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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10 - KSB
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM: COMMISSION FILE NO. 0-25314
JULY 1, 1996 TO DECEMBER 31, 1996
AMERICAN COMMUNICATIONS SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1947746
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
131 National Business Parkway Annapolis Junction, MD 20701
(Address of principle executive office) (Zip Code)
Registrant's telephone number, including area code: (301) 617-4200
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Act:
Title of Class
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COMMON STOCK, PAR VALUE $0.01 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K [ ].
As of March 27, 1997, the aggregate market value of the voting stock
held by non-affiliates based upon the last reported sales price of a share of
common stock as reported on the NASDAQ National Market was approximately
$40,483,401.
As of March 17, 1997, 8,193,109 common shares were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) The registrant's definitive Proxy Statement for its annual meeting of
stockholders is tentatively scheduled to be held on May 14, 1997, to be
filed with the Commission not later than 120 days after the close of the
registrant's fiscal year, has been incorporated by reference, in whole or
in part, into Part III, Items 9, 10, 11 and 12 of this Annual Report on
Form 10-KSB.
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AMERICAN COMMUNICATIONS SERVICES, INC.
FORM 10 - KSB
TABLE OF CONTENTS
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<S> <C>
PART I
Item 1. Business 3
Item 2. Properties 32
Item 3. Legal Proceedings 33
Item 4. Submission of Matters to a Vote of Security Holders 33
PART II
Item 5. Market for Common Equity and Related Stockholder 35
Matters
Item 6. Management's Discussion and Analysis of Results of 37
Operations and Financial Condition
Item 7. Financial Information 48
Item 8. Changes in and Disagreements with Accountants on 48
Accounting and Financial Disclosure
PART III
Item 9. Directors and Executive Officers of the Registrant 49
Item 10. Executive Compensation 49
Item 11. Security Ownership of Certain Beneficial Owners and 49
Management
Item 12. Certain Relationships and Related Transactions 49
Item 13. Exhibits and Reports on Form 8-K 71
Item 14. Signatures
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<PAGE> 3
PART I
Item 1. Business
The Company
American Communications Services, Inc. ("ACSI" or the "Company") is a provider
of integrated local voice and data communications services to commercial
customers primarily in mid-size metropolitan markets in the southern United
States. Incorporated in 1993, the Company is a rapidly growing competitive local
exchange carrier ("CLEC"), supplying businesses with advanced telecommunications
services through its digital SONET-based fiber optic local networks. To date,
the Company has derived substantially all of its revenues from the sale of
dedicated services, generally at a discount to the price of the ILECs. The
Company's dedicated services include special access, switched transport and
private line services.
As a supplement to its dedicated services, in late 1996 and early 1997 the
Company introduced local switched voice services in two of its markets and
expects to begin offering local switched voice services in two additional
markets using its own switching facilities by March 31, 1997. The Company's
local switched services include local exchange services (dial tone), advanced
ISDN and enhanced voice services. Beginning April 1, 1997, the Company intends
to begin providing local switched services on a resale basis in 15 markets and
plans to expand the number of markets in which it is reselling local switched
services throughout 1997 and the first quarter of 1998. In late 1996, the
Company also deployed ACSINet, a coast-to-coast, leased broadband data
communications network through which the Company offers frame relay, ATM and
Internet access services to both Internet service providers ("ISPs") and local
businesses. As of February 28, 1997, the Company had ACSINet data POPs in 44
markets, including all but one of the markets in which the Company has
operational local networks. Additionally, principally through the Company's
recent acquisition of Cybergate, Inc., a Florida-based ISP, the Company has
begun providing Internet services. The Cybergate acquisition provides a
foundation to support the Company's Internet service offerings to ISPs in
existing ACSI markets and to end users in targeted ACSI markets.
<PAGE> 4
Industry Overview
The continuing deregulation of the telecommunications industry and technological
change have resulted in an increasingly information-intensive business
environment. Regulatory, technological, marketing and competitive trends have
expanded substantially the Company's opportunities in the converging voice and
data communications services markets. Regulatory initiatives, such as the
Telecommunications Act of 1996 ("Federal Telecommunications Act"), are expected
to expand opportunities in the local telecommunications services market, the
size of which is estimated to be approximately $100 billion in 1997.
Technological advances, including rapid growth of the Internet, the increased
use of packet switching technology for voice communications and the growth of
multimedia applications, are expected to result in substantial growth in the
high-speed data services market to approximately $10 billion by 2000 compared to
$1 billion in 1995.
Dedicated Services-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 POPs of IXCs within a metropolitan area and, in some
cases, connecting business and government end users with IXCs. Most of the early
CAPs 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. 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 ILECs due, in part, to antiquated copper-based facilities used in many ILEC
networks.
