or holders of Old
Notes in the Exchange Offer, upon receipt, will not be tradeable by such holder
without restriction under the Securities Act and the Exchange Act and without
material restrictions under the "blue sky" or securities laws of substantially
all of the states.
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EXCHANGE AGENT
Chemical Bank has been appointed as Exchange Agent for the Exchange Offer.
Questions and requests for assistance and requests for additional copies of this
Prospectus or of the Letter of Transmittal should be directed to the Exchange
Agent addressed as follows:
<TABLE>
<S> <C>
By Mail: By Hand/Overnight Delivery:
Chemical Bank Chemical Bank
450 West 33rd Street Corporate Trust -- Securities Window
Fifteenth Floor 55 Water Street -- Room 234
New York, New York 10001-2697 North Building
New York, New York 10041
</TABLE>
Facsimile Transmission:
(212) 638-7380
(212) 638-7381
Confirm by Telephone:
Sharon Lewis: (212) 638-0454
Victor Matis: (212) 638-0459
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail; however, additional solicitations may be
made by telegraph, telephone, telecopy or in person by officers and regular
employees of the Company.
The Company will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
the Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith. The Company may also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of the Prospectus and related documents to the beneficial
owners of the Old Notes, and in handling or forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Company, including fees and expenses of the Exchange Agent and
Trustee (as hereinafter defined) and accounting, legal, printing and related
fees and expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be registered or issued
in the name of, any person other than the registered holder of the Old Notes
tendered, or if tendered Old Notes are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The New Notes will be recorded in the Company's accounting records at the
same carrying value as the Old Notes as reflected in the Company's accounting
records on the date of the exchange. Accordingly, no gain or loss for accounting
purposes will be recognized upon the consummation of the Exchange Offer. The
expenses of the Exchange Offer will be amortized by the Company over the term of
the New Notes in accordance with generally accepted accounting principles.
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<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere in this Prospectus.
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 in the southern U.S. 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 March 8, 1996,
the Company commenced construction of an additional 19 networks, ten of which
(Albuquerque, Columbia, El Paso, Fort Worth, Greenville, Lexington, Little Rock,
Mobile, Montgomery and Tucson) are currently operational. The Company expects to
provide commercial service in the Amarillo, Baton Rouge, Birmingham, Charleston,
Columbus, Irving, Jackson, Las Vegas and Spartanburg markets by the third
calendar quarter of 1996. The Company is actively developing the necessary
marketing and engineering plans and pursuing required municipal authorizations
to begin construction of additional markets during 1996 and plans to have a
total of 30 networks operational by mid-1997.
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 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 based on management's extensive experience in the industry. 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.
In addition, with a limited capital investment, the Company is developing
and has begun offering to small and mid-sized business and government end users,
on a limited basis, enhanced voice messaging services. These customers will be
billed by the Company. This 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, among others) 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 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
usage ramp-up of these services is not certain at this time.
The Company is developing and has begun offering on a limited basis
high-speed data services, including Internet access, and also plans to offer
frame relay and ATM services. 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. Internet access facilitates the connectivity of
corporate, institutional and governmental customers to the Internet, a
collection of data networks that communicate with one another using common
protocols. 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
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throughput rate of data for the particular service order. The Company intends to
utilize the same backbone network architecture employed by its enhanced voice
and local switched services for its data services offerings, 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.
As requisite regulatory approvals are obtained on a state-by-state basis,
the Company plans to provide local switched services, such as local dial tone,
termination of local calling, Centrex services, PBX trunking and switched access
services. It is expected that these services will be offered for appropriate
fixed and usage-based charges at rates below those charged by LECs for similar
services. The Company intends to employ 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 markets located
within the same geographical area via remote switching modules. The Company
believes that this strategy, if successfully implemented, will 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 Tier II and Tier III
markets through a central hub switch, the Company also expects to realize
reduced operating expenses associated with switch engineering and maintenance.
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 services. Finally, 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 may result in mutually beneficial alliances. Successful negotiation of
switching partnerships may further reduce the Company's capital and operating
expenses associated with the provision of switched services.
The Company believes that its local digital fiber optic networks, coupled
with the distributed hub arrangements described above, will provide a platform
for the provision of a wide variety of voice, data and communications 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 the facility to ACSI's network becomes 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 synergies
and new service offerings over its target 30-city market area.
Initially, the Company expects to experience negative cash flow from
operations in each of its operating subsidiaries. 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 fifteen 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, 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)
and as additional value-added services such as enhanced voice messaging,
high-speed data services and local switched services are offered.
Capital Expenditures; Operating Cash Flow (EBITDA)
Currently, the Company has completed construction and is operating eleven
digital fiber optic networks, has initiated construction on nine additional
networks and intends to have 30 operational networks by mid-1997. The costs
associated with the initial construction and operation of a network may vary
greatly, in large part because of market variations in geographic and
demographic characteristics. Management estimates that construction of the
initial one-to-three mile fiber optic backbone and 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, 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
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construction, certain of these expenses, to the extent they are related to such
construction, are capitalized. These capitalized expenses are amortized over the
anticipated life of the network. Management estimates that these capitalized
expenses amount to approximately $500,000 to $1,000,000 per 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 enhanced
voice messaging, high-speed data 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. In accordance with the
Company's 30-city business plan, management estimates that expenditures over the
next three years for these services will amount to approximately $20 to $25
million for enhanced voice messaging and high-speed data services and $30 to $40
million for local switched services.
Although the Company is now generating revenues from ten of its fiber optic
networks, on a consolidated basis it is still incurring negative cash flows due,
in part, to the funding requirements for its networks currently under
construction.
RESULTS OF OPERATIONS
Three Months Ended December 31, 1995 Compared to Three Months Ended December
31, 1994, and Six Months Ended December 31, 1995 Compared to Six Months Ended
December 31, 1994
Revenues
During the three months ended December 31, 1995 ("second quarter fiscal
1996"), the Company recorded $589,843 in revenues compared to $8,246 in revenues
in the three months ended December 31, 1994 ("second quarter fiscal 1995").
Prior to January 1995, the Company operated as a development stage company and
since December 31, 1994, quarterly revenues have grown from $87,385 for the
quarter ended March 31, 1995, to $293,256, $399,034 and $589,843 in the next
three following fiscal quarters, respectively. These revenues were derived
substantially from the Company's provision of dedicated special access services.
During the six months ended December 31, 1995 (the "first half of fiscal 1996"),
the Company recorded revenues of $988,877, as compared to revenues of $8,246
during the six months ended December 31, 1994 (the "first half of fiscal 1995").
Three of the largest IXCs accounted for approximately $640,000, or 65%, of
revenues for the first half of fiscal 1996.
Total Operating Expenses
Network development and operations expenses for the first half of fiscal
1996 increased to $2,921,709 from $634,694 in the first half of 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
initial networks and performing market feasibility, engineering, rights-of-way
and regulatory evaluations in additional target cities. Related personnel costs
increased to $1,552,178 in the first half of fiscal 1996 from approximately
$439,000 in the first half of fiscal 1995, when the Company was operating
primarily as a development stage company. 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, increased to $1,369,531 in the first half of
fiscal 1996 from approximately $195,694 in the first half of fiscal 1995.
Comparing the second quarter fiscal 1996 to the second quarter fiscal 1995,
network development and operations expenses increased to $1,336,837 from
$404,514, related personnel costs increased to $595,964 from approximately
$314,200 and other operating costs increased to $740,873 from approximately
$90,350, as the Company expanded its programs for rights-of-way and indefeasible
rights-of-use ("IRUs") with significant partners.
In the first half of fiscal 1996, selling, general and administrative
expenses increased to $3,077,678 from $1,242,553 in the first half of fiscal
1995. Related personnel costs increased to $1,533,735 in the first half of
fiscal 1996 from $830,700 in the first half of fiscal 1995 and corresponding
operating costs increased to $1,543,943 in the first half of fiscal 1996 from
$411,853 the first half of fiscal 1995. This increase reflected
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<PAGE> 32
costs associated with the Company's efforts in expanding its centralized 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, as noted above, and providing
quality network services. Reflecting these increased activities, second quarter
fiscal 1996 selling, general and administrative expenses increased to $1,907,206
from $887,681 in the second quarter fiscal 1995. Related personnel costs
increased to $597,720 in the second quarter fiscal 1996 from $497,103 in the
second quarter fiscal 1995 and corresponding operating costs increased to
$1,309,486 in the second quarter fiscal 1996 from $390,578 in the second quarter
fiscal 1995.
Depreciation and amortization expenses increased to $762,657 in the first
half of fiscal 1996 from $22,079 in the first half of fiscal 1995 and to
$498,669 in the second quarter fiscal 1996 from $3,013 in the second quarter
fiscal 1995. During the first half of fiscal 1996 the Company increased its
capital assets by approximately $17,657,200, representing an increase to such
assets of more than 109% over the end of the first half of fiscal 1995. Non-cash
stock compensation expense increased to $1,204,419 for the first half of fiscal
1996 from $608,631 for the first half of fiscal 1995 and to $410,550 for the
second quarter fiscal 1996 from $252,207 for the second quarter fiscal 1995.
This expense reflects the Company's accrual of non-cash costs for options and
warrants 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 obligations with respect to those
contracts. During the quarter ended September 30, 1995, this limitation was
reduced further to $2,000,000.
Interest and other income increased to $777,504 for the first half of
fiscal 1996 from $95,810 for the first half of fiscal 1995 and to $680,134 for
the second quarter fiscal 1996 from $81,300 for the second quarter fiscal 1995.
Interest and other expenses increased to $2,834,915 in the first half of fiscal
1996 from $129,003 in the first half of fiscal 1995 and increased to $2,694,893
in the second quarter fiscal 1996 from $69,411 in the second quarter fiscal
1995. Those increases in interest and other income reflected the significant
increase in available funds from the Company's sale of its 9% Series B Preferred
Stock in June and November 1995 and the 2005 Notes and Warrants in November
1995. The increase in interest and other expenses reflected the accrual of
interest related to the 2005 Notes and the Company's increased borrowings under
the AT&T Credit Facility. Payments of principal and interest on the AT&T Credit
Facility will begin in calendar 1997 and payments of interest on the Notes and
the 2005 Notes are expected to begin in 2001.
Debt conversion expense in the first half of fiscal 1995 totaled $579,985,
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 $155,861 and $88,594 for the first
half and second quarter of fiscal 1996, respectively, and by $11,660 for each of
the first half of and second quarter fiscal 1995.
Fiscal Year Ended June 30, 1995, Compared to Fiscal Year Ended June 30, 1994
Revenues
During the fiscal year ended June 30, 1995 ("fiscal 1995"), the Company
recorded $388,887 in revenues compared to no revenues in the fiscal year ended
June 30, 1994 ("fiscal 1994"). The Company operated as a development stage
company throughout fiscal 1994 and through the first half of fiscal 1995. These
revenues were comprised substantially of revenues from the Company's provision
of interstate dedicated services in its Louisville, Little Rock, Greenville and
Fort Worth networks in which it began recording revenues in December 1994, March
1995, May 1995 and June 1995, respectively. Three of the five largest IXCs
accounted for $329,000, or 85%, of fiscal 1995 revenues.
Total Operating Expenses
Network development and operations expenses for fiscal 1995 increased to
$3,282,200 compared to $1,054,400 in fiscal 1994, reflecting the Company's
significant increases in personnel, network development
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<PAGE> 33
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
first five competitive access provider networks, and with the performance of
market feasibility, engineering, rights-of-way and regulatory evaluations in
several additional cities. Related salaries, wages and benefits increased from
$331,500 in fiscal 1994 to $1,341,100 in fiscal 1995 as the number of network
development and operations employees increased from six at June 30, 1994, to 44
at June 30, 1995. The Company also incurred significant operating expenses
related to the development of prospective new markets. These costs, which
include expenses such as contract labor, legal and certain franchise fees,
travel, rent, utilities, and taxes, increased from $722,900 in fiscal 1994 to
$1,941,100 in fiscal 1995.
In fiscal 1995, selling, general and administrative expenses increased to
$4,597,600 from $1,297,500 in fiscal 1994. Related salaries, wages and benefits
increased from $382,900 during fiscal 1994 to $1,974,200 in fiscal 1995, and
corresponding office and other operating costs increased to $2,210,900 in fiscal
1995 from $134,600 in fiscal 1994. This increase reflected costs associated with
the recruitment of additional executive management, the establishment of a
centralized sales and marketing organization, and the establishment of
administration and sales staff in five cities. Selling, general and
administrative staff grew from nine at June 30, 1994, to 30 at June 30, 1995.
Consulting and professional fees decreased from $780,000 in fiscal 1994 to
$412,500 in fiscal 1995, as the Company's need for the significant legal and
accounting costs that it incurred early in fiscal 1994 as it restructured its
operations and began to finance its growth activities was reduced. Depreciation
and amortization expenses increased from $1,967 in fiscal 1994 to $497,811 in
fiscal 1995, as the Company began to depreciate the capitalized costs of its
first four networks in Louisville, Little Rock, Greenville, and Fort Worth.
Non-cash stock compensation expense increased from $633,151 in fiscal 1994
to $6,419,412 in fiscal 1995, primarily reflecting the accrual of costs equal to
the difference between the current fair market value of the shares of Common
Stock which vested under options and warrants granted to key executives and
consultants and the aggregate exercise price with respect to such shares. Such
options have put rights and other factors that required variable plan accounting
in fiscal 1994 and fiscal 1995. During June 1995, the Company renegotiated
contracts with certain of its officers and established a limit of $2,500,000 on
the Company's put obligations, thereby eliminating the requirement for the
Company to continue to record expenses based on the continually changing fair
market value of the underlying stock in excess of the $2,500,000 limitation. As
a result of establishing this limitation, the Company reclassified $4,511,000 to
additional paid-in capital from redeemable stock options and warrants.
Subsequent to the end of fiscal 1995, this limitation was reduced to $2,000,000.
Interest and other income increased from $5,155 in fiscal 1994 to $217,525
in fiscal 1995. The Company placed funds received from its financing efforts in
short-term interest investments. Due to increased borrowings in connection with
the construction and operation of its networks, interest and other expenses
increased from $332,997 in fiscal 1994 to $706,000 in fiscal 1995. In fiscal
1995, the Company capitalized $536,000 of interest in connection with its
construction of fiber optic networks, causing interest expense to decrease to
$170,095.
Debt conversion expense in fiscal 1994 totalled $681,250, reflecting debt
conversion expenses associated with the conversion of debt in September 1993.
During fiscal 1995, the Company incurred costs of $554,900 in connection with
(i) the issuance in June 1994 of $4,300,000 of notes, substantially all of which
were retired or converted into Series A Preferred Stock (as hereinafter defined)
in the Company's October 1994 $16,800,000 equity financing, and (ii) the
amortization of debt issuance costs associated with the Company's initial round
of secured debt financing under the AT&T Credit Facility, $323,900 of which was
capitalized. In connection with the conversion of the June 1994 notes, $231,000
was recorded as debt conversion expense for fiscal 1995. The Company recorded an
additional debt conversion expense amount of $154,000 due to a premium
associated with its conversion of certain secured notes that was paid in
conjunction with the Company's October 1994 equity financing.
AT&T Credit Corporation's minority interest in the Company's Louisville and
Fort Worth operating subsidiaries reduced operating losses for fiscal 1995 by
$40,000 and $8,000, respectively.
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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 the Company's two Preferred Stock offerings and the
AT&T Credit Facility, through which the Company obtained approximately $77
million in financings and financing commitments. In the November 1995 Private
Placement, the Company received approximately $96.8 million in net proceeds
(after deduction of discounts and offering expenses, including the GKM
Settlement Expenses). The 2005 Notes will accrete to an aggregate principal
amount of $190,000,000 by November 1, 2000, after which cash interest will
accrue and be payable on a semi-annual basis. The Company also received net
proceeds of approximately $4.7 million (after deduction of estimated offering
expenses) from the private sale to a principal stockholder of 50,000 shares of
Preferred Stock 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. In the Private Placement, the Company received approximately $61.8
million in net proceeds (after deduction of discounts and offering expenses).
The Company intends to continue to use these funds towards the completion
of the Company's 30-city business plan including the development and
construction of fiber optic networks, the further development and introduction
of new services, including enhanced voice messaging, high-speed data and local
switched services, for expansion of the Company's existing networks and to fund
negative operating cash flow until cash flow breakeven (i.e., positive EBITDA
before overhead allocations). Beginning with the development and construction of
the Company's first network in early 1994, the Company has estimated the total
capital requirements for implementation of its 30-city business plan to
aggregate between $250 and $275 million through the end of calendar year 1998.
The Company has announced that it is contemplating filing a registration
statement relating to a possible underwritten public offering of approximately
five million shares of Common Stock for the purpose of raising additional funds
toward the completion of the Company's 30-city business plan and the
implementation of its data and switched services businesses, which offering will
be made, if at all, only by means of a prospectus. The consummation of any such
offering will be subject to certain contingencies, and there can be no assurance
that such public offering will be consummated or any other financing will be
available to the Company on favorable terms, if at all. To meet its remaining
capital requirements, ACSI will consider the sale of additional debt or equity
securities or increases in existing credit facilities. 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 is not currently negotiating any particular
transaction. Any acquisitions 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 (the "Series A Preferred Stock") (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 $16,800,000,
including the conversion of $4,300,000 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 in connection with a June 1995 private
placement of Preferred Stock, for an aggregate exercise price of approximately
$100,000. See "Principal Stockholders" and "Description of Preferred Stock."
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 additional shares of 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
(before deduction of estimated offering expenses). The Series B Preferred Stock
is convertible into an aggregate of 9,909,525 shares of Common Stock.
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<PAGE> 35
Under the terms of the Series A-1 Preferred Stock and Series B Preferred
Stock, the Company is required to accrue quarterly dividends at an annual
interest rate of 9% of the face value of the Series A-1 and Series B Preferred
Stock outstanding. Such accrued dividends will be payable cumulatively beginning
January 1, 1998, or earlier upon conversion into Common Stock. Such conversion
may occur (i) any time at the holder's option or (ii) automatically upon the
consummation of a Qualifying Offering. See "Risk Factors -- Future Cash
Obligations" and "Description of Preferred Stock." The Company is also required
to accrue quarterly dividends at an annual interest rate of 18% on its Preferred
Stock from and after January 1, 2000, if a conversion has not occurred prior to
such date, and at any time after the occurrence and before the cure of certain
triggering events. As of December 31, 1995, no such conversions have occurred
and accrued dividends on the Preferred Stock totalled approximately $2,925,480.
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. 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 $19,800,000 in loans secured by the assets of
such subsidiaries. In September 1995, the Company's subsidiary in El 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 $5,500,000 in loans
secured by its assets. As of December 31, 1995, an aggregate of $12,390,000 had
been borrowed under these agreements. In connection with each loan, AT&T Credit
Corporation purchased 7.25% of the capital stock of the funded subsidiary and
ACSI pledged the other shares of the capital stock of such subsidiary to AT&T
Credit Corporation.
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<PAGE> 36
BUSINESS
INDUSTRY OVERVIEW
The 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 the increase in competition
in the telecommunications services industry, most recently in the local exchange
markets. CLECs such as ACSI have sought to take advantage of the opportunities
presented by increased competition and the demand for timely and reliable
telecommunications services. Regulatory and competitive trends have stimulated
dramatic growth in the CLEC industry. Regulatory initiatives in the
telecommunications industry introduced to foster competition in the local
exchange market have stimulated demand for local services, the total market for
which was approximately $93.0 billion in 1994. With the enactment of the
Telecommunications Act, the Company believes that competition in the local
telecommunications marketplace will be enhanced 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. 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.
Several factors have served to promote competition in the local exchange
market, including (i) rapidly growing customer demand for an alternative to the
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 IXCs were required to pay to LECs to access
the LECs' networks.
Competition in the local exchange services market began in the mid-1980s.
In New York City, Chicago and Washington, D.C., newly formed companies 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. 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, CAPs offered shorter
installation and repair intervals and improved reliability in comparison to the
LECs.
Most of the early CAPs were entrepreneurial enterprises that operated
limited networks in the central business districts of major cities in the U.S.
where the highest concentration of voice and data traffic, including IXC
traffic, is typically found.
Prior to the Interconnection Decisions, CAPs could effectively compete only
for special access and private line services to customers in buildings directly
connected to their separate networks. The Interconnection Decisions permit CAPs
to significantly increase the number of customers and markets serviced without
physically expanding their networks. The Interconnection Decisions also enable
CAPs to provide interstate switched access services in competition with LECs,
which has encouraged the development of competitive interstate switched access
markets.
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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 the southern U.S. The Company provides non-switched
dedicated services, generally at a discount to those of the LEC, and delivers
such services with a high level of network reliability. In addition to dedicated
services, the Company is developing and has begun to offer to business and
government end users, on a limited basis, high-speed data and enhanced voice
messaging services. Management believes that successful marketing of these
high-speed data and enhanced voice messaging services will not only provide the
Company with increased revenues, but also with an expanded end user customer
base and relevant marketing experience that can be leveraged into offering local
switched services. 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.
Currently, ACSI has eleven operational networks and an additional nine
networks under construction, most of which are expected to be operational by the
third calendar quarter of 1996. The Company intends to have 30 networks in
service by mid-1997. To date, management believes that it has been able to
deploy its capital most efficiently by constructing, rather than acquiring,
fiber optic networks (i.e., build vs. buy). By constructing all of its networks,
management believes that ACSI has realized significant cost savings, created
considerable networking efficiencies and ensured quality, reliability and high
operating standards.
ACSI NETWORKS
<TABLE>
<CAPTION>
TARGETED
TO BE
CURRENTLY OPERATIONAL BY
OPERATIONAL SEPTEMBER 30, 1996
---------------- ------------------
<S> <C>
Albuquerque, NM Amarillo, TX
Columbia, SC Baton Rouge, LA
El Paso, TX Birmingham, AL
Fort Worth, TX Charleston, SC
Greenville, SC Columbus, GA
Lexington, KY Irving, TX
Little Rock, AR Jackson, MS
Louisville, KY Las Vegas, NV
Mobile, AL Spartanburg, SC
Montgomery, AL
Tucson, AZ
</TABLE>
COMPANY STRATEGY
The Company's objective is to become a leading provider of dedicated,
high-speed data, enhanced voice messaging and local switched services in its
targeted markets by implementing the following strategies:
Early Entry in Tier II and Tier III Markets in the Southern U.S. The
Company targets Tier II and Tier III markets (200,000 to 2,000,000 in
population), as they are generally subject to less competition from other
CLECs relative to larger, more developed Tier I markets, thereby enabling
the Company to achieve market penetration quickly. ACSI intends to focus
its market entry in areas of the southern U.S. because of attractive
demographic trends and expected growth in demand for telecommunications
services in these regions. Between 1991 and 1995, one out of every three
new jobs in the U.S. was created in the southeast region of the U.S.
Additionally, between 1989 and 1994, the rate of access line growth in the
southern regions of the U.S. exceeded the national average by approximately
two and one-half times. 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 twelve of the above-listed twenty 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 are billed to
IXCs for services provided for the benefit of their customers. IXCs
generally choose the access provider of 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, 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 in which MCImetro has agreed to purchase
minimum levels of dedicated services from ACSI and has committed to
construct portions of ACSI's fiber optics networks in six cities. Recently,
the Company signed agreements with AT&T and one other IXC pursuant to which
the Company expects AT&T and such other IXC to use the Company as a
supplier of dedicated special access services in many of the Company's
markets. 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. See "Summary -- Recent Developments."
Aggressive Bottom-Line Approach to Network Deployment. The Company
rapidly deploys its networks and markets its services in order to achieve
cash flow operating breakeven (i.e. positive EBITDA before overhead
allocations) quickly. 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 phase and commencement of commercial service in a market
within 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 will extend the reach of its network
outside the central business district in response to customer demand. ACSI
anticipates that each operating subsidiary will achieve EBITDA breakeven
results, prior to overhead allocations, within ten to fifteen months after
initiation of service. In its most mature markets, Louisville and Little
Rock, the Company achieved such EBITDA breakeven results in nine months
after initiation of service.
Expanding Customer Base Through High-Speed Data and Enhanced Voice
Messaging Service Offerings. ACSI currently provides dedicated services
and is developing and has begun offering on a limited basis a wide range of
high-speed data and enhanced voice messaging services.
- - High-Speed Data Services. The Company is developing and has begun offering
high-speed data services, including Internet services, and plans to offer
frame relay and ATM services to business, government, IXCs and ISPs in
targeted markets. The Company has begun offering a total solution capabilities
to its customers, including high-speed data, voice and multi-media capability
as well as facilities management, expert sales support, consulting and CPE.
The Company believes that this strategy will differentiate ACSI from its
competitors.
- - Enhanced Voice Messaging Services. 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. Management believes that the
market for enhanced voicemail services in 1993 was approximately $1.25
billion, that such market is underserved and that, with the availability of
enhanced voice messaging services such as the Company's, the market has the
potential for growth as customers become more accustomed to use of these
services.
Cost-Effective Entry into Local Switched Services. The market for
local switched services in the U.S., which was approximately $89.0 billion
in 1994, represents a significant growth opportunity for the Company.
Following receipt of regulatory approval and when cost-effective, the
Company intends to begin offering local switched services in certain of its
markets beginning in late 1996 by installing its own switches or obtaining
switch capacity from third parties. Given the size and regional
concentration of ACSI's markets, the Company plans to deploy a hubbed
switching strategy whereby one switch can serve
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<PAGE> 39
multiple markets via remote switching modules. This strategy justifies the
switch investment in Tier II and Tier III markets by reducing capital costs
and operating expenses. The Company's enhanced voice messaging customers
are expected to provide an additional customer base to whom switched
services can be marketed.
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 addition to 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. Additionally, the Company believes that it can
construct and begin to operate fiber optic networks faster than any competitor
in the industry.
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.
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. See "Risk Factors -- Dependence on Rights-of-Way and Other
Third Party Agreements" and "-- Effect of Regulation."
Concurrent with its seeking municipal authorizations, the Company initiates
discussions with electric or gas utilities, CATV companies, 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
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<PAGE> 40
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 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 10 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 of 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
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 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 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.
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PRODUCTS AND SERVICES
The Company currently provides, or is actively implementing plans to
provide, a wide range of local telecommunications services including dedicated,
enhanced voice messaging, high-speed data and local switched services. The
Company's 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 the first half of fiscal 1996, dedicated
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 a 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 terminations, 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 DS-0 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.
- 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 its 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 is typically lower than
special access services that include a charge for terminating the
traffic at the end user's location and/or the IXC POP in addition to
the transport charges. 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).
High-Speed Data Services. The Company is developing and has begun offering
enhanced 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.
- Frame relay -- cost-effective data transport solutions for LAN-to-LAN
connectivity, legacy networks, clientserver and multimedia applications.
Frame relay combines fast packet switching with the high performance and
reliability of private lines.
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- ATM -- high bandwidth services providing virtual networking for voice,
data and video traffic on a single network.
- Internet access -- services that facilitate connectivity for business,
governmental and institutional end users to the Internet.
The Company has begun offering a total solution capability to its
customers, including high-speed data, voice and multi-media capabilities as well
as facilities management, expert sales support, consulting and CPE. The Company
believes that providing a comprehensive solution for the customer's data
communications needs will differentiate its products from those offered by
competing LECs, IXCs and other CLECs. In addition, as part of its marketing
efforts, the Company intends to package its data service offerings with ACSI's
dedicated and local switched services.
Increasing deployment and use of personal computers and the concurrent need
for interconnecting both local and wide area networks are some of the key
factors driving the growth in the high-speed data services market. There is a
progressive trend toward migration from dedicated data services to high-speed
switched data applications such as frame relay and ATM, with all growth in the
market coming from such switched data services. Based on independent research
data, the Company believes that in 1994, the total market for advanced switched
and dedicated data services in its target markets was estimated to be $373.0
million (representing 5.5% of the estimated $6.7 billion nationwide market for
data services) and is projected to increase by approximately 9.5% annually
through the year 2000 to approximately $650.0 million.
Enhanced Voice Messaging Services. 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. Management believes that the
market for enhanced voicemail services in 1993 was approximately $1.25 billion,
that such market is underserved and that, with the availability of enhanced
voice messaging services such as the Company's, the market has the potential for
growth as customers become more accustomed to use of these services.
Specifically, the menu of services for 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.
- 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.
- 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 plans to offer these services in all of its operational markets
in 1996. In addition, 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 services to be offered in the
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future. However, unlike traditional telephone service, customers have not yet
become fully accustomed to use of voice messaging services, and the usage
ramp-up of these services is not certain at this time.
Switched Services. Following receipt of the requisite regulatory approvals
and when cost-effective, the Company plans to offer local switched services in
certain of its markets beginning in late 1996, such as origination and
termination of local calls, Centrex services, PBX trunking and switched access
services.
- Origination and termination of local calls -- "plain old telephone
service" between local callers' stations.
- Centrex services -- combine local dial tone service with feature-rich
functionality, including free internal communications, call forwarding,
transfer, conference and speed dial. The Company plans to offer this
service to companies that have not invested in a PBX or as a backup to a
customer's PBX system, allowing companies to obtain state-of-the-art
communications without significant capital expenditures.
- PBX trunking -- carries switched traffic between ACSI's switch and the
customer's PBX and allows for up to 24 lines which are shared among up to
200 internal users to communicate with a public network. This product
will be offered to customers who have their own PBX system and manage
their own internal communications.
- Switched access -- origination or termination of long distance traffic
between a customer premise and an IXC POP via shared local trunks using a
local switch.
The Company intends to employ 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 markets located
within the same geographical area via remote switching modules. The Company
believes this strategy will reduce the capital expense associated with
installing a switch in each market, which may be too small on its own to justify
the investment. By aggregating switched traffic from multiple Tier II and Tier
III markets through a central hub switch, the Company also expects to realize
reduced operating expenses associated with switch engineering and maintenance.
The Company believes that providing dedicated, enhanced voice messaging and
highspeed data services will enhance the Company's ability to cross-market local
switched services. Finally, 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 may result in mutually beneficial alliances. Successful negotiation of
switching partnerships may further reduce the Company's capital and operating
expenses associated with the provision of switched services.
The Company's switched services plan is targeted at small and mid-sized
business and government end users. The typical customer is expected to have 10
to 100 employees. The Company will first target users within the buildings of
ACSI's existing customers and will connect these users directly to its network.
Subsequently, 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, making the capital investment of connecting the
facility to ACSI's network more cost-effective.
The Company believes that its local digital fiber optic networks, coupled
with the distributed hub arrangements described above, will provide a robust
platform for the provisions 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 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 synergies and new service offerings over its target 30-
city market area.
The domestic market for local switched services (including switched access)
was estimated to constitute more than 95% of the total local telecommunications
market in 1994, or approximately $89.0 billion.
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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 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 service. 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 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.
COMPETITION
The Company operates in a highly competitive environment and has no
significant market share in any market in which it operates. The Company
initially plans to provide 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. See "-- Regulation."
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
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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 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 which
include, among others, several of the Company's markets. See "Risk
Factors -- Competition." Other CLECs or CATV companies 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
accepted 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.
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 effort should be able to
effectively penetrate 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.
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.
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 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 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 services, will allow it to
penetrate 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
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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.
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.
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. 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 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.
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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.
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.
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 on February 8, 1996. 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 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.
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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 home 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;
- 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. 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 for 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. See "Risk Factors -- Competition."
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 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.
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The Company currently has obtained intrastate authority for the provision
of dedicated services in Alabama, Arkansas, Georgia, New Mexico, South Carolina,
Texas, Nevada and Kentucky (excludes intraexchange private line services). The
Company has applications pending before the public service commissions ("PSCs")
in Mississippi and Louisiana 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
will be required to seek additional authorization from such PSCs. The Company
has applied for authorization to provide local switched services in Alabama,
Maryland, Arizona, Arkansas, Georgia, Texas, Nevada and New Mexico and has been
granted such authority in Tennessee. There can be no assurances that the Company
will receive the authorizations it is currently seeking, or will seek, from
these PSCs. See "Risk Factors -- Rapid Expansion of Operations."
In most states, the Company will be 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 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. As of December
31, 1995, the Company had posted $2,146,375 of such bonds and letters of credit.
As of such date, the Company had been required to pledge $1,252,000 in cash
collateral to obtain such bonds and 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.
EMPLOYEES
As of December 31, 1995, the Company employed a total of 113 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.
The Company believes that its relations with its employees are good.
LEGAL PROCEEDINGS
On October 16, 1995, Gerard Klauer Mattison & Co., LLC ("GKM") filed a
complaint against the Company in the United States District Court for the
Southern District of New York (95 Civ. 8792 (SAS)) (the "Court"), alleging that
the Company had breached a contractual obligation under a March 20, 1995, letter
agreement (the "Agreement"), to designate GKM as the Company's "exclusive
underwriter or financial advisor" for all investment banking services through
September 20, 1996. On December 28, 1995, the Company and GKM entered into a
settlement agreement (the "GKM Settlement Agreement"). On January 3, 1996, the
parties executed a stipulation dismissing the action with prejudice and without
costs to either party. The District Court so ordered the stipulation on January
4, 1996. Pursuant to the GKM Settlement Agreement, in full satisfaction of any
and all claims that GKM may have had against the Company, the Company agreed to:
(i) pay GKM approximately $1.4 million, which represents payment in
49
<PAGE> 50
satisfaction of claims as well as for past consulting and other services
provided to the Company by GKM (the "GKM Settlement Expenses"); (ii) issue a
warrant ("GKM Warrant I") to GKM to purchase 96 shares of the Company's Common
Stock at an exercise price of $0.01 per share on or before June 28, 1996 (which
warrant has been exercised); and (iii) issue a warrant ("GKM Warrant II," and
together with GKM Warrant I, the "GKM Warrants") to GKM to purchase 62,473
shares of the Company's Common Stock at an exercise price of $2.80 per share
(subject to certain adjustments) at any time after 5:00 p.m. New York City time
on December 28, 1996, until 5:00 p.m. New York City time on December 28, 2000.
The shares of Common Stock underlying the GKM Warrants are entitled to certain
registration rights pursuant to the Supplemental Registration Rights Agreement
dated as of June 26, 1995 among the Company, GKM and Marvin Saffian and Company.
The GKM Settlement Expenses were paid on December 28, 1995. The GKM Warrants
were earned as a result of services that GKM performed in connection with the
June 1995 Private Placement. See "Certain Relationships and Related
Transactions."
The Company and its subsidiaries currently are not parties to any material
litigation. 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.
PROPERTIES
The Company leases for $16,583 per month as of December 31, 1995, subject
to periodic increases in specified amounts, a 14,265 square foot office space in
Annapolis Junction, Maryland for its corporate headquarters and network
management center. The Company has amended its lease to provide for an
additional 9,660 square feet of office space for an additional $11,230 per
month, subject to periodic increases in specified amounts, which amount shall be
payable upon the earlier to occur of the Company's occupancy of such additional
office space, or fifteen days following the date when such additional office
space is ready for occupancy. 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 December 31, 1995, the Company's various operating subsidiaries have
leased facilities for their offices and network nodes. The aggregate monthly
rent on these properties is approximately $36,000. The various leases expire on
dates ranging from February 28, 1998, to October 30, 2005. Most have renewal
options. A subsidiary of the Company leases shared office space in Greenville,
SC. 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.
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<PAGE> 51
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information regarding the directors and
executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
- ----------------------------------------- ---- -----------------------------------------
<S> <C> <C>
Anthony J. Pompliano..................... 57 Chairman of the Board of Directors
Richard A. Kozak......................... 50 President and Chief Executive Officer
George M. Tronsrue, III.................. 39 Chief Operating Officer
Riley M. Murphy.......................... 40 Executive Vice President -- Legal and
Regulatory Affairs, General Counsel and
Secretary
Douglas R. Hudson........................ 34 Executive Vice President -- Sales and
Marketing
Harry J. D'Andrea........................ 40 Chief Financial Officer
Robert H. Ottman......................... 57 Executive Vice President -- Network
Services
George M. Middlemas(2)................... 49 Director
Edwin M. Banks(1)........................ 33 Director
Christopher L. Rafferty(2)............... 47 Director
Benjamin P. Giess........................ 33 Director
Olivier L. Trouveroy(1)(2)............... 40 Director
Peter C. Bentz........................... 30 Director
</TABLE>
- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
In response to voting rights issues raised by the Nasdaq Stock Market staff
concerning the Company's governance structure, the Company amended its
Certificate of Incorporation, which amendments were approved by the stockholders
of the Company on January 26, 1996, such that the Board will be comprised of
seven members, four of whom will be elected by the holders of the Company's
Common Stock and three of whom will be elected by the holders of the Company's
Preferred Stock (a "Standard Board"). However, upon the occurrence of certain of
the triggering events set forth in the Company's Certificate of Incorporation,
the Board shall be increased to eleven members and the additional four directors
(in addition to the existing seven directors) shall be elected by holders of the
Company's Preferred Stock (a "Triggering Event Board"). Pursuant to the
Governance Agreement dated November 8, 1995 between the Company and certain
holders of its Preferred Stock (the "Governance Agreement"), until June 26,
1996, the Board was to consist of eleven members, four of whom were elected by
holders of the Common Stock and seven of whom were elected by holders of the
Preferred Stock. On February 26, 1996, the Company and the other parties to the
Governance Agreement signed the Supplemental Governance Agreement pursuant to
which the Board was reduced to seven members, four of whom were elected by
holders of the Common Stock and three of whom were elected by holders of the
Preferred Stock. When the Board was reduced to seven members on February 26,
1996, Richard A. Kozak, Steven G. Chrust, Frederick Galland and Cathy Markey,
all of whom had been elected by the holders of the Company's Preferred Stock,
resigned. Other than as provided herein, no other arrangement or understanding
exists between an officer or director and any other person under which any
officer or director was elected. All directors of the Company hold office until
the next annual meeting of stockholders and until their successors are duly
elected and qualified. No director or officer is related to any other director
or officer by blood, marriage, or adoption.
In connection with the changes in the Company's governance structure,
certain principal holders of the Company's Preferred Stock and Common Stock have
entered into a Voting Rights Agreement dated November 8, 1995, as amended as of
December 14, 1995 ("the Voting Rights Agreement"), pursuant to which such
stockholders have agreed to vote their shares of Preferred Stock and Common
Stock for the
51
<PAGE> 52
election of directors designated by Huff, ING and Apex. As of December 31, 1995,
the parties to the Voting Rights Agreement owned approximately 98% of the
Preferred Stock outstanding and approximately 51% of the Common Stock
outstanding. The Voting Rights Agreement provides that it shall terminate upon
the earliest of (i) a Qualifying Offering, (ii) ten years from the date of the
Voting Rights Agreement or (iii) upon the written agreement of Huff and ING.