Local Switched Voice Services-Initially, CAPs could compete effectively only
for special access and private line services to customers in buildings directly
connected to their separate networks, but the FCC Interconnection Decisions in
1992 and 1993 allowed CAPs to increase the number of customers and markets
serviced significantly without physically expanding their networks. Those
Interconnection Decisions also enabled CAPs to provide interstate switched
access services in competition with ILECs, which has encouraged the development
of the competitive interstate switched access market. The Company believes that
competition in this market will be further enhanced because the Federal
Telecommunications Act requires (i) removal of state and local entry barriers,
(ii) ILECs to provide interconnections to their facilities, and (iii) access to
rights-of-way. In addition, to the extent that ILECs begin to compete with IXCs
for long
<PAGE> 5
distance services, IXCs may have a competitive incentive to move access business
away from ILECs to CLECs, and CLEC market share may increase.
Data Communications Services-The Company believes that high-speed data
communications services represent one of the fastest growing segments of the
telecommunications services market due, in part, to the continuing proliferation
of computers and the increasing need to interconnect these computers via local
and wide area networks, the dramatic growth of the Internet and the emergence of
multimedia applications. Together, these applications have spawned numerous
network technologies and communications protocols to support legacy, current and
emerging needs. The domestic network infrastructure currently supporting both
voice and data transport requirements, which focuses on IP switching and framed
relay services, is being strained by the increasing demand for high bandwidth
transport at both the local and national levels. The Company believes that the
increasing volume and complexity of high-speed applications will further strain
the domestic network infrastructure and create an opportunity for ACSI to
provide a single high-quality ATM-based network capable of consistently
supporting diverse data communications needs.
Internet Access Services-Businesses are increasingly using the Internet to
transmit e-mail, engage in commercial transactions (e.g., electronic commerce)
and develop internal communications networks, or "intranets." Increasing
business utilization of the Internet has added to the demand for higher-speed
access (i.e., services connecting users to the Internet), applications (such as
"Web browsers"), increased port capacity and secure network facilities. In
addition, this has resulted in significant demand for local and interexchange
communications network services, applications software and systems integration
services.
Frame Relay-Frame relay service is a fast-packet transport solution targeted
at LAN-to-LAN and legacy networks. Frame relay service is designed to meet
fluctuating, or periodic, data transfer requirements by offering shared virtual
bandwidth connectivity at high speed. Frame relay services offer low cost data
transmission with generally minimal delay, few errors and high speed
performance.
ATM-ATM is a high bandwidth service providing virtual networking for voice,
data and multimedia traffic. The ability to combine all three media provides
opportunities to reduce costs associated with running three separate networks.
The major benefits of ATM include providing shared access to trunk bandwidth for
multiple applications and application types, minimizing the number of wide area
connections needed and supporting user access speeds of at least 1.5 mbps (T-1).
<PAGE> 6
The Company expects the growth in demand for frame relay services to slow and
the demand for ATM services to increase.
Internet Services-An increasing number of businesses and individuals have
access to the Internet through their personal computers and the use of the
modem. Individuals or businesses can connect to the Internet via a modem by
calling an ISP's local POP. ISPs connect users to the Internet via leased or
owned high-speed dedicated data lines. ISPs also help users install and
configure connectivity software and Internet access services. An ISP may offer a
commercial user Internet services at various speeds, depending on a customer's
needs, via direct connections or leased local lines to a local POP.
ACSI Local Networks
From January 1, 1996 to December 31, 1996, the Company increased the number of
its operational local networks from nine to 21 and increased its route miles in
service from 136 to 697. As of February 28, 1997, the Company had 24 operational
local networks and had 12 additional local networks under construction. The
Company is actively developing marketing and engineering plans necessary to
achieve its goal of 50 local networks operating or under construction by June
1998. The following local network information is provided as of February 28,
1997:
<TABLE>
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Operational as of Route Miles Date In
February 28, 1997 Initial Current Service
<S> <C> <C> <C>
Albuquerque, NM 2.2 31.4 12-95
Amarillo, TX 0.8 1.0 09-96
Baltimore, MD 2.8 12.0 10-96
Birmingham, AL 1.8 3.4 05-96
Charleston, SC 1.9 1.9 04-96
Chattanooga, TN 1.6 1.6 12-96
Colorado Springs, CO 1.0 1.0 01-97
Columbia, SC 2.2 18.5 10-95
Columbus, GA 2.2 31.5 09-96
Corpus Christi, TX 2.6 2.6 02-97
El Paso, TX 1.2 69.0 11-95
Fort Worth, TX 1.6 99.3 06-95
Greenville, SC 2.0 11.0 05-95
Irving, TX 8.8 23.0 09-96
Jackson, MS 2.2 5.4 07-96
Las Vegas, NV 0.2 16.4 05-96
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Lexington, KY 3.0 14.5 03-96
Little Rock, AR 1.6 5.5 02-95
Louisville, KY 2.8 45.7 11-94
Mobile, AL 1.2 31.3 04-96
Montgomery, AL 1.7 40.5 12-95
Spartanburg, SC 4.1 4.3 06-96
Tucson, AZ 6.3 109.0 12-95
Tulsa, OK 1.5 2.0 01-97
</TABLE>
<TABLE>
<CAPTION>
Initial Targeted
Markets Under Route Date In
Construction Miles Service
<S> <C> <C>
Austin, TX 2.2 09-97
Baton Rouge, LA 1.2 03-97
Dallas, TX 1.5 06-97
Jacksonville, FL 1.4 03-97
Kansas City, MO 2.0 03-97
Knoxville, TN 2.3 09-97
New Orleans, LA 3.9 03-97
Rio Rancho, NM 14.2 09-97
Roanoke, VA 1.2 09-97
Savannah, GA 6.6 09-97
Shreveport, LA 1.2 03-97
Tampa, FL 1.6 09-97
</TABLE>
Company Strategy
The Company's objective is to become the full service alternative local phone
company for businesses in markets served by its local networks. The Company's
strategy is to rapidly build-out SONET-based fiber optic local networks, which
are located primarily in mid-size U.S. markets, and integrate these local
networks with the Company's recently deployed coast-to-coast, leased broadband
data communications network. This integrated network gives the Company the
ability to deliver high quality voice and high-speed data communications
services to IXCs and end users. The Company expects to leverage its local
network investment by expanding service offerings to provide switched voice and
Internet and other data services through its sales force and its strategic
partners. The Company is establishing the ACSI brand name by aggressively
marketing its broad array of
<PAGE> 8
communications services directly to end users. In addition, the Company is
trying to expand the distribution of private label services through alternative
channels. The Company believes it can provide its customers with complete local
communications services and achieve its strategic objectives by implementing the
following strategies:
Expand Integrated Voice and Data Network-ACSI builds SONET-based fiber optic
local networks that are integrated with ACSINet, the Company's coast-to-coast,
leased broadband data communications network, to support voice, data, multimedia
and Internet technologies. By constructing rather than acquiring its local
networks, the Company believes it has achieved significant cost savings. In
addition, management believes the integrated design of its local networks and
ACSINet, which uses uniform technology throughout all of its markets, provides
the Company with substantial benefits, including networking efficiencies and
insured quality, reliability and operating standards.
Provide a Full Suite of ACSI-Branded Voice and Data Communications Services-
The Company believes that there is substantial demand for an integrated package
of communications services from mid-size commercial and government customers.
ACSI has extended its service offerings to include dedicated access, switched
voice, data and Internet services. The Company believes that packaging its
services under the ACSI brand name will enhance revenues from the Company's
existing customer base, provide services that more effectively meet its
customers' needs, improve customer loyalty and expand awareness of ACSI's
services and capabilities.
Rapidly Expand Sales, Marketing and Distribution Capabilities-In order to
enhance customer service and coverage, the Company has established a local,
customer-oriented, single point of service sales structure, supported by product
specialists. The Company plans to implement this structure and exploit the
opportunities presented by the increased number and size of its operational
local networks and the introduction of expanded ACSI-branded service offerings
by significantly increasing its sales force during 1997. The Company plans to
hire personnel with both voice and data sales experience to strengthen its
existing direct distribution structure, provide extensive product and sales
training and compensate personnel under a highly incentivized program. In
addition, the Company is seeking to leverage existing and establish new
strategic relationships with utility and independent telephone companies, CATVs
and cellular and other wireless communications providers as an alternative means
of distributing private label services to these companies' customers.
<PAGE> 9
Leverage Strategic Relationships-In addition to its end-user sales focus,
ACSI has developed strategic relationships with major IXCs, CATVs and electric
utilities. As of January 31, 1997, ACSI had more than 40 rights-of-way
agreements with gas and electric utility companies, ILECs and CATVs, allowing
the Company to construct its local networks using those companies'
infrastructure of conduits and utility poles. The Company historically has
leveraged and plans to continue to leverage relationships with these companies
to generate revenues and obtain cost effective rights-of-way. For the fiscal
period ended December 31, 1996, approximately 40% of the Company's revenues were
billed to four of the largest IXCs for services provided for the benefit of
their customers. The Company has a five-year agreement with MCImetro, pursuant
to which MCImetro has agreed to purchase minimum levels of dedicated services
from ACSI and has committed to construct portions of ACSI's fiber optic local
networks in six cities. In addition to the MCI Transaction, the Company has also
signed agreements with AT&T and two other IXCs, pursuant to which the Company
expects AT&T and such other IXCs to use the Company as a supplier of dedicated
special access services as well as such other services as may be agreed upon in
particular markets.
Recent Developments
Effective March 6, 1997, the company and MCImetro entered into an agreement in
which MCI names ACSI as its preferred local provider for dedicated and transport
services in 21 ACSI markets for at least a five year period. Pursuant to this
preferred provider agreement, MCI will migrate current dedicated transport
circuits in these markets to ACSI and ACSI will be listed as the first choice
provider in MCI's provisioning system for all new dedicated access circuits in
the designated markets. The preferred provider agreement contemplates that the
parties will execute an agreement giving MCI the opinion to purchase loop
transport services from ACSI where ACSI has collocations with the ILEC and MCI
has deployed its own local switch. If this loop transport agreement is not
executed prior to April 30, 1997, MCI can terminate ACSI's preferred provider
status and ACSI's right of first refusal under the preferred provider agreement.