Pursuant to the Voting Rights Agreement, during a period in which a
Standard Board is in effect, the holders of the Preferred Stock have agreed to
vote all of their shares to elect Messrs. Rafferty and Banks (designated by
Huff) and Mr. Trouveroy (designated by ING) to the Board. Such holders have also
agreed to vote all of their shares of Common Stock to elect Mr. Bentz
(designated by Huff), Mr. Middlemas (designated by Apex), Mr. Giess (designated
by ING) and Mr. Pompliano (designated by Huff and ING) to the Board. Conversely,
during a period in which a Triggering Event Board is in effect, the holders of
the Preferred Stock have agreed to vote all of their shares to elect Messrs.
Rafferty, Banks and Galland and Ms. Markey (designated by Huff), Messrs.
Trouveroy and Kozak (designated by ING) and Mr. Chrust (designated by Huff and
ING) to the Board. Such holders have also agreed to vote all of their shares of
Common Stock to elect Mr. Pompliano (designated by Huff and ING), Mr. Giess
(designated by ING), Mr. Middlemas (designated by Apex) and Mr. Bentz
(designated by Huff) to the Board. Designees may be substituted for the named
designees in the Voting Rights Agreement from time to time by the party having
the right to designate such named designees. Mr. Banks is an employee of W. R.
Huff Asset Management Co., L.L.C., an affiliate of Huff. Mr. Rafferty is an
employee of WRH Partners, L.L.C., the general partner of Huff. Messrs. Trouveroy
and Giess are employees of ING, which owned all of the shares of the Series B-1
Preferred Stock and Series B-4 Preferred Stock outstanding as of December 31,
1995. Mr. Bentz and Ms. Markey are also employees of W. R. Huff Asset Management
Co., L.L.C. Huff owned approximately 74.4% of the shares of Series A-1 Preferred
Stock outstanding as of December 31, 1995, and 98.5% of the shares of the Series
B-2 Preferred Stock outstanding as of December 31, 1995. Mr. Middlemas is a
general partner of Apex Management Partnership, which is the general partner of
Apex. Apex, together with certain affiliated partnerships, owned 19.1% of the
Series A-1 Preferred Stock and 84.0% of the shares of Series B-3 Preferred Stock
outstanding as of December 31, 1995.
In addition to the aforementioned provisions, the Voting Rights Agreement
contains provisions regarding the selection of substitute board members, members
of board committees and board members of the Company's subsidiaries.
The Board has established a Compensation Committee and an Audit Committee.
The Compensation Committee is comprised of three directors, none of whom may be
an employee of the Company or any of its subsidiaries and two of whom shall be
directors elected by holders of the Company's Preferred Stock (the "Preferred
Directors") selected by a majority of the Preferred Directors. The Audit
Committee is generally comprised of three directors, one of whom shall be a
senior executive officer of the Company (but not the chief financial or chief
accounting officer) and two of whom may not be employees of the Company or any
of its subsidiaries and shall be Preferred Directors selected by a majority of
the Preferred Directors. Currently, only two directors serve on the Audit
Committee.
In the event that the group of directors of the Company that are specified
to select a committee member is deadlocked over its selection of such committee
member for more than 30 days, the full Board shall select such committee member
from among such group of directors.
Anthony J. Pompliano, Chairman of the Board of Directors, has 30 years of
experience in the telecommunications industry. Mr. Pompliano was elected a
director of the Company in November 1993 and served as CEO of the Company from
November 1993 to October 31, 1995. He was co-founder and President of
Metropolitan Fiber Systems, the predecessor organization to MFS, a
publicly-traded CLEC. Mr. Pompliano served as President, CEO and Vice Chairman
of MFS from April 1988 until March 1991. He joined ACSI in August 1993 after the
expiration of his non-competition agreement with MFS. Before his association
with MFS and its predecessor, he was Vice President -- Operations and Sales for
MCI Telecommunications International from 1981 to 1987, and prior thereto, was
Vice President -- National Operations for Western Union International, Inc. from
1960 to 1981.
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<PAGE> 53
Richard A. Kozak, President and Chief Executive Officer, joined the Company
in November 1993. Mr. Kozak served as Chief Financial Officer of the Company
from September 30, 1994, until November 30, 1994. Mr. Kozak served on the Board
from November 15, 1994, until June 1995, when he resigned voluntarily to allow
the investors in the Company's June 1995 Private Placement to elect
representatives to the Board without unduly increasing its size and from
November 1995 until February 26, 1996 when he resigned to allow the Board to
return to seven members. Mr. Kozak has more than twenty years of experience in
the telecommunications industry. He was President of the Southern Division of
MFS from October 1992 until June 1993, where he was responsible for networks in
Atlanta, Baltimore, Dallas, Houston, Philadelphia, Pittsburgh and Washington,
DC, as well as for establishing networks in additional markets in the southern
U.S. Previously, he was President of MFS Development from July 1991 until
October 1992, where he was responsible for the planning, development and
implementation of more than $100 million of major expansions of networks
throughout the U.S., and Senior Vice President of Network Services for MFS.
Prior to joining MFS in 1990, he was a Vice-President and General Manager for
Telenet Communications Corporation (now Sprint International) from 1986 through
1989 and an Executive Vice President and Chief Financial Officer for TRT
Communications from 1982 to 1986. Mr. Kozak holds an engineering degree from
Brown University, studied at the University of Chicago Graduate School of
Business, and completed his MBA in Finance at the George Washington University
School of Government and Business Administration.
George M. Tronsrue, III, Chief Operating Officer, has seventeen years of
telecommunications industry and management experience. Mr. Tronsrue served as
Executive Vice President -- Strategic Planning and Business Development from
February 1994 until January 31, 1996. From 1993 until he joined ACSI in February
1994, Mr. Tronsrue was the Regional Vice President for the Central Region for
Teleport Communications Group and the Vice President of Emerging Markets,
responsible for start-up and profit and loss management of joint ventures with
major cable television providers in eight major markets. From 1987 until 1992,
he was a member of the initial management team at MFS, where he held senior
positions in planning and market development, served as Vice President of Sales
and the Vice President/General Manager for the initial start-up of MFS' New York
operations, and served as the Executive Vice President for MFS-Intelenet. Prior
to joining MFS, he was a Director of Operations for MCI Telecommunications
International. Mr. Tronsrue has a B.S. degree in applied sciences and
engineering from the United States Military Academy at West Point.
Riley M. Murphy, Executive Vice President -- Legal and Regulatory Affairs
and Secretary, had twelve years of experience in the private practice of
telecommunications regulatory law for inter-exchange, cellular, paging and other
competitive telecommunication services prior to joining the Company. Since
February 1995, she has served as an officer and director of The Association for
Local Telecommunications Services. Ms. Murphy joined ACSI on a full-time basis
in April 1994 and was senior counsel to Locke Purnell Rain Harrell, a
Dallas-based law firm through December 1994. From 1987 to 1992, Ms. Murphy was a
partner of Wirpel and Murphy, a telecommunications law firm she co-founded, and
from 1992 to 1993 she was a sole practitioner. She holds a B.A. degree from the
University of Colorado and a J.D. from the Catholic University of America, and
is admitted to practice law in the District of Columbia and Louisiana.
Douglas R. Hudson, Executive Vice President -- Sales and Marketing, has ten
years of sales and marketing experience within the telecommunications industry.
For seven years prior to joining ACSI in May 1994, Mr. Hudson had been with MFS,
having served as a director of field sales from September 1987 to September
1989, Vice President of Industry Sales and Marketing from September 1989 to July
1992 and as Vice President and General Manager in charge of MFS's Mid-Atlantic
region from July 1992 until May 1994. Prior to joining MFS, Mr. Hudson was a
regional sales manager for Microtel International, Inc., a national
telecommunications company providing competitive long distance and private line
services.
Harry J. D'Andrea, Chief Financial Officer, has over fifteen years of
experience in financial management. Mr. D'Andrea joined the Company on February
6, 1996. From 1989 through 1995, Mr. D'Andrea was employed by Caterair
International Corporation ("CIC"), where he served as Vice President, Finance
and Treasurer from 1989 through 1993 and Executive Vice President, Chief
Financial Officer and Treasurer from 1993 through 1995. As Chief Financial
Officer of CIC, Mr. D'Andrea was responsible for all of CIC's financial planning
and analysis, treasury operations, financial and management reporting, tax and
internal
53
<PAGE> 54
audit operations. From 1987 to 1989, Mr. D'Andrea served as Controller of
Marriott Corporation ("Marriott"), where he was responsible for twelve airline
catering units in five countries. Mr. D'Andrea also served as Director of
Pricing of Marriott from 1986 to 1987. Mr. D'Andrea has a B.A. degree from
Pennsylvania State University and completed his MBA in Finance at Drexel
University.
Robert H. Ottman, Executive Vice President -- Network Services, joined the
Company in May 1995. Mr. Ottman has 30 years of experience in telecommunications
and has been involved in network services, operations, quality assurance, human
resources and labor relations within the telecommunications industry. Prior to
joining ACSI, he was the Vice President of Operations and Quality Assurance for
MCI International and directly responsible for the New York City, Washington,
Atlanta, Boston, Miami, Chicago, Detroit, San Francisco, Los Angeles, Puerto
Rico, Hawaii and Guam Networks from 1993 to 1995. From 1981 to 1982, Mr. Ottman
was Assistant Vice President of Operations and Labor Relations for Western Union
International, Inc. (which was acquired by MCI in 1982). From 1982 to 1993, Mr.
Ottman held various positions with MCI International, including: Director of
Metro Operations from 1982 to 1983, Director of Administration and Labor
Relations from 1983 to 1988, and Vice President of Administration and Labor
Relations from 1988 to 1993. While at MCI International, in 1989 Mr. Ottman
initiated Quality Programs for the support and assistance of MCI customers.
George M. Middlemas, Director, was elected a director of the Company in
December 1993. Mr. Middlemas is a general partner of Apex Management
Partnership, which is the general partner of Apex Investment Fund I, L.P. and
Apex Investment Fund II, L.P., both of which are venture capital funds, and
affiliates of First Analysis Corporation, a principal stockholder of the
Company. See "Principal Stockholders." From March 1991 to December 1991, Mr.
Middlemas acted as an independent consultant providing fund raising and other
advisory services. From 1985 until March 1991, Mr. Middlemas was a Senior Vice
President and Principal of Inco Venture Capital Management, a venture capital
firm. He also serves on the Board of Directors of PureCycle Corporation,
Security Dynamics Technologies, Inc. and several privately held companies.
Edwin M. Banks, Director, was elected a director of the Company in October
1994. Since 1988, Mr. Banks has been employed by W. R. Huff Asset Management
Co., L.L.C. and currently serves as a portfolio manager concentrating in the
healthcare, communications, food and food services industries. From 1985 until
he joined W. R. Huff Asset Management Co., L.L.C., Mr. Banks was employed by
Merrill Lynch & Company. Mr. Banks received his Bachelor of Arts degree from
Rutgers College and his Masters of Business Administration degree from Rutgers
University. Mr. Banks also serves as a director of Charter Medical Corporation,
Del Monte Foods Company and ABCO Food Service.
Christopher L. Rafferty, Director, was elected a director of the Company in
October 1994. Mr. Rafferty has been employed by WRH Partners, L.L.C., the
general partner of Huff since June 1994. From January 1993 to February 1994, Mr.
Rafferty was Vice President -- Acquisitions for Windsor Pet Care, Inc., a
venture capital-backed firm focusing on consolidating the pet care services
industry. From October 1990 to January 1993, Mr. Rafferty was a consultant
specializing in merchant banking, leveraged acquisitions and venture capital
transactions. From June 1987 to the time he started his consulting business, Mr.
Rafferty was a Managing Director of Chase Manhattan Capital Corporation, the
merchant banking and private equity investment affiliate of Chase Manhattan
Corporation. Mr. Rafferty also serves as a director of Del Monte Foods Company.
Mr. Rafferty received his undergraduate degree from Stanford University and his
law degree from Georgetown University.
Benjamin P. Giess, Director, was elected a director of the Company in June
1995. Since 1992, Mr. Giess has been employed by ING and its predecessors and
affiliates and currently serves as a Vice President responsible for originating,
structuring and managing equity and debt investments. From 1991 to 1992, Mr.
Giess worked in the Corporate Finance Group of ING Capital. From 1990 to 1991,
Mr. Giess was employed by the Corporate Finance Group of General Electric
Capital Corporation where he worked in the media and entertainment group. Prior
to attending business school, from 1986 to 1988, Mr. Giess was the Credit
Department Manager of the Boston Branch of ABN Amro North America, Inc. From
1984 to 1986, Mr. Giess was employed at the Shawmut Bank of Boston. Mr. Giess
also serves as a director of Matthews
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<PAGE> 55
Studio Equipment Group and CMI Holding Corp. Mr. Giess received his
undergraduate degree from Dartmouth College and his Masters of Business
Administration degree from the Wharton School of the University of Pennsylvania.
Olivier L. Trouveroy, Director, was elected a director of the Company in
June 1995. Since 1992, Mr. Trouveroy has been employed by ING and its
predecessors and affiliates and currently serves as a Managing Director
responsible for originating, structuring and managing equity and debt
investments. From 1990 to 1992, Mr. Trouveroy was a Managing Director in the
Corporate Finance Group ("CFG") of General Electric Capital Corporation in
charge of CFG's office in Paris, France. From 1984 to 1990, Mr. Trouveroy held
various positions in the Mergers and Acquisitions department of Drexel Burnham
Lambert in New York, most recently as a First Vice President. Mr. Trouveroy also
serves as a director of AccessLine Technologies, Inc. and Cost Plus, Inc. Mr.
Trouveroy holds Bachelor of Science and Masters degrees in Economics from the
University of Louvain in Belgium, as well as a Masters of Business
Administration degree from the University of Chicago.
Peter C. Bentz, Director, was elected a director of the Company in June
1995. Since 1992, Mr. Bentz has been employed by W. R. Huff Asset Management
Co., L.L.C. as a research analyst specializing in telecommunications, media and
healthcare. Mr. Bentz received his Bachelor of Science degree from Boston
College in 1987 and his Masters of Business Administration degree from the
Wharton School of the University of Pennsylvania in 1992.
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<PAGE> 56
EXECUTIVE COMPENSATION
The Company's current executive officers did not receive any compensation
from the Company during any fiscal year prior to fiscal 1994. The following
table provides a summary of compensation for fiscal 1995 and 1994, with respect
to the Company's Chief Executive Officer and the other four most highly
compensated officers of the Company whose annual salary and bonus during fiscal
1995 exceeded $100,000 (collectively, the "Named Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION(1) COMPENSATION
-------------------------------------------- AWARDS
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND SALARY BONUS COMPENSATION OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($)(2) (#)(3) ($)
----- ------- ------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Pompliano....................... 1995 219,500 175,000(4) - 0 - 500,000 6,977(5)
Chairman of the Board of Directors 1994 110,000 - 0 - 25,000(6) 1,349,899 61,507(7)
Richard A. Kozak........................... 1995 184,378 175,000(8) - 0 - 399,999 3,750(9)
President and Chief Executive Officer 1994 87,500 - 0 - 39,728(6) 899,932 - 0 -
George M. Tronsrue......................... 1995 150,000 135,417(10) 68,800(11) 350,000(12) - 0 -
Chief Operating Officer 1994 53,827 50,000 - 0 - - 0 - - 0 -
Riley M. Murphy............................ 1995 150,000 81,500(13) - 0 - 250,002(12) 9,783(14)
Executive Vice President -- Legal and
Regulatory Affairs, General Counsel and
Secretary 1994 37,500 - 0 - 48,620(15) - 0 - - 0 -
Douglas R. Hudson.......................... 1995 125,004 100,000(16) - 0 - 250,002(12) - 0 -
Executive Vice President -- Sales and
Marketing 1994 10,417 - 0 - - 0 - - 0 - - 0 -
</TABLE>
- ---------------
(1) Prior to fiscal 1994, none of the individuals noted received compensation
from the Company.
(2) Excludes perquisites and other personal benefits that in the aggregate do
not exceed 10% of the Named Officers' total annual salary and bonus.
(3) See information provided in "Option Grants in Last Fiscal Year," and
"Option Exercises and Fiscal Year-End Values."
(4) This bonus was comprised of $50,000 paid with respect to the successful
debt financing for two networks during fiscal 1995 and $125,000 paid with
respect to the successful completion of the June 1995 private placement of
the Series B Preferred Stock.
(5) Includes $3,800 for car allowance and $3,177 in premiums for disability
insurance in excess of that provided to other employees.
(6) Consists of amounts paid to Messers. Pompliano and Kozak as consultants for
services rendered prior their employment by the Company in August 1993 and
November 1993, respectively.
(7) Consists of $20,000 received as compensation in connection with the
Company's November 1993 sale of 400,000 shares of Common Stock and $41,507
received as compensation in connection with the Company's June 1994
issuance of $4,300,720 principal amount of 15% convertible notes.
(8) This bonus was comprised of $50,000 paid with respect to the successful
debt financing for two networks during fiscal 1995 and $125,000 paid with
respect to the successful completion of the June 1995 private placement of
the Series B Preferred Stock.
(9) Includes $3,750 in premiums for disability insurance in excess of that
provided to other employees.
(10) This payment represents the first installment of a bonus of $244,500,
$135,417 of which was due and payable on February 28, 1995, and $54,116 of
which is due and payable on each of February 24, 1996, and February 24,
1997.
(11) Includes $65,000 paid in connection with relocation and moving expenses
relating to the relocation of the Company's headquarters from Oak Brook,
Illinois to Annapolis Junction, Maryland, of which $45,000 must be repaid
to the Company if Mr. Tronsrue voluntarily terminates his employment with
the Company prior to May 31, 1996.
(12) 150,000 of these options were originally granted in fiscal 1994 at an
exercise price of $2.50 per share and such exercise price was subsequently
reduced to $2.25 per share in connection with the October 1994 Private
Placement.
(13) This payment represents the first installment of a bonus of $244,500, which
is due and payable in the amount of $81,500 on each of January 31, 1995,
January 31, 1996, and January 31, 1997.
(14) Includes $3,360 of premiums for disability and life insurance paid for by
the Company in excess of that provided for other employees and $6,423 of
premiums in connection with professional liability insurance for the period
prior to her employment with the Company.
(15) Consists of $43,620 received for performing legal services for the Company
as outside counsel and $5,000 received pursuant to a relocation agreement.
(16) This payment was comprised of $18,750 paid with respect to a quarterly
bonus payable pursuant to Mr. Hudson's employment agreement, and $81,250,
which represents the first installment of a bonus of $243,750, which is due
and payable in the amount of $81,250 on each of January 31, 1995, January
31, 1996, and January 31, 1997.
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<PAGE> 57
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of stock
options to the Named Officers during fiscal 1995.
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS MARKET PRICE
UNDERLYING GRANTED TO EXERCISE OR OF UNDERLYING
OPTIONS EMPLOYEES IN BASE PRICE SECURITIES ON EXPIRATION
NAME GRANTED FISCAL YEAR ($/SHARE) DATE OF GRANT DATE
- --------------------------------- ----------- ------------ ------------ -------------- ---------
<S> <C> <C> <C> <C> <C>
Anthony J. Pompliano............. 50,000(1) 1.94% $ 2.25 $ 3.75 (i) 10/20/99
100,000(2) 3.87 2.25 3.94(ii) 6/26/00
100,000(3) 3.87 2.25 3.94(ii) 8/24/06
250,000(3) 9.68 2.80 3.94(ii) 8/24/06
Richard A. Kozak................. 30,000(4) 1.16 2.25 3.50 (i) 10/17/99
40,000(5) 1.55 2.25 3.94(ii) 6/29/00
80,000(6) 3.10 2.25 3.94(ii) 11/01/06
249,999(6) 9.68 2.80 3.94(ii) 11/01/06
George M. Tronsrue, III.......... 50,000(7) 1.94 2.25 3.75(i) 2/23/99
33,333(7) 1.29 2.25 3.75(i) 2/23/00
33,333(7) 1.29 2.25 3.75(i) 2/23/01
33,333(7) 1.29 2.25 3.75(i) 2/23/02
20,000(8) .77 2.25 4.00(i) 3/31/00
20,000(8) .77 2.25 4.00(i) 8/31/00
20,000(8) .77 2.25 4.00(i) 6/30/01
40,000(8) 1.55 2.25 4.00(i) 9/01/01
16,667(9) .65 2.25 3.25(i) 2/23/00
16,667(9) .65 2.25 3.25(i) 2/23/01
16,667(9) .65 2.25 3.25(i) 2/23/02
50,000(9) 1.94 2.25 3.25(i) 2/23/03
Riley M. Murphy.................. 25,000(10) .97 2.25 3.75(i) 3/31/99
41,666(10) 1.61 2.25 3.75(i) 3/31/00
41,667(10) 1.61 2.25 3.75(i) 3/31/01
41,667(10) 1.61 2.25 3.75(i) 3/31/02
14,584(11) .56 2.25 3.25(i) 3/30/00
14,584(11) .56 2.25 3.25(i) 3/30/01
14,584(11) .56 2.25 3.25(i) 3/30/02
56,250(11) 2.18 2.25 3.25(i) 3/30/03
Douglas R. Hudson................ 25,000(12) .97 2.25 3.75(i) 5/30/99
41,666(12) 1.61 2.25 3.75(i) 5/30/00
41,667(12) 1.61 2.25 3.75(i) 5/30/01
41,667(12) 1.61 2.25 3.75(i) 5/30/02
14,584(11) .56 2.25 3.25(i) 5/30/00
14,584(11) .56 2.25 3.25(i) 5/30/01
14,584(11) .56 2.25 3.25(i) 5/30/02
56,250(11) 2.18 2.25 3.25(i) 5/30/03
</TABLE>
- ---------------
(i) Underlying market price is based on the average of the high and low bid
price on the date of grant as reported by the National Quotation Bureau.
(ii) Underlying market price is based on the average of the closing bid and
asked price of the Company's stock on the date of grant on The Nasdaq
SmallCap Market.
(1) These options vested on October 21, 1994.
(2) These options vested on June 26, 1995.
(3) These options vest on August 24, 2001, except that vesting may be
accelerated upon the achievement of certain milestones. In the event vesting
is accelerated, the expiration date of such options will be modified to be
five years from such accelerated vesting date.
(4) These options vested on October 17, 1994.
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<PAGE> 58
(5) These options vested on June 30, 1995.
(6) 63,333 of these options have vested and the remaining will vest on November
1, 2001, except that vesting may be accelerated upon the achievement of
certain milestones. In the event vesting is accelerated, the expiration
date of such options will be modified to be five years from such
accelerated vesting date.
(7) These options were originally granted with an exercise price of $2.50. The
average high and low bid price for the Common Stock on February 24, 1994,
the date these options were granted, was $4.00. In connection with the
October 1994 private placement, the exercise price of these options was
reduced to $2.25, the conversion price of the Series A Preferred Stock. On
October 21, 1994, the date the October 1994 private placement closed, the
average high and low bid price of the Common Stock was $3.75. Mr.
Tronsrue's options vested with respect to 50,000 shares upon the signing of
his employment agreement, as to 33,333 shares on each of February 23, 1995
and February 23, 1996, and, provided that he does not voluntarily terminate
his employment with the Company or is not terminated for cause prior to the
applicable vesting date, as to 33,333 shares on the third anniversary of
his employment with the Company. At the time such options were granted and
the exercise price was reduced, the Common Stock was thinly traded and the
Company believes the pink sheet quotes were not necessarily a fair
representation of what the market price would have been if any significant
volume of trading were to have occurred.
(8) Of such options, 20,000 were granted in connection with the Company's
successful completion by December 31, 1994, of detailed business plans for
five networks and completion by June 30, 1995, of detailed business plans
for an additional five networks. The remaining 80,000 options were granted
to Mr. Tronsrue at the same time, 60,000 of which have vested and the
remaining 20,000 of which will vest only upon the occurrence of certain
milestones.
(9) These options were granted on December 14, 1994, with an exercise price of
$2.25. The average high and low bid price for the Common Stock on December
14, 1994, the date these options were granted, was $3.25. These options
vested with respect to 16,667 shares on February 23, 1995 and with respect
to 16,667 shares on February 23, 1996, and, provided that he does not
voluntarily terminate his employment with the Company or is not terminated
for cause prior to the applicable vesting date, will vest as to 16,667
shares on February 23, 1997, and as to the remaining 50,000 shares on
February 23, 1998.
(10) These options were originally granted with an exercise price of $2.50. The
average high and low bid price for the Common Stock on April 4, 1994, the
date for which the National Quotation Bureau can provide quotes which is
closest to the date these options were granted, was $2.625. In connection
with the October 1994 private placement, the exercise price of these
options was reduced to $2.25. On October 21, 1994, the date the October
1994 private placement closed, the average high and low bid price of the
Common Stock was $3.75. Ms. Murphy's options vested with respect to 25,000
shares upon the signing of her employment agreement, as to 41,666 shares on
March 31, 1995 and as to 41,667 shares on March 31, 1996, and, provided
that she does not voluntarily terminate her employment with the Company or
is not terminated for cause prior to the applicable vesting date, as to
41,667 shares on the third anniversary of her employment with the Company.
At the time such options were granted and the exercise price was reduced
the Common Stock was thinly traded and the Company believes the pink sheet
quotes were not necessarily a fair representation of what the market price
would have been if any significant volume of trading were to have occurred.
(11) These options were granted on December 14, 1994, with an exercise price of
$2.25. The average high and low bid price for the Common Stock on December
14, 1994, the date these options were granted, was $3.25. These options
vested with respect to 14,584 shares on March 31, 1995 and as to 14,584
shares on March 31, 1996, and, provided that Ms. Murphy or Mr. Hudson, as
the case may be, does not voluntarily terminate employment with the Company
or is not terminated for cause prior to the applicable vesting date, will
vest as to 14,584 shares on each of March 31, 1997 and May 30 of 1996, and
1997, respectively, and as to the remaining 56,250 shares on March 31 or
May 30, 1998, respectively.
(12) These options were originally granted with an exercise price of $2.50. The
average high and low bid price for the Common Stock on May 26, 1994, the
date these options were granted was $2.50. In connection with the October
1994 private placement, the exercise price of these options was reduced to
$2.25. On October 21, 1994, the date the October 1994 private placement
closed, the average high and low bid price of the Common Stock was $3.75.
Mr. Hudson's options vested with respect to 25,000 shares upon the signing
of his employment agreement, as to 41,666 shares on May 31, 1995, and,
provided that he does not voluntarily terminate his employment with the
Company or is not terminated for cause prior to the applicable vesting
date, as to 41,667 shares on each of the second and third anniversaries of
his employment with the Company. At the time such options were granted and
the exercise price was reduced the Common Stock was thinly traded and the
Company believes the pink sheet quotes were not necessarily a fair
representation of what the market price would have been if any significant
volume of trading were to have occurred.
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<PAGE> 59
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth the information with respect to the Named
Officers concerning the exercise of options during fiscal 1995 and unexercised
options held as of June 30, 1995.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT FISCAL OPTIONS AT FISCAL
ACQUIRED YEAR-END YEAR-END(1)
ON VALUE ----------------------- --------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- --------- --------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Pompliano... 0 0 1,049,932 799,967 $2,943,546 $1,781,151
Richard A. Kozak....... 0 0 744,949 554,982 2,138,597 1,073,698
George M. Tronsrue,
III.................. 0 0 120,000 230,000 195,000 373,750
Riley M. Murphy........ 0 0 81,250 168,752 132,031 274,222
Douglas R. Hudson...... 0 0 81,250 168,752 132,031 274,222
</TABLE>
- ---------------
(1) Represents the difference between the exercise price and a fair market value
of $3.875 as determined by the average of the closing bid and asked
quotations on June 29, 1995, as reported on The Nasdaq SmallCap Market. The
Company's stock did not trade on June 30, 1995.
DIRECTORS' COMPENSATION
Members of the Board do not receive cash compensation for acting as members
of the Board or Committees of the Board, other than reimbursement for reasonable
out-of-pocket expenses incurred in connection with their attendance at meetings
of the Board and its committees. The Company is obligated to pay the reasonable
fees and expenses of two counsel selected by the directors elected by the
Preferred Directors from time to time to represent them in their capacity as
directors. During fiscal 1995, the Company paid no such counsel fees. Directors
who also serve as executive officers receive cash compensation for acting in
their capacity as executive officers. See "--Summary Compensation Table."
Directors' Stock Options
From time to time the Board has granted options to purchase shares of
Common Stock to members of the Board who are not also officers of the Company in
consideration for their service as directors. However, other than "formula
grants" under the Company's 1994 Stock Option Plan, no formal arrangement
exists. For fiscal 1995, the following directors were granted the options listed
below in consideration for serving on the Board.
<TABLE>
<CAPTION>
NUMBER OF EXERCISE EXPIRATION
NAME OPTIONS PRICE DATE
------------------------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
Russell Stern(1)........................... 20,000 $0.875(2) 07/21/99
30,000 $2.25 (3) 07/21/99
</TABLE>
- ---------------
(1) Mr. Stern resigned as a director of the Company in September 1994.
(2) On July 21, 1994, the date for which the National Quotations Bureau can
provide quotes which is closest to the date these options were granted, the
average high and low bid price as reported by the National Quotations Bureau
was $2.375.
(3) These options originally had exercise prices ranging from $6.00 to $8.00. On
July 21, 1994, the exercise prices of the options were all reduced to $3.10.
On that date, the average high and low bid price of the Common Stock was
$2.375. On December 31, 1994, the exercise prices of the options were all
reduced to $2.25. On that date, the average high and low bid price of the
Common Stock was $3.50.
EMPLOYMENT AGREEMENTS
Anthony J. Pompliano The Company has entered into an employment agreement
with Anthony J. Pompliano, its Chairman, which terminates on August 23, 1998.
Under the terms of the agreement, as amended, Mr. Pompliano is entitled to an
annual base salary of $250,000 and is entitled to a cash bonus of up to $175,000
for each of the fiscal years ending June 30, 1996, 1997 and 1998 based upon the
Company's achievement of certain performance goals for the relevant fiscal year.
Mr. Pompliano earned a bonus of
59
<PAGE> 60
$100,000 upon the consummation of the offering of the 2005 Notes. Under his
prior employment agreement, Mr. Pompliano previously earned bonuses aggregating
$225,000 based upon the Company's achievement of certain performance goals
($25,000 of which was earned subsequent to June 30, 1995) and will be entitled
to an additional bonus of $25,000 in the event an additional performance goal is
achieved. Mr. Pompliano was granted options to purchase an aggregate of
1,349,899 shares of the Company's Common Stock at an exercise price of $0.875
per share (the "Initial Stock Options"), all of which are currently vested and
exercisable. Mr. Pompliano was also granted (i) options to purchase an
additional 150,000 shares at an exercise price of $2.25 per share, all of which
vested and became exercisable based upon the Company's achievement of certain
performance goals, and (ii) options to purchase an additional 350,000 shares of
Common Stock at exercise prices ranging from $2.25 per share to $2.80 per share,
which will vest and become exercisable on August 24, 2001, if Mr. Pompliano is
then employed by the Company or earlier, as to specified tranches of such
shares, based upon the Company's achievement of certain performance goals
related to each such tranche or upon a "change in control," as defined in the
agreement (collectively, the "Performance Stock Options"). Mr. Pompliano has the
right to obtain a 30-day loan from the Company for the purpose of paying the
aggregate exercise price of the options granted to him.
In the event Mr. Pompliano's employment is terminated pursuant to his
death, disability or voluntary resignation, the Initial Stock Options,
regardless of whether they have then vested, and the Performance Stock Options,
to the extent they have then vested, will become immediately exercisable by Mr.
Pompliano or his estate in accordance with their terms. In the event Mr.
Pompliano's employment is terminated pursuant to the Company's material breach
of the agreement, upon a "change in control," or by the Company without cause,
all of the Initial Stock Options and the Performance Stock Options, regardless
of whether they have then vested, will become immediately exercisable in
accordance with their terms. In the event Mr. Pompliano's employment is
terminated due to his death or disability, the Company's material breach of the
agreement, upon a change in control or by the Company without cause prior to
August 24, 1996, Mr. Pompliano (or his estate) is entitled to receive a lump sum
severance payment equal to his base salary for two years and the continuation of
his health and medical benefits for two years; or if Mr. Pompliano's employment
is so terminated subsequent to August 24, 1996, he (or his estate) shall be
entitled to receive a lump sum severance payment equal to the greater of his
base salary for one year or his base salary from the date of termination through
August 23, 1998, and continuation of his health and medical benefits for a
minimum of one year.
Mr. Pompliano shall have the right, for a period of 90 days after the
termination of his employment with the Company (unless such employment is
terminated by the Company "for cause" (as defined in the agreement) or Mr.
Pompliano voluntarily resigns), to sell to the Company and the Company is
required to purchase, the shares of Common Stock issued or issuable pursuant to
the options granted to Mr. Pompliano under his employment agreement, at a price
equal to the publicly-traded price of the Common Stock (as defined in the
agreement), less the exercise price of the options with respect to unexercised
options. The aggregate purchase price paid by the Company for such shares shall
not exceed $1 million (which amount shall be reduced by the net proceeds
received by Mr. Pompliano from his sales of shares of Common Stock in the market
or otherwise). This right may be exercised by Mr. Pompliano only if at the time
of exercise the aggregate value (based on the publicly traded price) of the
Company's outstanding shares of Common Stock and the shares of Common Stock
issuable pursuant to options, warrants and other convertible securities which
have an exercise or conversion price which is equal to or less than the then
publicly traded price of the Common Stock is greater than $200 million and at
least 5,000,000 outstanding shares of Common Stock are neither held by
"affiliates" (as defined in Rule 405 under the Securities Act) of the Company
nor "restricted securities" (as defined in Rule 144 under the Securities Act).
Mr. Pompliano's agreement contains non-compete, non-solicitation and
confidentiality provisions.
Richard A. Kozak The Company has entered into an employment agreement with
Richard A. Kozak, its President and Chief Executive Officer, which terminates on
October 31, 1998. Under the terms of the agreement, as amended, Mr. Kozak is
entitled to a minimum annual base salary of $200,000 through October 31, 1995,
and $250,000 thereafter. He is entitled to cash bonuses of up to $150,000 for
the fiscal year ending June 30, 1996, $175,000 for the fiscal year ending June
30, 1997, and $200,000 for the fiscal year ending June 30, 1998, based upon the
Company's achievement of certain performance goals for the relevant
60
<PAGE> 61
fiscal year. Mr. Kozak earned a bonus of $50,000 upon the consummation of the
offering of the 2005 Notes. Under his prior employment agreement, Mr. Kozak
previously earned bonuses aggregating $225,000 based upon the Company's
achievement of certain performance goals ($25,000 of which was earned subsequent
to June 30, 1995) and will be entitled to an additional bonus of $25,000 in the
event an additional performance goal is achieved. Mr. Kozak was granted Initial
Stock Options to purchase an aggregate of 899,932 shares of the Company's Common
Stock at an exercise price of $0.875 per share, all of which are currently
vested and exercisable. Mr. Kozak was also granted Performance Stock Options
that will allow him to: (i) purchase an additional 70,000 shares at an exercise
price of $2.25 per share, all of which vested and became exercisable based upon
the Company's achievement of certain performance goals, and (ii) purchase an
additional 329,999 shares of Common Stock at exercise prices ranging from $2.25
per share to $2.80 per share, which will vest and become exercisable on November
1, 2001, if Mr. Kozak is then employed by the Company or earlier, as to
specified tranches of such shares, based upon the Company's achievement of
certain performance goals related to each such tranche or upon a change in
control, as defined in the agreement, of which 163,333 have vested. In
particular, Mr. Kozak's Performance Stock Options vested as to 123,333 shares
upon the consummation of the offering of the 2005 Notes. Mr. Kozak has the right
to obtain a 30-day loan from the Company for the purpose of paying the aggregate
exercise price of the options granted to him.
In the event Mr. Kozak's employment is terminated pursuant to his death,
disability or voluntary resignation, the Initial Stock Options, regardless of
whether they have then vested, and the Performance Stock Options, to the extent
they have then vested, will become immediately exercisable by Mr. Kozak or his
estate in accordance with their terms. In the event Mr. Kozak's employment is
terminated pursuant to the Company's material breach of the agreement, upon a
"change in control", or by the Company without cause, all of the Initial Stock
Options and the Performance Stock Options, regardless of whether they have then
vested, will become immediately exercisable in accordance with their terms. In
the event Mr. Kozak's employment is terminated due to his death or disability,
the Company's material breach of the agreement, upon a change in control, or by
the Company without cause prior to November 1, 1996, Mr. Kozak (or his estate)
is entitled to receive a lump sum severance payment equal to his base salary for
two years and the continuation of his health and medical benefits for two years;
or if Mr. Kozak's employment is so terminated subsequent to November 1, 1996, he
(or his estate) shall be entitled to receive a lump sum severance payment equal
to the greater of his base salary for one year or his base salary from the date
of termination through October 31, 1998, and continuation of his health and
medical benefits for a minimum of one year.
Mr. Kozak shall have the right, for a period of 90 days after the
termination of his employment with the Company (unless such employment is
terminated by the Company "for cause" (as defined in the agreement) or Mr. Kozak
voluntarily resigns), to sell to the Company and the Company is required to
purchase, the shares of Common Stock issued or issuable pursuant to the options
granted to Mr. Kozak under his employment agreement, at a price equal to the
publicly-traded price of the Common Stock (as defined in the agreement), less
the exercise price of the options with respect to unexercised options. The
aggregate purchase price paid by the Company for such shares shall not exceed $1
million (which amount shall be reduced by the net proceeds received by Mr. Kozak
from his sales of shares of Common Stock in the market or otherwise). This right
may be exercised by Mr. Kozak only, if at the time of exercise, the aggregate
value (based on the publicly traded price) of the Company's outstanding shares
of Common Stock and shares of Common Stock issuable pursuant to options,
warrants and other convertible securities which have an exercise or conversion
price which is equal to or less than the then publicly traded price of the
Common Stock is greater than $200 million and at least 5,000,000 outstanding
shares of Common Stock are neither held by "affiliates" (as defined, in Rule 405
under the Securities Act) of the Company nor "restricted securities" (as defined
in Rule 144 under the Securities Act). Mr. Kozak's agreement contains
non-compete, non-solicitation and confidentiality provisions.