The parties also have agreed to use their best efforts to execute an agreement
pursuant to which MCI will resell local switched services in at least 10 of the
21 identified markets on a wholesale basis by July 23, 1997. In connection with
these agreements (collectively, the "MCI Transaction"), ACSI issues MCI warrants
to purchase up to 620,000 shares of ACSI's Common Stock at 9.86 per share,
subject to number and price adjustment in certain circumstances. ACSI has also
agreed to issue warrants to purchase up to an aggregate of approximately 1.7
million additional shares of ACSI's Common Stock at fair market value on the
date of grant in tranches every six months after execution
<PAGE> 10
of the preferred provider agreement, subject to, and abased upon, certain
increases in revenues to ACSI generated under that agreement. Of the 620,000
warrants issued to MCI on March 6, 1997, 360,000 warrants will vest only when
the loop transport agreement is executed or MCI has agreed in writing not to
terminate ACSI's preferred provider status or right of first refusal under the
preferred provider agreement (the "Waiver") and the remaining 260,000 warrants
will vest only upon execution of the switched services resale agreement and the
loop transport agreement or when MCI has executed the Waiver. Subject to certain
exceptions, including this offering, MCI has the right to purchase additional
shares of ACSI's Common Stock at a 10% discount to fair market value so MCI can
maintain its equity ownership interest in the Company after giving effect to
warrants issued in connection with the MCI Transaction and shares issued upon
exercise of such warrants. MCI has certain registration rights with respect to
any shares of Common Stock issued to MCI in connection with the MCI Transaction.
If MCI terminates ACSI's status as a preferred provider or ACSI's right of first
refusal under the preferred provider agreement for any reason (other than ACSI's
default under such agreement or a related agreement or a change in control of
ACSI) or MCI fails to deliver to ACSI the Waiver, in each case, on or before May
12, 1997, the warrants, to the extent issued and not previously exercised, case,
on or before May 12, 1997, the warrants, to the extent issued and not previously
exercised, ACSI's obligation to issue additional warrants, MCI's right to
purchase additional shares of ACSI in order to maintain its equity ownership
interest and ACSI's obligation to register shares of ACSI common stock issuable
to MCI in connection with the MCI Transaction with terminate.
On January 17, 1997, the Company acquired 100% of the outstanding capital stock
of Cybergate, Inc. in exchange for 1,030,000 shares of Common Stock plus up to
an additional 150,000 shares if certain performance goals are achieved (the
"Cybergate Acquisition"). Cybergate, a Florida-based ISP, delivers high-speed
data communications services, including computer network connections and related
infrastructure services, that provide both commercial and residential customers
access to the Internet through their personal computers and the use of a modem.
Cybergate had over 200 commercial dedicated line accounts and 13,000 consumer
accounts at December 31, 1996 compared to 25 commercial accounts and 7,500
consumer accounts at December 31, 1995. Cybergate had revenues of approximately
$4.9 million and EBITDA of approximately $744,000 for the year ended December
31, 1996. The Company believes the Cybergate Acquisition will help it achieve
its goal of becoming a major provider of high-speed data communications services
in the southern United States. The Cybergate Acquisition provides ACSI with the
ability to offer direct Internet access to end-user commercial
<PAGE> 11
and consumer customers as well as to provide private label Internet services for
the company's strategic distribution partners throughout all of the company's
markets.
On December 2, 1996, the Company announced a reorganization of its management
structure to create an Office of the Chairman. Anthony J. Pompliano was named
Executive Chairman and has resumed responsibility for the overall day-to-day
operations of the company. Jack E. Reich, formerly President of Ameritech
Corporation's Customer Business Services Division, joined the Company as
President and Chief Executive Officer of the Communications Services Division
and also has assumed oversight responsibility for the Company's finance,
accounting and investor relations functions. George M. Tronsrue, III was named
as President and Chief Operating Officer of Strategy and Technology Development
and Riley M. Murphy continued as General Counsel and Executive Vice President -
Legal and Regulatory Affairs. Messrs. Reich and Tronsrue and Ms. Murphy will
report directly to Anthony J. Pompliano. Effective February 2, 1997, the
employment of Richard A. Kozak, who was named President and Chief Executive
Officer - Corporate Services and Acting Chief Financial Officer in the
management reorganization, was terminated. Mr. Kozak and the Company have
settled their dispute relating to Mr. Kozak's termination.
On March 11, 1997, ACSI announced that Mr. David L. Piazza will join the Company
as its Chief Financial Officer on March 24, 1997. For the last 10 years, Mr.
Piazza has been employed by MFS Communications Company, Inc. ("MFS
Communications") in various finance and senior management positions, most
recently as the Senior Vice President and Chief Financial Officer of MFS
Telecom, Inc., a subsidiary of MFS Communications. Prior to his employment with
MFS Communications, MR. Piazza was employed by AT&T in its finance and support
divisions. Mr. Piazza will report directly to Mr. Reich.
Sales and Marketing
The Company generated substantially all of its revenues in the fiscal period
ended December 31, 1996 from sales to IXCs and ISPs. As ACSI develops its
ACSI-branded product offerings and expands its sales force, the Company will
market its voice and high-speed data services through three channels: (i) direct
sales to end users, (ii) sales to IXCs and ISPs and (iii) sales of private-label
services through alternative distribution channels.
<PAGE> 12
Direct Sales-The Company intends to focus its local sales force on the
commercial end users in each of the markets it serves. Generally, three or four
local sales representatives will provide a single point-of-service for the
customer base in each market and will be supported by voice, data and Internet
product specialists in order to respond effectively to unique and complex
customer needs. In addition, national account representatives will be
responsible for coordinating marketing efforts to Fortune 500 companies located
in the Company's markets. The Company believes that this local,
customer-oriented, single point-of-service sales structure facilitates greater
customer care in both the sales and customer service processes and helps the
Company differentiate itself as a customer focused telecommunications services
provider. The Company expects the percentage of revenues generated through the
direct sales channel to increase as it hires additional local sales
representatives and focuses on sales directly to end users. The Company expects
to increase its direct sales force from 52 to 149 in the first half of 1997.
Carrier Sales-The Company sells dedicated services to IXCs and ISPs (together,
"carriers") who utilize the Company's products and services to provide local
access for their own products. The Company has a five-year agreement with
MCImetro, under which MCImetro has agreed to purchase minimum levels of
dedicated services from ACSI. In addition to the MCI Transaction, ACSI is also
a party to agreements with AT&T and two other IXCs to use the Company as a
supplier of dedicated access services in certain markets. The Company intends
to support and expand its relationships with carriers through additional
agreements to offer dedicated and switched services on its integrated network.
At December 31, 1996, 10 sales professionals targeted IXC and ISP customers. For
the fiscal period ended December 31, 1996, approximately 40% of the Company's
revenues were billed to four of the largest IXCs for services provided for the
benefit of their customers, and approximately 19% of the Company's revenues were
billed to ISPs.
Alternative Distribution-The Company plans to expand distribution of its
services by contracting with IXCs, utilities, CATVs, out-of-region RBOCs, ILECs
and cellular and other wireless communication providers to resell the Company's
products and services under their own private labels. The Company is presently
recruiting a dedicated sales force to serve in support of sales through
alternative channels.
The Company is developing a core competency in marketing its integrated voice
and data network by focusing on branding its services and using its sales force
to sell ACSI's branded services continuously through its three sales channels.
The Company also plans to market its services by uniquely packaging them in ways
that
<PAGE> 13
meet its customers' various needs. Also, ACSI intends to deliver additional
services to its end-user customers throughout 1997.
ACSI Services
The Company currently provides, or is actively implementing plans to provide, a
wide range of local telecommunications services including dedicated and private
line, high-speed data services, including IP switching and managed services,
local switched voice services and Internet services. The Company's SONET-based
fiber optic local 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 1996, dedicated and private line services for IXCs
and other carriers generated a substantial portion of the Company's revenues,
with the remaining revenues generated from business and government end users.
The Company's dedicated services provide high capacity non-switched
interconnections: (i) between POPs of the same IXC; (ii) between POPs of
different IXCs; (iii) between large business and government end users and their
selected IXCs; (iv) between an IXC POP and a ILEC central office or between two
ILEC 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 ILEC. 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 ILEC.
Customer charges are based on the number of channel termination's, fixed
and mileage-sensitive transport charges, and costs for any services
required to multiplex circuits.
Switched transport services. Switched transport services are offered to
IXCs that have large volumes of long distance traffic aggregated by a
ILEC switch at a central office where the CAP has collocated its network.
The Company provides dedicated facilities for transporting these
aggregated volumes of long distance traffic from the ILEC central office
to its POP or between ILEC central offices. The flat monthly charge to
the IXC is typically lower than the transport fees charged by the ILEC,
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.
<PAGE> 14
Private line services. Private line services provide dedicated facilities
between two end-user locations in the same metropolitan area (e.g., a
central banking facility and a branch office or a manufacturing facility
and its remote data processing center) and are priced like special access
services (channel termination charges plus transport and any associated
multiplexing charges). The Company expects the demand for private line
service to increase in conjunction with higher bandwidth customer
applications.
Local Switched Voice Services-As of February 28, 1997 the Company offered
local switched voice services in Columbus, Georgia and Montgomery, Alabama and
expected to begin offering local switched voice services in two more of its
local network markets by March 31, 1997 using its own facilities. Beginning
April 1, 1997, the Company intends to begin providing local switched services on
a resale basis in 15 markets and plans to expand the number of markets in which
it is reselling local switched services throughout 1997 and the first quarter of
1998.