George M. Tronsrue III The Company has entered into an employment
agreement with George M. Tronsrue, III, its Chief Operating Officer, which
terminates on February 23, 1999. The agreement, as amended, calls for an annual
salary of $170,000, a $400 per month car allowance and a guaranteed bonus of
$244,500, $135,417 of which was received on February 24, 1995, $54,116 of which
was received on February 24, 1996, and $54,116 of which will be received by Mr.
Tronsrue on February 24, 1997. Mr. Tronsrue was granted Initial Stock Options to
purchase 150,000 shares of Common Stock at a price of $2.25 per share.
61
<PAGE> 62
These options vested as to 50,000 shares at the commencement of Mr. Tronsrue's
employment and vested as to 33,333 shares on each of February 23, 1995, and
February 23, 1996 (the first and second anniversaries, respectively, of his
employment with the Company). The options will vest as to 33,333 shares on the
third anniversary of Mr. Tronsrue's employment with the Company. Mr. Tronsrue
was granted five year options to purchase up to 100,001 shares of Common Stock
at an exercise price of $2.25 per share. These options vested with respect to
16,667 shares on each of February 23, 1995, and February 23, 1996, and will vest
as to 16,667 shares on February 23, 1997, and as to the remaining 50,000 shares
on February 23, 1998. Mr. Tronsrue was granted Performance Stock Options to
purchase 20,000 shares of Common Stock exercisable at a price of $2.25 per share
through March 31, 2000, based upon the achievement of certain performance goals.
Upon the achievement of certain performance goals, Mr. Tronsrue also is entitled
to receive five year Performance Stock Options to purchase up to 80,000 shares
of Common Stock at an exercise price of $2.25 per share, 60,000 of which options
have vested. Upon the occurrence of the respective performance criteria, the
options will vest as to 20,000 shares on June 30, 1996. On July 6, 1995,
pursuant to the agreement, Mr. Tronsrue was also granted options to purchase
50,000 shares of Common Stock at an exercise price of $3.40 per share. These
options will vest as to 25,000 shares on each of February 23, 1998, and February
23, 1999. None of the foregoing options granted to Mr. Tronsrue shall be deemed
earned if, as to any given year, Mr. Tronsrue's employment is terminated for
cause or if he voluntarily resigns. In the event Mr. Tronsrue's employment is
terminated without cause or pursuant to his death, disability or the Company's
material breach of the agreement, Mr. Tronsrue or his estate shall be entitled
to receive his earned bonus and exercise the Initial Stock Options to purchase
150,000 shares in accordance with their terms. In the event Mr. Tronsrue's
employment is terminated without cause or pursuant to his death, disability or
the Company's material breach of the agreement prior to February 24, 1997, he
will receive his then current base salary and health and medical benefits
coverage at the Company's expense for two years from the date of such
termination or if on or subsequent to February 24, 1997, he will receive his
then current base salary and health and medical benefits coverage at the
Company's expense for the longer of (i) the period from the date of termination
through February 23, 1999, or (ii) one year from the date of termination. Mr.
Tronsrue's employment agreement also contains a two year non-compete/non-solicit
provision.
Riley M. Murphy The Company has entered into an employment agreement with
Riley M. Murphy, its Executive Vice President for Legal and Regulatory Affairs,
which terminates on March 31, 1999. The agreement, as amended, calls for an
annual salary of $160,000 and a guaranteed bonus of $244,500. $81,500 of this
bonus was received by Ms. Murphy on January 31, 1995, $81,500 was received by
her on January 31, 1996, and $81,500 will be received by her on January 31,
1997. The agreement includes options to purchase 150,000 shares of Common Stock
at a price of $2.25 per share. These options vested with respect to 25,000
shares upon the signing of her employment agreement and vested as to 41,666
shares on the first anniversary of her employment with the Company and as to
41,667 shares on the second anniversary of her employment with the Company and
will vest as to 41,667 shares on the third anniversary of her employment with
the Company. The agreement also includes options to purchase 100,002 shares
which were granted on December 14, 1994, with an exercise price of $2.25. These
options vested with respect to 14,584 shares on March 31, 1995, and as to 14,584
shares on March 31, 1996, and will vest as to 14,584 shares on March 31, 1997,
and as to the remaining 56,250 shares on March 31, 1998. On July 6, 1995,
pursuant to the agreement, Ms. Murphy was also granted options to purchase
50,000 shares of Common Stock at an exercise price of $3.40 per share. These
options will vest as to 25,000 shares on each of March 31, 1998, and March 31,
1999. None of the foregoing options granted to Ms. Murphy shall be deemed earned
if, as to any given year, Ms. Murphy's employment is terminated for cause or if
she voluntarily resigns. In the event Ms. Murphy's employment is terminated
without cause or pursuant to her death, disability or the Company's material
breach of the agreement, Ms. Murphy or her estate shall be entitled to receive
her earned bonus and exercise the options to purchase 150,000 shares in
accordance with their terms. In the event Ms. Murphy's employment is terminated
without cause or pursuant to her death, disability or the Company's material
breach of the agreement prior to April 1, 1997, she will receive her then
current base salary and health and medical benefits coverage at the Company's
expense for two years from the date of such termination or if on or subsequent
to April 1, 1997, she will receive her then current base salary and health and
medical benefits coverage at the Company's expense for the longer of (i) the
period from the date of termination through March 31, 1999, or
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<PAGE> 63
(ii) one year from the date of termination. Ms. Murphy's employment agreement
also contains a two year non-compete/non-solicit provision.
Douglas R. Hudson The Company has entered into an employment agreement
with Douglas R. Hudson, its Executive Vice President for Sales and Marketing,
which terminates on May 30, 1999. The agreement, as amended, calls for an annual
salary of $135,000, a Sales Commission Plan for the fiscal year ending June 30,
1996, based on 1% of the incremental billings in excess of those for the fiscal
year ended June 30, 1995, net of disconnects and credits, paid quarterly, and a
guaranteed three year bonus, $81,250 of which was received by him on January 31,
1995, $81,250 of which was received by him on January 31, 1996, and $81,250 of
which will be received by him on January 31, 1997. The agreement includes
options to purchase 150,000 shares of Common Stock at a price of $2.25 per
share. The options vested as to 25,000 shares on May 31, 1994, and vested as to
41,666 shares on the first anniversary of his employment with the Company and
will vest as to 41,667 shares on each of the second and third anniversaries of
his employment with the Company. The agreement also includes options to purchase
100,002 shares which were granted on December 14, 1994, with an exercise price
of $2.25. These options vested with respect to 14,584 shares on May 31, 1995,
and will vest as to 14,584 shares on each of May 31, 1996, and May 31, 1997, and
as to the remaining 56,250 shares on May 31, 1998. On July 6, 1995, pursuant to
the agreement, Mr. Hudson was also granted options to purchase 50,000 shares of
Common Stock at an exercise price of $3.40 per share. These options will vest as
to 25,000 shares on each of May 31, 1998, and May 31, 1999. None of the
foregoing options granted to Mr. Hudson shall be deemed earned if, as to any
given year, Mr. Hudson's employment is terminated for cause or if he voluntarily
resigns. In the event Mr. Hudson's employment is terminated without cause or
pursuant to his death, disability or the Company's material breach of the
agreement, Mr. Hudson or his estate shall be entitled to receive his earned
bonus and exercise the options to purchase 150,000 shares in accordance with
their terms. In the event Mr. Hudson's employment is terminated without cause or
pursuant to his death, disability or the Company's material breach of the
agreement prior to May 31, 1997, he will receive his then current base salary
and health and medical benefits coverage at the Company's expense for two years
from the date of such termination or if on or subsequent to May 31, 1997, he
will receive his then current base salary and health and medical benefits
coverage at the Company's expense for the longer of (i) the period from the date
of termination through May 31, 1999, or (ii) one year from the date of
termination. Mr. Hudson's employment agreement also contains a two year
noncompete/non-solicit provision.
The shares of Common Stock underlying the stock options discussed above are
the subject of a registration rights agreement among the Company and Mr.
Pompliano, Mr. Kozak, Mr. Tronsrue, Ms. Murphy and Mr. Hudson pursuant to which
theses executive officers have been granted certain demand and piggy-back
registration rights with respect to the shares of Common Stock underlying
options granted to them under their employment agreements with the Company.
REPORTING OF SECURITIES TRANSACTIONS
Ownership of, and transactions in, the Company's stock by executive
officers and directors of the Company and owners of 10% or more of the Company's
outstanding Common Stock are required to be reported to the Securities and
Exchange Commission pursuant to Section 16(a) of the Exchange Act. Russell
Stern, William Salatich and Cathy Markey, former directors of the Company,
Anthony Pompliano, the Company's Chairman of the Board, Richard Kozak, the
Company's President and Chief Executive Officer, Christopher Rafferty and Edwin
Banks, directors of the Company, George Tronsrue, the Company's Chief Operating
Officer, and Huff, ING and First Analysis Corporation, principal stockholders of
the Company, each inadvertently did not file on a timely basis during the fiscal
year ended June 30, 1995, a report regarding the beneficial ownership of, or
transaction in, certain shares of the Company's Common Stock. Each of the
foregoing have since filed reports regarding the beneficial ownership of or
transaction in certain shares of the Company's Common Stock.
1994 STOCK OPTION PLAN
On November 15, 1994, the Board adopted and on December 16, 1994,
stockholders approved the 1994 Stock Option Plan (the "1994 Plan"). In December
1995, the Board adopted and on January 26, 1996, the
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Company's stockholders approved amendments to the 1994 Plan. The 1994 Plan will
terminate no later than November 15, 2004, ten years after adoption by the Board
of Directors and after such termination no additional options may be granted.
The 1994 Plan is administered by the Compensation Committee who will make
discretionary grants ("discretionary grants") of options to employees (including
employees who are officers and directors of the Company), Outside Directors (as
defined herein) and consultants. The 1994 Plan also provides for formula grants
("formula grants") of options to directors who are not employees of the Company
("Outside Directors"). Under the 1994 Plan, 1,700,000 shares of Common Stock
have been reserved for discretionary grants and 210,000 shares of Common Stock
have been reserved for formula grants.
Options granted pursuant to discretionary grants may be nonqualified
options or incentive options within the meaning of Section 422 of the Code (as
defined herein). The selection of participants, allotment of shares,
determination of price and other conditions of purchase of such options will be
determined by the Compensation Committee, in its sole discretion. Options
granted pursuant to discretionary grants are exercisable for a period of up to
ten years, except that incentive options granted to optionees who, at the time
the option is granted, own stock representing greater than 10% of the voting
power of all classes of stock of the Company or any parent or subsidiary, are
exercisable for a period of up to five years. The per-share exercise price of
incentive options granted pursuant to discretionary grants must be no less than
100% of the fair market value of the Common Stock on the date of grant, except
that the per share exercise price of incentive options granted to optionees who,
at the time the option is granted, own stock representing greater than 10% of
the voting power of all classes of stock of the Company or any parent or
subsidiary, must be no less than 110% of the fair market value of the Common
Stock. The per share exercise price of nonqualified stock options granted
pursuant to discretionary grants must be no less than 85% of the fair market
value of the Common Stock on the date of grant. To the extent options are
granted at less than fair market value, the Company incurs a non-cash cost for
financial reporting purposes.
Under the formula grants, each Outside Director will be granted
automatically a nonqualified option to purchase 50,000 shares (subject to
adjustment as provided in the 1994 Plan). Each such director may decline such
grant. Each option granted pursuant to a formula grant will vest and become
exercisable as to 10,000 shares on the date such option is granted (the "Grant
Date"), as to 10,000 shares on the date of the first annual meeting of
stockholders held at least eight months after the Grant Date (the "First Annual
Meeting") and as to 10,000 shares on the date of each of the next three annual
meetings of stockholders held after the First Annual Meeting, provided that the
option will only vest on the relevant annual meeting of stockholders date if the
Outside Director is re-elected to the Board at such meeting. Each such option
shall have a term of five years from the relevant vesting date. The exercise
price per share of Common Stock for options granted pursuant to a formula grant
shall be 100% of the fair market value as determined under the terms of the 1994
Plan.
Options granted under the 1994 Plan are nontransferable, other than by will
or by the laws of descent and distribution, and may be exercised during the
optionee's lifetime, only by the optionee, or in the event of the optionee's
legal incapacity to do so, by the optionee's guardian or legal representative.
An optionee will not generally recognize any taxable income upon the grant
of a nonqualified option because, under current Treasury regulations pursuant to
Section 83 of the Code, the fair market value of an option at the time it is
granted is ordinarily not considered to be readily ascertainable. However, upon
exercise of a nonqualified option, an optionee must recognize ordinary income in
an amount equal to the excess of the fair market value of the Common Stock at
the time of exercise over the exercise price. Upon the subsequent disposition of
the Common Stock, the optionee will realize a capital gain or loss, depending on
whether the selling price exceeds the fair market value of the Common Stock on
the date of exercise.
An optionee's tax basis in the shares received on exercise of a
nonqualified option will be equal to the amount of consideration paid by the
optionee on exercise, plus the amount of ordinary income recognized as a result
of the receipt of such shares, which together equals the fair market value of
the Common Stock on the date of exercise. The optionee's holding period in the
Common Stock, for capital gains and losses purposes, begins on the date of
exercise. Optionees who are required to report their holdings and transfers of
the Common Stock under Section 16(a) of the Exchange Act ("Section 16 Persons")
are subject to the trading
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restrictions of Section 16(b) of the Exchange Act and unless the election
described below is made will not recognize ordinary compensation income until
the date such trading restrictions terminate (the "Deferred Date"), rather than
the exercise date. If the election is not made, the amount of such taxable
income will equal the excess of the fair market value on the Deferred Date of
the Common Stock received over the exercise price for such Common Stock and the
holding period for long-term capital gain would not begin until the Deferred
Date.
Section 16 Persons may elect to recognize compensation income on the date
of exercise of the nonqualified option. In such event, the amount of taxable
income to be recognized would equal the excess of the fair market value of the
Common Stock on such exercise date, over the exercise price for such Common
Stock. The election to recognize income on the date of exercise of the
nonqualified option, may be made by the timely filing of an appropriate
statement with the Internal Revenue Service.
The Company will be entitled to a deduction for federal income tax purposes
at the same time and in the same amount as the optionee recognizes compensation
income, provided the Company satisfied any applicable withholding tax obligation
with respect to such income.
Under Section 422 of the Code, no taxable income is realized by the
optionee upon the grant or exercise of an incentive stock option, provided that
the optionee is continuously employed by the Company during the period beginning
on the date of grant and ending on the date three months before the date of
exercise (or, in the case of disability, one year before the date of exercise).
However, the exercise of an incentive stock option may result in alternative
minimum tax liability for the optionee. If no disposition of shares issued to an
optionee pursuant to the exercise of an incentive stock option is made by the
optionee within two years from the date of grant or within one year after the
transfer of such shares to the optionee, then upon sale of such shares, any
amount realized in excess of the exercise price will be taxed to the optionee as
long-term capital gain (and any loss sustained will be long-term capital loss)
and no deduction will be allowed to the Company for federal income tax purposes.
The grant of an incentive stock option and the optionee's exercise of the
incentive stock option will result in no federal income tax consequences to the
Company.
If the shares of Common Stock acquired upon the exercise of an incentive
stock option are disposed of prior to the expiration of the two-year and
one-year holding periods described above (a "disqualifying disposition"),
generally the optionee will realize ordinary income in the year of disposition
in an amount equal to the excess (if any) of the fair market value of the shares
on the date of exercise (or, if less, the amount realized on an arms-length sale
of such shares) over the exercise price thereof, and the Company will be
entitled to deduct such amount as compensation expenses.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 1, 1992, Russell T. Stern, Jr., Patrick J. Haynes and Willard
McNitt, the stockholders of Alabama Lightwave, Inc., North Carolina Lightwave,
Inc., Chicago Lightwave, Inc., Delaware Lightwave, Inc., and Virginia Lightwave,
Inc. (collectively referred to as the "ALI subsidiaries") entered into stock
exchange agreements with ALI. Under these agreements, the stockholders of the
ALI subsidiaries received 650 shares of ALI mandatorily redeemable, nonvoting,
cumulative Series A preferred stock (the "ALI Preferred Stock") and 103,920
shares of ALI common stock (the "ALI Common Stock"). Additionally, ALI issued
363,720 shares of ALI Common Stock to existing stockholders for $0.0042 per
share.
At the time of the exchange agreements, ALI also entered into a stock
subscription agreement under which an aggregate 500 shares of ALI Preferred
Stock and an aggregate of 181,860 shares of ALI Common Stock were issued to
Apex, The Productivity Fund II, L.P. ("Productivity") and Brian Boyer for a
total of $500,875. The ALI Preferred Stock was issued for $1,000 per share and
the ALI Common Stock was issued for $0.0048 per share.
On December 15, 1992, 100 additional shares of ALI Preferred Stock and
36,372 shares of ALI Common Stock were issued to Apex, Productivity and Brian
Boyer for a total of $100,175 under the stock subscription agreement noted above
on the same terms and at the same per share price as noted above.
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<PAGE> 66
On September 14, 1993, an acquisition agreement and related agreements,
among other things, resulted in the acquisition of ALI by Golf Links Ltd.
("GLL"), a dormant publicly-held company, with GLL as the surviving corporation,
in exchange for newly issued shares of GLL's preferred and common stock. Under
the agreements, each outstanding common share of ALI Common Stock was exchanged
for 207.84 shares of GLL common stock and each outstanding share of ALI
Preferred Stock was exchanged for one share of GLL preferred stock and the
shares of ACC and ACS which were held by certain stockholders of ALI were
assigned to GLL. Additionally, notes receivable for common stock of ACC totaling
$50,000 held by Russell T. Stern, Jr. and Patrick J. Haynes were forgiven in
conjunction with the merger. After the merger, GLL changed its name to American
Communication Services, Inc. (a Colorado Corporation).
On September 15, 1993, the Company's former subsidiary, ALI, issued
promissory notes to Apex, Productivity, Russell T. Stern, Jr. and Brian Boyer
for $68,825, $68,825, $7,083 and $1,350, respectively (the "ALI Notes"). These
ALI Notes were originally due September 15, 1994, but ALI had the option to
extend the maturity date to September 15, 1995. Interest was payable on the
notes at ten percent (10%) per annum. The noteholders had warrants to purchase,
at any time up to September 14, 1996, shares of ALI Common Stock at a price of
$181.86 per share, subject to anti-dilution adjustments. ALI elected to extend
the maturity date to September 14, 1995, and the number of ALI shares that the
noteholder could purchase pursuant to the warrant increased as provided therein.
The holders of ALI Notes converted the ALI Notes and warrants into notes and
warrants substantially similar to notes and warrants issued by the Company on or
about September 14, 1993. These notes, together with accrued interest, were
repaid on the maturity date. The converted warrants along with the additional
warrants issued upon the extension of the ALI Notes gave the four holders listed
above the right to purchase an aggregate of 36,500 shares of the Company's
Common Stock at a price of $0.875 per share. The unexpired term of the
three-year warrants carried over to the converted warrants. In connection with
the October 1994 private placement, Apex and Productivity agreed to reduce the
number of warrants held by each of them by 50% in exchange for the exercise
price of 50% of such remaining warrants being reduced to $0.44 and 50% of such
remaining warrants being reduced to $0.01. Apex and Productivity each exercised
warrants for 8,353 shares of Common Stock at $0.44 per share during November
1994 and each exercised warrants for 8,353 shares of Common Stock at $0.01 per
share during December 1994.
In November 1993, the Company executed a financial consulting and advisory
agreement with The Thurston Group, Inc. for a period of six months. The Company
believes that Russell T. Stern, Jr., who, as of December 31, 1995, owned in
excess of 5% of the Company's outstanding voting stock and was a director of the
Company at the time the consulting agreement was executed, and Patrick J.
Haynes, who at the time the consulting agreement was executed was an executive
officer of the Company and owned in excess of 5% of the Company's outstanding
voting stock, had controlling interests in The Thurston Group, Inc. In
consideration, The Thurston Group, Inc. or its transferees received warrants to
purchase 300,000 shares of ACSI Common Stock, exercisable at $0.875 per share.
The holders of these warrants had the right to resell the shares to ACSI for
$2.25 per share through October 25, 1995. Pursuant to an Assignment and
Assumption Agreement dated June 21, 1995, Apex assumed the Company's obligation
to purchase such shares for a purchase price of $2.25 per share.
On June 1, 1994, the Company entered into a Stock Exchange Agreement with
the following holders of 1,700 shares of its preferred stock, some of whom were
affiliates of the Company at such time: Apex -- 247.5 shares;
Productivity -- 247.5 shares; Brian Boyer -- 5 shares; Russell T. Stern,
Jr. -- 550 shares and The Thurston Group, Inc. -- 650 shares. George Middlemas,
who is a director of the Company, is a general partner of a partnership which is
the general partner of Apex. Productivity, until the closing of the October 1994
private placement owned in excess of 5% of the Company's outstanding voting
stock. Brian Boyer is a former officer and director of the Company. Russell T.
Stern, Jr. owned in excess of 5% of the Company's outstanding voting stock as of
December 31, 1995, and was a director of the Company at the time such exchange
was effective. The Company believes that Mr. Stern is also a principal
stockholder of The Thurston Group, Inc. See "Principal Stockholders". The
preferred stock had a face value of $1,000 per share, and represented all of the
then issued and outstanding shares of the Company's preferred stock. As of June
30, 1994, none of the preferred stock remained outstanding. The Company
exchanged each share of such preferred stock for the number of shares of Common
Stock determined by dividing the face amount of such
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shares of preferred stock by $3.10 (which equals the average of the high bid and
low ask prices for the Company's Common Stock during the five trading days
immediately preceding June 1, 1994). The preferred stockholders were granted
piggyback registration rights for the Common Stock received in the exchange, and
demand registration rights on two occasions for the two year period, June 1,
1995, to June 1, 1997, upon written request of 60% of the holders of such Common
Stock received in the exchange. The preferred stockholders also each executed a
general release in favor of the Company.
On June 9, 1994, the Company issued Secured Convertible Notes to, and
executed Security Agreements with, Apex and Productivity, and with Russell T.
Stern, Jr. The notes, which were repaid immediately following the October 1994
private placement, had principal amounts of $264,680, $264,680 and $77,281,
respectively, with an interest rate of 15% per annum. The notes were secured
pari passu by the tangible assets of the Company's subsidiaries in the first two
cities to complete construction of networks, American Communication Services of
Louisville, Inc. and American Communication Services of Little Rock, Inc. The
Company paid the principal and accrued interest on Mr. Stern's note in cash and
paid Apex and Productivity in shares of its Series A Preferred Stock. Under the
terms of the notes, because the notes held by Apex and Productivity were paid in
shares of Series A Preferred Stock valued at $90 per share, the Company was
obligated to pay an additional $77,250 each to Apex and Productivity, payable
also in shares of Series A Preferred Stock valued at $90 per share.
On June 16, 1994, the Company entered into a financial consulting agreement
with Thurston Partners, Inc. and Global Capital, Inc., both of which the Company
believes to be affiliates of Russell T. Stern, Jr. and Patrick J. Haynes. The
Company agreed to pay $153,750 for consulting services rendered through the date
of the agreement, and a monthly payment of $7,500 continuing for a period of two
years.
In June 1994, Apex, Productivity and William G. Salatich, then a director
of the Company, purchased notes with the aggregate principal amount of
$1,300,720. These notes paid interest at a rate of 15% per annum and were
originally due December 31, 1994. The principal of these Notes was converted
into 14,453 shares of Series A Preferred Stock as part of the October 1994
private placement and the holders thereof received warrants to purchase 173,428
shares of Common Stock, which warrants were exercised. The accrued interest of
$62,736 on these Notes as of October 21, 1994, was paid by the Company in cash.
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 Mr. 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; (2) options to purchase up to 50,000 shares of the Company's Common
Stock that vest on July 1, 1997, and are exercisable on or before July 1, 1999;
and (3) a fee equal to 4% of the total aggregate consideration received by the
Company or its shareholders, in any transaction that the Company completes with
a strategic partner, merger partner or buyer if SGC is the finder of such
entity; or in the case where SGC is not the finder but proves instrumental in
completing the transaction then a fee of 2% will be payable to SGC. In either
case, 50% of the fee will be payable in cash at the time of closing and 50% will
be payable in warrants to purchase securities or instruments similar to those
received by the Company or its shareholders, unless the entire purchase price is
paid in cash. In the latter case, the entire fee will be payable in cash at
closing. Any warrants will have an exercise life of five years from date of
issuance or vesting whichever is later and will be exercisable at the same price
as established by the transaction that generates the warrant fee. At the end of
each month of the term of the agreement, SGC earns a credit against the exercise
price of the options referred to in (2) above equal to 1/36th of the exercise
price. The shares issued upon exercise of the options were priced at the average
of the high bid and low asked price on the closing date of the October 1994
private placement and have piggy-back registration rights.
In August 1994, Apex loaned the Company $250,000. The terms of this loan
were 15% per annum interest on a note due December 31, 1994, the grant of a
security interest in the tangible assets of the Company's operating subsidiary
that was then constructing a CAP network, and the issuance of the Company's
warrants in the amount of $250,000 to purchase shares of Preferred Stock at $90
per share. Apex converted the principal of this loan into 2,778 shares of Series
A Preferred at $90 per share as part of the October 1994 private placement. In
addition, Apex received warrants to purchase 3,333 shares of Common
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Stock at $1.125 per share and warrants to purchase 3,333 shares of Common Stock
at $0.01 per share in connection with this conversion. All of these warrants
were exercised.
In October 1994, the Company completed the October 1994 private placement
in which it sold an aggregate of 186,664 shares of its Series A Preferred Stock
and issued warrants to purchase an aggregate of 2,674,506 shares of Common Stock
for an aggregate consideration of $16.8 million, including the conversion of
$4.3 million of outstanding debt. Each share of the Series A Preferred Stock is
convertible into 40 shares of Common Stock, subject to anti-dilution
adjustments, generally at the option of the holder. Huff acquired control of the
Company through its purchase of 138,889 shares of the Series A Preferred Stock
for an aggregate purchase price of $12.5 million and its receipt of warrants to
purchase 77,000 and 1,414,222 shares of Common Stock at prices of $1.125 and
$0.01 per share, respectively, all of which were exercised in November 1994.
Huff is an investment limited partnership and the consideration for the Series A
Preferred Stock was obtained from its general and limited partners through
capital calls for investments by the fund. Upon completion of these
transactions, Huff owned approximately 55.1% of the Company's outstanding voting
stock.
In June 1995, the Company completed the June 1995 private placement of its
currently outstanding Series B-1, Series B-2 and Series B-3 Preferred Stock in
which ING purchased an aggregate of 100,000 shares of the Company's Series B-1
Preferred Stock, warrants to purchase 428,571 shares of Common Stock at an
exercise price of $0.01 per share and a warrant to purchase 100,000 shares of
Common Stock at an exercise price of $2.50 per share. In connection with the
private placement, the Series A Preferred Stock was exchanged for an identical
number of shares of Series A-1 Preferred Stock and subsequently retired. Huff
and certain of its affiliates purchased an aggregate of 100,975 shares of Series
B-2 Preferred Stock, warrants to purchase 432,749 shares of Common Stock at an
exercise price of $0.01 per share, a warrant to purchase 100,000 shares of
Common Stock at an exercise price of $1.79 and a warrant to purchase 100,000
shares at an exercise price of $2.50 per share. Apex and certain of its
affiliates purchased an aggregate of 21,000 shares of Series B-3 Preferred Stock
and warrants to purchase an aggregate of 90,000 shares of Common Stock at an
exercise price of $0.01 per share. The price per unit in the June 1995 private
placement was $100. Pursuant to the Series B Purchase Agreement, ING purchased
50,000 shares of the Company's Series B-4 Preferred Stock and exercised a
warrant entitling ING to purchase 214,286 shares of Common Stock at an exercise
price of $0.01 per share, which purchase was consummated in November 1995. In
connection with the private placement, the Company entered into the Registration
Rights Agreement dated June 26, 1995, among the holders of the Series A-1
Preferred Stock, the holders of the Series B Preferred Stock, certain holders of
Common Stock and certain holders of options or warrants convertible into Common
Stock (the "Registration Rights Agreement") wherein the parties were granted
piggy-back registration rights with respect to any registration statements
(other than Registration Statements filed on Forms S-4 or S-8) filed by the
Company with the Commission at any time prior to the sixth anniversary of the
Registration Rights Agreement, and certain demand registration rights following
the occurrence of, among other things, a Qualifying Offering.
The Company also has entered into the Stockholder's Agreement, dated as of
June 26, 1995, with the holders of the Series A-1, Series B-1, Series B-2 and
Series B-3 Preferred Stock, Anthony J. Pompliano and Richard A. Kozak. The
Stockholders Agreement, among other things, generally restricts the transfer of
Common and Preferred Stock owned by the parties to the agreement with the
exception of stock sold: (i) in a public offering pursuant to an effective
registration statement under the Securities Act, or (ii) in the public market
pursuant to Rule 144 under the Securities Act. The agreement further provides
the stockholders with rights of first refusal in the case of sales initiated by
stockholders that are parties to the agreement and certain "tag-along" rights,
which allow the stockholders to sell a proportionate amount of their stock in
the event a stockholder proposes to sell such stock to an unrelated purchaser.
On November 8, 1995, the Company entered into the Governance Agreement with
Huff, ING, Apex and other holders of the Preferred Stock. On February 26, 1996,
the same parties entered into the Supplemental Governance Agreement. See
"Management."
On December 28, 1995, the Company entered into the GKM Settlement
Agreement, wherein the Company agreed to pay to GKM the GKM Settlement Expenses
and issue the GKM Warrant I, which will
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allow GKM to purchase 96 shares of the Company's Common Stock at an exercise
price of $0.01 per share at any time before June 28, 1996, and the GKM Warrant
II, which will allow GKM to purchase 62,473 shares of the Company's Common Stock
at an exercise price of $2.80 per share (subject to certain adjustments) at any
time after 5:00 p.m. New York City time on December 28, 1996, until 5:00 p.m.
New York City time on December 28, 2000. See "Business -- Legal Proceedings."
The GKM Warrants were earned as a result of services that GKM performed in
connection with the June 1995 private placement. The Common Stock issuable upon
the exercise of the GKM Warrants has certain registration rights. The GKM
Warrant I was exercised.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of March 31, 1996,
concerning stock ownership of all persons known by the Company to own 5% or more
of the outstanding shares of the Company's Common Stock, each director of the
Company, each executive officer of the Company named in the Summary Compensation
Table and all of the executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND
OF BENEFICIAL NATURE OF PERCENT
OWNER OR BENEFICIAL OF STOCK
IDENTITY OF GROUP(1) OWNERSHIP(2) OUTSTANDING(3)
- ---------------------------------------------------------------- ---------- --------------
<S> <C> <C>
Anthony J. Pompliano(4)......................................... 1,499,999 5.9%
Richard A. Kozak(5)............................................. 1,133,465 4.5%
George M. Tronsrue, III(6)...................................... 230,000 1.0%
Riley M. Murphy(7).............................................. 137,501 *
Douglas R. Hudson(8)............................................ 137,501 *
George M. Middlemas(9).......................................... 1,423,676 5.9%
Christopher Rafferty(10)........................................ 8,000 *
Edwin M. Banks(10).............................................. 0 *
Peter C. Bentz(10).............................................. 0 *
Olivier L. Trouveroy(11)........................................ 0 *
Benjamin P. Giess(11)........................................... 0 *
The Huff Alternative Income Fund, L.P.(12)
30 Schuyler Place, Morristown, New Jersey 07962............... 11,246,782 46.6%
ING Equity Partners, L.P. I(13)
135 East 57th Street, 9th Floor, New York, NY 10022........... 6,100,000 25.4%
First Analysis Corporation(14)
233 South Wacker Drive, Suite 9600, Chicago, IL 60606......... 2,840,183 11.9%
Russell T. Stern, Jr.(15)
660 Mews, Winnetka, IL 60093.................................. 1,355,860 5.7%
All executive officers and directors as a group (13 persons).... 4,745,142 17.4%
</TABLE>
- ------------
* Less than one percent.
(1) The address of all officers and directors listed above is in the care of
the Company.
(2) The numbers listed represent the voting power of the shares of Common Stock
and Preferred Stock, as well as the voting power of Common Stock subject to
warrants and options which were exercisable as of March 31, 1996, or which
will become exercisable within 60 days of such date, held by each
individual or entity listed. Except as discussed below, none of these
shares are subject to rights to acquire beneficial ownership, as specified
in Rule 13d-3(d)(1) under the Exchange Act, and the beneficial owner has
sole voting and investment power, subject to community property laws where
applicable.
(3) Gives effect to 186,664 shares of Series A-1 Preferred Stock outstanding as
of March 31, 1996, which are convertible into 7,466,560 shares of Common
Stock and 277,500 shares of Series B Preferred Stock outstanding as of
March 31, 1996, which are convertible into 9,910,714 shares of Common
Stock. Except with respect to the election of directors and certain
transactions set forth in the Company's Certificate of Incorporation, the
Preferred Stock and Common Stock vote together as a single class. In the
case of a vote for the election of Preferred Directors each share of
Preferred Stock has one vote. Otherwise, each share of Preferred Stock is
entitled to that number of votes equal to the number of shares of Common
Stock into which it is convertible. The percentage of voting stock
outstanding for each stockholder is calculated by dividing (i) the number
of shares of Common Stock deemed to be beneficially owned by such
stockholder as of March 31, 1996 (assuming that each share of Preferred
Stock has been converted into shares of Common Stock), by (ii) the sum of
(A) the number of shares of Common Stock outstanding as of March 31, 1996,
plus (B) the number of shares of Common Stock into which the shares of
Preferred Stock outstanding as of March 31, 1996, are convertible plus (C)
the number of shares issuable upon exercise of options or warrants held by
such
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stockholder which were exercisable as of March 31, 1996, or which will
become exercisable within 60 days after March 31, 1996.
(4) Includes 1,499,899 shares subject to options held by Mr. Pompliano which
were exercisable as of March 31, 1996, or which will become exercisable
within 60 days after March 31, 1996, and 100 shares of Common Stock owned
directly.
(5) Includes 1,133,265 shares subject to options held by Mr. Kozak which were
exercisable as of March 31, 1996, or which will become exercisable within
60 days after March 31, 1996, and 200 shares of Common Stock owned
directly.
(6) Includes 230,000 shares subject to options held by Mr. Tronsrue which were
exercisable as of March 31, 1996, or which will become exercisable within
60 days after March 31, 1996.
(7) Includes 137,501 shares subject to options held by Ms. Murphy which were
exercisable as of March 31, 1996, or which will become exercisable within
60 days after March 31, 1996.
(8) Includes 137,501 shares subject to options held by Mr. Hudson which were
exercisable as of March 31, 1996, or which will become exercisable within
60 days after March 31, 1996.
(9) Includes 30,000 shares subject to options held by Mr. Middlemas which were
exercisable as of March 31, 1996, or which will become exercisable within
60 days after March 31, 1996. Also includes 245,560 shares of Common Stock,
16,803 shares of Series A-1 Preferred Stock convertible into 672,120 shares
of Common Stock, 3,269.9 shares of Series B-3 Preferred Stock convertible
into 116,782 shares of Common Stock currently owned by Apex. Includes 2,595
shares of Series A-1 Preferred Stock convertible into 103,800 shares of
Common Stock, 4,904.85 shares of Series B-3 Preferred Stock convertible
into 175,173 shares of Common Stock and 80,241 shares of Common Stock
currently owned by Apex Investment Fund Limited Partnership ("Apex I"). Mr.
Middlemas is a general partner of Apex Management Partnership which is the
general partner of Apex and Apex I. Mr. Middlemas disclaims beneficial
ownership of the shares owned by Apex and Apex I, except to the extent of
his ownership in the general partner of Apex I and in the general partner
of Apex.
(10) Messrs. Banks and Bentz are employees of W.R. Huff Asset Management Co.,
L.L.C., an affiliate of Huff, but do not exercise sole or shared voting or
dispositive power with respect to the shares held by Huff which are
described in footnote (14) and thus, are not deemed to beneficially own
such shares. Mr. Rafferty is an employee of WRH Partners, L.L.C., the
general partner of Huff, but does not exercise sole or shared voting or
dispositive power with respect to the shares held by Huff which are
described in footnote (14) and thus, is not deemed to beneficially own such
shares. Mr. Rafferty's amounts include 200 shares of Series B-2 Preferred
Stock convertible into 7,143 shares of Common Stock and 857 shares of
Common Stock.
(11) Mr. Trouveroy is a stockholder, executive officer and director of Lexington
Partners, Inc. and Mr. Giess is an executive officer of Lexington Partners,
Inc., which is the sole general partner of Lexington Partners, L.P., the
sole general partner of ING, but do not exercise sole or shared voting or
dispositive power with respect to the shares held by ING which are
described in footnote (15) and thus, are not deemed to beneficially own
such shares.
(12) Includes 1,919,793 shares of Common Stock, 138,889 shares of Series A-1
Preferred Stock convertible into 5,555,560 shares of Common Stock, 100,000
shares of Series B-2 Preferred Stock convertible into 3,571,429 shares of
Common Stock and 200,000 shares of Common Stock subject to currently
exercisable warrants.
(13) Includes 642,857 shares of Common Stock, 100,000 shares of Series B-1
Preferred Stock convertible into 3,571,429 shares of Common Stock and
100,000 shares subject to currently exercisable warrants owned by ING and
50,000 shares of Series B-4 Preferred Stock convertible into 1,785,714
shares of Common Stock.
(14) Includes 245,560 shares of Common Stock, 16,803 shares of Series A-1
Preferred Stock convertible into 672,120 shares of Common Stock, 3,269.9
shares of Series B-3 Preferred Stock convertible into 116,782 shares of
Common Stock currently owned by Apex. Includes 2,595 shares of Series A-1
Preferred Stock convertible into 103,800 shares of Common Stock, 4,904.85
shares of Series B-3 Preferred Stock convertible into 175,173 shares of
Common Stock and 80,241 shares of Common Stock currently owned by Apex I.
Includes 272,945 shares of Common Stock, 10,249 shares of Series A-1
Preferred Stock convertible into 409,960 shares of Common Stock, 1,380.61
shares of Series B-3 Preferred Stock
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convertible into 49,308 shares of Common Stock currently owned by The
Productivity Fund II, L.P. ("Productivity"). Includes 6,056 shares of
Series A-1 Preferred Stock convertible into 242,240 shares of Common Stock,
11,444.64 shares of Series B-3 Preferred Stock convertible into 408,737
shares of Common Stock and 63,316 shares of Common Stock currently owned by
Environmental Private Equity Fund II, L.P. ("EPEF"). First Analysis
Corporation ("FAC") is an ultimate general partner of Apex, Apex I,
Productivity and EPEF and may be deemed to be the beneficial owner of the
shares owned by them. FAC disclaims beneficial ownership of these shares.
This information was obtained from a Schedule 13D filed with the Securities
and Exchange Commission on August 4, 1995, as amended in October 1995.
(15) Mr. Stern owns 1,084,012 shares of the Company's Common Stock, an option
exercisable through July 21, 1999, to purchase 30,000 additional shares at
an exercise price of $0.875 per share and a warrant to purchase 3,542
shares at an exercise price of $0.875 per share. The Thurston Group, Inc.,
of which Mr. Stern is a principal, owns 238,306 shares of the Company's
Common Stock.
DESCRIPTION OF CERTAIN INDEBTEDNESS
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. 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 El
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 December 31,
1995, outstanding borrowings under the AT&T Credit Facility totalled
approximately $12.4 million, including accrued interest of approximately
$559,000. Interest is currently payable on the loans at fixed interest rates
ranging from 11.8% to 13.6%.
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 capitalized 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). 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 factors could limit ACSI's
ability to meet its obligations with respect to the 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, the Company has contributed
approximately $7.9 million in capital to its subsidiaries through December 31,
1995, and AT&T Credit Corporation received 7.25% of the
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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
the respective 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.
NOVEMBER 1995 PRIVATE PLACEMENT
On November 14, 1995, the Company completed the November 1995 Private
Placement, for which it received net proceeds of approximately $96.8 million
(after deduction of discounts and offering expenses). Offering expenses include
substantially all of the GKM Settlement Expenses. The 2005 Notes and the
Warrants issued in the November 1995 Private Placement have certain registration
rights. The Company has completed an offer, pursuant to an effective
registration statement, to exchange the 2005 Notes issued in the November 1995
Private Placement for 2005 Notes which, with certain exceptions, are freely
transferable under the Securities Act. The Company also has filed a registration
statement with the Commission with respect to the resale of the Warrants and the
issuance of the underlying Common Stock which has been declared effective. The
2005 Notes rank pari passu in right of payment with the Notes and the indenture
for the 2005 Notes includes covenants and other terms which are substantially
similar to those contained in the Indenture.
DESCRIPTION OF THE NEW NOTES
GENERAL
The Old Notes were, and the New Notes will be, issued under an indenture,
dated as of March 26, 1996 (the "Indenture"), between the Company and Chemical
Bank, as trustee under the Indenture (the "Trustee"). For purposes of this
Description of the New Notes, the term "Company" refers to American
Communications Services, Inc. and does not include its subsidiaries except for
purposes of financial data determined on a consolidated basis.
The terms of the New Notes include those stated in the Indenture and those
made a part of the Indenture by reference to the Trust Indenture Act of 1939 as
in effect on the date of the Indenture (the "Trust Indenture Act"). The
following summaries of certain provisions of the Indenture do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all of the provisions of the Indenture. A copy of the Indenture is available
from the Company upon request. Whenever particular defined terms of the
Indenture not otherwise defined herein are referred to, such defined terms are
incorporated herein by reference. The New Notes are subject to all such terms,
and holders of the Notes are referred to the Indenture and the Trust Indenture
Act for a complete statement of such terms. Certain terms used herein are
defined below under "-- Certain Definitions."
The New Notes will rank pari passu in right of payment with all existing
and future senior unsecured indebtedness of the Company, including the 2005
Notes, and will be senior in right of payment to all existing and future
subordinated indebtedness of the Company. As of December 31, 1995, the total
outstanding subordinated indebtedness of the Company was approximately $106.2
million and the total outstanding indebtedness of the Company that would rank
pari passu with the New Notes was approximately $103.2 million. The New Notes
will not be secured by any assets and will be effectively subordinated to any
secured indebtedness of the Company to the extent of the value of the assets
securing such indebtedness. As of December 31, 1995, the Company had
approximately $12.4 million outstanding of secured indebtedness.
The operations of the Company are conducted through its subsidiaries and,
therefore, the Company is dependent upon cash flow from those entities to meet
its obligations. The Company's subsidiaries will have no direct obligation to
pay amounts due on the New Notes and will not guarantee the New Notes. As a
result, the New Notes effectively will be subordinated to all existing and
future third-party indebtedness and other liabilities of the Company's
subsidiaries (including trade payables). As of December 31, 1995, the total
liabilities of the Company's subsidiaries (after the elimination of loans and
advances by the Company to its subsidiaries) were approximately $16.0 million.
Of that amount, approximately $12.4 million in indebtedness
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was secured by first priority liens on all the assets of the borrowing
subsidiaries. See "Description of Certain Indebtedness." Any rights of the
Company and its creditors, including the holders of New Notes, to participate in
the assets of any of the Company's subsidiaries upon any liquidation or
reorganization of any such subsidiary will be subject to the prior claims of
that subsidiary's creditors (including trade creditors).
PRINCIPAL, MATURITY AND INTEREST
The New Notes will be limited in aggregate principal amount to $120 million
and will mature on April 1, 2006. The Old Notes were issued at a discount to
their aggregate principal amount, which generated net proceeds to the Company of
approximately $61.8 million. The New Notes will accrete at a rate of
approximately 12 3/4% per annum, compounded semi-annually, to an aggregate
principal amount of $120 million by April 1, 2001. Cash interest will not accrue
on the New Notes prior to April 1, 2001. Thereafter, interest on the New Notes
will accrue at the rate of 12 3/4% per annum and will be payable in cash semi-
annually on April 1 and October 1, commencing October 1, 2001. Interest on the
New Notes will accrue from the most recent date to which interest has been paid
or, if no interest has been paid, from April 1, 2001. Interest will be computed
on the basis of a 360-day year comprised of twelve 30-day months.
If the Company does not comply with certain deadlines set forth in the
Registration Agreement with respect to the Exchange Offer or the registration of
the New Notes for resale under a shelf registration statement, holders of the
New Notes will be entitled to Special Interest. See "The Exchange Offer."
Principal and interest will be payable at the office of the Paying Agent
but, at the option of the Company, interest may be paid by check mailed to the
registered holders at their registered addresses. The New Notes will be issued
without coupons and in fully registered form, in denominations of $1,000 and
integral multiples thereof. Unless otherwise designated by the Company, the
Company's office or agency in New York is the office of the Trustee maintained
for such purpose.
OPTIONAL REDEMPTION
The New Notes will not be redeemable at the option of the Company prior to
April 1, 2001. Thereafter, the New Notes will be subject to redemption at the
option of the Company, in whole or in part, upon not less than 30 nor more than
60 days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below, plus accrued and unpaid interest thereon (if any), if
redeemed during the twelve months beginning April 1 of the years indicated
below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
-------------------------------------------------------------------------- ----------
<S> <C>
2001...................................................................... 106.375%
2002...................................................................... 104.250%
2003...................................................................... 102.125%
2004 and thereafter....................................................... 100.000%
</TABLE>
MANDATORY REDEMPTION
Except as set forth under "-- Repurchase at the Option of Holders upon a
Change of Control" and "-- Asset Sales," the Company is not required to make
mandatory redemption payments or sinking fund payments with respect to the New
Notes.
REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of New Notes shall
have the right to require the Company to repurchase all or any part (equal to
$1,000 principal amount at maturity or an integral multiple thereof) of such
holder's New Notes pursuant to the offer described below (the "Change of Control
Offer") at a purchase price (the "Change of Control Purchase Price") equal to
101% of the Accreted Value thereof on any Change of Control Payment Date (as
defined below) prior to April 1, 2001, or 101% of the
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principal amount thereof plus accrued and unpaid interest, if any, to any Change
of Control Payment Date on or after April 1, 2001.
Within 30 days following any Change of Control, the Company or the Trustee
(at the expense of the Company) shall mail a notice to each holder stating: (1)
that a Change of Control Offer is being made pursuant to the covenant in the
Indenture entitled "Repurchase at the Option of Holders upon a Change of
Control" and that all New Notes timely tendered will be accepted for payment;
(2) the Change of Control Purchase Price and the purchase date (the "Change of
Control Payment Date"), which shall be no earlier than 30 days nor later than 40
days from the date such notice is mailed; (3) that any New Notes or portions
thereof not tendered or accepted for payment will continue to accrete in value
or accrue interest, as the case may be; (4) that, unless the Company defaults in
the payment of the Change of Control Purchase Price, all New Notes or portions
thereof accepted for payment pursuant to the Change of Control Offer shall cease
to accrete in value or accrue interest, as the case may be, from and after the
Change of Control Payment Date; (5) that holders electing to have any New Notes
or portions thereof purchased pursuant to a Change of Control Offer will be
required to surrender the New Notes, with the form entitled "Option of Holder to
Elect Purchase" on the reverse of the New Notes completed, to the Paying Agent
at the address specified in the notice prior to the close of business on the
third Business Day preceding the Change of Control Payment Date; (6) that
holders will be entitled to withdraw their election if the Paying Agent
receives, not later than the close of business on the second Business Day
preceding the Change of Control Payment Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the holder, the principal
amount of New Notes delivered for purchase, and a statement that such holder is
withdrawing his election to have such New Notes or portions thereof purchased;
and (7) that holders whose New Notes are being purchased only in part will be
issued New Notes equal in principal amount to the unpurchased portion of the New
Note or New Notes surrendered, which unpurchased portion must be equal to $1,000
in principal amount at maturity or an integral multiple thereof.
The Company will comply with the requirements of Section 14(e) under the
Exchange Act and any other securities laws and regulations, to the extent such
laws and regulations are applicable, in connection with the repurchase of New
Notes pursuant to a Change of Control Offer.
On the Change of Control Payment Date, the Company will (1) accept for
payment New Notes or portions thereof properly tendered pursuant to the Change
of Control Offer; (2) irrevocably deposit with the Paying Agent in immediately
available funds an amount equal to the Change of Control Purchase Price in
respect of all New Notes or portions thereof so tendered; and (3) deliver, or
cause to be delivered, to the Trustee the New Notes so accepted together with an
Officers' Certificate listing the New Notes or portions thereof tendered to the
Company and accepted for payment. The Paying Agent shall promptly mail to each
holder of New Notes so accepted payment in an amount equal to the Change of
Control Purchase Price for such New Notes, and the Trustee shall promptly
authenticate and mail to each holder a New Note equal in principal amount to any
unpurchased portion of the New Notes surrendered, if any; provided that each
such New Note shall be in a principal amount of $1,000 or any integral multiple
thereof.
The existence of the holders' right to require, subject to certain
conditions, the Company to repurchase New Notes upon a Change of Control may
deter a third-party from acquiring the Company in a transaction that constitutes
a Change of Control. If a Change of Control Offer is made, there can be no
assurance that the Company will have sufficient funds to pay the Change of
Control Purchase Price for all New Notes tendered by holders seeking to accept
the Change of Control Offer. In addition, instruments governing other
indebtedness of the Company may prohibit the Company from purchasing any New
Notes prior to their stated maturity, including pursuant to a Change of Control
Offer. See "Description of Certain Indebtedness." In the event that a Change of
Control Offer occurs at a time when the Company does not have sufficient
available funds to pay the Change of Control Purchase Price for all New Notes
tendered pursuant to such offer or a time when the Company is prohibited from
purchasing the New Notes (and the Company is unable either to obtain the consent
of the holders of the relevant indebtedness or to repay such indebtedness), an
Event of Default would occur under the Indenture. In addition, one of the events
that constitutes a Change of Control under the Indenture is a sale, conveyance,
transfer or lease of all or substantially all of the property of the Company.
The Indenture is governed by New York law, and there is no established
definition under New
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York law of "substantially all" of the assets of a corporation. Accordingly, if
the Company were to engage in a transaction in which it disposed of less than
all of its assets, a question of interpretation could arise as to whether such
disposition was of "substantially all" of its assets and whether the Company was
required to make a Change of Control Offer.
Except as described herein with respect to a Change of Control, the
Indenture does not contain any other provisions that permit holders of New Notes
to require that the Company repurchase or redeem New Notes in the event of a
takeover, recapitalization or similar restructuring.
ASSET SALES
The Company will not, and will not permit any Restricted Subsidiary to,
consummate an Asset Sale unless (i) no Event of Default shall have occurred and
be continuing or shall occur as a consequence thereof; (ii) the Company or such
Restricted Subsidiary, as the case may be, receives net consideration at the
time of such Asset Sale at least equal to the Fair Market Value (as evidenced by
a Board Resolution delivered to the Trustee) of the Property or assets sold or
otherwise disposed of; (iii) at least 75% of the consideration received by the
Company or such Restricted Subsidiary for such Property or assets consists of
Cash Proceeds or Telecommunications Assets; and (iv) the Company or such
Restricted Subsidiary, as the case may be, uses the Net Cash Proceeds from such
Asset Sale in the manner set forth in the next paragraph.
Within 270 days after any Asset Sale, the Company or such Restricted
Subsidiary, as the case may be, may at its option (i) reinvest (or enter a
binding agreement to reinvest, provided that such reinvestment is completed
within 180 days of the date of such agreement) an amount equal to the Net Cash
Proceeds (or any portion thereof) from such Asset Sale in Telecommunications
Assets and/or (ii) apply an amount equal to such Net Cash Proceeds (or remaining
Net Cash Proceeds) to the permanent reduction of Indebtedness of the Company
(other than Indebtedness to a Restricted Subsidiary) that is pari passu with the
New Notes or to the permanent reduction of Indebtedness or preferred stock of
any Restricted Subsidiary (other than Indebtedness to, or preferred stock owned
by, the Company or another Restricted Subsidiary); provided, however, that any
Net Cash Proceeds applied to the reduction of Indebtedness represented by the
2005 Notes shall be in accordance with the next paragraph. Any Net Cash Proceeds
from any Asset Sale that are not used to reinvest in Telecommunications Assets
and/or reduce pari passu Indebtedness of the Company or Indebtedness or
preferred stock of its Restricted Subsidiaries shall constitute Excess Proceeds.
If at any time the aggregate amount of Excess Proceeds (including any Net
Cash Proceeds applied to the permanent reduction of Indebtedness represented by
the 2005 Notes) calculated as of such date exceeds $10 million, the Company
shall, within 30 days of the date the amount of Excess Proceeds exceeds $10
million, use such Excess Proceeds to make an offer to purchase (an "Asset Sale
Offer") on a pro rata basis, from all holders, outstanding New Notes, Old Notes
and 2005 Notes in an aggregate principal amount equal to the maximum principal
amount that may be purchased out of Excess Proceeds, at a purchase price (the
"Offer Purchase Price") in cash equal to 100% of the Accreted Value (as defined
in the relevant indenture) thereof, plus accrued and unpaid interest, if any, to
the purchase date, in accordance with the procedures set forth in the relevant
indenture. Upon completion of an Asset Sale Offer (including payment of the
Offer Purchase Price), any surplus Excess Proceeds that were the subject of such
offer shall cease to be Excess Proceeds, and the Company may then use such
amounts for general corporate purposes.
The Company will comply with the requirements of Section 14(e) under the
Exchange Act and any other securities laws and regulations, to the extent such
laws and regulations are applicable, in connection with the repurchase of New
Notes pursuant to an Asset Sale Offer.
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CERTAIN COVENANTS
Set forth below are certain covenants contained in the Indenture:
Limitation on Indebtedness
The Company will not, and will not permit its Restricted Subsidiaries to,
directly or indirectly, incur any Indebtedness (including Acquired Indebtedness)
and the Company will not issue any Disqualified Stock or permit any of its
Restricted Subsidiaries to issue any Disqualified Stock or preferred stock;
provided that the Company may incur Indebtedness or issue Disqualified Stock if,
after giving effect to such issuance or incurrence on a pro forma basis, the
Debt to EBITDA Ratio of the Company does not exceed 5.5x in the case of any
issuance or incurrence on or before November 1, 1998, or 5.0x in the case of any
issuance or incurrence thereafter.
The foregoing limitation will not apply to: (a) the incurrence by the
Company or any of its Restricted Subsidiaries of Indebtedness under the Secured
Credit Facility; provided that the aggregate principal amount of Indebtedness
under such facility does not exceed $35 million at any one time outstanding; (b)
the Existing Indebtedness; (c) the incurrence by the Company or any of its
Restricted Subsidiaries of intercompany Indebtedness between or among the
Company and any of its Restricted Subsidiaries; (d) the incurrence by the
Company or any of its Restricted Subsidiaries of Interest Hedging Obligations
with respect to any floating rate Indebtedness that is permitted by the covenant
described in this paragraph; (e) the incurrence by the Company of any Exchange
Rate Obligations, provided that such Exchange Rate Obligations were entered into
in connection with transactions in the ordinary course of business or the
incurrence of Indebtedness that is permitted by the covenant described in this
paragraph; (f) the incurrence by the Company of Indebtedness represented by the
Notes; (g) Indebtedness of the Company in connection with one or more standby
letters of credit issued in the ordinary cause of business; (h) Indebtedness in
respect of performance, surety or appeal bonds provided by the Company in the
ordinary course of business; (i) Indebtedness of the Company not to exceed, at
any one time outstanding, the amount of the Net Cash Proceeds in excess of $40
million received by the Company from the issuance and sale of its Qualified
Stock (other than preferred stock) subsequent to the Issue Date; provided such
Indebtedness shall have a stated maturity no earlier than that of the Notes and
is subordinated in right of payment to the Notes; (j) the incurrence by the
Company or any of its Restricted Subsidiaries of Refinancing Indebtedness issued
in exchange for, or the proceeds of which are used to refinance, repurchase,
replace, refund or defease ("Refinance" and correlatively, "Refinanced" and
"Refinancing") Indebtedness permitted pursuant to clause (b) or (f) of this
paragraph; provided that (i) the amount of such Refinancing Indebtedness shall
not exceed the principal amount of, premium, if any, and accrued interest on the
Indebtedness so Refinanced (or if such Indebtedness was issued with original
issue discount, the original issue price plus amortization of the original issue
discount at the time of the repayment of such Indebtedness) plus the fees,
expenses and costs of such Refinancing and reasonable prepayment premiums, if
any, in connection therewith; (ii) such Refinancing Indebtedness shall have a
stated maturity no earlier than the Indebtedness being Refinanced; (iii) such
Refinancing Indebtedness shall have an Average Life equal to or greater than the
Average Life of the Indebtedness being Refinanced; (iv) if the Indebtedness
being Refinanced is subordinated in right of payment to the New Notes, such
Refinancing Indebtedness shall be subordinated in right of payment to the New
Notes on terms at least as favorable to the holders of New Notes as those
contained in the documentation governing the Indebtedness being so Refinanced;
and (v) no Restricted Subsidiary shall incur Refinancing Indebtedness to
Refinance Indebtedness of the Company or another Subsidiary; (k) the incurrence
by the Company of Permitted Subordinated Financing; and (l) Indebtedness not
otherwise permitted to be incurred pursuant to the covenant described in this
paragraph in an aggregate amount not to exceed $428,634.
Limitation on Issuances of Guarantees by Restricted Subsidiaries
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to the Indenture providing for a Guarantee
(a "Subsidiary Guarantee") of payment of the Notes by such Restricted Subsidiary
and (ii) such Restricted
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Subsidiary waives and will not in any manner whatsoever claim or take the
benefit or advantage of, any rights of reimbursement, indemnity or subrogation
or any other rights against the Company or any other Restricted Subsidiary as a
result of any payment by such Restricted Subsidiary under its Subsidiary
Guarantee. If the Guaranteed Indebtedness is (i) pari passu with the Notes then
the Guarantee of such Guaranteed Indebtedness shall be pari passu with, or
subordinated to, the Subsidiary Guarantee or (ii) subordinated to the Notes,
then the Guarantee of such Guaranteed Indebtedness shall be subordinated to the
Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated to the Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary shall provide by its terms that it shall be automatically and
unconditionally released and discharged upon the release or discharge of the
Guarantee which resulted in the creation of such Subsidiary Guarantee, except a
discharge or release by, or as a result of, payment under such Guarantee.
Limitation on Liens
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into, create, incur, assume or
suffer to exist any Liens of any kind, other than Permitted Liens, on or with
respect to any of its Property or assets now owned or hereafter acquired, or any
interest therein or any income or profits therefrom, without effectively
providing that the Notes shall be secured equally and ratably with (and provided
the Notes shall be secured prior to any secured obligation that is subordinated
in right of payment to the Notes) the obligations so secured for so long as such
obligations are so secured.
Limitation on Sale and Leaseback Transactions
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into, assume, Guarantee or
otherwise become liable with respect to any Sale and Leaseback Transaction,
unless (i) the Company or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Sale and Leaseback Transaction at
least equal to the Fair Market Value (as evidenced by a Board Resolution
delivered to the Trustee) of the Property or assets subject to such transaction;
(ii) the Attributable Indebtedness of the Company or such Restricted Subsidiary
with respect thereto is included as Indebtedness and would be permitted by the
covenant described under "-- Limitation on Indebtedness"; (iii) the Company or
such Restricted Subsidiary would be permitted to create a Lien on such Property
or assets without securing the Notes by the covenant described under
"-- Limitation on Liens"; and (iv) the Net Cash Proceeds from such transaction
are applied in accordance with the covenant described under "-- Asset Sales."
Restricted Payments
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, make any Restricted Payment unless, at
the time of and after giving effect to such proposed Restricted Payment (i) no
Default or Event of Default shall have occurred and be continuing or shall occur
as a consequence thereof; (ii) after giving effect, on a pro forma basis, to
such Restricted Payment and the incurrence of any Indebtedness the net proceeds
of which are used to finance such Restricted Payment, the Company could incur at
least $1.00 of additional Indebtedness pursuant to the first paragraph of
"-- Limitation on Indebtedness"; and (iii) after giving effect to such
Restricted Payment on a pro forma basis, the aggregate amount expended or
declared for all Restricted Payments after the Issue Date does not exceed the
sum of (A) 50% of the Consolidated Net Income of the Company (or, if
Consolidated Net Income shall be a deficit, minus 100% of such deficit) for the
period (taken as one accounting period) beginning on the last day of the fiscal
quarter immediately preceding the Issue Date and ending on the last day of the
fiscal quarter immediately preceding the date of such Restricted Payment, plus
(B) 100% of the aggregate Net Cash Proceeds received by the Company subsequent
to the Issue Date from the issuance or sale (other than to a Restricted
Subsidiary) of shares of its Qualified Stock, including Qualified Stock issued
upon the exercise of options, warrants or rights to purchase Qualified Stock,
plus (C) 100% of the amount of any Indebtedness of the Company or any of its
Restricted Subsidiaries (as expressed on the face of a balance sheet in
accordance with GAAP), or the carrying value of any Disqualified Stock, which
has been converted into, exchanged for or
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satisfied by the issuance of shares of Qualified Stock of the Company subsequent
to the Issue Date, less the amount of any cash, or the value of any other
Property distributed by the Company or its Restricted Subsidiaries upon such
conversion, exchange or satisfaction, plus (D) 100% of the net reduction in
Investments, subsequent to the Issue Date, in any Person, resulting from
payments of interest on Indebtedness, dividends, repayments of loans or
advances, or other transfers of Property (but only to the extent such interest,
dividends, repayments or other transfers of Property are not included in the
calculation of Consolidated Net Income), in each case to the Company or any
Restricted Subsidiary from any Person (including without limitation, from
Unrestricted Subsidiaries) or from redesignations of Unrestricted Subsidiaries
as Restricted Subsidiaries (valued in each case as provided in the definition of
"Investments"), not to exceed in the case of any Person the amount of
Investments previously made by the Company or any Restricted Subsidiary in such
Person and which was treated as a Restricted Payment, minus (E) 100% of the
amount of Investments made pursuant to clauses (vii) and (viii) of the following
paragraph subsequent to the Issue Date.
The foregoing limitations shall not prevent the Company from (i) paying a
dividend on its Capital Stock at any time within 60 days after the declaration
thereof if, on the declaration date, the Company could have paid such dividend
in compliance with the Indenture; (ii) retiring (A) any Capital Stock of the
Company or any Restricted Subsidiary of the Company or (B) Indebtedness of the
Company that is subordinate to the Notes or (C) Indebtedness of a Restricted
Subsidiary of the Company, in exchange for, or out of the proceeds of the
substantially concurrent sale of Qualified Stock of the Company; (iii) retiring
any Indebtedness of the Company subordinated in right of payment to the Notes in
exchange for, or out of the proceeds of, the substantially concurrent incurrence
of Indebtedness of the Company (other than Indebtedness to a Subsidiary of the
Company), provided that such new Indebtedness (A) is subordinated in right of
payment to the Notes at least to the same extent as, (B) has an Average Life at
least as long as, and (C) has no scheduled principal payments due in any amount
earlier than, any equivalent amount of principal under the Indebtedness so
retired; (iv) retiring any Indebtedness of a Restricted Subsidiary of the
Company in exchange for, or out of the proceeds of, the substantially concurrent
incurrence of Indebtedness of the Company or any Restricted Subsidiary that is
permitted under the covenant described under "-- Limitation on Indebtedness" and
that (A) is not secured by any assets of the Company or any Restricted
Subsidiary to a greater extent than the retired Indebtedness was so secured, (B)
has an Average Life at least as long as the retired Indebtedness and (C) is
subordinated in right of payment to the Notes at least to the same extent as the
retired Indebtedness; (v) retiring any Capital Stock of the Company or any
Restricted Subsidiary of the Company held by any member of the Company's (or any
of its Subsidiaries') management pursuant to any management equity subscription
agreement or stock option plan in effect on the Issue Date or upon the death or
termination of such member, provided that the aggregate price paid for all such
retired Capital Stock shall not exceed, in the aggregate, the sum of $2.0
million plus the aggregate cash proceeds received by the Company from any
reissuance of Capital Stock by the Company to members of management of the
Company and its Subsidiaries; (vi) making loans to members of management of the
Company as required pursuant to employment agreements with such members,
provided that the aggregate amount of all such loans shall not exceed $2.2
million; (vii) making Investments in Joint Ventures to construct or operate
Telecommunications Networks in an aggregate amount not to exceed $5 million;
(viii) making Investments in Qualified Joint Ventures to construct or operate
Telecommunications Networks (in addition to any Investments made pursuant to
clause (vii) of this paragraph) in an aggregate amount not to exceed $5 million
plus the greater of (A) the Lit Cities Amount and (B) the New Financing Amount;
and (ix) permitting a Restricted Subsidiary to pay a dividend with respect to
any shares of Capital Stock of such Subsidiary held by a Lender, which shares of
Capital Stock were acquired by such Lender in connection with the Secured Credit
Facility.
Not later than the date of making any Restricted Payment (including any
Restricted Payment permitted to be made pursuant to the previous paragraph), the
Company shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
required calculations were computed, which calculations may be based upon the
Company's latest available financial statements.
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Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, cause or suffer to exist or become effective, or enter
into, any encumbrance or restriction (other than pursuant to law or regulation)
on the ability of any Restricted Subsidiary (i) to pay dividends or make any
other distributions in respect of its Capital Stock or pay any Indebtedness or
other obligation owed to the Company or any Restricted Subsidiary of the
Company; (ii) to make loans or advances to the Company or any Restricted
Subsidiary of the Company; or (iii) to transfer any of its Property or assets to
the Company or any other Restricted Subsidiary of the Company, except: (a) any
encumbrance or restriction existing as of the Issue Date pursuant to an
agreement relating to the Secured Credit Facility or the Existing Indebtedness;
(b) any encumbrance or restriction pursuant to an agreement relating to an
acquisition of assets or Property, so long as the encumbrances or restrictions
in any such agreement relate solely to the assets or Property so acquired; (c)
any encumbrance or restriction relating to any Indebtedness of any Restricted
Subsidiary existing on the date on which such Restricted Subsidiary is acquired
by the Company or any Restricted Subsidiary (other than Indebtedness issued by
such Restricted Subsidiary in connection with or in anticipation of its
acquisition), provided that the EBITDA of such Restricted Subsidiary is not
taken into account in determining whether such acquisition is permitted by the
terms of the Indenture; (d) any encumbrance or restriction pursuant to an
agreement effecting a permitted Refinancing of Indebtedness issued pursuant to
an agreement referred to in the foregoing clauses (a) through (c), so long as
the encumbrances and restrictions contained in any such Refinancing agreement
are not materially more restrictive than the encumbrances and restrictions
contained in such agreements; (e) customary provisions restricting subletting or
assignment of any lease of the Company or any Restricted Subsidiary or customary
provisions in certain agreements that restrict the assignment of such agreement
or any rights thereunder; (f) any temporary encumbrance or restriction with
respect to a Restricted Subsidiary pursuant to an agreement that has been
entered into for the sale or disposition of all or substantially all of the
Capital Stock of, or Property and assets of, such Restricted Subsidiary; and (g)
any restriction on the sale or other disposition of assets or Property securing
Indebtedness as a result of a Permitted Lien on such assets or Property
permitted by the covenant described under "-- Limitation on Liens."
Limitation on Issuance and Sale of Capital Stock of Restricted Subsidiaries
The Company (i) shall not permit any Restricted Subsidiary to issue any
Capital Stock other than to the Company or a Restricted Subsidiary and (ii)
shall not permit any Person other than the Company or a Restricted Subsidiary to
own any Capital Stock of any Restricted Subsidiary (other than directors'
qualifying shares), except for (a) a sale of 100% of the Capital Stock of a
Restricted Subsidiary sold in a transaction not prohibited by the covenant
described under "-- Asset Sales"; (b) Capital Stock of a Restricted Subsidiary
issued and outstanding on the Issue Date and held by Persons other than the
Company or any Restricted Subsidiary; (c) Capital Stock of a Restricted
Subsidiary issued and outstanding prior to the time that such Person becomes a
Restricted Subsidiary so long as such Capital Stock was not issued in
contemplation of such Person's becoming a Restricted Subsidiary or otherwise
being acquired by the Company; (d) any Disqualified Stock permitted to be issued
under "Limitation on Indebtedness"; (e) Capital Stock of a Subsidiary issued to
a lender or lenders under the Secured Credit Facility in an aggregate amount not
to exceed 7.25% of the outstanding Capital Stock of such Subsidiary; and (f)
Capital Stock of a Restricted Subsidiary that operates a Telecommunications
Network issued to a Strategic Investor, provided that (A) after giving effect to
such issuance, less than 50% of the outstanding Capital Stock of such Restricted
Subsidiary will have been issued to Strategic Investors pursuant to this clause
(f), (B) the Company or such Restricted Subsidiary, as the case may be, receives
net consideration at the time of such issuance at least equal to the Fair Market
Value (as evidenced by a Board Resolution delivered to the Trustee) of the
Capital Stock issued, (C) any consideration received by the Company or such
Restricted Subsidiary in respect of such issuance consist of Cash Proceeds
and/or Telecommunications Assets, (D) the Company or such Restricted Subsidiary,
as the case may be, within 270 days of such issuance, uses the Net Cash Proceeds
from such issuance to (1) reinvest (or enters a binding agreement to reinvest,
provided that such reinvestment is completed within 180 days of the date of such
agreement) an amount equal to the Net Cash Proceeds (or any portion thereof)
from such issuance in Telecommunications Assets and/or (2) apply an amount equal
to such Net Cash Proceeds (or remaining Net
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Cash Proceeds) from such issuance to repurchase or redeem Notes or to
permanently reduce Indebtedness of the Company (other than Indebtedness to a
Restricted Subsidiary) that is pari passu with the Notes or to permanently
reduce Indebtedness or preferred stock of any Restricted Subsidiary (other than
Indebtedness to, or preferred stock owned by, the Company or another Restricted
Subsidiary) and (E) after giving effect to such issuance, the total amount of
consideration that will have been received as a result of all issuances made
pursuant to this clause (f) is less than the greater of (x) $5 million and (y)
5% of the Consolidated Tangible Assets of the Company determined as of the date
of such issuance.
Transactions with Affiliates
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, sell, lease, transfer, or otherwise
dispose of, any of its Properties or assets to, or purchase any Property or
assets from, or enter into any contract, agreement, understanding, loan, advance
or Guarantee with or for the benefit of, any Affiliate (each of the foregoing,
an "Affiliate Transaction"), unless (a) such Affiliate Transaction is on terms
that are no less favorable to the Company or such Restricted Subsidiary than
those that would have been obtained in a comparable arm's-length transaction by
the Company or such Restricted Subsidiary with a Person that is not an Affiliate
and (b) the Company delivers to the Trustee (i) with respect to any Affiliate
Transaction involving aggregate payments in excess of $1.0 million, a Board
Resolution certifying that such Affiliate Transaction complies with clause (a)
above and that such Affiliate Transaction has been approved by a majority of the
Independent Directors, who have determined that such Affiliate Transaction is in
the best interests of the Company or such Restricted Subsidiary and (ii) with
respect to any Affiliate Transaction (other than Permitted Subordinated
Financing) involving aggregate payments in excess of $5.0 million, an opinion as
to the fairness from a financial point of view to the Company or such Restricted
Subsidiary issued by an investment banking firm of national standing together
with an Officers' Certificate to the effect that such opinion complies with this
clause (ii); provided that the following shall not be deemed Affiliate
Transactions: (i) any employment agreement entered into by the Company or any of
its Restricted Subsidiaries in the ordinary course of business and consistent
with industry practice; (ii) any agreement or arrangement with respect to the
compensation of a director of the Company or any Restricted Subsidiary approved
by the Board of Directors and consistent with industry practice; (iii)
transactions between or among the Company and its Restricted Subsidiaries; (iv)
transactions permitted by the covenant described under "-- Restricted Payments";
(v) transactions pursuant to contracts existing on the Issue Date and listed in
a schedule to the Indenture; and (vi) loans and advances to employees and
officers of the Company or a Restricted Subsidiary in the ordinary course of
business and consistent with the past practice of the Company or such Restricted
Subsidiary, provided that the aggregate principal amount of all such loans and
advances shall not exceed $3.0 million at any one time outstanding, and
provided, further, that in the event the aggregate principal amount of all such
loans or advances exceeds $1.0 million at any one time outstanding, the Company
shall, within 180 days of the date such amount first exceeds $1.0 million,
reduce such amount to an amount less than $1.0 million.
Restricted and Unrestricted Subsidiaries
(a) The Company may designate a Subsidiary (including a newly formed or
newly acquired Subsidiary) of the Company or any of its Restricted Subsidiaries
as an Unrestricted Subsidiary if such Subsidiary does not have any obligations
which, if in Default, would result in a cross default on Indebtedness of the
Company or a Restricted Subsidiary (other than Indebtedness to the Company or a
Restricted Subsidiary), and (i) such Subsidiary has total assets of $1,000 or
less or (ii) such designation is effective immediately upon such Person becoming
a Subsidiary. Unless so designated as an Unrestricted Subsidiary, any Person
that becomes a Subsidiary of the Company or any of its Restricted Subsidiaries
shall be classified as a Restricted Subsidiary thereof. Except as provided in
clause (a)(i), no Restricted Subsidiary may be redesignated as an Unrestricted
Subsidiary.
(b) The Company will not, and will not permit any of its Restricted
Subsidiaries to, take any action or enter into any transaction or series of
transactions that would result in a Person (other than a newly formed Subsidiary
having no outstanding Indebtedness (other than Indebtedness to the Company or a
Restricted
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Subsidiary) at the date of determination) becoming a Restricted Subsidiary
(whether through an acquisition, the redesignation of an Unrestricted Subsidiary
or otherwise) unless, after giving effect to such action, transaction or series
of transactions, on a pro forma basis, (i) the Company could incur at least
$1.00 of additional Indebtedness pursuant to the first paragraph of
"-- Limitation on Indebtedness" and (ii) no Default or Event of Default would
occur.
(c) Subject to clause (b), an Unrestricted Subsidiary may be redesignated
as a Restricted Subsidiary. The designation of a Subsidiary as an Unrestricted
Subsidiary or the designation of an Unrestricted Subsidiary as a Restricted
Subsidiary in compliance with clause (b) shall be made by the Board of Directors
pursuant to a Board Resolution delivered to the Trustee and shall be effective
as of the date specified in such Board Resolution, which shall not be prior to
the date such Board Resolution is delivered to the Trustee.
Reports
Whether or not the Company is subject to Section 13(a) or 15(d) of the
Exchange Act, or any successor provision thereto, the Company shall file with
the Commission the annual reports, quarterly reports and other documents which
the Company would have been required to file with the Commission pursuant to
such Section 13(a) or 15(d) or any successor provision thereto if the Company
were subject thereto, such documents to be filed with the Commission on or prior
to the respective dates (the "Required Filing Dates") by which the Company would
have been required to file them. The Company shall also (whether or not it is
required to file reports with the Commission), within 30 days of each Required
Filing Date, (i) transmit by mail to all holders of Notes, as their names and
addresses appear in the Security Register and to any Persons that request such
reports in writing, without cost to such holders or Persons, and (ii) file with
the Trustee, copies of the annual reports, quarterly reports and other documents
(without exhibits) which the Company has filed or would have filed with the
Commission pursuant to Section 13(a) or 15(d) of the Exchange Act, any successor
provisions thereto or this covenant. The Company shall not be required to file
any report with the Commission if the Commission does not permit such filing.
CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER
The Company will not, in any transaction or series of transactions,
consolidate with, or merge with or into, any other Person (other than a merger
of a Restricted Subsidiary into the Company in which the Company is the
continuing corporation), or sell, convey, assign, transfer, lease or otherwise
dispose of all or substantially all of the Property and assets of the Company
and the Restricted Subsidiaries taken as a whole to any other Person, unless:
(i) either (a) the Company shall be the continuing corporation or (b)
the corporation (if other than the Company) formed by such consolidation or
into which the Company is merged, or the Person which acquires, by sale,
assignment, conveyance, transfer, lease or disposition, all or
substantially all of the Property and assets of the Company and the
Restricted Subsidiaries taken as a whole (such corporation or Person, the
"Surviving Entity"), shall be a corporation organized and validly existing
under the laws of the United States of America, any political subdivision
thereof, any state thereof or the District of Columbia, and shall expressly
assume, by a supplemental indenture, the due and punctual payment of the
principal of (and premium, if any) and interest on all the Notes and the
performance of the Company's covenants and obligations under the Indenture;
(ii) immediately after giving effect to such transaction or series of
transactions on a pro forma basis (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or
in respect of such transaction or series of transactions), no Event of
Default or Default shall have occurred and be continuing or would result
therefrom; and
(iii) immediately after giving effect to such transaction or series of
transactions on a pro forma basis (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or
in respect of such transaction or series of transactions), the Company (or
the Surviving Entity, if the Company is not continuing) would (A) be
permitted to incur $1.00 of additional Indebtedness pursuant
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to the first paragraph of " -- Limitation on Indebtedness" or (B) have a
Total Market Capitalization of at least $1.0 billion and total Indebtedness
in an amount less than 40% of its Total Market Capitalization.