The Company's local switched voice services include telephone exchange service,
including optional enhanced services such as call waiting, caller ID and
three-way conference calling; switching traffic between ACSI's switch and a
business customer's PBX and routing local, intraLATA and interLATA phone calls
according to the customers' specific requirements; providing local dial tone
services with functionality such as free internal communications, call
forwarding, call transfer, conference call and speed dialing; ISDN data
services; and origination and termination of long distance traffic between a
customer premise and interexchange carrier via shared trunks utilizing the
Company's local switch.
By March 31, 1997, the Company expects to have begun generating revenues from
its enhanced voice services that are currently being offered to small and
mid-sized business and government end users in a limited number of its local
network markets. During and after this time, the Company's goal is to expand its
enhanced voice service offerings and customer base. The Company's enhanced voice
services include its First Line and First Line Plus messaging products and
services under the brand names Virtualine and Virtualine 800, including basic
voice messaging, follow-me call routing, virtual calling card services, fax
services, e-mail and paging notification services, and automated attendant
services.
<PAGE> 15
High-Speed Data Services-ACSINet, the Company's coast-to-coast, leased
broadband data communications network supports the following Company services:
ACSINet Internet Access Service. The Company provides public Internet
connectivity and IP transport for the business and reseller communities. This
service is targeted to local and regional ISPs and corporate Internet users
requiring dedicated access. The service operates over the ACSINet DS3 (45 Mbps)
backbone, a fully-meshed, coast-to-coast network with Internet connectivity at
multiple network access points (NAPs) to ensure continuous availability to the
Internet.
Managed Services. These services include design, installation, maintenance,
hardware (such as switches, routers and modems), configuration management (such
as maintaining consistent versions of the router software and deploying
consistent configurations) and overall network management for a customer's
network. The Company's managed services are designed to eliminate many of the
timing, coordination and inter-operability issues that arise in installations
requiring multiple vendors.
Frame Relay. Frame relay service is provided to end users with LAN-to-LAN and
legacy networks, allowing them to share virtual bandwidth connectivity at high
speed. Frame relay services offer low cost data transmission with generally
minimal delay, few errors and high speed performance. As users' requirements
expand into multimedia applications, which require higher bandwidth, frame relay
offers a natural migration path to ATM.
ATM. The Company's ATM services include native speed LAN connectivity,
diagnostic imaging, videoconferencing and other high bandwidth applications.
Internet Services. Principally through the Cybergate Acquisition, the Company
has begun to offer high-speed data communications services, including computer
network connections and related infrastructure services, to allow both
commercial and residential customers to have access to the Internet through
their personal computers and the use of a modem.
Implementation of Integrated Network
The Company has developed an integrated communications network consisting of
SONET-based fiber optic local networks, a coast-to-coast, leased broadband data
communications network and local central office switching facilities.
<PAGE> 16
Local Network Development-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, which continues to be used in varying degrees by the
ILECs. Fiber optic networks also generally require less maintenance than copper
wire or microwave facilities of comparable transmission capacity, thereby
decreasing operating costs. Because ACSI is employing the latest digital
transmission technology in its local networks, these SONET-based fiber optic
networks will have substantial additional capacity, and further increases in
capacity can be achieved through a change in electronics. The Company believes
it will be able to use its local CLEC networks to provide a wide range of
telecommunications services with only incremental facilities costs. Key elements
of the Company's local 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, concentrations of commercial real
estate, and the local city permit 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 ILEC, the telecommunications requirements of such
end user, current pricing by the ILEC 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
<PAGE> 17
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.
Concurrently with its seeking municipal authorizations, the Company initiates
discussions with electric or gas utilities, CATVs and other private providers of
rights-of-way and/or facilities that may be used by the Company for installation
of its network. These discussions are intended to result in agreements that
allow the Company to make use of those parties' fiber optic cables (such as
IRUs), the underground conduits, distribution poles, transmission towers, and
building entrances. The Company's ability to enter into such agreements can have
a material impact on the Company's capital costs for network construction and
the speed with which the Company can construct its networks. Additionally,
obtaining such agreements facilitates the Company's ability to expand
efficiently beyond the central business district to serve additional end users
in its markets. The term of such agreements is typically ten to 25 years, with
renewal terms of five to 15 years. The Company believes that the experience of
members of its senior management team in negotiating such agreements gives it a
competitive advantage over other CLECs that have less experience in successfully
negotiating such agreements.
Implementation of Local Network Construction. The Company initially builds a
one-to three-mile SONET-based 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's
networks are then expanded into suburban business areas and other ILEC central
offices to serve additional customers. These expansions may be in excess of 100
route miles. The Company utilizes outside contractors to construct its networks.
The Company, through outside consultants, prepares preliminary and final
engineering studies for the initial portions of its local networks prior to
obtaining municipal authorizations required to begin network construction. This
process enables the Company to initiate network construction activities
immediately upon receipt of municipal authorizations. Outside plant construction
of a typical downtown network will take from four to six months, depending on
various factors. The Company also coordinates collocation with the ILEC's
downtown central office and interconnections with selected IXC POPs with other
construction milestones,
<PAGE> 18
reducing overall network development costs and allowing the Company 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 ILEC 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 concurrently with the construction of the downtown network,
increasing the speed of overall network construction and, in the Company's
opinion, creating a competitive advantage over other CLECs that may have entered
or are seeking to enter the market. To the extent possible, the Company engages
the third party right-of-way provider to install ACSI's cable in or on the third
party's facilities, usually at a lower cost and with greater speed than that
obtained by using outside contractors.