EVENTS OF DEFAULT
Each of the following is an "Event of Default" under the Indenture:
(a) default in the payment of interest on any Note when the same
becomes due and payable, and the continuance of such default for a period
of 30 days;
(b) default in the payment of the principal of (or premium, if any,
on) any Note at its maturity, upon optional redemption, required repurchase
(including pursuant to a Change of Control Offer or an Asset Sale Offer) or
otherwise or the failure to make an offer to purchase any Note as required;
(c) the Company fails to comply with any of its covenants or
agreements contained in "-- Limitation on Indebtedness" " -- Limitation on
Sale and Leaseback Transactions" or "-- Restricted Payments," or fails to
perform or comply with the provisions described under "-- Repurchase at the
Option of the Holders upon a Change of Control," "-- Asset Sales" or
"-- Consolidation, Merger, Conveyance, Lease or Transfer;"
(d) default in the performance, or breach, of any covenant or warranty
of the Company in the Indenture (other than a covenant or warranty
addressed in (a), (b) or (c) above) and continuance of such Default or
breach for a period of 30 days after written notice thereof has been given
to the Company by the Trustee or to the Company and the Trustee by holders
of at least 25% of the aggregate principal amount of the outstanding Notes;
(e) Indebtedness of the Company or any Restricted Subsidiary is not
paid when due within the applicable grace period, if any, or is accelerated
by the holders thereof and, in either case, the principal amount of such
unpaid or accelerated Indebtedness exceeds $10 million;
(f) the entry by a court of competent jurisdiction of one or more
final judgments against the Company or any Restricted Subsidiary in an
uninsured or unindemnified aggregate amount in excess of $10 million which
is not discharged, waived, appealed, stayed, bonded or satisfied for a
period of 60 consecutive days;
(g) the entry by a court having jurisdiction in the premises of (i) a
decree or order for relief in respect of the Company or any Significant
Restricted Subsidiary in an involuntary case or proceeding under U.S.
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal, state, or foreign bankruptcy, insolvency, or other similar law or
(ii) a decree or order adjudging the Company or any Significant Restricted
Subsidiary a bankrupt or insolvent, or approving as properly filed a
petition seeking reorganization, arrangement, adjustment or composition of
or in respect of the Company or any Significant Restricted Subsidiary under
U.S. bankruptcy laws, as now or hereafter constituted, or any other
applicable Federal, state or foreign bankruptcy, insolvency, or similar
law, or appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or any Significant
Restricted Subsidiary or of any substantial part of the Property or assets
of the Company or any Significant Restricted Subsidiary, or ordering the
winding up or liquidation of the affairs of the Company or any Significant
Restricted Subsidiary, and the continuance of any such decree or order for
relief or any such other decree or order unstayed and in effect for a
period of 60 consecutive days; or
(h) (i) the commencement by the Company or any Significant Restricted
Subsidiary of a voluntary case or proceeding under U.S. bankruptcy laws, as
now or hereafter constituted, or any other applicable Federal, state or
foreign bankruptcy, insolvency or other similar law or of any other case or
proceeding to be adjudicated a bankrupt or insolvent; or (ii) the consent
by the Company or any Significant Restricted Subsidiary to the entry of a
decree or order for relief in respect of the Company or any Significant
Restricted Subsidiary in an involuntary case or proceeding under U.S.
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal, state, or foreign bankruptcy, insolvency or other
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similar law or to the commencement of any bankruptcy or insolvency case or
proceeding against the Company or any Significant Restricted Subsidiary; or
(iii) the filing by the Company or any Significant Restricted Subsidiary of
a petition or answer or consent seeking reorganization or relief under U.S.
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal, state or foreign bankruptcy, insolvency or other similar law; or
(iv) the consent by the Company or any Significant Restricted Subsidiary to
the filing of such petition or to the appointment of or taking possession
by a custodian, receiver, liquidator, assignee, trustee, sequestrator or
similar official of the Company or any Significant Restricted Subsidiary or
of any substantial part of the Property or assets of the Company or any
Significant Restricted Subsidiary, or the making by the Company or any
Significant Restricted Subsidiary of an assignment for the benefit of
creditors; or (v) the admission by the Company or any Significant
Restricted Subsidiary in writing of its inability to pay its debts
generally as they become due; or (vi) the taking of corporate action by the
Company or any Significant Restricted Subsidiary in furtherance of any such
action.
If any Event of Default (other than an Event of Default specified in clause
(g) or (h) above) occurs and is continuing, then and in every such case the
Trustee or the holders of not less than 25% of the outstanding aggregate
principal amount of Notes may declare the Default Amount and any accrued and
unpaid interest on all Notes then outstanding to be immediately due and payable
by a notice in writing to the Company (and to the Trustee if given by holders of
the Notes), and upon any such declaration, such Default Amount and any accrued
interest will become and be immediately due and payable. If any Event of Default
specified in clause (g) or (h) above occurs, the Default Amount and any accrued
and unpaid interest on the Notes then outstanding shall become immediately due
and payable without any declaration or other act on the part of the Trustee or
any holder of Notes. In the event of a declaration of acceleration because an
Event of Default set forth in clause (e) above has occurred and is continuing,
such declaration of acceleration shall be automatically rescinded and annulled
if the event of default triggering such Event of Default pursuant to clause (e)
shall be remedied, or cured or waived by the holders of the relevant
Indebtedness, within 60 days after such event of default. Until April 1, 2001,
the Default Amount shall equal the Accreted Value of the Notes as of such date.
On or after April 1, 2001, the Default Amount shall equal 100% of the principal
amount thereof. Under certain circumstances, the holders of a majority in
principal amount of the outstanding Notes by notice to the Company and the
Trustee may rescind an acceleration and its consequences.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required within 30
days after becoming aware of any Default or Event of Default, to deliver to the
Trustee a statement describing such Default or Event of Default, its status and
what action the Company is taking or proposes to take with respect thereto.
AMENDMENT, SUPPLEMENT AND WAIVER
The Company and the Trustee may, at any time and from time to time, without
notice to or consent of any holder of Notes, enter into one or more indentures
supplemental to the Indenture (1) to evidence the succession of another Person
to the Company and the assumption by such successor of the covenants of the
Company in the Indenture and the Notes; (2) to add to the covenants of the
Company, for the benefit of the holders, or to surrender any right or power
conferred upon the Company by the Indenture; (3) to add any additional Events of
Default; (4) to provide for uncertificated Notes in addition to or in place of
certificated Notes; (5) to evidence and provide for the acceptance of
appointment under the Indenture of a successor Trustee; (6) to secure the Notes;
(7) to cure any ambiguity in the Indenture, to correct or supplement any
provision in the Indenture which may be inconsistent with any other provision
therein or to add any other provisions with respect to matters or questions
arising under the Indenture; provided such actions shall not adversely affect
the interests of the holders in any material respect; or (8) to comply with the
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act.
With the consent of the holders of not less than a majority in principal
amount of the outstanding Notes, the Company and the Trustee may enter into one
or more indentures supplemental to the Indenture for
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the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of the Indenture or modifying in any manner the rights of
the holders; provided that no such supplemental indenture shall, without the
consent of the holders of not less than 75% in principal amount of the
outstanding Notes, modify the obligations of the Company to make offers to
purchase Notes upon a Change of Control or from the proceeds of Asset Sales;
and, provided, further, that no such supplemental indenture shall, without the
consent of the holder of each outstanding Note: (1) change the Stated Maturity
of the principal of, or any installment of interest on, any Note, or reduce the
principal amount thereof (or premium, if any), or the interest thereon that
would be due and payable upon Maturity thereof, or change the place of payment
where, or the coin or currency in which, any Note or any premium or interest
thereon is payable, or impair the right to institute suit for the enforcement of
any such payment on or after the maturity thereof; (2) reduce the percentage in
principal amount of the outstanding Notes, the consent of whose holders is
necessary for any such supplemental indenture or required for any waiver of
compliance with certain provisions of the Indenture or certain Defaults
thereunder; (3) subordinate in right of payment, or otherwise subordinate, the
Notes to any other Indebtedness; (4) modify any provision of the Indenture
relating to the calculation of Accreted Value; or (5) modify any provision of
this paragraph (except to increase any percentage set forth herein).
The holders of not less than a majority in principal amount of the
outstanding Notes may, on behalf of the holders of all the Notes, waive any past
Default under the Indenture and its consequences, except Default (1) in the
payment of the principal of (or premium, if any) or interest on any Note, or (2)
in respect of a covenant or provision hereof which under the first proviso to
the prior paragraph cannot be modified or amended without the consent of the
holders of not less than 75% in principal amount of the outstanding Notes, or
(3) in respect of a covenant or provision hereof which under the second proviso
to the prior paragraph cannot be modified or amended without the consent of the
holder of each outstanding Note affected; provided with respect to any past
Default referred to in clause (2) of this paragraph, the holders of not less
than 75% in principal amount of the outstanding Notes may waive such Default.
SATISFACTION AND DISCHARGE OF THE INDENTURE, DEFEASANCE
The Company may terminate its obligations under the Indenture when (i)
either (A) all outstanding Notes have been delivered to the Trustee for
cancellation or (B) all such Notes not theretofore delivered to the Trustee for
cancellation have become due and payable, will become due and payable within one
year or are to be called for redemption within one year under irrevocable
arrangements satisfactory to the Trustee for the giving of notice of redemption
by the Trustee in the name and at the expense of the Company, and the Company
has irrevocably deposited or caused to be deposited with the Trustee funds in an
amount sufficient to pay and discharge the entire indebtedness on the Notes, not
theretofore delivered to the Trustee for cancellation, for principal of
(premium, if any, on) and interest to the date of deposit or maturity or date of
redemption; (ii) the Company has paid or caused to be paid all sums payable by
the Company under the Indenture; and (iii) the Company has delivered an
Officers' Certificate and an Opinion of Counsel relating to compliance with the
conditions set forth in the Indenture.
The Company, at its election, shall (a) be deemed to have paid and
discharged its debt on the Notes and the Indenture shall cease to be of further
effect as to all outstanding Notes (except as to (i) rights of registration of
transfer, substitution and exchange of Notes and the Company's right of optional
redemption, (ii) rights of holders to receive payments of principal of, premium,
if any, and interest on the Notes (but not the Change of Control Purchase Price
or the Offer Purchase Price) and any rights of the holders with respect to such
amounts, (iii) the rights, obligations and immunities of the Trustee under the
Indenture and (iv) certain other specified provisions in the Indenture) or (b)
cease to be under any obligation to comply with certain restrictive covenants
including those described under "-- Certain Covenants," after the irrevocable
deposit by the Company with the Trustee, in trust for the benefit of the
holders, at any time prior to the maturity of the Notes, of (A) money in an
amount, (B) U.S. Government Obligations which through the payment of interest
and principal will provide, not later than one day before the due date of
payment in respect of the Notes, money in an amount, or (C) a combination
thereof, sufficient to pay and discharge the principal of, and interest on, the
Notes then outstanding on the dates on which any such payments are due in
accordance with the terms of the Indenture and of the Notes. Such defeasance or
covenant defeasance shall
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be deemed to occur only if certain conditions are satisfied, including, among
other things, delivery by the Company to the Trustee of an opinion of outside
counsel acceptable to the Trustee to the effect that (i) such deposit,
defeasance and discharge will not be deemed, or result in, a taxable event for
federal income tax purposes with respect to the holders; and (ii) the Company's
deposit will not result in the Trust or the Trustee being subject to regulation
under the Investment Company Act of 1940.
THE TRUSTEE
Chemical Bank is the Trustee under the Indenture and its current address is
450 West 33rd Street, Fifteenth Floor, New York, New York 10001-2697.
The holders of not less than a majority in principal amount of the
outstanding Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. Except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. The Indenture provides that in case an Event of Default shall
occur (which shall not be cured or waived), the Trustee will be required, in the
exercise of its rights and powers under the Indenture, to use the degree of care
of a prudent person in the conduct of such person's own affairs. Subject to such
provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any of the holders of the
Notes, unless such holders shall have offered to the Trustee indemnity
satisfactory to it against any loss, liability or expense.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes or the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation, solely by reason of such person's or
entity's status as a director, officer, employee, incorporator or stockholder of
the Company. By accepting a Note each holder waives and releases all such
liability (but only such liability). The waiver and release are part of the
consideration for issuance of the Notes. Nonetheless, such waiver may not be
effective to waive liabilities under the federal securities laws and it has been
the view of the Commission that such a waiver is against public policy.
EXCHANGE OFFER; REGISTRATION RIGHTS
In connection with the initial issuance and sale of the Old Notes, the
Company entered into the Registration Agreement with the Initial Purchasers for
the benefit of the holders of the Old Notes. Pursuant to such Registration
Agreement, the Company has agreed, at its expense, to (i) file the Exchange
Offer Registration Statement with the Commission with respect to a registered
offer to exchange the Old Notes for the New Notes, which will be identical in
all respects to the Old Notes (except that the New Notes will not contain terms
with respect to the interest rate step-up provision and certain transfer
restrictions), on or prior to June 24, 1996, and (ii) cause the Exchange Offer
Registration Statement to be declared effective under the Securities Act on or
prior to August 23, 1996. Promptly after the Exchange Offer Registration
Statement is declared effective, the Company will offer the New Notes in
exchange for surrender of the Old Notes. The Company will use its best efforts
to complete the Exchange Offer within 30 days (or longer if required by
applicable law) after the date notice of the Exchange Offer is mailed to the
holders of the Old Notes. For each Old Note tendered to the Company pursuant to
the Exchange Offer and not validly withdrawn by the holder thereof, the holder
of such Old Note will receive a New Note having a principal amount equal to the
principal amount of such surrendered Old Note.
Based on existing interpretations of the Securities Act by the staff of the
Commission as set forth in several no-action letters to third-parties, and
subject to the immediately following sentence, the Company believes that the New
Notes may be offered for resale, resold and otherwise transferred by the holders
thereof without further compliance with the registration and prospectus delivery
provisions of the Securities Act.
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However, any purchaser of Old Notes who is an "affiliate" of the Company or who
intends to participate in the Exchange Offer for the purpose of distributing the
New Notes (i) will not be able to rely on the interpretation of the staff of the
Commission set forth in the above-mentioned no-action letters, (ii) will not be
able to tender its Old Notes in the Exchange Offer and (iii) must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the Old Notes unless such sale or
transfer is made pursuant to an exemption from such requirements. The staff of
the Commission has not considered the Exchange Offer in the context of a
no-action letter and there can be no assurance that the staff of the Commission
would make a similar determination with respect to the Exchange Offer.
Each holder of the Old Notes (other than certain specified holders) who
wishes to exchange Old Notes for New Notes in the Exchange Offer will be
required to represent that (i) it is not an affiliate of the Company, (ii) any
New Notes to be received by it were acquired in the ordinary course of its
business and (iii) at the time of commencement of the Exchange Offer, it was not
engaged in, and did not intend to engage in, a distribution of such New Notes
and had no arrangement or understanding with any person to participate in the
distribution (within the meaning of the Securities Act) of the New Notes. In
addition, in connection with any resales of New Notes, any broker-dealer (an
"Exchanging Dealer") who acquired the New Notes for its own account as a result
of market-making activities or other trading activities must deliver a
prospectus meeting the requirements of the Securities Act. The Commission has
taken the position that Exchanging Dealers may fulfill their prospectus delivery
requirements with respect to the New Notes (other than a resale of an unsold
allotment from the original sale of the Old Notes) with the prospectus contained
in the Exchange Offer Registration Statement. Under the Registration Agreement,
the Company is required to allow Exchanging Dealers and other persons, if any,
subject to similar prospectus delivery requirements to use the prospectus
contained in the Exchange Offer Registration Statement in connection with the
resale of such New Notes.
In the event that any changes in law or applicable interpretations of the
staff of the Commission do not permit the Company to effect the Exchange Offer,
or if for any reason the Exchange Offer Registration Statement is not declared
effective on or before August 23, 1996, or upon the request of an Initial
Purchaser under certain circumstances, the Company will, in lieu of or in
addition to effecting the registration of the New Notes pursuant to the Exchange
Offer Registration Statement and at its expense, (i) as promptly as practicable,
file with the Commission a shelf registration statement (the "Note Shelf
Registration Statement") covering resales of the Old Notes or the New Notes, as
the case may be, (ii) cause the Note Shelf Registration Statement to be declared
effective under the Securities Act on or prior to September 22, 1996, (or
promptly in the event of a request by an Initial Purchaser) and (iii) keep
effective the Note Shelf Registration Statement until three years after its
effective date. The Company will, in the event of the filing of a Note Shelf
Registration Statement, provide to each holder of Notes covered by the Note
Shelf Registration Statement copies of the prospectus which is a part of the
Note Shelf Registration Statement, notify each such holder when the Note Shelf
Registration Statement for the Notes has become effective and take certain other
actions as are required to permit unrestricted resales of the Notes. A holder of
Notes that sells such Notes pursuant to the Note Shelf Registration Statement
generally will be required to be named as a selling securityholder in the
related prospectus and to deliver a prospectus to the purchaser, will be subject
to certain of the civil liability provisions under the Securities Act in
connection with such sales and will be bound by the provisions of the
Registration Agreement which are applicable to such holder (including certain
indemnification obligations). In addition, each holder of Notes will be required
to deliver information to be used in connection with the Note Shelf Registration
Statement in order to have its Notes included in the Note Shelf Registration
Statement and to benefit from the provisions regarding Special Interest
described in the following paragraph.
The Registration Agreement provides that if (a) the Exchange Offer
Registration Statement is not filed with the Commission on or prior to June 24,
1996, (b) the Exchange Offer Registration Statement is not declared effective on
or prior to August 23, 1996, or (c) the Exchange Offer is not consummated or a
Note Shelf Registration Statement is not declared effective on or prior to
September 22, 1996, Special Interest will accrue (in addition to the accretion
of the Notes) from and including the next day following each of (i) June 24,
1996, in the case of clause (a) above, (ii) August 23, 1996, in the case of
clause (b) above and
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(iii) September 22, 1996, in the case of clause (c) above. In each case such
Special Interest will be payable in cash semi-annually in arrears each April 1
and October 1, commencing October 1, 1996, at a rate per annum equal to 0.5% of
the Accreted Value of the Notes (determined daily). The aggregate amount of
Special Interest payable pursuant to the above provisions will in no event
exceed 1.5% per annum of the Accreted Value (determined daily). Upon (x) the
filing of the Exchange Offer Registration Statement after June 24, 1996 (y) the
effectiveness of the Exchange Offer Registration Statement after August 23, 1996
or (z) the consummation of the Exchange Offer or the effectiveness of a Note
Shelf Registration Statement, as the case may be, after September 22, 1996, the
Special Interest Payable on the Old Notes from the date of such filing,
effectiveness or consummation, as the case may be, will cease to accrue and all
accrued and unpaid Special Interest as of the occurrence of (x), (y) or (z)
shall be paid to the holders of the New Notes thereafter. Following the
occurrence of (x), (y) or (z) above, as the case may be, the terms of the New
Notes shall revert to the original terms set forth on the cover page of this
Offering Memorandum.
In the event that a Note Shelf Registration Statement is declared effective
pursuant to the paragraph preceding the immediately preceding paragraph, if the
Company fails to keep such Note Shelf Registration Statement continuously
effective for the period required by the Registration Agreement, then from such
time as the Note Shelf Registration Statement is no longer effective until the
earlier of (i) the date that the Note Shelf Registration Statement is again
deemed effective, (ii) the date that is the third anniversary of the original
issuance of the Old Notes (or, in the case of a Note Shelf Registration
Statement filed at the request of an Initial Purchaser, the first anniversary of
the original issuance of the Old Notes) or (iii) the date as of which all of the
Notes are sold pursuant to the Note Shelf Registration Statement, Special
Interest shall accrue at a rate per annum equal to 0.5% of the Accreted Value of
the Notes (determined daily) (1.0% thereof if the Note Shelf Registration
Statement is no longer effective for 30 days or more), and shall be payable in
cash semi-annually in arrears each April 1 and October 1, commencing October 1,
1996.
Payment of Special Interest is the sole remedy available to holders of Old
Notes in the event the Company does not comply with the deadlines set forth in
the Registration Agreement with respect to the conduct of an exchange offer for
the Old Notes or the registration of the Old Notes for resale under a shelf
registration statement.
BOOK-ENTRY; DELIVERY AND FORM
All New Notes will be represented by a permanent Global Note in fully
registered form without coupons (the "Global Note"), which will be deposited
with the Trustee as custodian for the Depositary and registered in the name of
the Depositary or of a nominee of the Depositary.
The New Notes will be subject to certain restrictions on transfer set forth
therein and will bear the legend regarding such restrictions set forth under
"Transfer Restrictions." No beneficial interest in the Global Note may be
transferred except in compliance with the transfer restrictions set forth in
such legend. See "Transfer Restrictions."
Upon issuance of the Global Note, the Depositary will credit, on its
internal system, the respective amount of the individual beneficial interests in
the Global Note to persons who have accounts with the Depositary
("Participants"). Such accounts initially were designated by or on behalf of the
Initial Purchasers. Ownership of beneficial interests in the Global Note will be
shown on, and the transfer of such beneficial interests will be effected only
through, records maintained by the Depositary or its nominee (with respect to
interests of Participants) and the records of Participants (with respect to
interests of persons other than Participants). Qualified institutional buyers
may hold their interests in the Global Note directly through the Depositary if
they are Participants, or indirectly through organizations which are
Participants.
So long as the Depositary or its nominee is the registered owner of the
Global Note, the Depositary or such nominee, as the case may be, will be
considered the sole owner of the New Notes represented by the Global Note for
all purposes under the Indenture and the New Notes. Accordingly, beneficial
owners of an interest in the Global Note must rely on the procedures of the
Depositary, and if such person is not a Participant, on the procedures of the
Participant through which such person owns its interest, to exercise any rights
and fulfill any obligations of a holder under the Indenture. No beneficial owner
of an interest in the
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Global Note will be able to transfer that interest except in accordance with the
Depositary's applicable procedures, in addition to those provided for in the
Indenture.
Payments of the principal of, premium, if any, and interest on, the Global
Note will be made to the Depositary or its nominee, as the case may be, as the
registered owner thereof. Neither the Company, the Trustee or any Paying Agent
will have any responsibility or liability for any aspect of the records relating
to, or payments made on account of, beneficial interests in the Global Note or
for maintaining, supervising or reviewing any records relating to such
beneficial interests.
The Company expects that the Depositary or its nominee, upon receipt of any
payment of principal, premium or interest in respect of the Global Note will
credit Participants' accounts with payments in amounts proportionate to such
Participants' respective beneficial interests in the principal amount of such
Global Note as shown on the records of the Depositary or its nominee. The
Company also expects that payments by Participants to owners of beneficial
interests in the Global Note held through such Participants will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers registered in the names of
nominees for such customers. Such payments will be the responsibility of such
Participants.
The Depositary has advised the Company that it will take any action
permitted to be taken by a holder of New Notes (including the presentation of
Old Notes for exchange as described below) only at the direction of one or more
Participants to whose accounts interests in the Global Note is credited and only
in respect of such portion of the aggregate principal amount of New Notes, as
the case may be, as to which such Participant or Participants has or have given
such direction.
The Depositary has advised the Company as follows: The Depositary is a
limited purpose trust company organized under the laws of the State of New York,
a "banking organization" within the meaning of New York Banking Law, a member of
the Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. The Depositary was created to
hold securities for its Participants and facilitate the clearance and settlement
of securities transactions between Participants through electronic book-entry
changes in accounts of its Participants, thereby eliminating the need for
physical movement of certificates. Indirect access to the Depositary system is
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Participant ("Indirect
Participants").
Although the Depositary and its Participants are expected to follow the
foregoing procedures in order to facilitate transfers of interests in the Global
Note among Participants, they are under no obligation to perform or continue to
perform such procedures, and such procedures may be discontinued at any time.
Neither the Company, the Trustee or any Paying Agent will have any
responsibility for the performance by the Depositary, Participants or Indirect
Participants of their respective obligations under the rules and procedures
governing their operations.
Owners of beneficial interests in the Global Note will be entitled to
receive Notes in definitive form ("Definitive Notes") if the Depositary is at
any time unwilling or unable to continue as, or ceases to be, a "clearing
agency" registered under Section 17A of the Exchange Act, and a successor to the
Depositary registered as a "clearing agency" under Section 17A of the Exchange
Act is not appointed by the Company within 90 days. Any Definitive Notes issued
in exchange for beneficial interests in the Global Note will be registered in
such name or names as the Depositary shall instruct the Trustee. It is expected
that such instructions will be based upon directions received by the Depositary
from Participants with respect to ownership of beneficial interests in the
Global Note.
In addition to the foregoing, on or after the occurrence of an Event of
Default under the Indenture, owners of beneficial interests in the Global Note
will be entitled to request and receive Definitive Notes. Such Definitive Notes
will be registered in such name or names as the Depositary shall instruct the
Trustee.
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TRANSFER AND EXCHANGE
A holder may transfer or exchange New Notes in accordance with the
Indenture. The Company, the Registrar and the Trustee may require a holder,
among other things, to furnish appropriate endorsements and transfer documents
and the Company may require a holder to pay any taxes and fees required by law
or permitted by the Indenture.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any capitalized terms used herein for which no definition
is provided.
"Accreted Value" of any outstanding New Note as of or to any date of
determination prior to April 1, 2001, shall mean an amount equal to the sum of
(i) the issue price of the Old Note as determined in accordance with Section
1273 of the Code, plus (ii) the aggregate of the portions of the original issue
discount (the excess of the amounts considered as part of the "stated redemption
price at maturity" of the New Note within the meaning of Section 1273(a)(2) of
the Code or any successor provisions, whether denominated as principal or
interest, over the issue price of such New Note) that shall theretofore have
accrued pursuant to Section 1272 of the Code (without regard to Section
1272(a)(7) of the Code) from the date of issue of such Old Note (a) for each
six-month or shorter period ending April 1 or October 1 prior to the date of
determination and (b) for the shorter period, if any, from the end of such
immediately preceding six-month or shorter period, as the case may be, to the
date of determination, plus (iii) accrued and unpaid interest to the date such
Accreted Value is paid (without duplication of any amount set forth in (ii)
above), minus all amounts theretofore paid in respect of such New Note, which
amounts are considered as part of the "stated redemption price at maturity" of
such New Note within the meaning of Section 1273(a)(2) of the Code or any
successor provisions (whether such amounts paid were denominated principal or
interest). On or after April 1, 2001, the Accreted Value of any outstanding New
Note will equal the principal amount of such New Note.
"Acquired Indebtedness" means, with respect to any specified Person,
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person,
but excluding Indebtedness which is extinguished, retired or repaid in
connection with such other Person merging with or into or becoming a Subsidiary
of such specified Person.
"Affiliate" means, as to any Person, any other Person which directly or
indirectly controls, or is under common control with, or is controlled by, such
Person; provided that each Unrestricted Subsidiary shall be deemed to be an
Affiliate of the Company and of each other Subsidiary of the Company; provided,
further, neither the Company nor any of its Restricted Subsidiaries shall be
deemed to be Affiliates of each other; and provided, further, any lender under
the Secured Credit Facility and its Affiliates shall not be deemed to be
Affiliates of the Company or any Restricted Subsidiary solely as a result of the
existence of the Secured Credit Facility or their holdings of Capital Stock of
the Company or any Restricted Subsidiary acquired in connection with the Secured
Credit Facility. For purposes of this definition, "control" (including, with
correlative meanings, the terms "controlling," "under common control with," and
"controlled by"), and as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of Voting Stock, by agreement or otherwise; provided that beneficial
ownership of 10% or more of the Voting Stock of a Person shall be deemed to be
control.
"Asset Sale" means, with respect to any Person, any transfer, conveyance,
sale, lease or other disposition (including, without limitation, by way of
consolidation or merger, but excluding by means of any Sale and Leaseback
Transaction or by the granting of a Lien permitted under "-- Limitation on
Liens") by such Person or any of its Restricted Subsidiaries to any Person other
than the Company or a Restricted Subsidiary of the Company, in one transaction,
or a series of related transactions (each hereinafter referred to as a
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"Disposition"), of Property or assets of such Person or any of its Restricted
Subsidiaries, the Fair Market Value of which exceeds $2 million, other than (i)
a Disposition of Property in the ordinary course of business consistent with
industry practice, (ii) a Disposition that constitutes a Restricted Payment
permitted under
"-- Restricted Payments" and (iii) a Disposition by the Company in connection
with a transaction permitted under "-- Consolidation, Merger, Conveyance, Lease
or Transfer."
"Attributable Indebtedness" means, with respect to any Sale and Leaseback
Transaction of any Person, as at the time of determination, the greater of (i)
the capitalized amount in respect of such transaction that would appear on the
balance sheet of such Person in accordance with GAAP and (ii) the present value
(discounted at a rate consistent with accounting guidelines, as determined in
good faith by such Person) of the payments during the remaining term of the
lease (including any period for which such lease has been extended or may, at
the option of the lessor, be extended) or until the earliest date on which the
lessee may terminate such lease without penalty or upon payment of a penalty (in
which case the rental payments shall include such penalty).
"Average Life" means, as of any date, with respect to any debt security or
Disqualified Stock, the quotient obtained by dividing (i) the sum of the
products of (x) the number of years from such date to the dates of each
scheduled principal payment or redemption payment (including any sinking fund or
mandatory redemption payment requirements) of such debt security or Disqualified
Stock multiplied in each case by (y) the amount of such principal or redemption
payment, by (ii) the sum of all such principal or redemption payments.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Board Resolution" means a duly adopted resolution of the Board of
Directors in full force and effect at the time of determination and certified as
such.
"Capital Lease Obligation" of any Person means the obligation to pay rent
or other payment amounts under a lease of (or other Indebtedness arrangement
conveying the right to use) real or personal property of such Person which is
required to be classified and accounted for as a capital lease or a liability on
the face of a balance sheet of such Person in accordance with GAAP and the
stated maturity thereof shall be the date of the last payment of rent or any
amount due under such lease prior to the first date upon which such lease may be
terminated by the lessee without payment of a penalty.
"Capital Stock" in any Person means any and all shares, interests,
participations or other equivalents in the equity interest (however designated)
in such Person and any rights (other than Indebtedness convertible into an
equity interest), warrants or options to acquire an equity interest in such
Person.
"Cash Proceeds" means, with respect to any Asset Sale or issuance or sale
of Capital Stock by any Person, the aggregate consideration received in respect
of such sale or issuance by such Person in the form of cash or Eligible Cash
Equivalents.
"Change of Control" shall be deemed to occur if (i) the sale, conveyance,
transfer or lease of all or substantially all of the assets of the Company to
any "Person" or "group" (within the meaning of Sections 13(d)(3) and 14(d)(2) of
the Exchange Act or any successor provision to either of the foregoing,
including any group acting for the purpose of acquiring, holding or disposing of
securities within the meaning of Rule 13d-5(b)(i) under the Exchange Act) (other
than any Permitted Holder (as defined below) or any Restricted Subsidiary of the
Company) shall have occurred; (ii) any "Person" or "group" (within the meaning
of Sections 13(d)(3) and 14(d)(2) of the Exchange Act or any successor provision
to either of the foregoing, including any group acting for the purpose of
acquiring, holding or disposing of securities within the meaning of Rule
13d-5(b)(i) under the Exchange Act), other than any Permitted Holder, becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more
than 35% of the total voting power of all classes of the Voting Stock of the
Company and/or warrants or options to acquire such Voting Stock, calculated on a
fully diluted basis, and such voting power percentage is greater than or equal
to the total voting power percentage then beneficially owned by the Permitted
Holders in the aggregate; or (iii) during any period of two consecutive years,
individuals who at the beginning of such period constituted the Board of
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Directors (together with any new directors whose election or appointment by such
board or whose nomination for election by the shareholders of the Company was
approved by a vote of a majority of the directors then still in office who were
either directors at the beginning of such period or whose election or nomination
for election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors then in office.
"Consolidated Interest Expense" means, with respect to any Person for any
period, without duplication (A) the sum of (i) the aggregate amount of cash and
non-cash interest expense (including capitalized interest) of such Person and
its Restricted Subsidiaries for such period as determined on a consolidated
basis in accordance with GAAP in respect of Indebtedness (including, without
limitation, (v) any amortization of debt discount, (w) net costs associated with
Interest Hedging Obligations (including any amortization of discounts), (x) the
interest portion of any deferred payment obligation, (y) all accrued interest
and (z) all commissions, discounts and other fees and charges owed with respect
to letters of credit, bankers' acceptances or similar facilities) paid or
accrued, or scheduled to be paid or accrued, during such period; (ii) dividends
or distributions with respect to preferred stock or Disqualified Stock of such
Person (and of its Restricted Subsidiaries if paid to a Person other than such
Person or its Restricted Subsidiaries) declared and payable in cash; (iii) the
portion of any rental obligation of such Person or its Restricted Subsidiaries
in respect of any Capital Lease Obligation allocable to interest expense in
accordance with GAAP; (iv) the portion of any rental obligation of such Person
or its Restricted Subsidiaries in respect of any Sale and Leaseback Transaction
allocable to interest expense (determined as if such were treated as a Capital
Lease Obligation); and (v) to the extent any Indebtedness of any other Person is
Guaranteed by such Person or any of its Restricted Subsidiaries, the aggregate
amount of interest paid, accrued or scheduled to be paid or accrued, by such
other Person during such period attributable to any such Indebtedness, less (B)
to the extent included in (A) above, amortization or write-off of deferred
financing costs of such Person and its Restricted Subsidiaries during such
period and any charge related to any premium or penalty paid in connection with
redeeming or retiring any Indebtedness of such Person and its Restricted
Subsidiaries prior to its stated maturity; in the case of both (A) and (B)
above, after elimination of intercompany accounts among such Person and its
Restricted Subsidiaries and as determined in accordance with GAAP.
"Consolidated Net Income" of any Person means, for any period, the
aggregate net income (or net loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis determined in accordance
with GAAP; provided that there shall be excluded therefrom, without duplication
(i) all items classified as extraordinary, (ii) any net income of any Person
other than such Person and its Restricted Subsidiaries, except to the extent of
the amount of dividends or other distributions actually paid to such Person or
its Restricted Subsidiaries by such other Person during such period, (iii) the
net income of any Person acquired by such Person or any of its Restricted
Subsidiaries in a pooling-of-interests transaction for any period prior to the
date of the related acquisition, (iv) any gain or loss, net of taxes, realized
on the termination of any employee pension benefit plan, (v) net gains (but not
net losses) in respect of Asset Sales by such Person or its Restricted
Subsidiaries, (vi) the net income (but not net loss) of any Restricted
Subsidiary of such Person to the extent that the payment of dividends or other
distributions to such Person is restricted by the terms of its charter or any
agreement, instrument, contract, judgment, order, decree, statute, rule,
governmental regulation or otherwise, except for any dividends or distributions
actually paid by such Restricted Subsidiary to such Person, (vii) with regard to
a non-wholly owned Restricted Subsidiary, any aggregate net income (or loss) in
excess of such Person's or such Restricted Subsidiary's pro rata share of such
non-wholly owned Restricted Subsidiary's net income (or loss) and (viii) the
cumulative effect of changes in accounting principles.
"Consolidated Tangible Assets" of any Person means, as of any date, the sum
for such Person and its Restricted Subsidiaries (after eliminating intercompany
items) of the net book value of all Property and assets of such Person and its
Restricted Subsidiaries reflected on a balance sheet of such Person or such
Restricted Subsidiary, as the case may be, prepared in accordance with GAAP,
less the net book value of all items that would be classified as intangibles
under GAAP, including, without limitation, (i) licenses, patents, patent
applications, copyrights, trademarks, trade names, goodwill, noncompete
agreements and organizational expenses, and (ii) unamortized deferred financing
costs, debt discount and expenses.
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"Debt to EBITDA Ratio" means, as at any date of determination, the ratio of
(i) the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis as at the date of determination to (ii) the
aggregate amount of EBITDA of the Company and its Restricted Subsidiaries for
the four preceding fiscal quarters for which financial information is available
immediately prior to the date of determination; provided that any Indebtedness
incurred or retired by the Company or any of its Restricted Subsidiaries during
the fiscal quarter in which the date of determination occurs shall be calculated
as if such Indebtedness was so incurred or retired on the first day of the
fiscal quarter in which the date of determination occurs; and provided, further,
that (x) if the transaction giving rise to the need to calculate the Debt to
EBITDA Ratio would have the effect of increasing or decreasing Indebtedness or
EBITDA in the future, Indebtedness or EBITDA shall be calculated on a pro forma
basis as if such transaction had occurred on the first day of such four fiscal
quarter period preceding the date of determination, and (y) if during such four
fiscal quarter period, the Company or any of its Restricted Subsidiaries shall
have engaged in any Asset Sale, EBITDA for such period shall be reduced by an
amount equal to the EBITDA (if positive), or increased by an amount equal to the
EBITDA (if negative), directly attributable to the assets which are the subject
of such Asset Sale and any related retirement of Indebtedness as if such Asset
Sale and related retirement of Indebtedness had occurred on the first day of
such period or (z) if during such four fiscal quarter period the Company or any
of its Restricted Subsidiaries shall have acquired any material assets outside
the ordinary course of business, EBITDA shall be calculated on a pro forma basis
as if such asset acquisition and related financing had occurred on the first day
of such period.
"Default" means any event, act or condition, the occurrence of which is, or
after notice or the passage of time or both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, or otherwise, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, or is exchangeable for
Indebtedness at any time, in whole or in part, on or prior to the date on which
the New Notes mature.
"EBITDA" means, with respect to any Person for any period, the sum for such
Person for such period of Consolidated Net Income plus, to the extent reflected
in the income statement of such Person for such period from which Consolidated
Net Income is determined, without duplication, (i) Consolidated Interest
Expense, (ii) income tax expense, (iii) depreciation expense, (iv) amortization
expense, (v) any non-cash expense related to the issuance to employees of such
Person of options to purchase Capital Stock of such Person and (vi) any charge
related to any premium or penalty paid in connection with redeeming or retiring
any Indebtedness prior to its stated maturity and minus, to the extent reflected
in such income statement, any non-cash credits that had the effect of increasing
Consolidated Net Income of such Person for such period. This definition of
EBITDA is used only for the purpose of this Description of the New Notes and the
Indenture.
"Eligible Cash Equivalents" means (i) securities issued or directly and
fully guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof), (ii) time deposits and
certificates of deposit of any commercial bank organized in the United States
having capital and surplus in excess of $500 million with a maturity date not
more than one year from the date of acquisition, (iii) repurchase obligations
with a term of not more than seven days for underlying securities of the types
described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (ii) above, (iv) direct obligations issued by
any state of the United States of America or any political subdivision of any
such state or any public instrumentality thereof maturing, or subject to tender
at the option of the holder thereof within ninety days after the date of
acquisition thereof and, at the time of acquisition, having a rating of A or
better from Standard & Poor's Ratings Group ("Standard & Poor's") or A-2 or
better from Moody's Investors Service, Inc. ("Moody's"), (v) commercial paper
issued by the parent corporation of any commercial bank organized in the United
States having capital and surplus in excess of $500 million and commercial paper
issued by others having one of the two highest ratings obtainable from either
Standard & Poor's or Moody's and in each case maturing within ninety days after
the date of acquisition, (vi) overnight bank deposits and bankers' acceptances
at any commercial bank organized in the United States having capital and surplus
in excess of $500 million,
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(vii) deposits available for withdrawal on demand with a commercial bank
organized in the United States having capital and surplus in excess of $500
million and (viii) investments in money market funds substantially all of whose
assets comprise securities of the types described in clauses (i) through (vi).
"Exchange Rate Obligation" means, with respect to any Person, any currency
swap agreements, forward exchange rate agreements, foreign currency futures or
options, exchange rate collar agreements, exchange rate insurance and other
agreements or arrangements, or combination thereof, designed to provide
protection against fluctuations in currency exchange rates.
"Existing Indebtedness" means Indebtedness outstanding on the date of the
Indenture (other than under the Secured Credit Facility), including the 2005
Notes, and disclosed in a schedule attached to the Indenture, and the incurrence
by the Company of Indebtedness represented by the 2005 Notes.
"Fair Market Value" means, with respect to any asset or Property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy, as determined in good faith by the Board of
Directors.
"GAAP" means United States generally accepted accounting principles,
consistently applied, as set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board, or in such other statements by such other entity as may be
approved by a significant segment of the accounting profession of the United
States, that are applicable to the circumstances as of the date of
determination; provided that, except as otherwise specifically provided, all
calculations made for purposes of determining compliance with the terms of the
provisions of the Indenture shall utilize GAAP as in effect on the Issue Date.
"Guarantee" means any direct or indirect obligation, contingent or
otherwise, of a Person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other Person in any manner (and
"Guaranteed," "Guaranteeing" and "Guarantor" shall have meanings correlative to
the foregoing).
"incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), extend,
assume, Guarantee or otherwise become liable in respect of such Indebtedness or
other obligation or the recording, as required pursuant to GAAP or otherwise, of
any such Indebtedness or obligation on the balance sheet of such Person (and
"incurrence," "incurred," "incurable" and "incurring" shall have meanings
correlative to the foregoing); provided that a change in GAAP that results in an
obligation of such Person that exists at such time becoming Indebtedness shall
not be deemed an incurrence of such Indebtedness. Indebtedness otherwise
incurred by a Person before it becomes a Subsidiary of the Company shall be
deemed to have been incurred at the time at which it becomes a Subsidiary.
"Indebtedness" means at any time (without duplication), with respect to any
Person, whether recourse is to all or a portion of the assets of such Person,
and whether or not contingent, (i) any obligation of such Person for money
borrowed, (ii) any obligation of such Person evidenced by bonds, debentures,
notes, Guarantees or other similar instruments, including, without limitation,
any such obligations incurred in connection with acquisition of Property, assets
or businesses, excluding trade accounts payable made in the ordinary course of
business, (iii) any reimbursement obligation of such Person with respect to
letters of credit, bankers' acceptances or similar facilities issued for the
account of such Person, (iv) any obligation of such Person issued or assumed as
the deferred purchase price of Property or services (but excluding trade
accounts payable or accrued liabilities arising in the ordinary course of
business, which in either case are not more than 60 days overdue or which are
being contested in good faith), (v) any Capital Lease Obligation of such Person,
(vi) the maximum fixed redemption or repurchase price of Disqualified Stock of
such Person and, to the extent held by other Persons, the maximum fixed
redemption or repurchase price of Disqualified Stock of such Person's Restricted
Subsidiaries, at the time of determination, (vii) the notional amount of any
Interest Hedging Obligations or Exchange Rate Obligations of such Person at the
time of determination, (viii) any Attributable Indebtedness with respect to any
Sale and Leaseback Transaction to which such Person is a party and (ix) any
obligation of the type referred to in clauses (i) through (viii) of this
definition of another Person and all dividends and distributions of another
Person the payment of which, in either case, such Person has
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Guaranteed or is responsible or liable, directly or indirectly, as obligor,
Guarantor or otherwise. For purposes of the preceding sentence, the maximum
fixed repurchase price of any Disqualified Stock that does not have a fixed
repurchase price shall be calculated in accordance with the terms of such
Disqualified Stock as if such Disqualified Stock were repurchased on any date on
which Indebtedness shall be required to be determined pursuant to the Indenture;
provided that if such Disqualified Stock is not then permitted to be
repurchased, the repurchase price shall be the book value of such Disqualified
Stock. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability of any Guarantees at such date; provided that
for purposes of calculating the amount of the Notes or 2005 Notes outstanding at
any date, the amount of such Notes or 2005 Notes shall be the Accreted Value (as
defined in the relevant indenture) thereof as of such date unless cash interest
has commenced to accrue pursuant to the relevant indenture, in which case the
amount of the Notes or 2005 Notes outstanding will be determined pursuant to the
relevant indenture and will not include any accrued and unpaid cash interest
which would otherwise be included in Accreted Value because of clause (iii) of
the definition thereof in the relevant indenture.
"Interest Hedging Obligation" means, with respect to any Person, an
obligation of such Person pursuant to any interest rate swap agreement, interest
rate cap, collar or floor agreement or other similar agreement or arrangement
designed to protect against or manage such Person's or any of its Subsidiaries'
exposure to fluctuations in interest rates.
"Investment" in any Person means any direct, indirect or contingent (i)
advance or loan to, Guarantee of any Indebtedness of, extension of credit or
capital contribution to such Person, (ii) the acquisition of any shares of
Capital Stock, bonds, notes, debentures or other securities of such Person, or
(iii) the acquisition, by purchase or otherwise, of all or substantially all of
the business, assets or stock or other evidence of beneficial ownership of such
Person; provided that Investments shall exclude commercially reasonable
extensions of trade credit. The amount of any Investment shall be the original
cost of such Investment, plus the cost of all additions thereto and minus the
amount of any portion of such Investment repaid to such Person in cash as a
repayment of principal or a return of capital, as the case may be, but without
any other adjustments for increases or decreases in value, or write-ups,
write-downs or write-offs with respect to such Investment. In determining the
amount of any Investment involving a transfer of any Property other than cash,
such Property shall be valued at its Fair Market Value at the time of such
transfer.
"Issue Date" means the date on which the Old Notes were first authenticated
and delivered under the Indenture.
"Joint Venture" means a Telecommunications Company of which less than 50
percent of the Voting Stock is held by the Company; provided the management and
operations of such company are controlled by the Company pursuant to (i) the
charter documents of such company, or (ii) an agreement between the holders of
the Voting Stock of such company, or (iii) a management agreement between the
Company and such company.
"Lien" means, with respect to any Property or other asset, any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien (statutory or other), charge, easement, encumbrance, preference,
priority or other security or similar agreement or preferential arrangement of
any kind or nature whatsoever on or with respect to such Property or other asset
(including, without limitation, any conditional sale or title retention
agreement having substantially the same economic effect as any of the
foregoing).
"Lit Cities Amount" means, at the time of determination, (i) 0, in the
event the Company and its Restricted Subsidiaries are operating
Telecommunications Networks in less than 15 Major Cities, or (ii) $5 million, in
the event the Company and its Restricted Subsidiaries are operating
Telecommunications Networks in 15 or more, but less than 20, Major Cities, or
(iii) $10 million in the event the Company and its Restricted Subsidiaries are
operating Telecommunications Networks in 20 or more Major Cities.
"Major Cities" means cities included on a schedule attached to the
Indenture and cities deemed in the judgment of the Board of Directors, as
evidenced by a Board Resolution, to provide an opportunity for the
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profitable construction and operation of a Telecommunications Network comparable
to the cities included on such schedule.
"Maturity" means, when used with respect to a Note, the date on which the
principal of such Note becomes due and payable as provided therein or in the
Indenture, whether on the date specified in such Note as the fixed date on which
the principal of such Note is due and payable, on the Change of Control Payment
Date or purchase date established pursuant to the terms of the Indenture with
regard to a Change of Control Offer or an Asset Sale Offer, as applicable, or by
declaration of acceleration, call for redemption or otherwise.
"Net Cash Proceeds" means, with respect to the sale of any Property or
assets by any Person or any of its Restricted Subsidiaries, Cash Proceeds
received net of (i) all reasonable out-of-pocket expenses of such Person or such
Restricted Subsidiary incurred in connection with such sale, including, without
limitation, all legal, title and recording tax expenses, commissions and other
fees and expenses incurred (but excluding any finder's fee or broker's fee
payable to any Affiliate of such Person) and all federal, state, foreign and
local taxes arising in connection with such sale that are paid or required to be
accrued as liability under GAAP by such Person or its Restricted Subsidiaries,
(ii) all payments made or required to be made by such Person or its Restricted
Subsidiaries on any Indebtedness which is secured by such Properties or other
assets in accordance with the terms of any Lien upon or with respect to such
Properties or other assets or which must, by the terms of such Lien, or in order
to obtain a necessary consent to such transaction or by applicable law, be
repaid in connection with such sale and (iii) all contractually required
distributions and other payments made to minority interest holders (but
excluding distributions and payments to Affiliates of such Person) in Restricted
Subsidiaries of such Person as a result of such transaction; provided that, in
the event that any consideration for a transaction (which would otherwise
constitute Net Cash Proceeds) is required to be held in escrow pending
determination of whether a purchase price adjustment will be made, such
consideration (or any portion thereof) shall become Net Cash Proceeds only at
such time as it is released to such Person or its Restricted Subsidiaries from
escrow; provided, further, that any non-cash consideration received in
connection with any transaction, which is subsequently converted to cash, shall
be deemed to be Net Cash Proceeds at such time, and shall thereafter be applied
in accordance with the Indenture.
"New Financing Amount" means, at the time of determination, the sum of (i)
the amount of Indebtedness incurred by the Company subsequent to the Issue Date
(other than under credit facilities existing on the Issue Date) that is
permitted under "-- Limitation on Indebtedness" and (ii) the amount of Net Cash
Proceeds received by the Company from the issuance and sale of Qualified Stock
subsequent to the Issue Date; provided Indebtedness incurred at any time after
the New Financing Amount equals or exceeds $25 million shall not be included in
the New Financing Amount.
"Officers' Certificate" means a certificate signed by the Chairman of the
Board, a Vice Chairman of the Board, the President or a Vice President, and by
the Chief Financial Officer, the Chief Accounting Officer, the Treasurer, an
Assistant Treasurer, the Secretary or an Assistant Secretary of the Company and
delivered to the Trustee, which shall comply with the Indenture.
"Permitted Holders" means The Huff Alternative Income Fund, L.P., ING
Equity Partners, L.P.I, Anthony J. Pompliano and Richard A. Kozak and Affiliates
(other than the Company and the Restricted Subsidiaries) of each of the
foregoing.
"Permitted Investments" means (i) Eligible Cash Equivalents; (ii)
Investments in Property used in the ordinary course of business; (iii)
Investments in any Person as a result of which such Person becomes a Restricted
Subsidiary in compliance with the Indenture; (iv) Investments pursuant to
certain agreements or obligations of the Company or a Restricted Subsidiary, in
effect on the Issue Date, to make such Investments, and disclosed in a schedule
attached to the Indenture; (v) Investments in prepaid expenses, negotiable
instruments held for collection and lease, utility and workers' compensation,
performance and other similar deposits; (vi) Interest Hedging Obligations with
respect to any floating rate Indebtedness that is permitted by the terms of the
Indenture to be outstanding; (vii) Exchange Rate Obligations, provided that such
Exchange Rate Obligations were entered into in connection with transactions in
the ordinary course of business or the incurrence of Indebtedness that is
permitted by the terms of the Indenture to be outstanding; (viii) bonds,
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notes, debentures or other debt securities received as a result of Asset Sales
permitted under the covenant described under "-- Asset Sales," and (ix)
Investments in existence at the Issue Date.
"Permitted Liens" means (i) Liens on Property or assets of a Person
existing at the time such Person is merged into or consolidated with the Company
or any Subsidiary of the Company, provided that such Liens were in existence
prior to the contemplation of such merger or consolidation and do not secure any
Property or assets of the Company or any of its Subsidiaries other than the
Property or assets subject to the Liens prior to such merger or consolidation;
(ii) Liens on Telecommunications Assets existing during the time of the
construction thereof; (iii) Liens incurred or deposits made to secure the
performance of tenders, bids, leases, statutory or regulatory obligations,
surety or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business consistent with industry practice;
(iv) Liens existing as of the Issue Date; (v) Liens to secure borrowings
permitted under clause (a) of the second paragraph of "-- Limitation on
Indebtedness"; (vi) any Lien on Property of the Company in favor of the United
States of America or any state thereof, or any instrumentality of either, to
secure certain payments pursuant to any contract or statute; (vii) any Lien for
taxes or assessments or other governmental charges or levies not then due and
payable (or which, if due and payable, are being contested in good faith and for
which adequate reserves are being maintained, to the extent required by GAAP);
(viii) easements, rights-of-way, licenses and other similar restrictions on the
use of Properties or minor imperfections of title that, in the aggregate, are
not material in amount and do not in any case materially detract from the
Properties subject thereto or interfere with the ordinary conduct of the
business of the Company or its Subsidiaries; (ix) any Lien to secure obligations
under workmen's compensation laws or similar legislation, including any Lien
with respect to judgments which are not currently dischargable; (x) any
statutory warehousemen's, materialmen's or other similar Liens for sums not then
due and payable (or which, if due and payable, are being contested in good faith
and with respect to which adequate reserves are being maintained, to the extent
required by GAAP); (xi) any interest or title of a lessor in Property subject to
a Capital Lease Obligation; (xii) Liens to secure any Vendor Financing
Indebtedness; provided that such Liens do not extend to any Property or assets
other than the Property or assets the acquisition of which was financed by such
Indebtedness; (xiii) Liens in favor of the Company or any Restricted Subsidiary;
(xiv) Liens securing reimbursement obligations with respect to letters of credit
that encumber documents and other Property relating to such letters of credit
and the products and proceeds thereof; and (xv) Liens to secure any permitted
extension, renewal, refinancing or refunding (or successive extensions,
renewals, refinancings or refundings), in whole or in part, of any Indebtedness
secured by Liens referred to in the foregoing clauses (i) through (v) and (xii),
provided that such Liens do not extend to any other Property or assets and the
principal amount of the Indebtedness secured by such Liens is not increased.
"Permitted Subordinated Financing" means Indebtedness or preferred stock of
the Company issued to a Permitted Holder on terms specified in the Indenture,
provided that (i) in the case of Permitted Subordinated Financing that
constitutes Indebtedness, such Indebtedness is subordinated in right of payment
to the Notes and has a maturity of 180 days or less and (ii) in the case of
Permitted Subordinated Financing that constitutes preferred stock, such
preferred stock is retired within 180 days of issuance.
"Person" means any individual, corporation, partnership, joint venture,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Property" means, with respect to any Person, any interest of such Person
in any kind of property or asset, whether real, personal or mixed, or tangible
or intangible, excluding Capital Stock in any other Person.
"Qualified Joint Venture" means a Joint Venture in which any Voting Stock
not held by the Company is held by (i) a Strategic Investor, or (ii) an issuer
of a class of debt securities rated by Moody's and Standard and Poor's in
generic rating categories that signify investment grade, or (iii) a Person that
does not have a class of debt securities rated by either Moody's or Standard &
Poor's, but which has received a letter from Moody's or Standard & Poor's
indicating that debt securities that may be issued by such Person, as of the
date of the Company's Investment in such Joint Venture, would be rated in a
generic rating category that signifies investment grade.
"Qualified Stock" of any Person means a class of Capital Stock other than
Disqualified Stock.
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"Refinancing Indebtedness" means any Indebtedness incurred in connection
with the Refinancing of other Indebtedness.
"Restricted Payment" means (i) a dividend or other distribution declared or
paid on the Capital Stock of the Company or to the Company's stockholders (in
their capacity as such), or declared or paid to any Person other than the
Company or a Restricted Subsidiary of the Company on the Capital Stock of any
Restricted Subsidiary of the Company, in each case, other than dividends,
distributions or payments made solely in Qualified Stock of the Company or such
Restricted Subsidiary, (ii) a payment made by the Company or any of its
Restricted Subsidiaries (other than to the Company or any Restricted Subsidiary)
to purchase, redeem, acquire or retire any Capital Stock of the Company or of a
Restricted Subsidiary, (iii) a payment made by the Company or any of its
Restricted Subsidiaries (other than a payment made solely in Qualified Stock of
the Company) to redeem, repurchase, defease (including an in-substance or legal
defeasance) or otherwise acquire or retire for value (including pursuant to
mandatory repurchase covenants), prior to any scheduled maturity, scheduled
sinking fund or mandatory redemption payment, Indebtedness of the Company or
such Restricted Subsidiary which is subordinate (whether pursuant to its terms
or by operation of law) in right of payment to the Notes and which was scheduled
to mature on or after the maturity of the Notes or (iv) an Investment in any
Person, including an Unrestricted Subsidiary or the designation of a Subsidiary
as an Unrestricted Subsidiary, other than (a) a Permitted Investment, (b) an
Investment by the Company in a Restricted Subsidiary or (c) an Investment by a
Restricted Subsidiary in the Company or a Restricted Subsidiary.
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been classified as an "Unrestricted Subsidiary."
"Sale and Leaseback Transaction" means, with respect to any Person, any
direct or indirect arrangement pursuant to which Property is sold or transferred
by such Person or a Restricted Subsidiary of such Person and is thereafter
leased back from the purchaser or transferee thereof by such Person or one of
its Restricted Subsidiaries.
"Secured Credit Facility" means the AT&T Credit Facility as in effect on
the Issue Date and additional secured credit agreements to which the Company is
or becomes a party, in an aggregate amount not to exceed $35 million, and all
related amendments, notes, collateral documents, guarantees, instruments and
other agreements executed in connection therewith, as the same may be amended,
modified, supplemented, restated, renewed, extended, refinanced, substituted or
replaced from time to time.
"Significant Restricted Subsidiary" means a Restricted Subsidiary that is a
"significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X under the
Securities Act and the Exchange Act.
"Strategic Investor" means, with respect to any relevant transaction, a
Telecommunications Company which, both as of the Trading Day immediately before
the day of the closing of such transaction and the Trading Day immediately after
the day of the closing of such transaction, has, or whose parent has, a Total
Market Capitalization of at least $1.0 billion on a consolidated basis. For
purposes of this definition, the term "parent" means any Person of which the
relevant Strategic Investor is a Subsidiary.
"Subsidiary" means, with respect to any Person, (i) any corporation more
than 50% of the outstanding shares of Voting Stock of which is owned, directly
or indirectly, by such Person, or by one or more other Subsidiaries of such
Person, or by such Person and one or more other Subsidiaries of such Person,
(ii) any general partnership, joint venture or similar entity, more than 50% of
the outstanding partnership or similar interests of which are owned, directly or
indirectly, by such Person, or by one or more other Subsidiaries of such Person,
or by such Person and one or more other Subsidiaries of such Person and (iii)
any limited partnership of which such Person or any Subsidiary of such Person is
a general partner.
"Telecommunications Assets" means, with respect to any Person, assets
(including, without limitation, rights of way, trademarks and licenses to use
copyrighted material), that are utilized by such Person, directly or indirectly,
in a Telecommunications Business. Telecommunications Assets shall include stock,
joint venture or partnership interests in another Person, provided that
substantially all of the assets of such other Person consist of
Telecommunications Assets, and provided, further, that if such stock, joint
venture or partnership
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interests are held by the Company or a Restricted Subsidiary, such other Person
either is, or immediately following the relevant transaction shall become, a
Restricted Subsidiary of the Company pursuant to the Indenture. The
determination of what constitutes Telecommunication Assets shall be made by the
Board of Directors and evidenced by a Board Resolution delivered to the Trustee.
"Telecommunications Business" means the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data through
owned or leased transmission facilities, (ii) creating, developing or marketing
communications related network equipment, software and other devices for use in
(i) above or (iii) evaluating, participating or pursuing any other activity or
opportunity that is related to those specified in (i) or (ii) above.
"Telecommunications Company" means any Person substantially all of the
assets of which consist of Telecommunications Assets.
"Telecommunications Network" means a self-healing digital fiber optic
telecommunications network that serves a Major City.
"Total Market Capitalization" of any Person means, at the time of
determination, the product of (i) the aggregate amount of outstanding shares of
common stock of such Person (which shall not include any common stock issuable
upon the exercise of options or warrants on, or securities convertible or
exchangeable into, shares of common stock of such Person) and (ii) the average
closing price of such common stock over the preceding 20 consecutive Trading
Days. If no such closing price exists with respect to shares of any such class,
the value of such shares shall be determined by the Board of Directors in good
faith as evidenced by a Board Resolution delivered to the Trustee.
"Trading Day" means, with respect to a security traded on a securities
exchange, automated quotation system or market, a day on which such exchange,
system or market is open for a full day of trading.
"U.S. Government Obligations" means (x) securities that are (i) direct
obligations of the United States of America for the payment of which the full
faith and credit of the United States of America is pledged or (ii) obligations
of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America, which, in either case, are not callable or redeemable at the
option of the issuer thereof, and (y) depository receipts issued by a bank (as
defined in Section 3(a)(2) of the Securities Act) as custodian with respect to
any U.S. Government Obligation which is specified in clause (x) above and held
by such bank for the account of the holder of such depository receipt, or with
respect to any specific payment of principal or interest on any U.S. Government
Obligation which is so specified and held, provided that (except as required by
law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by the
custodian in respect of the U.S. Government Obligation or the specific payment
of principal or interest of the U.S. Government Obligation evidenced by such
depository receipt.
"Unrestricted Subsidiary" means any Subsidiary of the Company that the
Company has classified as an "Unrestricted Subsidiary" and that has not been
reclassified as a Restricted Subsidiary, pursuant to the terms of the Indenture.
"Vendor Financing Indebtedness" of any Person means an obligation owed by
such Person to a vendor of any Telecommunications Assets solely in respect of
the purchase price of such assets, provided that the amount of such Indebtedness
does not exceed the Fair Market Value of such assets, and provided, further,
that such Indebtedness is incurred within 180 days of the acquisition of such
assets.
"Voting Stock" means, with respect to any Person, securities of any class
or classes of Capital Stock in such Person entitling the holders thereof
(whether at all times or at the times that such class of Capital Stock has
voting power by reason of the happening of any contingency) to vote in the
election of members of the board of directors or comparable body of such Person.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
ACSI's authorized capital stock consists of 75,813,336 shares of capital
stock, consisting of 75,000,000 shares of Common Stock, par value $0.01 per
share, and 813,336 shares of Preferred Stock, par value $1.00 per share. The
Company has designated 186,664 shares of its authorized Preferred Stock as 9%
Series A-1 Preferred Stock, 100,000 shares as its 9% Series B-1 Preferred Stock,
102,500 shares as its 9% Series B-2 Preferred Stock, 25,000 shares as its 9%
Series B-3 Preferred Stock, and 50,000 shares as its 9% Series B-4 Preferred
Stock.
PREFERRED STOCK
The authorized but unissued Preferred Stock may be issued by the Board of
Directors of the Company from time to time in one or more series with such
preferences, terms and rights as the Board of Directors may determine without
further action by the stockholders of the Company. Accordingly, the Board of
Directors has the power to fix the dividend rate and to establish the
provisions, if any, relating to dividends, voting rights, redemption rates,
sinking funds, liquidation preferences and conversion rights for any series of
Preferred Stock issued in the future.
It is not possible to state the actual effect of the authorization of any
particular series of Preferred Stock upon the rights of holders of the Common
Stock until the Board of Directors determines the specific rights of the holder
of Preferred Stock of any further series. The issuance of Preferred Stock may
have the effect of delaying, deferring or preventing a change in control of the
Company without further action by the stockholders.
The Series A-1 and Series B Preferred Stock differ with respect to
conversion prices, but are identical with respect to liquidation preferences,
dividends, conversion rights, preemptive rights and other rights.
Voting Rights of Preferred Stock -- Election of Directors
The Certificate of Incorporation provides that the Company's Board of
Directors shall be a Standard Board of seven directors, four of whom shall be
elected by the holders of the Company's Common Stock (the "Common Directors")
and three of whom (the Preferred Directors) shall be elected by the holders of
the Company's Preferred Stock. However, upon the occurrence of certain of the
Triggering Events (as hereinafter defined), the Board shall be increased to a
Triggering Event Board of eleven directors, and the additional four directors
shall be elected by the holders of the Company's Preferred Stock (the "Expansion
Directors"). In such a case, the Board shall have eleven members, of which
holders of Common Stock shall have the right to elect the Common Directors, and
of which holders of shares of Preferred Stock shall have the right to elect the
Preferred Directors and, until the first anniversary of the cure of the
Triggering Event, the Expansion Directors. One year after such Triggering Event
has been cured, the Board shall return in size to seven directors and the
Expansion Directors shall cease to be directors of the Company. Certain holders
of the Company's Preferred Stock and Common Stock have entered into the Voting
Rights Agreement for the purpose of electing the Company's Board of Directors.
See "Management."
Voting Rights of Preferred Stock -- Approval of Certain Actions
Generally, with the exception of the election of directors, the Preferred
Stock and Common Stock vote together as a single class. Each share of Preferred
Stock is entitled to that number of votes equal to the number of shares of
Common Stock into which it is convertible on the record date. In addition to any
other required vote, the consent of the holders of at least 75% of the Preferred
Stock at the time outstanding, voting as a single class, shall be necessary for
each of the following:
(i) the authorization or creation of any other class or series of
stock, if such class or series ranks, or any series thereof could rank,
prior to or on a parity with any of the Preferred Stock;
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(ii) the amendment, alteration, waiver or repeal of the provisions of
the Certificate of Incorporation or the By-Laws of the Company (with the
understanding that holders of at least 75% of the shares of Preferred Stock
at the time outstanding, voting together as a single class, may effect or
validate any amendment of the Certificate of Incorporation, may waive any
provision of the Certificate of Incorporation and may consent to any action
or inaction that would, in the absence of such consent, violate the
Certificate of Incorporation or constitute a Triggering Event);
(iii) the merger, consolidation or other business combination of the
Company with or into any other corporation or the recapitalization of the
Company; or
(iv) the sale of all or substantially all of the assets of the
Company.
Voting Rights of Preferred Directors -- Approval of Certain Actions
Generally, the Board of Directors shall act by majority vote of all
disinterested directors (as defined under Section 144 of the DGCL) on matters
affecting the Company. Notwithstanding the foregoing, the unanimous consent of
the Preferred Directors and, if there are any Expansion Directors serving on the
Board, the consent of six-sevenths of the total number of Preferred Directors
and Expansion Directors, if any, shall be required to approve the following
transactions:
(i) the disposition or encumbrance of a material portion of the assets
or business of the Company or any of its subsidiaries, including any sale
of securities of any of the Company's subsidiaries, affiliates or joint
ventures (by the Company or any such entities);
(ii) the formation of any joint venture, partnership or other business
combination by the Company or any of its subsidiaries;
(iii) expenditures by the Company or any of its subsidiaries in a
single transaction or a series of related transactions in excess of
$500,000, or commitments to make any such expenditures;
(iv) dividends or distributions, whether in cash or otherwise, in
respect of the Company's Common Stock, or any redemption, purchase or other
acquisition of any capital stock of the Company (or securities convertible
into or exchangeable for such capital stock) or the authorization, issuance
or grant of any securities of the Company or any subsidiary, other than the
put rights referred to in the Series B Preferred Stock and Warrant Purchase
Agreement dated June 26, 1995, among the holders of the Series B Preferred
Stock (the "Series B Purchase Agreement");
(v) the selection of an underwriter or placement agent for any
financing involving the securities of the Company or any of its
subsidiaries;
(vi) the establishment of any committees of the Board of Directors
(other than the compensation and audit committees);
(vii) any transaction with an affiliate or an associate of the Company
or any subsidiary of the Company (other than a direct or indirect
wholly-owned subsidiary of the Company) (it being understood that the
transactions contemplated by this clause (vii) do not include compensation
and benefit arrangements with employees), except those transactions set
forth in the Series B Purchase Agreement);
(viii) the incurrence by the Company or any subsidiary of the Company
of any indebtedness for borrowed money (in addition to indebtedness
outstanding as of the date of such amendment), including obligations under
capital leases, or guarantees of any such indebtedness of another person or
entity, or the issuance of any securities of the Company or any subsidiary
of the Company, except as described in the Series B Purchase Agreement;
(ix) a change in the compensation or benefits to any officer, director
or employee of the Company or any subsidiary of the Company from the
amounts in effect at June 26, 1995;
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(x) any amendment or other change in any insurance policy covering the
Company or any subsidiary of the Company in effect on the date of such
amendment or any change of the identity of any insurer;
(xi) except as set forth in the Series B Purchase Agreement, any
leasehold commitment involving consideration or a liability, contingent or
otherwise, in excess of $50,000 in the aggregate;
(xii) any change in the accounting policies or procedures of the
Company or any subsidiary or any change in the Company's independent
accountants;
(xiii) any other transaction or series of related transactions in
which any party's total commitments and obligations exceed $50,000; and
(xiv) any change in the Company's Business Plan (as defined in the
Series B Purchase Agreement), including, without limitation, the Company or
any subsidiary, directly or indirectly through an affiliate or joint
venture, entering into any line of business other than as contemplated by
the Business Plan, or the acquisition or creation of any other business or
entity.
Liquidation Preference
In the event of any liquidation or winding up of the Company, the holders
of the Preferred Stock shall be entitled to receive in preference to the holders
of the Common Stock of the Company an amount equal to the purchase price of
their shares plus all accumulated but unpaid dividends. After such preference
payments, the remaining assets of the Company available for distribution to
stockholders shall be distributed among the holders of the Preferred Stock, any
other series or class of preferred stock entitled to a share of the remaining
assets of the Company and Common Stock pro rata based on the number of shares of
Common Stock held by each (assuming full conversion of all such Preferred Stock
or such other series or class of preferred stock). A consolidation or merger of
the Company with or into another entity (in which the Company will not be the
surviving corporation) or the voluntary sale of all or substantially all of its
assets to another person or entity shall not be deemed to be a liquidation or
winding-up for purposes of the liquidation preference.
Dividends
No dividends shall be paid to or declared and set apart for payment to the
holders of any series of Preferred Stock prior to January 1, 1998, unless in
connection with the holder's conversion of the same. Thereafter, the holders of
Preferred Stock are entitled to receive, as declared by the Company's Board of
Directors from legally available funds, cumulative dividends in preference to
the Common Stock of the Company. Such dividends shall be payable in cash at an
annual rate of 9%, payable quarterly, except that the annual rate shall be 18%
(a) on or after January 1, 2000, and (b) at any time after the occurrence and
before the cure of the following "Triggering Events":
(i) the Company or any subsidiary shall have failed to pay or prepay
when due any principal, interest or premium on any indebtedness for
borrowed money after any applicable cure period;
(ii) the Company or any subsidiary shall have breached any obligation
in respect of any indebtedness for borrowed money, or any condition shall
have existed, as a result of which any such indebtedness may, after any
applicable cure period, become or be declared due prior to its stated
maturity, and such breach or condition shall remain uncured, unremedied or
unwaived for 120 or more days after such breach or condition;
(iii) there shall have been any material misrepresentation or breach
of warranty by the Company under (A) the investment agreement dated October
21, 1994, among the Company and certain of the initial holders of the
Series A Preferred Stock, as amended by the Exchange Agreement dated June
26, 1995, among the Company and the holders of the Series A Preferred Stock
as of such date (as amended, the "Series A Investment Agreement"); (B) the
Series B Purchase Agreement; (C) the Stockholders Agreement dated June 26,
1995, among the holders of the Series A-1 Preferred Stock, the holders of
the Series B Preferred Stock and certain holders of Common Stock (the
"Stockholders Agreement"); (D)
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the Registration Rights Agreement; and (E) the Governance Agreement, which,
as to (B) through (E) remain uncured, unremedied or unwaived for 30 or more
days;
(iv) there shall have been any material breach of any agreement by the
Company under any of certain transaction documents, as defined in the
Series A Investment Agreement and the Series B Purchase Agreement, that
remain uncured for 30 or more days after the Company first has or should
have had actual knowledge of such breach;
(v) the Company shall have failed to pay any dividends on any
outstanding shares of Preferred Stock, or pursuant to a promissory note
issued for the payment of dividends, which failure remains uncured,
unremedied or unwaived for 30 or more days;
(vi) the Company shall have failed to comply with any provisions of
its Certificate of Incorporation or By-Laws relating to the Preferred
Stock, or materially failed to comply with any other provisions of the
Certificate of Incorporation or By-Laws, which failure remains uncured,
unremedied or unwaived for 30 or more days; or
(vii) the Company and its subsidiaries shall have failed by 20% or
more to meet the major business milestones set forth in the Series B
Purchase Agreement;
(viii) a court or governmental authority of competent jurisdiction
shall have entered an order appointing, without the consent of the Company,
a custodian, receiver, trustee or other similar officer with respect to the
Company or any substantial part of its property, or if an order for relief
shall have been entered in any case or proceeding for liquidation or
reorganization of the Company in bankruptcy or ordering the dissolution,
winding-up or liquidation of the Company or any subsidiary or if any
petition for any such relief shall have been filed against the Company or a
subsidiary and such petition shall not have been dismissed within 60 days;
or
(ix) a final judgment in excess of $250,000 shall have been rendered
against the Company or any subsidiary which judgment shall not have been
discharged within 60 days or execution thereon shall not have been stayed
within 60 days (or such judgment is not discharged within 60 days after
such stay expires).
Conversion Rights
The holders of the Company's Preferred Stock have the right to convert
their shares of Preferred Stock into shares of Common Stock at effective rates
of 40 shares of Common Stock for each share of Series A-1 Preferred Stock and
35.71 shares of Common Stock for each share of Series B Preferred Stock. If the
Company issues additional shares of Common Stock or securities convertible into
Common Stock at a purchase price less than $2.25 per share, in the case of
Series A-1 Preferred Stock, or $2.80 per share, in the case of Series B
Preferred Stock, in each case with certain exceptions, these conversion ratios
will be adjusted to prevent dilution. The Preferred Stock shall be automatically
converted into Common Stock, at the then-applicable conversion rates, upon the
consummation of a Qualifying Offering.
Preemptive Rights
If, at any time prior to a Qualifying Offering, the Company proposes to
issue any securities to any person or entity, with certain exceptions, each
holder of shares of Preferred Stock or common stock issued upon conversion
thereof shall have the right to purchase, upon the same terms, a proportionate
quantity of those securities in the proportion that the aggregate number of
shares of common stock (assuming exercise of all warrants and conversion of all
Preferred Stock) then beneficially owned by that party bears to the total number
of shares of common stock (assuming exercise of all warrants and conversion of
all Preferred Stock) of the Company then beneficially owned by all holders of
shares of Preferred Stock or Common Stock issued upon conversion thereof.
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COMMON STOCK
Currently, ACSI is authorized to issue 75,000,000 shares of Common Stock.
As of December 31, 1995, 6,518,723 shares of Common Stock were issued and
outstanding. Under the Company's By-Laws, at least a majority of the issued and
outstanding voting securities of the Company present at a duly called
stockholders' meeting constitutes a quorum. Generally, if a quorum is present
the affirmative vote of the majority of the voting securities represented at the
meeting constitutes an act of the stockholders. However, the affirmative vote of
a majority of the Common Stock, 75% of Preferred Stock voting together as a
single class, and a majority of the Common Stock and the Preferred Stock (voting
on an as-converted basis) voting as a single class, is required to amend the
Company's Amended and Restated Certificate of Incorporation, as well as to
approve certain other actions.
Subject to the rights of holders of the Preferred Stock, certain covenants
contained in the Indenture which restrict the Company's ability to declare
dividends on its Common Stock, and the restrictions on dividends contained in an
agreement between the Company and AT&T Credit Corporation, holders of the
Company's Common Stock are entitled to receive dividends, on a pro rata basis,
as may from time to time be declared by the Board of Directors. The holders of
Common Stock are entitled to one vote per share, voting together with the
holders of Preferred Stock (voting on an as-converted basis) as a single class
(except with respect to the election of directors and certain transactions and
matters), on every question submitted to them at a meeting of shareholders. In
the event of liquidation, dissolution or winding up, the holders of Common Stock
are, subject to the liquidation preference of the holders of Preferred Stock,
entitled to share ratably in all assets of the Company available for
distribution to stockholders along with the holders of the Preferred Stock, any
other series or class of preferred stock entitled to a share of the remaining
assets of the Company pro rata based on the number of shares of Common Stock
held by each (assuming full conversion of all such Preferred Stock or such other
series or class of preferred stock). The holders of the Company's Common Stock
do not have pre-emptive rights or cumulative voting rights with respect to the
election of directors.
ANTI-TAKEOVER STATUTE
Section 203 of the DGCL prohibits certain transactions between a Delaware
corporation and an interested stockholder, which is defined therein as a person
who, together with any affiliates and/or associates of such person, beneficially
owns, directly or indirectly, 15% or more of the outstanding voting shares of a
Delaware corporation. This provision prohibits certain business combinations
(defined broadly to include mergers, consolidations, sales or other dispositions
of assets having an aggregate value in excess of 10% of the consolidated assets
of the corporation, and certain transactions that would increase the interested
stockholder's proportionate share ownership in the corporation) between an
interested stockholder and a corporation for a period of three years after the
date the interested stockholder acquired its stock unless (i) the business
combination is approved by the corporation's Board of Directors prior to the
date the interested stockholder acquired shares, (ii) the interested stockholder
acquired at least 85% of the voting stock of the corporation in the transaction
in which it becomes an interested stockholder or (iii) the business combination
is approved by a majority of the Board of Directors and by the affirmative vote
of 66 2/3% of the votes entitled to be cast by disinterested stockholders at an
annual or special meeting. The Amended and Restated Certificate of Incorporation
and By-laws do not exclude the Company from the restrictions imposed under
Section 203 of the DGCL.