The Company's network management center in Annapolis Junction, Maryland monitors
all of the Company's networks from one central location. Centralized electronic
monitoring and control of the Company's networks allows the Company to avoid
duplication of this function in each city. This consolidated operations center
also helps to reduce the Company's per customer monitoring and customer service
costs, such that they are lower than would be available if monitored on a
single-city basis. The Company also plans to use this facility to monitor the
performance of data and switched voice services. During 1996, the Company
performed various network management services for other telecommunications
service providers and plans to continue to offer these services on a limited
basis.
A critical element of the Company's local network development plan is
integrating the Company's local networks with ACSINet, its coast-to-coast
broadband data communications network.
Implementation of Local Switched Voice and High-Speed Data Services-Where
technically feasible and economically practicable, the Company intends to deploy
a hubbed switching strategy by using Company-owned or leased switch capacity in
a
<PAGE> 19
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. By aggregating switched traffic from multiple small markets
through a central hub switch, the Company also expects to realize reduced
operating expenses associated with switch engineering and maintenance.
As of February 28, 1997, the Company had installed central office switching
facilities in Columbus, Georgia and Montgomery, Alabama, and was in the process
of installing switches in two additional markets. The company expects to have
installed switches in 24 more markets by December 1999, 12 of those switches are
expected to be installed by December 1997. Toward this end, the Company had
long-term lease commitments for nine initial switches as of February 28, 1997.
In December 1996, the Company deployed ACSINet, a coast-to-coast, leased
broadband data communications backbone network via leased inter-city fiber
connections on which customers' high-speed data and multimedia traffic may be
transported at a high-quality level on a cost-effective basis. ACSI believes its
ATM-based high bandwidth network will be capable of simultaneously supporting IP
switching, frame relay and multimedia applications. This technology will allow
network customers to migrate transparently from lower speed services to high
bandwidth services, as their data communications requirements expand.
Competition
Dedicated Services-The Company operates in a highly competitive environment
and has no significant market share in any market in which it operates. The
Company provides dedicated services to large business and government end users.
In each of the metropolitan areas to be served by the Company's networks, the
Company's dedicated services will compete principally with the dedicated
services offered by the ILEC. The ILECs, 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 ILECs also offer certain services that the Company
cannot currently provide without first obtaining requisite regulatory approvals.
Competition for dedicated services is based on price, quality, network
reliability, customer service, service features and responsiveness to the
customer's needs. The Company believes that its management expertise, coupled
with its highly reliable, state-of-the-art digital networks, which offer
significant transmission capacity at competitive prices, will allow it to
compete effectively with the ILECs, which may
<PAGE> 20
have not yet fully deployed fiber optic networks in many of the Company's target
markets. The Company currently prices its services at a modest discount compared
to the prices of the ILEC while providing what the Company believes is 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 ILEC's networks (which were originally designed in tree and
branch or star configurations).
Other potential competitors of the Company include CATVs, 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 Federal 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. Other CLECs or CATVs currently are
competitors in various markets in which the Company has networks in operation or
under construction. Based on management's experience at other CLECs, the initial
market entrant with an operational fiber optic CLEC network generally enjoys a
competitive advantage over other CLECs that later enter the market. The Company
expects that there will be other CLECs operating in most, if not all, of its
target markets and that some of these CLECs may have networks in place and
operating before the Company's network is operational. While it is generally
considered within the CLEC industry that being the first market entrant to offer
services typically enhances that CLEC's competitive advantage relative to CLECs
that enter the market at a later time, the Company recognizes that in some
instances it may have other competitive advantages (such as a superior
right-of-way arrangement or large customer commitments) that it believes
outweigh another CLEC's first-to-market advantage; in these instances, the
Company may elect to enter a market where an established CLEC already exists.
High-Speed Data Services-The Company's competitors for high-speed data
services include 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
<PAGE> 21
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 ILEC or another CLEC in each market or that cannot obtain
intercity transport rates on as favorable terms as the Company.
There is significant competition for Internet access and related services in the
United States, with few barriers to entry. The Company expects that competition
will increase as existing services and network providers and new entrants
compete for customers. ACSI's current and future competitors include
telecommunications companies, including the RBOCs, IXCs, CLECs and CATVs, and
other Internet access providers, such as UUNET Technologies, Inc., Advanced
Network & Services, Inc., BBN Corporation, NETCOM On-Line Communications
Services, Inc. and PSINet Inc. Many of these competitors have greater financial,
technical, marketing and human resources, more extensive infrastructure and
stronger customer and strategic relationships than ACSI. The Company believes
that it will have a competitive advantage in offering Internet access services
to those ISPs and commercial customers in markets where ACSI has local fiber
optic network facilities relative to other Internet access providers that must
purchase local loop access from the ILEC, ACSI or another CLEC in that market.