LIMITATION OF LIABILITY OF DIRECTORS
The Amended and Restated Certificate of Incorporation provides that a
director of the Company will not be personally liable for monetary damages to
the Company or its stockholders for breach of fiduciary duty as a director,
except for liability, (i) for any breach of the director's duty of loyalty to
such corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) for unlawful payments of dividends or unlawful stock repurchases or
redemption as provided in Section 174 of the DGCL or (iv) for any transaction
from which the director derived an improper personal benefit.
This provision is intended to afford directors additional protection and
limit their potential liability from suits alleging a breach of the duty of care
by a director. As a result of the inclusion of such a provision,
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stockholders may be unable to recover monetary damages against directors for
actions taken by them that constitute negligence or gross negligence or that are
otherwise in violation of their fiduciary duty of care, although it may be
possible to obtain injunctive or other equitable relief with respect to such
actions. If equitable remedies are found not to be available to stockholders in
any particular situation, stockholders may not have an effective remedy against
a director in connection with such conduct.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Amended and Restated Certificate of Incorporation and the By-laws
provide that directors and officers of the Company (as well as agents and
employees of the Company at the discretion of the Board) shall, to the fullest
extent authorized by the DCGL or any other applicable laws then in effect, be
indemnified against liabilities arising from their service as directors and
officers. Additionally, the Company has entered into indemnification agreements
with each of its executive officers and directors to reimburse them for certain
liabilities incurred in connection with the performance of their fiduciary
duties. Section 145 of the DGCL empowers a corporation to indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Section 145 also empowers a corporation to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that such person acted in any of the
capacities set forth above, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted under similar standards, except
that no indemnification may be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the corporation
unless, and only to the extent that, the Delaware Court of Chancery or the court
in which such action was brought shall determine that despite the adjudication
of liability such person is fairly and reasonably entitled to indemnity for such
expenses which the Delaware Court of Chancery or such other court shall deem
proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to above or in the defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith; that indemnification provided for by Section 145 shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled;
and that the corporation is empowered to purchase and maintain insurance on
behalf of any person who is a or was a director, officer, employee or agent of
the corporation against any liability asserted against him in any such capacity,
or arising out of his status as such, whether or not the corporation would have
the power to indemnify him against such liabilities under Section 145.
There has not been in the past and there is not presently pending any
litigation or proceeding involving a director, officer, employee or agent of the
Company which could give rise to an indemnification obligation on the part of
the Company. In addition, except as described herein, the Board of Directors is
not aware of any threatened litigation or proceeding which may result in a claim
for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a
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director, officer or controlling person of the Company in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The foregoing summary of certain material provisions of ACSI's Amended and
Restated Certificate of Incorporation and By-laws is qualified in its entirety
by reference to the complete text of those documents.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar of ACSI's Common Stock is The Bank of New
York, 101 Barclay Street, New York, New York 10296.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion sets forth the material anticipated U.S. Federal
income tax considerations applicable to the purchase, ownership and disposition
of the New Notes. This summary is based upon the Internal Revenue Code of 1986,
as amended (the "Code"), its legislative history, existing and proposed
regulations thereunder (including regulations concerning the treatment of debt
instruments issued with original issue discount (the "OID Regulations")),
published rulings and court decisions all as in effect and existing on the date
hereof and all of which are subject to change at any time, which change may be
applied retroactively in a manner that could adversely affect holders of the New
Notes.
This summary applies only to those persons who are the initial holders of
Old Notes and who hold Old Notes as capital assets. The summary does not address
the tax consequences to taxpayers who purchase the New Notes from such initial
holders. This summary does not purport to deal with all aspects of Federal
income taxation that may be relevant to an investor's decision to purchase and
it is not intended to be applicable to all categories of investors, some of
which, such as dealers in securities, banks, insurance companies, tax-exempt
organizations and foreign persons, may be subject to special rules.
ALL PROSPECTIVE PURCHASERS OF SECURITIES ARE ADVISED TO CONSULT THEIR OWN
TAX ADVISORS REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF
THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE SECURITIES.
A holder will not recognize taxable gain or loss as a result of the
exchange of Old Notes for New Notes as provided herein.
TAXATION OF THE NEW NOTES
Original Issue Discount
The New Notes will be issued with original issue discount for federal
income tax purposes. Accordingly, each holder of New Notes generally will be
required to include original issue discount in income as it accrues under a
constant yield method in advance of cash payments attributable to such income
(regardless of whether the holder is a cash or accrual basis taxpayer). The
amount of original issue discount with respect to a New Note will be the excess
of the stated redemption price at maturity of such New Note over the issue price
of the Old Notes (which will be treated as the issue price of the New Notes).
The stated redemption price at maturity will include all cash payments required
to be made on the New Notes, whether denominated as principal or interest.
The Company will report annually to the Internal Revenue Service ("IRS")
and to record holders of the New Notes information with respect to original
issue discount accruing during the calendar year.
Each holder of a New Note will be required to include in gross income an
amount equal to the sum of the daily portions of original issue discount for
each day during a taxable year in which the New Note is held without regard to
when the cash or other payments attributable to such income are received. The
daily portions of original issue discount will be determined by allocating the
pro rata portion of the original issue discount that is allocable to the accrual
period (i.e., each six-month period, or shorter initial period, that ends on
April 1 or October 1) to each day in an accrual period. The amount of original
issue discount that is allocable to an accrual period is generally equal to the
product of the adjusted issue price of the New Notes at the beginning of the
accrual period (the issue price of the New Notes generally increased by all
prior accruals of original issue discount and reduced by any cash payments on
the New Notes) and the yield-to-maturity of the New Notes (the discount rate,
which, when applied to all payments under the New Notes, results in a present
value equal to the issue price of the New Notes). In the case of the final
accrual period, the allocable original issue discount is the difference between
the amount payable at maturity and the adjusted issue price at the beginning of
the accrual period. Each payment made under a New Note (except for payments of
qualified stated interest, if any, and certain early redemption payments
discussed below) will be treated first as a payment of any accrued original
issue discount that has not been allocated to prior payments and second as a
payment of principal (which is not includable in income).
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Optional Redemption
Under the OID Regulations, for purposes of determining the amount of
original issue discount, ACSI will be presumed to exercise its option to redeem
the New Notes at any time on or after April 1, 2001, if, by utilizing the date
of exercise of the call option as the maturity date and the Redemption Price as
the amount paid at maturity, the yield on the New Notes would be lower than such
yield would be if the option were not exercised. See "Description of New
Notes -- Optional Redemption."
If ACSI is presumed under the above described rule to exercise its option
to redeem the New Notes on a given date (the "Presumed Exercise Date"), the New
Notes would bear original issue discount equal to the sum of all payments due
under the New Notes on or before the Presumed Exercise Date (including the
Redemption Price on such Date) over their issue price. The yield on the New
Notes would be computed on their issue date for purposes of calculating the
current original issue discount inclusion by treating the Presumed Exercise Date
as the maturity date of the New Notes and the Redemption Price as the amount
paid at maturity. If ACSI's option were not exercised in fact on the Presumed
Exercise Date, the New Notes would be treated, for certain purposes, as if the
New Notes had been redeemed and new debt instruments issued on the Presumed
Exercise Date for an amount of cash equal to the adjusted issue price of the New
Notes on that date. In such case, it appears that any payment of stated interest
due under the New Notes after the Presumed Exercise Date would constitute
qualified stated interest (rather than original issue discount) and would be
taxable as ordinary interest income at the time such interest was accrued or was
received, in accordance with such holder's regular method of accounting for tax
purposes.
The holder's right to redeem the New Notes if ACSI experiences a Change of
Control should not affect, and will not be treated by ACSI as affecting, the
determination of the yield or maturity of the New Notes for original issue
discount calculations. The tax treatment of these redemptions and the optional
redemptions described above should be governed by the rules for dispositions
generally. See "-- Sale, Redemption or Other Taxable Disposition of New Notes."
Sale, Redemption or Other Taxable Disposition of New Notes
Generally, any sale, redemption or other taxable disposition of New Notes
by a holder will result in taxable gain or loss equal to the difference between
(1) the sum of the amount of cash and the fair market value of other property
received with respect to such taxable sale, redemption or other distribution
(except that consideration attributable to accrued interest not previously taken
into account is treated as interest received) and (2) the holder's adjusted tax
basis in the New Notes. If a holder is deemed to have purchased New Notes for
their "issue price," the holder's adjusted tax basis for such New Notes will
equal the issue price of the New Notes, increased by any accrued original issue
discount includable in such holder's gross income and decreased by any cash
payments received by such holder with respect to the New Notes (other than
payments of qualified stated interest) regardless of whether such payments are
denominated as principal or interest. Any gain or loss upon a sale or other
disposition of the New Notes will generally be capital gain or loss, which will
be long term if the New Notes have been held by the holder for more than one
year (including any period during which a holder held the Old Notes).
Certain Federal Income Tax Consequences to ACSI and to Corporate Holders
The New Notes will constitute applicable high yield discount obligations
("HYDOs") if their yield to maturity is equal to or greater than the sum of the
applicable federal rate (the "AFR") for debt instruments issued in March 1996
(namely 5.98%, compounded semi-annually), plus five percentage points, and the
New Notes are issued with significant original issue discount. If the New Notes
are HYDOs, ACSI will not be entitled to deduct original issue discount that
accrues with respect to such New Notes until amounts attributable to such
original issue discount are paid. In addition, if the yield to maturity of the
New Notes exceeds the sum of the relevant AFR plus six percentage points (the
"Excess Yield"), ACSI's deduction for the "disqualified portion" of the original
issue discount accruing on the New Notes will be disallowed. In general, the
"disqualified portion" of the original issue discount for any accrual period
will be equal to the
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<PAGE> 109
product of (i) the Excess Yield divided by the yield to maturity on the New
Notes, and (ii) the original issue discount for the accrual period.
Subject to otherwise applicable limitations, holders that are U.S.
corporations will be entitled to a dividends received deduction (generally at a
70% rate) with respect to any disqualified portion of the accrued original issue
discount to the extent that ACSI has sufficient current or accumulated earnings
and profits. If the disqualified portion exceeds ACSI's current and accumulated
earnings and profits, the excess will continue to be taxed as ordinary original
issue discount income in accordance with the rules described above in "Original
Issue Discount."
Backup Withholding
Under certain circumstances, a holder may be subject to backup withholding
at a 31% rate on payments received with respect to the New Notes. This
withholding generally applies only if the holder (i) fails to furnish his or her
social security or other taxpayer identification number ("TIN"), (ii) furnishes
an incorrect TIN, (iii) is notified by the IRS that he or she has failed to
properly report payment of interest and dividends and the IRS has notified ACSI
that he or she is subject to backup withholding, or (iv) fails, under certain
circumstances, to provide a certified statement, signed under penalty of
perjury, that the TIN provided is his or her correct number and that he or she
is not subject to backup withholding. Any amount withheld from a payment to a
holder under the backup withholding rules is allowable as a credit against such
holder's Federal income tax liability, provided that the required information is
furnished to the IRS. Certain holders (including, among others, corporations and
foreign individuals who comply with certain certification requirements) are not
subject to backup withholding. Holders should consult their tax advisors as to
their qualification for exemption from backup withholding and the procedure for
obtaining such an exemption.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Notes where such
Notes were acquired as a result of market-making activities or other trading
activities. The Company has agreed that, starting on the Expiration Date and
ending on the close of business one year after the Expiration Date, it will make
this Prospectus, as amended or supplemented, available to any broker-dealer for
use in connection with any such resale. In addition, until June 24, 1996, all
dealers effecting transactions in the New Notes may be required to deliver a
prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit of any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of one year after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such
109
<PAGE> 110
documents in the Letter of Transmittal. The Company has agreed to pay all
expenses incident to the Exchange Offer (including the expenses of one counsel
for the Holders of the Notes) other than commissions or concessions of any
brokers or dealers and will indemnify the Holders of the New Notes (including
any broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
Certain legal matters regarding the New Notes will be passed on for the
Company by Cravath, Swaine & Moore, New York, New York.
EXPERTS
The consolidated financial statements of the Company as of and for the
fiscal year ended June 30, 1995, have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, and as of and for the fiscal year
ended June 30, 1994, by Coopers & Lybrand L.L.P., independent certified public
accountants, and their respective reports thereon, appearing elsewhere herein,
and upon the authority of said firms as experts in accounting and auditing.
CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS
On April 21, 1995, pursuant to authorization of its Board of Directors and
approval of its Audit Committee, the Company dismissed the firm of Coopers &
Lybrand L.L.P ("Coopers & Lybrand") as its auditors and retained KPMG Peat
Marwick LLP ("KPMG Peat Marwick"). Coopers & Lybrand's report for each of the
fiscal years ended June 30, 1993, and June 30, 1994, indicated uncertainties as
to the Company's ability to continue as a going concern. However, Coopers &
Lybrand's report for these years did not contain an adverse opinion or a
disclaimer of opinion and was not qualified or modified as to audit scope or
accounting principles.
During the fiscal years ended June 30, 1993, and June 30, 1994, and the
subsequent interim periods immediately preceding the change in accountants,
there were no disagreements with Coopers & Lybrand on any matter of accounting
principles or practice, financial statement disclosure, or auditing scope or
procedure, which if not resolved to the satisfaction of Coopers & Lybrand would
have caused them to make reference to the subject matter of the disagreement in
connection with their reports on the Company's financial statements. During the
fiscal years ended June 30, 1993, and June 30, 1994, and the subsequent interim
periods immediately preceding the change in accountants, there were no
reportable events (as that term is used in Regulation S-K, Item 304(a)(1)(v)(A)
through (D) of the Exchange Act), except that at the March 30, 1994, meeting of
the Audit Committee at which representatives of Coopers & Lybrand were present,
Coopers & Lybrand communicated to the Audit Committee that through approximately
August 1993, documentation of equity or other non-cash transactions and controls
over cash were less than adequate. This matter was then discussed. The Company
has authorized Coopers & Lybrand to respond fully to the inquiries of KPMG Peat
Marwick concerning such reportable events.
110
<PAGE> 111
GLOSSARY
ACCESS CHARGES -- The fees paid by IXCs to LECs for originating and
terminating long distance calls on their local networks.
ATM (Asynchronous Transfer Mode) -- A recently commercialized switching and
transmission technology that is one of a general class of packet technologies
that relay traffic by way of an address contained within the first five bits of
a standard fifty-three bit-long packet or cell. ATM switching was specifically
developed to allow switching and transmission of mixed voice, data and video
(sometimes referred to as "multi-media" information) at varying rates. The ATM
format can be used by many different information systems, including LANs.
BROADBAND -- communications systems can transmit large quantities of voice,
date and video by way of digital or analog signals. Examples of broadband
communication systems include DS-3 fiber optic systems, which can transmit 672
simultaneous voice conversations, or a broadcast television station, that
transmits high resolution audio and video signals into the home. Broadband
connectivity is also an essential element for interactive multimedia
applications.
CAP (Competitive Access Provider) -- A company that provides its customers
with an alternative to the local telephone company for local transport of
private line, special access and interstate transport of switched access
telecommunications services. CAPs are also referred to in the industry as
alternative local telecommunications service providers (ALTs) and metropolitan
area network providers (MANs) and were formerly referred to as alternative
access vendors (AAVs).
CENTRAL OFFICES -- The switching centers or central switching facilities of
the LECs.
CENTREX -- Centrex is a service that offers features similar to those of a
Private Branch Exchange (PBX), except the equipment is located at the carrier's
premises and not at the premises of the customer. These features include direct
dialing within a given phone system, direct dialing of incoming calls, and
automatic identification of outbound calls. This is a value-added service that
carriers can provide to a wide range of customers who do not have the size or
the funds to support their own on-site PBX.
CLEC -- A CAP that also provides switched local telecommunications
services.
CO-CARRIER STATUS -- A relationship between competitive local exchange
carriers that affords the same access to and right on each other's networks, and
that provides access and services on an equal basis.
COLLOCATION -- The ability of a CLEC such as the Company to connect its
network to the LEC's central offices. Physical collocation occurs when a CLEC
places its network connection equipment inside the LEC's central offices.
Virtual collocation is an alternative to physical collocation pursuant to which
the LEC permits a CLEC to connect its network to the LEC's central offices at
competitive prices, even though the CLEC's network connection equipment is not
physically located inside the central offices.
DEDICATED LINES -- Telecommunications lines dedicated or reserved for use
exclusively by particular customers along predetermined routes (in contrast to
telecommunications lines within the LEC's public switched network).
DEDICATED SERVICES -- Special access, switched transport and private line
services generally offered by CLECs, including the Company.
DIGITAL -- A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary code digits 0 and 1. Digital transmission and switching technologies
employ a sequence of these pulses to represent information as opposed to the
continuously variable analog signal. Digital transmission and switching
technologies offer a threefold improvement in speed and capacity over analog
techniques, allowing much more efficient and cost-effective transmission of
voice, video, and date.
DS-0, DS-1, DS-3 -- Standard telecommunications industry digital signal
formats, which are distinguishable by bit rate (the number of binary digits (0
and 1) transmitted per second). DS-0 service has a bit
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<PAGE> 112
rate of 64 kilobits per second. DS-1 service has a bit rate of 1.544 megabits
per second and DS-3 service has a bit rate of 45 megabits per second.
FCC -- Federal Communications Commission.
FIBER MILE -- The number of route miles installed (excluding pending
installations) along a telecommunications path multiplied by the number of
fibers along that path. See the definition of "route mile" below.
FIBER OPTICS -- Fiber optic cable is the medium of choice for the
telecommunications and cable industries. Fiber is immune to electrical
interference and environmental factors that affect copper wiring and satellite
transmission. Fiber optic technology involves sending laser light pulses across
glass strands in order to transmit digital information. A strand of fiber optic
cable is as thick as a human hair yet is said to have more bandwidth capacity
than copper cable the size of a telephone pole.
FIBER OPTIC RING NETWORK -- Most CLECs have built their networks in ring
configurations in order to ensure that, if one segment of a network is damaged
or cut, the traffic is simply re-routed and sent to its destination in the
opposite direction. The Company uses a "self-healing" optical fiber ring
architecture in its networks.
FRAME RELAY -- Frame relay is a high-speed data packet switching service
used to transmit data between computers. Frame Relay supports data units of
variable lengths at access speeds ranging from 56kbs to 1.5 mbs. This service is
ideal for connecting LANs, but is not appropriate for voice and video
applications due to the variable delays that can occur. Frame Relay was designed
to operate at higher speeds on modern fiber optic networks.
INTERCONNECTION DECISIONS -- Rulings by the FCC announced in September 1992
and August 1993, which require the RBOCs and most other LECs to provide
interconnection in LEC central offices to any CLEC, long distance carrier or end
user seeking such interconnection for the provision of interstate special access
and switched access transport services.
IXC (Interexchange Carriers) -- See Long Distance Carrier.
LANS (Local Area Networks) -- The interconnection of computers for the
purpose of sharing files, programs and various devices such as work stations,
printers and high-speed modems. LANs may include dedicated computers or file
servers that provide a centralized source of shared files and programs.
LATAS (Local Access and Transport Areas) -- The geographically defined
areas in which LECs are authorized by the MFJ to provide local switched
services.
LECS (Local Exchange Carrier) -- A company providing local telephone
services.
LOCAL EXCHANGE AREAS -- A geographic area determined by the appropriate
state regulatory authority in which local calls generally are transmitted
without toll charges to the calling or called party.
LONG DISTANCE CARRIERS OR IXCS (Interexchange Carriers) -- Long distance
carriers provide services between local exchanges on an interstate or intrastate
basis. A long distance carrier may offer services over its own or another
carrier's facilities. Long distance carriers include, among others, AT&T, MCI,
Sprint, WorldCom and LCI, as well as resellers of long distance capacity.
MFJ (Modified Final Judgment) -- The MFJ was an agreement made in 1982
between AT&T and the Department of Justice that forced the breakup of the old
Bell System. This judgment, also known as the Divestiture of AT&T, established
seven separate Regional Bell Operating Companies (RBOCs) and created two
distance segments of telecommunications service: local and long distance. This
laid the ground work for intense competition in the long distance industry, but
essentially created seven separate regionally-based local switched service
monopolies.
NODE -- An individual point of origination and termination of data on the
network transported using frame relay or similar technology.
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<PAGE> 113
OFF-NET -- A customer that is not physically connected to one of the
Company's networks but who is accessed through interconnection with a LEC
network.
ON-NET -- A customer that is physically connected to one of the Company's
networks.
PBX (Private Branch Exchange) -- A switching system within an office
building which allows calls from outside to be routed directly to the individual
instead of through a central number. This PBX also allows for calling within an
office byway of four digit extensions. Centrex is a service which can simulate
this service from an outside switching source, thereby eliminating the need for
a large capital expenditure on a PBX.
PCS (Personal Communications Service) -- A type of wireless telephone
system that uses light, inexpensive handheld sets and communicates via low power
antennas.
POPS (Points of Presence) -- Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long distance carrier.
PRIVATE LINE -- A private, dedicated telecommunications connection
different location (excluding long distance carrier POPs).
RBOCS (Regional Bell Operating Companies) -- The seven local telephone
companies established by the MFJ. These RBOCs are prohibited from providing
interLATA services and from manufacturing telecommunications equipment.
ROUTE MILES -- The number of miles of the telecommunications path in which
fiber optic cables are installed as it would appear on a network map.
SPECIAL ACCESS SERVICES -- The lease of private, dedicated
telecommunications lines or "circuits" along the network of a LEC or a CLEC
(such as the Company), which lines or circuit run to or from the long distance
carrier POPs. Examples of special access services are telecommunications lines
running between POPs of a single long distance carrier, from one long distance
carrier POP to the POP of another long distance carrier or from an end used to
its long distance carrier POP. Special access services do not require the use of
switches.
SWITCH -- A sophisticated computer that accepts instructions from a caller
in the form of a telephone number. Like an address on an envelope, the numbers
tell the switch where to route the call. The switch opens or closes circuits or
selects the paths or circuits to be used for transmission of information.
Switching is a process of interconnecting circuits to form a transmission path
between users. Switches allow local telecommunications service providers to
connect calls directly to their destination, while providing advanced features
and recording connection information for future billing.
SWITCHED ACCESS SERVICES -- The origination or termination of long distance
traffic between a customer premise and an IXC POP via shared local trunks using
a local switch.
SWITCHED TRANSPORT SERVICES -- Transportation of switched traffic along
dedicated lines between the LEC central offices and IXC POPs.
SWITCHED TRAFFIC -- Telecommunications traffic along a switched network.
VGE (Voice Grade Equivalent Circuits) -- A measure of service equivalent to
one telephone line (64 kilobits of bandwidth) actually billed to a customer.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.......................................................... F-2
Report of Independent Accountants..................................................... F-3
Consolidated Balance Sheets, June 30, 1995, and 1994.................................. F-4
Consolidated Statements of Operations for the Years Ended June 30, 1995, and 1994..... F-5
Consolidated Statements of Series A Preferred Stock and Stockholders' Equity (Deficit)
for the Years Ended June 30, 1995, and 1994......................................... F-6
Consolidated Statements of Cash Flows for the Years Ended June 30, 1995, and 1994..... F-7
Notes to Consolidated Financial Statements............................................ F-8
Condensed Consolidated Balance Sheet as of December 31, 1995 (unaudited).............. F-20
Condensed Consolidated Statements of Operations for the Six Months Ended December 31,
1995, and December 31, 1994, and for the Three Months Ended December 31, 1995, and
December 31, 1994 (unaudited)....................................................... F-21
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31,
1995, and December 31, 1994, and for the Three Months Ended December 31, 1995, and
December 31, 1994 (unaudited)....................................................... F-22
Notes to Unaudited Condensed Consolidated Interim Financial Statements................ F-23
</TABLE>
F-1
<PAGE> 115
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
American Communications Services, Inc.:
We have audited the accompanying consolidated balance sheet of American
Communications Services, Inc. and its subsidiaries as of June 30, 1995, and the
related consolidated statements of operations, Series A preferred stock and
stockholders' equity (deficit), and cash flows for the year 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 audit.
We conducted our audit 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 audit provides 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 its subsidiaries as of June 30, 1995, and the
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Washington, D.C.
August 25, 1995
F-2
<PAGE> 116
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
American Communication Services, Inc.:
We have audited the accompanying consolidated balance sheet of American
Communications Services, Inc. (a development stage company) as of June 30, 1994
and the related consolidated statements of operations, Series A preferred stock
and stockholders' equity (deficit) and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
Our original report on the Company's fiscal 1994 financial statements,
dated August 29, 1994, included an explanatory paragraph that referenced to a
footnote discussing factors indicating substantial doubt as to the Company's
ability to continue as a going concern for a reasonable period of time beyond
December 31, 1994. Such note also discussed the Company's being in the
development stage and continuation of the Company being dependent upon obtaining
and maintaining adequate sources of capital or other financing arrangements,
evolving from the development stage and achieving sufficiently profitable
operations. Based on events subsequent to our original report, the reissued
fiscal 1994 financial statements accompanying this report do not contain such
footnote disclosures and an explanatory paragraph discussing such matters is no
longer required.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
Communication Services, Inc. as of June 30, 1994 and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
Chicago, Illinois
August 29, 1994, except for matters discussed
in the third paragraph above, as to which the
date is September 15, 1995
F-3
<PAGE> 117
AMERICAN COMMUNICATIONS SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (note 1)....................................... $ 20,350,791 $ 3,270,397
Restricted cash (note 1)................................................. 752,000 200,000
Trade accounts receivable, net of allowance for doubtful accounts of
$8,570................................................................. 350,436 --
Other current assets..................................................... 92,325 --
------------ -----------
Total current assets.............................................. 21,545,552 3,470,397
Networks, equipment and furniture, net (note 2)............................ 15,567,290 522,918
Deferred financing fees, net of accumulated amortization of $34,956 and
$124,021 at June 30, 1995 and 1994, respectively......................... 292,113 601,879
Other assets............................................................... 222,010 10,465
------------ -----------
Total assets...................................................... $ 37,626,965 $ 4,605,659
============ ===========
LIABILITIES, REDEEMABLE STOCK, OPTIONS AND WARRANTS, MINORITY INTEREST AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................................................... $ 3,843,167 $ 492,332
Accrued financing fees................................................... 1,542,255 179,950
Accrued employee costs................................................... 836,509 117,176
Other accrued liabilities................................................ 1,269,484 355,547
Convertible bridge notes (note 4)........................................ -- 4,300,720
Secured note -- stockholder (note 4)..................................... -- 75,000
Secured convertible notes -- related party (note 4)...................... -- 606,640
Notes payable -- stockholders (note 4)................................... 146,083 627,775
------------ -----------
Total current liabilities......................................... 7,637,498 6,755,140
Long term liabilities:
Notes payable (note 4)................................................... 3,652,085 --
Dividends payable (note 3)............................................... 1,070,985 --
------------ -----------
Total liabilities................................................. 12,360,568 6,755,140
------------ -----------
Redeemable stock, options and warrants (notes 6 and 7)..................... 2,930,778 1,116,276
------------ -----------
Minority interest (note 4)................................................. 194,402 --
------------ -----------
Stockholders' equity (deficit) (note 6):
Preferred stock, no par value, non-voting, cumulative, 2,000 shares
authorized, 1,700 shares issued and outstanding at June 30, 1994,
liquidation value is equal to face value (note 12)..................... -- 1,700,000
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, 1995 (notes 3 and 4).......................................... 186,664 --
Preferred stock, $1.00 par value, 277,500 shares authorized and
designated as 9% Series B Convertible Preferred Stock; 227,500 shares
issued and outstanding at June 30, 1995 (notes 3 and 5)................ 227,500 --
Common stock, no par value, 20,000,000 shares authorized, 2,755,005
shares issued and outstanding at June 30, 1994......................... -- --
Common stock, $.01 par value, 30,000,000 shares authorized, 5,744,782
shares issued and outstanding at June 30, 1995 (notes 5, 6, and 12, and
13).................................................................... 56,827 --
Additional paid-in capital............................................... 42,411,448 1,080,566
Note receivable from sale of common stock................................ -- (2,750)
Accumulated deficit...................................................... (20,741,222) (6,043,573)
------------ -----------
Total stockholders' equity (deficit).............................. 22,141,217 (3,265,757)
------------ -----------
Commitments and contingencies (notes 1, 6, 7, 8, and 9)
Total liabilities, redeemable stock, options and warrants, minority
interest and stockholders' equity (deficit).............................. $ 37,626,965 $ 4,605,659
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 118
AMERICAN COMMUNICATIONS SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ ----------
<S> <C> <C>
Revenues............................................................ $ 388,887 --
------------- -----------
Operating expenses:
Network development and operations................................ 3,282,183 1,054,358
Selling, general and administrative............................... 4,597,615 1,297,499
Noncash stock compensation (note 6)............................... 6,419,412 633,151
Depreciation and amortization..................................... 497,811 1,967
------------- -----------
Total operating expenses............................................ 14,797,021 2,986,975
Non-operating income (expenses):
Interest and other income......................................... 217,525 5,155
Interest and other expense........................................ (170,095) (332,997)
Debt conversion expense (note 4).................................. (385,000) (681,250)
------------- -----------
Loss before minority interest....................................... (14,745,704) (3,996,067)
Minority interest................................................... 48,055 --
------------- -----------
Net loss............................................................ (14,697,649) (3,996,067)
Preferred stock dividends and accretion (note 3).................... (1,070,985) (48,670)
------------- -----------
Net loss to common stockholders..................................... $(15,768,634) (4,044,737)
============= ===========
Net loss per common share........................................... $ (3.30) (1.77)
============= ===========
Average number of common shares outstanding......................... 4,771,689 2,283,695
============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 119
AMERICAN COMMUNICATIONS SERVICES, INC.
CONSOLIDATED STATEMENTS OF SERIES A PREFERRED STOCK AND STOCKHOLDERS'
EQUITY(DEFICIT)
YEARS ENDED JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------------------
SERIES A SERIES A SERIES B COMMON
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK STOCK
------------------- ------------------- ----------------- ----------------- ---------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
------ ----------- ------ ----------- ------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1993............ 1,250 $ 960,061 -- $ -- -- $ -- -- $ -- 893,712
Series A Preferred Stock dividends
accrued.......................... -- 48,670 -- -- -- -- -- -- --
Exchange of Series A Preferred
Stock and common stock for
debt............................. (100 ) (73,378) -- -- -- -- -- -- (36,372)
Common stock exchanged for trade
payables (note 5)................ -- -- -- -- -- -- -- -- 151,588
Exchange of notes receivable for
Series A Preferred Stock and
common stock (note 4)............ 550 550,000 -- -- -- -- -- -- 628,577
Series A Preferred exchanged for
Preferred Stock.................. (1,700) (1,485,353) 1,700 1,700,000 -- -- -- -- --
Common stock issuance in reverse
acquisition...................... -- -- -- -- -- -- -- -- 562,500
Common stock issued to Bridge Loan
creditors (note 3)............... -- -- -- -- -- -- -- -- 150,000
Issuance of common stock to an
employee......................... -- -- -- -- -- -- -- -- 5,000
Issuance of common stock (note
3)............................... -- -- -- -- -- -- -- -- 400,000
Issuance of put right obligation
(note 7)......................... -- -- -- -- -- -- -- -- --
Net loss........................... -- -- -- -- -- -- -- -- --
------ ----------- ------ ----------- ------- -------- ------- -------- ---------
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)......................... -- -- -- -- -- -- -- -- --
Acquisition of Piedmont Teleport,
Inc. (note 13)................... -- -- -- -- -- -- -- -- 62,000
Write-off of note receivable for
common stock..................... -- -- -- -- -- -- -- -- --
Series A Preferred private
placement, net of related costs
(note 3)......................... -- -- -- -- 186,664 186,664 -- -- --
Series B Preferred private
placement, net of related costs
(note 3)......................... -- -- -- -- -- -- 227,500 227,500 --
Issuance of put right obligations
(notes 6 and 9).................. -- -- -- -- -- -- -- -- --
Cancellation of put right
obligation (note 7).............. -- -- -- -- -- -- -- -- --
Warrant and stock option exercises
and stock grant (note 6)......... -- -- -- -- -- -- -- -- 2,379,390
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
====== ========== ====== ========== ======= ======== ======= ======== ========
<CAPTION>
NOTES
RECEIVABLE EQUITY TOTAL
ADDITIONAL ON SALE OF IN STOCKHOLDERS'
PAID-IN COMMON COMBINED ACCUMULATED EQUITY
AMOUNT CAPITAL STOCK EQUITIES DEFICIT (DEFICIT)
------- ----------- ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1993............ $ -- 190,919 (2,750) 35,000 (2,047,506 ) (1,824,337)
Series A Preferred Stock dividends
accrued.......................... -- (48,670) -- -- -- (48,670)
Exchange of Series A Preferred
Stock and common stock for
debt............................. -- (26,797) -- (35,000 ) -- (61,797)
Common stock exchanged for trade
payables (note 5)................ -- 132,636 -- -- -- 132,636
Exchange of notes receivable for
Series A Preferred Stock and
common stock (note 4)............ -- 550,000 -- -- -- 550,000
Series A Preferred exchanged for
Preferred Stock.................. -- (214,647) -- -- -- 1,485,353
Common stock issuance in reverse
acquisition...................... -- -- -- -- -- --
Common stock issued to Bridge Loan
creditors (note 3)............... -- 131,250 -- -- -- 131,250
Issuance of common stock to an
employee......................... -- 4,375 -- -- -- 4,375
Issuance of common stock (note
3)............................... -- 849,000 -- -- -- 849,000
Issuance of put right obligation
(note 7)......................... -- (487,500) -- -- -- (487,500)
Net loss........................... -- -- -- -- (3,996,067 ) (3,996,067)
------- ----------- ---------- -------- ----------- -------------
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 (33,033) -- -- -- --
Acquisition of Piedmont Teleport,
Inc. (note 13)................... -- -- -- -- -- --
Write-off of note receivable for
common stock..................... -- (2,750) 2,750 -- -- --
Series A Preferred private
placement, net of related costs
(note 3)......................... -- 15,009,461 -- -- -- 15,196,125
Series B Preferred private
placement, net of related costs
(note 3)......................... -- 20,434,000 -- -- -- 20,661,500
Issuance of put right obligations
(notes 6 and 9).................. -- (53,303) -- -- -- (53,303)
Cancellation of put right
obligation (note 7).............. -- 487,500 -- -- -- 487,500
Warrant and stock option exercises
and stock grant (note 6)......... 23,794 349,030 -- -- -- 372,824
Establish limitation on common
stock put right obligation (note
6)............................... -- 4,510,962 -- -- -- 4,510,962
Series A Preferred Stock dividends
accrued (note 3)................. -- (1,070,985) -- -- -- (1,070,985)
Net loss........................... -- -- -- -- (14,697,649) (14,697,649)
------- ----------- ---------- -------- ----------- -------------
Balances at June 30, 1995............ $56,827 42,411,448 -- -- (20,741,222) 22,141,217
======= ========== ========= ========= =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 120
AMERICAN COMMUNICATIONS SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................................ $(14,697,649) (3,996,067)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization......................................................... 497,811 1,967
Amortization of deferred financing fees............................................... 323,900 124,020
Provision for doubtful accounts....................................................... 8,570 --
Loss attributed to minority interest.................................................. (48,055) --
Noncash compensation, consultants and other expenses.................................. 6,419,412 633,151
Noncash debt conversion expense....................................................... 385,000 681,250
Changes in operating assets and liabilities:
Trade accounts receivable........................................................... (359,007) --
Restricted cash related to operating activities..................................... 200,000 (200,000)
Other current assets................................................................ (92,325) --
Other assets........................................................................ (26,545) (9,865)
Accounts payable.................................................................... 3,170,885 472,973
Accrued financing fees.............................................................. 1,542,255 --
Accrued employee costs.............................................................. 719,333 117,176
Other accrued liabilities........................................................... 1,055,673 312,748
------------- -----------
Net cash used in operating activities..................................................... (900,742) (1,862,647)
------------- -----------
Cash flows from investing activities:
Purchase of net assets of Piedmont Teleport, Inc........................................ (19,135) --
Proceeds from sale of Wilmington Delaware Network....................................... -- 70,000
Purchase of furniture and fixtures...................................................... (306,454) (14,731)
Restricted cash related to network activities........................................... (752,000) --
Network development costs............................................................... (14,996,303) (505,214)
------------- -----------
Net cash used in investing activities..................................................... (16,073,892) (449,945)
------------- -----------
Cash flows from financing activities:
Issuance of notes payable............................................................... 3,510,349 --
Payment of deferred financing fees...................................................... (310,175) (594,900)
Warrant and stock option exercises...................................................... 372,824 --
Issuance of common stock, net of offering costs......................................... -- 699,000
Issuances of Series A Preferred Stock, net of offering costs and conversion of bridge
financing............................................................................. 10,962,046 --
Issuances of Series B Preferred Stock, net of offering costs............................ 20,661,500 --
Issuance of bridge notes................................................................ -- 4,300,720
Issuance of secured convertible note.................................................... -- 606,640
Issuance of secured note................................................................ -- 75,000
Issuance of notes payable -- stockholders............................................... 250,000 641,606
Proceeds from sale of minority interest in subsidiaries................................. 242,457 --
Payments of notes payable -- stockholders............................................... (481,692) (150,000)
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................................................. 34,055,028 5,578,066
------------- -----------
Net increase in cash and cash equivalents................................................. 17,080,394 3,265,474
Cash and cash equivalents beginning of year............................................... 3,270,397 4,923
------------- -----------
Cash and cash equivalents end of year..................................................... $ 20,350,791 3,270,397
============= ===========
Supplemental disclosure of cash flow information -- interest paid on all debt
obligations............................................................................. $ 219,554 21,452
============= ===========
Supplemental disclosure of noncash investing and financing activities:
Series A Preferred exchanged for Preferred Stock.......................................... $ -- 1,485,353
============= ===========
Dividends declared in connection with Series A Preferred Stock............................ $ 1,070,985 48,670
============= ===========
Bridge financing, secured convertible notes, and notes payable -- stockholders converted
to equity in connection with private placements......................................... $ 4,080,079 --
============= ===========
Accrued redeemable warrant costs.......................................................... $ (487,500) 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 --
============= ===========
Common stock exchanged for trade payable.................................................. $ -- 132,636
============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 121
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1994
(1) BASIS OF PRESENTATION AND RELATED MATTERS
Basis of Presentation
As of July 1, 1993, the Company's operations consisted of the activities of
American Lightwave, Inc. (ALI) and its subsidiaries, Alabama Lightwave, Inc.,
North Carolina Lightwave, Inc., Chicago Lightwave, Inc., Delaware Lightwave,
Inc. and Virginia Lightwave, Inc. combined with American Consolidated
Communications, Inc. (ACC) and its subsidiaries, Austin Lightwave, Inc., Los
Colinas Lightwave, Inc., Winston Salem Lightwave, Inc., and Phoenix Lightwave,
Inc. combined with a management company, American Communication Services, Inc.
(an Illinois Corporation) (ACS). These entities are collectively referred to
hereafter as "Combined ALW." Common ownership served as the basis for
combination. All significant intercompany accounts and transactions were
eliminated in the combination.
On September 14, 1993, a merger agreement and related agreements, among
other things, caused the merger of Combined ALW into Golf Links Ltd. (GLL), a
dormant publicly-held company, with GLL as the surviving corporation, in
exchange for newly issued shares of GLL's preferred and common stock. Under the
agreements, each outstanding common share of ALI was exchanged for 207.84044
shares of GLL common stock, and each outstanding share of ALI Series A Preferred
Stock was exchanged for one share of GLL preferred stock and the shares of ACC
and ACS were assigned to GLL. Additionally, notes receivable for common stock of
ACC totaling $50,000 were forgiven in conjunction with the merger. After the
merger, GLL changed its name to American Communication Services, Inc. (a
Colorado Corporation) (hereinafter "the Company" or "ACSI"). ACSI became a
Delaware corporation in September 1994.
For accounting purposes, and as required by Securities and Exchange
Commission Staff Accounting Bulletin 2A-2, the above transaction was treated as
a reverse acquisition. Combined ALW is deemed to have acquired GLL. As such, the
historical financial statements have been prepared on the historical basis of
Combined ALW and have been presented as if held by a holding company. The
transaction is presented as if the Company was capitalized with 1,637,500 shares
of common stock and 1,700 shares of preferred stock issued to its stockholders
which was consistent with the actual shares received in this transaction. The
stockholders' equity (deficit) of the Company retroactively reflects such
capitalization.
Additionally, the transaction has been recorded as if the Company issued
common stock to each of the stockholders of GLL in exchange for GLL shares on a
one-for-one basis to effect the merger on September 14, 1993. Since this
transaction was considered a reverse acquisition, it has been accounted for
using the purchase method. All material intercompany transactions and accounts
have been eliminated in consolidation.
As of and for the year ended June 30, 1995, the consolidated financial
statements include the accounts of American Communications Services, Inc. and
its subsidiaries, all of which, excluding the Louisville and Fort Worth
subsidiaries, are wholly owned. As discussed in note 4 to the consolidated
financial statements, the Company has a 92.75 percent ownership interest in
these two subsidiaries. All material intercompany accounts and transactions have
been eliminated in consolidation.
Business
The Company's efforts have been directed toward becoming a competitive
access provider (CAP) of business telecommunications services in selected
mid-sized cities. The Company builds and operates competitive access fiber optic
networks to provide local special access telecommunications services to major
businesses and government customers in selected target markets.
F-8
<PAGE> 122
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) BASIS OF PRESENTATION AND RELATED MATTERS -- (CONTINUED)
The Company was considered a Development Stage Company through November
1994 as defined in Statement of Financial Accounting Standards (SFAS) No. 7,
"Accounting and Reporting by Development Stage Enterprises." In December of
1994, the Company recorded its first operating revenues.
During 1995, the Company raised capital in two separate private placements
of equity, a portion of which was used to repay debt (see notes 3 and 4). Also,
the Company obtained a financing facility from AT&T Credit Corporation, with
respect to equipment and working capital financing for up to $31.2 million, a
portion of which has been drawn upon as of June 30, 1995 (see notes 3 and 4).
The Company has utilized its existing equity and debt financing to enable
it to establish its initial five networks and support its operations through
1995 and believes that it can sustain its general operating expenses through the
end of fiscal 1996 through these sources. The Company is in the process of
seeking and obtaining additional funding, without which it will be forced to
severely curtail its operations and development activities, to enable it to
support its future operating requirements and further develop its next networks.
The Company is continuing discussions with a number of equity and debt
investors. While the success of these efforts is uncertain, the Company's
management believes that it will secure the necessary funding to carry out its
business plans.
Cash Equivalents
Cash equivalents generally consist of highly liquid debt instruments with
an initial maturity date of three months or less. At June 30, 1995, cash
equivalents consisting of overnight investments are $20,944,751, including
restricted cash of $752,000.
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 $752,000 and $200,000 at June 30, 1995 and 1994, respectively.
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 regulatory authorizations and the
net amount of interest costs associated with the network development. In 1995,
the Company has capitalized interest of approximately $536,000.
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:
<TABLE>
<S> <C>
Networks:
Fiber optic cables and installation costs.................... 20 years
Telecommunications equipment................................. 3-7 years
Interconnection and collocation costs........................ 10 years
Leasehold improvements......................................... Life of lease
Furniture and fixtures......................................... 5 years
</TABLE>
F-9
<PAGE> 123
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) BASIS OF PRESENTATION AND RELATED MATTERS -- (CONTINUED)
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.
Revenue Recognition
Revenue is recognized as services are provided and is recorded net of
interconnection payments to local exchange carriers. 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. For the per share
computation, accrued dividends on the Series A Preferred Stock have been added
to the reported net loss. 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 1994 financial statements
to conform to the 1995 presentation. Such reclassifications had no effect on net
loss or total stockholders' equity.
(2) NETWORKS, EQUIPMENT AND FURNITURE
Networks, equipment and furniture consists of the following at June 30:
<TABLE>
<CAPTION>
1995 1994
----------- --------
<S> <C> <C>
Networks and telecommunications equipment................... $15,570,450 505,214
Furniture and fixtures...................................... 327,112 20,658
----------- --------
15,897,562 525,872
Less -- accumulated depreciation and amortization........... 330,272 2,954
----------- --------
Total, net of accumulated depreciation and amortization..... $15,567,290 522,918
=========== ========
</TABLE>
(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 with proceeds of
$10,962,046, net of placement agent commissions and related placement fees and
costs.
F-10
<PAGE> 124
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) PRIVATE PLACEMENTS -- (CONTINUED)
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 second 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 (the Series B-1 Preferred, Series B-2 Preferred and
Series B-3 Preferred, hereafter collectively referred to as the "Series B
Preferred Stock"). There were 227,500 shares issued for cash at $100 per share
with proceeds of $20,661,500, net of placement agents commissions and related
placement fees and costs. An additional 50,000 shares of 9% Series B-4
Convertible Preferred Stock (the "Series B-4 Preferred Stock"), $1.00 par value,
will be issued for $5,000,000 in cash less commissions upon the achievement of
certain milestones. The Company currently expects to meet these requirements by
the end of the second quarter of 1996. Additionally, 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 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, 1995, the outstanding Series A-1 Preferred Stock was
convertible into 7,466,560 shares of common stock and the outstanding Series B
Preferred Stock (all series) was convertible into 8,125,003 shares of common
stock. If issued, the Series B-4 Preferred Stock will be convertible into
1,785,714 shares of the Company's common stock.
The holders of common stock are entitled to elect two directors and the
holders of the Preferred Stock are entitled to elect an aggregate of seven
directors. In addition, certain transactions and matters require the consent of
the holders of at least the majority of the shares of Series A-1 Preferred Stock
voting as a separate class and a majority of the shares of Series B-1 Preferred
Stock voting as a separate class.
In connection with the Company's private placement offering of its Series
A-1 Preferred Stock, the Company has recorded $1,070,985 as a reduction in
additional paid-in capital, for the payment of anticipated dividends. The
associated investment agreement requires the Company to accrue dividends, on a
quarterly basis, at an annual rate of 9 percent of the face value of the Series
A-1 Preferred Stock. The Series B Preferred Stock, which was issued on June 26,
1995, will also accrue dividends on a quarterly basis, at an annual rate of 9
percent of their face value.
Although the Board of Directors of the Company has not taken any formal
action as of June 30, 1995, as a condition of the aforementioned agreement, the
dividends have been deemed declared and properly reflected in the accompanying
consolidated financial statements as of June 30, 1995. Pursuant to the
resolution authorizing the Series A-1 and B Preferred Stock, 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 will issue promissory notes to the holders on
January 1, 1998 for dividends accrued, if conversion has not occurred.
Conversion may occur at any time at the holder's option or automatically, upon
certain qualifying issuance of common stock, liquidation, or occurrence of
certain triggering events. As of June 30, 1995, no conversions have occurred.
F-11
<PAGE> 125
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) DEBT
Long-term debt at June 30 consists of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Convertible Bridge Notes, interest at 15%, maturing
December 31, 1994............................................ $ -- 4,300,720
Secured note -- stockholder, interest at 15%, maturing
December 31, 1994............................................ -- 75,000
Secured convertible notes -- related party at 15%, maturing
December 31, 1994............................................ -- 606,640
Notes payable -- stockholders at 10-15%, maturing September 15,
1995 and September 14 and 15, 1994, respectively............. 146,083 627,775
AT&T Credit Corporation equipment and working capital financing
facility..................................................... 3,652,085 --
---------- ---------
Total long-term debt........................................... 3,798,168 5,610,135
Less current portion........................................... 146,083 5,610,135
---------- ---------
$3,652,085 --
========== =========
</TABLE>
Principal payments for each of the years from 1996 to 2000 and thereafter,
are due as follows at June 30, 1995:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, AMOUNT
------------------------------------------------- ----------
<S> <C>
1996............................................. $ 146,083
1997............................................. 198,715
1998............................................. 190,946
1999............................................. 376,331
2000............................................. 546,180
Thereafter....................................... 2,339,913
----------
$3,798,168
==========
</TABLE>
Convertible Bridge Notes
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, to 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 offering (see note 3). The Company recorded noncash
debt conversion expense of $231,000 associated with the related unamortized
financing fees.
Secured Note -- Stockholder
On May 25, 1994, the Company issued a Promissory Note in the principal
amount of $75,000 to a stockholder with an interest rate of 15 percent per
annum, due December 31, 1994. As additional consideration, the Company issued
6,923 shares of common stock. In October 1994, the cash proceeds of the Series A
Preferred Stock private placement offering were used to retire the outstanding
principal and accrued interest associated with this secured note (see note 3).
F-12
<PAGE> 126
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) DEBT -- (CONTINUED)
Secured Convertible Notes
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 percent 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 for 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.
Demand Note
In August 1994, the Company borrowed $250,000, at a rate of 15 percent per
annum from an affiliate that was payable on demand. In October 1994, this note
was converted for 2,778 shares of Series A Preferred Stock (see note 3).
Notes Payable -- Stockholders
At June 30, 1994, the Company had a total of $627,775 in notes payable to
stockholders. Such notes payable included $300,000 in ACSI Bridge Notes due
September 14, 1994, $252,775 in ALI Senior Subordinated Notes Payable (Senior
Notes) including accrued interest due September 15, 1994, that were convertible
into ACSI Bridge Notes, and a note payable to a stockholder of $75,000, that was
paid by the Company on July 6, 1994. The ACSI Bridge Notes and the Senior Notes
bore interest at 10 percent per annum while the note payable to stockholder bore
interest at 15 percent per annum. Additionally, at June 30, 1994, the Senior
Notes had attached warrants to purchase a total of 12,500 shares of ACSI common
stock for every $50,000 of principal amount exercisable at $.875.
The aforementioned ACSI Bridge Notes and Senior Notes due September 14,
1994 and September 15, 1994, respectively, were all, with the exception of
$146,083 principal amount, paid in July and August 1994. The maturity date for
the remaining $146,083 was extended until September 14, 1995.
At June 30, 1993, ALI had short-term notes payable due to stockholders (ALI
Notes Payable) totaling $569,994. The notes bore interest at various rates
ranging from 8 to 10 percent, which was payable quarterly. Immediately prior to
the reverse acquisition, as described in note 1, a stockholder exchanged the
remaining balance on these ALI Notes Payable totaling $550,000 for 550 shares of
no par Series A Preferred Stock and 628,577 shares of common stock. The Company
recorded noncash debt conversion expense of $550,000 related to the exchange
transaction.
Immediately prior to the September 14, 1993 reverse acquisition, ALI issued
$600,000 of Senior Unsecured Promissory Notes (ALI Bridge Notes), which bore
interest at 10 percent, payable quarterly. The ALI Bridge Notes had attached
warrants to purchase 12,500 shares of common stock of ACSI, exercisable at $.875
per share, for every $50,000 of principal amount. The ALI Bridge Notes carried
an initial term of one year. In conjunction with the reverse acquisition, the
ALI Bridge Notes were converted into ACSI Bridge Notes (ACSI Bridge Notes). As
an inducement to convert, the holders of the ALI Bridge Notes received, at no
cost, 12,500 shares of ACSI common stock for every $50,000 of principal amount.
The Company recorded a noncash debt conversion expense of $131,250 in 1994
associated with the debt conversion. During 1994, the Company made principal
payments totaling $150,000 to the holders of such ACSI Bridge Notes. The Company
also issued 400,000 shares of common stock at $2.50 per share for cash totaling
$850,000 in
F-13
<PAGE> 127
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) DEBT -- (CONTINUED)
satisfaction of $150,000 of such ACSI Bridge Notes. The issuance of the common
stock has been recorded as an increase in additional paid-in capital net of
offering costs totaling $151,000.
Additionally, in anticipation of the September 14, 1993 reverse
acquisition, certain stockholders converted 100 shares of ALI Series A Preferred
Stock, 36,372 shares of ALI common stock, and 3,325 shares of ACC common stock
to Senior Notes with principal value of $135,175. The Senior Notes bore interest
at 10 percent and matured in one year. Stockholders also exchanged short-term
notes payable totaling $107,083 for Senior Notes.
AT&T Credit Corporation Equipment and Working Capital Financing Facility
The Company has an arrangement for an anticipated $31,200,000 secured
equipment and working capital financing facility with AT&T Credit Corporation.
Each network is treated as a separate loan facility which has a maturity date of
nine years after the closing of the facility. Each loan shall bear interest at a
rate per annum equal to a fixed rate or a variable rate, computed on the basis
of a 360 day year compounded monthly. The variable rate is based upon the
average offering rate for three month commercial paper. The fixed rate is based
upon the "ask yields" of United States seven year treasury notes.
Interest on each loan shall be payable quarterly in arrears on each payment
date providing that no event of default has occurred. All of the principal and
related interest payments are deferred for twenty-four months from the date of
closing. The Company is responsible for an interest deferral rate ranging from 5
to 5.75 percent.
The Company's subsidiaries, which have built and are currently operating
networks in Louisville, Kentucky, Fort Worth, Texas, and Greenville and
Columbia, South Carolina, have received loan commitments totaling approximately
$19.8 million under this arrangement, of which approximately $3,650,000,
including interest of approximately $142,000, which is accruing at rates ranging
from 11.76 to 13.59 percent, has been drawn down at June 30, 1995. The Company
also sold a 7.25 percent ownership interest in the Louisville and Fort Worth
subsidiaries to AT&T Credit Corporation during 1995. Pursuant to this facility,
subsequent to June 30, 1995, the Company also sold a 7.25 percent ownership
interest in its Greenville and Columbia, South Carolina subsidiaries to AT&T
Credit Corporation and received additional loan commitments from AT&T Credit
Corporation totalling $5.5 million for its El Paso, Texas network on
substantially identical terms.
The AT&T Credit Corporation facility is subject to certain conditions with
respect to the funding of each city's network, including the execution of
definitive loan documents, the completion of due diligence and submission of
business plans satisfactory to the lender for each network to be funded.
The provisions of the facility restrict the subsidiaries' incurrence of
liens and other indebtedness, sale of assets, dividend payments, and other
activities not designated in the business plan. Additionally, timely reporting
of financial and other non-financial information is required as well as
maintaining the established minimum cash flow requirements, fixed charge
coverage, and debt service reserve. At June 30, 1995, the Company and its
subsidiaries were in compliance with the covenants contained in the agreements.
Further, pursuant to the facility, the Company is required to purchase
certain minimum levels of equipment from AT&T, an affiliate of AT&T Credit
Corporation, at prevailing market prices. At June 30, 1995, the Company is
required to purchase approximately $2.3 million in AT&T equipment over the next
two years. For the year ended June 30, 1995, the Company purchased approximately
$1,775,000 of telecommunications equipment from AT&T, which amount is recorded
as networks, equipment and furniture within the accompanying consolidated
financial statements.
F-14
<PAGE> 128
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) STOCKHOLDERS' EQUITY
Common Stock
In 1995, the Company established a par value of $.01 for its issued and
outstanding common stock.
In 1994, prior to the September 14, 1993 reverse acquisition (see note 1),
the Company issued 151,588 shares of common stock in settlement of $132,636 in
liabilities payable for services rendered. GLL issued 212,500 shares of common
stock in payment of $185,938 in services to effect the reverse acquisition. This
amount was charged to paid-in-capital.
Additionally, in October 1993, the Company approved the issuance of a total
of 5,000 shares of the common stock of the Company to an employee in
consideration for services performed. Noncash compensation expense recorded for
the transaction was $4,375.
Preferred Stock
Pursuant to the Series B Preferred Stock offering, as described in note 3,
four classes of Series B Preferred Stock have been issued. The composition of
the Series B Preferred Stock at June 30, 1995 is as follows:
<TABLE>
<S> <C>
Preferred Stock, $1.00 par value, 100,000 shares designated as 9% Series
B-1 Convertible Preferred Stock authorized, issued and outstanding...... $100,000
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 Convertible Preferred Stock authorized, issued and outstanding...... 25,000
Preferred Stock, $1.00 par value, 50,000 shares authorized and designated
as 9% Series B-4 Convertible Preferred Stock; none issued and
outstanding............................................................. --
--------
Total..................................................................... $227,500
========
</TABLE>
(6) STOCK OPTIONS AND STOCK PURCHASE WARRANTS
The Company has a stock option plan which provides for the granting of
options to certain officers, employees, and affiliated members of the Company to
purchase shares of its common stock within prescribed periods at a price which
generally equals the fair market value on the date of grant.
In 1994, the Company entered into employment agreements with five executive
officers. In 1995, the employment agreements were amended. As of June 30, 1995,
pursuant to the agreements, as amended, such executive officers have been
granted options to purchase 3,999,835 shares of common stock of the Company at
exercise prices ranging from $.875 to $2.80 per share. The options vest at
various dates as specified in the employment agreements with 3,919,835 of the
options vesting on specific dates ranging from October 31, 1993 to March 31,
1998, and 80,000 of such options vesting upon the occurrence of certain
specified performance milestones from August 31, 1995 through September 1, 1996.
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 reduction based on the employees' sales of stock. As of June
30, 1995 and 1994, 2,586,487 and 549,966 of the options are vested and
exercisable, respectively. Noncash compensation expense associated with these
agreements amounted to approximately $6,382,000 and $628,000, in 1995 and 1994,
respectively.
F-15
<PAGE> 129
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) STOCK OPTIONS AND STOCK PURCHASE WARRANTS -- (CONTINUED)
During 1995 and in connection with the Series A and Series B Preferred
Stock private placements and related bridge note conversions, warrants for
4,258,810 shares of common stock were issued at prices ranging from $.01 to
$3.10. Subsequently, 2,299,967 in such options and warrants were exercised
during the year for proceeds totaling approximately $305,000.
The Company has also issued 500,000 options to a supplier to purchase stock
at 90 percent 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.
None of the options have been exercised to date and they expire in June of 1998.
The Company's obligation with respect to the options is included in redeemable
stock, options, and warrants in the accompanying consolidated financial
statements.
Stock option activity for the years ended June 30, 1995 and 1994 is as
follows:
<TABLE>
<CAPTION>
NUMBER PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Balances, June 30, 1993.................................... -- $ --
Granted.................................................. 858,875 .875 - 3.10
Cancelled................................................ -- --
--------- -----------
Balances, June 30, 1994.................................... 858,875 .875 - 3.10
Granted.................................................. 4,935,314 .875 - 4.00
Exercised................................................ -- --
Cancelled................................................ (100,000) 2.25
--------- -----------
Balances, June 30, 1995.................................... 5,694,189 $ .875 - 4.00
========= ===========
</TABLE>
In addition to the Company's stock option plan, several options and
warrants to purchase the Company's stock have been issued pursuant to various
consulting agreements, bridge note conversions and in connection with the
Company's Series A Preferred Stock and Series B Preferred Stock private
placements.
At June 30, 1994, 512,194 warrants pursuant to consulting and subordinated
note agreements, granted at $.875 during 1994, were outstanding. Pursuant to
these warrant agreements, an additional 2,109 warrants were issued during 1995.
Additionally, during 1995, 33,412 of such warrants were canceled and 72,500 of
such warrants were exercised. Proceeds to the Company upon the exercise of such
warrants approximated $64,000.
At June 30, 1995, 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, 1996.................... 408,391 $ 0.875
Series A and Series B Preferred Stock placements........... 1,958,843 .01 - 3.10
--------- -----------
Total...................................................... 2,367,234 $ .01 - 3.10
</TABLE>
Subsequent to June 30, 1995, warrants issued in connection with the Series
B private placement for 108,268 shares were exercised at $.01 per share.
(7) COMMITMENTS AND CONTINGENCIES
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 was
released from its
F-16
<PAGE> 130
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
obligations to repurchase the shares. 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.
As of June 30, 1995, 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.
(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, 1995 are,
approximately, as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, AMOUNT
------------------------------------------------- ----------
<S> <C>
1996............................................. $ 787,000
1997............................................. 719,000
1998............................................. 604,000
1999............................................. 562,000
2000............................................. 569,000
Thereafter....................................... 888,000
----------
$4,129,000
==========
</TABLE>
Rent expense for the years ended June 30, 1995 and 1994 was approximately
$200,000 and $48,000, respectively.
(9) RELATED-PARTY TRANSACTIONS
The Company and all of its subsidiaries are parties to a management
services agreement whereby the Company renders financial, legal, and other
administrative and network support services in connection with the development
and operational needs of each subsidiary. A fee, based on direct and allocated
costs, is billed monthly. The term of the agreement is initially 15 years and is
renewed automatically for successive 5 year terms. During 1995 and 1994,
intercompany billings for the aforementioned arrangement were approximately $2.3
million and $0, respectively, all of which have been eliminated in
consolidation.
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 1995, the Company paid
$67,500 under this arrangement.
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 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
F-17
<PAGE> 131
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) RELATED-PARTY TRANSACTIONS -- (CONTINUED)
exercise of the options will be priced at $2.25 per share and the shares issued
will have piggy back registration rights.
An entity controlled by significant stockholders of the Company provided
office space and certain administrative personnel through February 1, 1994. The
Company was charged for these items based on a percentage of space occupancy and
personnel time usage. Total charges for the year ended June 30, 1994 were
$78,840. The Company incurred no such costs during 1995.
(10) INCOME TAXES
Temporary differences and carryforwards that give rise to deferred tax
assets and liabilities at June 30 are as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Deferred tax assets:
Capitalized start-up and other costs...................... $4,163,941 1,898,244
Stock options -- noncash compensation..................... 2,768,488 251,510
Net operating loss carryforwards.......................... 1,149,755 225,573
Other accrued liabilities................................. 454,391 --
---------- ----------
Total gross deferred tax assets............................. 8,536,575 2,375,327
Less: valuation allowance................................. 8,291,380 2,375,327
---------- ----------
Net deferred tax assets..................................... 245,195 --
Deferred tax liabilities -- fixed assets depreciation and
amortization.............................................. 245,195 --
---------- ----------
Net deferred tax assets (liabilities)....................... $ -- --
========== ==========
</TABLE>
The valuation allowance for deferred tax assets as of July 1, 1994 was
$2,375,327. The net change in the total valuation allowance for the year ended
June 30, 1995 was an increase of $6,161,248. The valuation allowances at June
30, 1995 and 1994 are a result of the uncertainty 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 $2,927,000 and
$564,000 at June 30, 1995 and 1994, respectively, 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 2010. 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, 1995
and 1994 as the aforementioned deferred tax assets have provided no tax benefit.
(11) MAJOR CUSTOMERS
During 1995, special access services provided by the Company to three long
distance carriers accounted for 85 percent of total revenues. No revenues were
recorded in 1994.
(12) EXCHANGE OF STOCK
On June 1, 1994, the Company entered into an agreement to exchange 548,387
shares of ACSI Common Stock for all 1,700 issued and outstanding shares of ACSI
Preferred Stock. This transaction was completed in July 1994.
F-18
<PAGE> 132
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) 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.
F-19
<PAGE> 133
AMERICAN COMMUNICATIONS SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1995
JUNE 30, ------------
1995
------------ (UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents..................................... $ 20,350,791 $ 57,348,301
Restricted cash............................................... 752,000 1,452,000
Marketable Securities -- available for sale................... -- 49,826,803
Accounts receivable, net...................................... 350,436 556,664
Other current assets.......................................... 92,325 545,193
------------ -----------
Total current assets.................................. 21,545,552 109,728,961
Networks furniture and equipment, net........................... 15,567,290 32,605,162
Deferred financing fees and other assets........................ 514,123 5,600,392
------------ -----------
Total assets.......................................... $ 37,626,965 $147,934,515
============ ===========
LIABILITIES, REDEEMABLE STOCK, OPTIONS AND WARRANTS, MINORITY
INTEREST, AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable.............................................. $ 3,843,167 $ 5,045,859
Accrued liabilities........................................... 3,648,248 2,768,169
Notes payable -- stockholders................................. 146,083 --
------------ -----------
Total current liabilities............................. 7,637,498 7,814,028
Long term liabilities
Notes payable................................................. 3,652,085 12,389,894
Senior discount notes......................................... -- 95,420,469
Dividends payable............................................. 1,070,985 2,925,480
------------ -----------
Total liabilities..................................... 12,360,568 118,549,871
------------ -----------
Redeemable stock, options and warrants.......................... 2,930,778 2,659,579
------------ -----------
Minority interest............................................... 194,402 417,016
------------ -----------
Stockholders' equity
Preferred stock, $1.00 par value, 186,664 shares designated as
9% Series A-1 Convertible Preferred Stock, authorized,
issued and outstanding..................................... 186,664 186,664
Preferred stock, $1.00 par value, 277,500 shares authorized
and designated as 9% Series B Convertible Preferred Stock;
227,500 and 277,500 shares, respectively, issued and
outstanding at June 30, and December 31, 1995.............. 227,500 277,500
Common stock, $0.01 par value, 30,000,000 shares authorized,
5,744,782 and 6,518,723 shares, respectively, issued and
outstanding at June 30, and December 31, 1995.............. 56,827 64,567
Additional paid-in capital.................................... 42,411,448 55,399,675
Accumulated deficit........................................... (20,741,222) (29,620,357)
------------ -----------
Total stockholders' equity............................ 22,141,217 26,308,049
------------ -----------
Commitments and contingencies...................................
Total Liabilities, redeemable stock, options and warrants,
minority interest and stockholders' equity.................... $ 37,626,965 $147,934,515
============ ===========
</TABLE>
June 30, 1995, information was condensed from audited financial statements.
See accompanying notes to unaudited condensed consolidated interim financial
statements.
F-20
<PAGE> 134
AMERICAN COMMUNICATIONS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIODS
ENDED FOR THE SIX MONTH PERIODS ENDED
-------------------------------- --------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1994 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues........................ $ 8,246 $ 589,843 $ 8,246 $ 988,877
----------- ----------- ------------ -------------
Operating expenses:
Network development and
operations................. $ 404,514 $ 1,336,837 $ 634,694 $ 2,921,709
Selling, general and
administrative............. 887,681 1,907,206 1,242,553 3,077,678
Noncash stock compensation.... 252,207 410,550 608,631 1,204,419
Depreciation and
amortization............... 3,013 498,669 22,079 762,657
----------- ----------- ------------ -------------
Total operating expenses........ 1,547,415 4,153,262 2,507,957 7,966,463
Non-operating income (expenses):
Interest and other income..... 81,300 680,134 95,810 777,504
Interest and other expense.... (69,411) (2,694,893) (129,003) (2,834,914)
Debt conversion cost.......... (5,000) -- (579,985) --
----------- ----------- ------------ -------------
Loss before minority interest... (1,532,280) (5,578,178) (3,112,889) (9,034,996)
Minority interest............... 11,660 88,594 11,660 155,861
----------- ----------- ------------ -------------
Net loss........................ (1,520,620) (5,489,584) (3,101,229) (8,879,135)
Preferred stock dividends and
accretions.................... -- (956,362) -- (1,854,495)
----------- ----------- ------------ -------------
Net loss to common
shareholders.................. $ (1,520,620) $ (6,445,946) $ (3,101,229) $ (10,733,630)
=========== =========== ============ =============
Net loss per common share....... $ (0.33) $ (1.07) $ (0.81) $ (1.82)
=========== =========== ============ =============
Average number of common shares
outstanding................... 4,641,231 5,996,311 3,835,214 5,900,606
=========== =========== ============ =============
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements.
F-21
<PAGE> 135
AMERICAN COMMUNICATIONS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD FOR THE SIX MONTH PERIOD
ENDED ENDED
------------------------------ -----------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1994 1995
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss....................................... $(1,520,620) $(5,489,584) $(3,101,229) $(8,879,135)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization................ $ 3,013 $ 498,669 $ 22,079 $ 762,657
Noncash debt conversion expense.............. 5,000 579,985
Noncash interest expense..................... 2,694,893 2,807,273
Provision for doubtful accounts.............. 0 19,651 0 30,223
Loss attributable to minority interest....... (11,660) (88,594) (11,660) (155,861)
Noncash compensation......................... 252,207 410,550 608,631 1,204,419
Changes in operating assets and liabilities:
Restricted cash related to operating
activities.............................. (76,225) 0 (104,069) 0
Trade accounts receivable.................. (7,496) (332,458) (7,496) (236,451)
Other current assets....................... (183,754) (261,673) (183,754) (452,868)
Other assets............................... 204,112 (499,448) 0 (572,836)
Accounts payable........................... 577,230 3,073,813 850,960 1,202,692
Other accrued liabilities.................. (118,640) 309,486 235,716 (1,117,069)
------------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities..................................... (876,833) 335,305 (1,110,837) (5,406,958)
------------- ----------- ----------- -----------
Cash flows from investing activities:
Investment in network, equipment and
software..................................... (4,045,682) (12,377,272) (6,090,069) (17,657,193)
Investment in marketable securities --
available for sale........................... 0 (49,826,803) 0 (49,826,803)
Decrease (increase) in restricted cash related
to network activities........................ 175,000 (700,000) (475,000) (700,000)
------------- ----------- ----------- -----------
Net cash used in investment activities........... (3,870,682) (62,904,075) (6,565,069) (68,183,996)
------------- ----------- ----------- -----------
Cash flows from financing activities
Issuance of preferred stock, net of offering
costs and conversion of bridge financing..... 11,371,912 4,725,318 11,371,912 4,725,318
Increase in deferred financing fees............ (4,805,546) (4,805,546)
Issuance of senior discount notes and
warrants..................................... 101,679,353 101,679,353
Issuance of notes payable...................... 888,283 4,254,523 888,283 8,737,809
Warrant or stock option exercises.............. 304,563 18,055 304,563 19,137
Proceeds from sale of minority interest
in subsidiaries.............................. 109,475 0 109,475 378,474
Issuance of stockholder notes payable.......... 0 0 250,000 0
Payment of notes payable....................... (1,152,281) 0 (1,633,973) (146,083)
Payments of capital lease obligation........... (5,202) (13,831)
------------- ----------- ----------- -----------
Net cash flow from financing activities.......... 11,516,750 105,871,703 11,276,429 110,588,460
------------- ----------- ----------- -----------
Net increase in cash and cash equivalents........ 6,769,235 43,302,933 3,600,523 36,997,510
Cash and cash equivalents -- beginning of
period......................................... 101,685 14,045,368 3,270,397 20,350,791
------------- ----------- ----------- -----------
Cash and cash equivalents -- end of period....... $ 6,870,920 $57,348,301 $ 6,870,920 $57,348,301
============= =========== =========== ===========
Supplemental disclosure of cash flow information:
Interest paid on all indebtedness.............. $ 0 $ 0 $ 0 $ 27,641
============= =========== =========== ===========
Supplemental disclosure of noncash investing and
financing activities:
Dividends accrued in connection with
preferred stock.............................. 0 956,362 0 1,854,495
------------- ----------- ----------- -----------
Increase (decrease) in redeemable stock option
and warrants costs........................... $ (356,424) $ 157,730 $ 0 $ (338,949)
------------- ----------- ----------- -----------
Increase in negotiated right-of-way for option
discount..................................... $ 201,000 $ 62,500 $ 0 $ 67,750
============= =========== =========== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements.
F-22
<PAGE> 136
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION AND RELATED MATTERS
Basis of Presentation
As of the end of and for the three and six month periods ended December 31,
1995, the accompanying unaudited condensed consolidated interim financial
statements include the accounts of American Communications Services, Inc. and
its subsidiaries, all of which, excluding the Louisville, Kentucky, Fort Worth,
Texas, Columbia and Greenville, South Carolina, and El Paso, Texas subsidiaries,
are wholly owned. The Louisville, Kentucky subsidiary was also not wholly owned
for the three month period ending December 31, 1994. The Company has a 92.75
percent ownership interest in these subsidiaries. Such statements, including
comparative information for the three and six month periods ended December 31,
1994, where applicable, have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and item 310(b) of Regulation S-B. The unaudited
condensed consolidated statements should be read in conjunction with the
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB filed with the SEC on October 13, 1995, as amended. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. All material
intercompany accounts and transactions have been eliminated in consolidation.
Results of the interim periods are not indicative of the results to be expected
for the full year.
Business
American Communications Services, Inc. ("ACSI" or the "Company") is a
competitive access provider ("CAP") that constructs and operates digital fiber
optic networks and offers local telecommunications services to long distance
companies (interexchange carriers or "IXCs") and business and government end
users in the southern U.S. ACSI's management team includes pioneers in the
development of the CAP industry with demonstrated expertise in successfully
deploying fiber optic networks and aggressively managing operations.
The Company currently provides non-switched dedicated services including
special access, switched transport and private line services. These services
generally are offered by the Company in competition with local exchange
telephone companies ("LEC's") and are delivered with a high level of network
reliability. In addition to these dedicated services, the Company is developing
and has begun offering on a limited basis enhanced voice messaging and
high-speed data services to business and government end users. Successful
marketing of these enhanced voice messaging and high-speed data services will
not only provide the Company with increased revenues, but also with an expanded
end user customer base and relevant marketing experience that can be leveraged
into the planned future offering of local switched services.
As of December 31, 1995, ACSI had nine operational networks and an
additional eight networks under construction, most of which are expected to be
operational by mid-1996. During the quarter ended September 30, 1995, ACSI
became the first competitive local provider of telecommunications to receive
state authority in South Carolina to offer intrastate dedicated services
beginning February 1, 1996, and, by February 5, 1996, the Company has added
certification in Tennessee to provide both switched and dedicated services and
certifications in Georgia, Texas, Kentucky, and Arkansas to provide intrastate
dedicated services. The Company intends to have 30 networks in service by
mid-1997. To date, management believes that it has been able to deploy 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.
F-23
<PAGE> 137
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS -- (CONTINUED)
(1) BASIS OF PRESENTATION AND RELATED MATTERS -- (CONTINUED)
Financing Activities
On November 14, 1995, the Company completed a private offering of 190,000
Units (the "Units") consisting of $190,000,000 principal amount of 13% Senior
Discount Notes due 2005 (the "Notes") and warrants to purchase 2,432,000 shares
of the Company's common stock at a price of $7.15 per share ("Warrants"). The
Notes and Warrants have certain registration rights. The Notes will accrete to
an aggregate principal amount of $190,000,000 by November 1, 2000, after which
cash interest will accrue on a semi-annual basis. The Company received net
proceeds of approximately $96,826,000 from the sale of the Units. At the time of
such closing, the Company also received net proceeds of approximately $4,725,000
from the private sale to ING Equity Partners, L.P.I. ("ING") of 50,000 shares of
its 9% Series B-4 Convertible Preferred Stock and the exercise by ING of
warrants to purchase 214,286 shares of its common stock pursuant to the June
1995 Series B Convertible Preferred Stock private placement.
The Company will continue to use the proceeds from the sale of the Units
and the Series B-4 Preferred Stock to complete its 30-city network plan, as
discussed above, and to fund negative operating cash flow until break-even.
(2) SUBSEQUENT EVENTS
In February, 1996, the U.S. Congress enacted, and the President signed into
law, comprehensive telecommunications reform legislation. The new law requires
all LECs to unbundle their local network offerings and allow other providers of
telecommunications services to interconnect with their facilities and equipment.
Such provisions enable the Company to obtain critical connections to LEC
facilities. In addition, LECs are obligated to provide local number portability
and dialing parity upon request and make their local services available for
resale by competitors. Under the legislation, LECs also have to allow
competitors nondiscriminatory access to LEC pole attachments, conduit space and
other rights-of-way. Moreover, states are prohibited from disallowing local
competition, although they are allowed to regulate such competition.
The Company believes that each of these requirements is likely to enhance
competition in the local telecommunications marketplace and simplify the process
of switching from LEC services to those offered by CAPs. However, the
legislation also offers important benefits to the LECs. The LECs are granted
substantial new pricing flexibility and Regional Bell Operating Companies
("RBOC's" ) regain the ability to provide long distance services and obtain new
rights to provide certain cable TV services. These changes tend to enhance the
competitive position of the LECs.
F-24
<PAGE> 138
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES OR IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE
HAS NOT BEEN ANY CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
Available Information................. 2
Summary............................... 3
Summary Consolidated Financial and
Operating Data...................... 10
Risk Factors.......................... 11
Use of Proceeds....................... 20
Capitalization........................ 21
Selected Consolidated Financial
Data................................ 22
The Exchange Offer.................... 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 29
Business.............................. 36
Management............................ 51
Executive Compensation................ 56
Certain Relationships and Related
Transactions........................ 65
Principal Stockholders................ 70
Description of Certain Indebtedness... 72
Description of the New Notes.......... 73
Description of Capital Stock.......... 100
Certain Federal Income Tax
Considerations...................... 107
Plan of Distribution.................. 109
Legal Matters......................... 110
Experts............................... 110
Change in Independent
Public Accountants.................. 110
Glossary.............................. 111
Index to Financial Statements......... F-1
</TABLE>
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LOGO
Offer to Exchange its
12 3/4% Senior Discount Notes
due 2006 which have been
registered under the
Securities Act of 1933,
as amended, for any and all
of its outstanding
12 3/4% Senior Discount Notes
due 2006
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PROSPECTUS
MAY 13, 1996
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