Additionally, ACSI believes that customers with operations in multiple locations
served by ACSI local fiber optic networks will find single-source Internet
access services from ACSI more cost effective.
All of the seven original RBOCs offer at least some basic frame relay service.
The Company believes that most IXCs offer substantial domestic and international
frame relay service, generally positioned to provide significant savings over
traditional private lines. Other frame relay service providers include WorldCom,
Inc. and Intermedia Communications. A number of companies, primarily CLECs, have
announced plans to offer frame relay service. ATM offerings are only beginning
to emerge. ATM service is currently being offered by most of the original RBOCs,
WorldCom, Inc., AT&T, MCI, Sprint and WilTel, Inc. A number of other data
communications providers, CLECs and facilities-based CATVs have announced their
intentions to offer ATM services in the future.
A number of equipment vendors, systems integrators and Internet access and
service providers offer components of managed services. The Company believes
that it will have a competitive advantage over those managed services providers
that do not have local loop facilities.
<PAGE> 22
Local Switched Voice Services-In all of the markets where the Company is
currently operating or plans to operate, the ILEC currently is a de facto
monopoly provider of local switched voice services, including enhanced voice
services. The Company expects that the Federal Telecommunications Act will
enable CLECs, CATVs, electric utilities, cellular and wireless providers, and
others to offer local switched voice services in competition with the ILECs in
the Company's target markets. The Company believes that its strategy to leverage
its basic network infrastructure into higher margin service offerings, migrating
to local switched voice services, will allow it to procure a profitable share of
the market. The Company's ability to cross-market services will create
opportunities to increase margins by migrating customers from off-network to
on-network status. As the number of end users in a given off-network building
increases for all service offerings, the economics improve to the point where
the capital costs of connecting the building to ACSI's network are more than
covered by the increased margins represented by retaining the portion of
customer revenue paid out to the ILEC.
Competition for enhanced voice services primarily consists of basic voice mail
services offered by ILECs and cellular providers in connection with their core
offerings and customer premise-based voice mail platforms. The voice mail
offerings of the ILECs typically have limited features and flexibility compared
to the services contemplated by the Company; thus, the Company believes its
enhanced voice messaging services and focused sales efforts should be able to
penetrate effectively those segments of the small and mid-sized business market
that require more features and/or flexibility than services offered by the
ILECs. 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.
Internet Services-The market for Internet access services is extremely
competitive. There are no substantial barriers to entry, and the Company expects
that competition will intensify in the future. The Company has entered this
market principally through the Cybergate Acquisition and believes that its
ability to compete successfully will depend upon a number of factors, including
market presence; the capacity, reliability and security of its network
infrastructure; ease of access to and navigation of the Internet; the pricing
policies of its competitors and suppliers; the timing of introductions of new
products and services by the Company and its competitors; the Company's ability
to support existing and emerging industry standards; and industry and general
economic trends.
<PAGE> 23
The Company's current and prospective competitors include many large companies
that have substantially greater market presence and financial, technical,
marketing and other resources than the Company. The Company expects to compete
directly or indirectly with the following categories of companies: (1) other
international, national and regional commercial Internet service providers; (2)
established on-line services companies that currently offer or are expected to
offer Internet access; (3) computer hardware and software and other technology
companies; (4) IXCs; (5) RBOCs; (6) CATVs; and (7) nonprofit or educational
Internet service providers. The ability of these competitors or others to bundle
services and products with Internet connectivity services could place the
Company at a significant competitive disadvantage in this services market.
Regulation
Overview
The Company's services are subject to federal, state and local regulation. The
Federal Communications Commission (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.
Federal Regulation
The Federal Telecommunications Act-On February 1, 1996, the U.S. Congress
enacted comprehensive telecommunications reform legislation, which the President
signed into law on February 8, 1996 (the Federal Telecommunications Act). The
Company believes that this legislation is likely to enhance competition in the
local telecommunications marketplace because it (i) removes state and local
entry barriers, (ii) requires ILECs to provide interconnections to their
facilities, (iii) facilitates the end users' choice to switch service providers
from ILECs to CLECs such as the Company and (iv) requires access to
rights-of-way. The legislation also will tend to enhance the competitive
position of the ILECs and increase local competition by IXCs, CATVs and public
utility companies. Under the Federal Telecommunications Act, ILECs have
substantial new pricing flexibility; RBOCs have regained the ability to provide
long distance services and have obtained new
<PAGE> 24
rights to provide certain cable TV services; IXCs are permitted to construct
their own local facilities and/or resell local services; and state laws can no
longer require CATVs to obtain a franchise before offering telecommunications
services nor permit CATVs' franchise fees to be based on their
telecommunications revenues. In addition, under the Federal Telecommunications
Act all utility holding companies are permitted to diversify into
telecommunications services.
The Federal Telecommunications Act requires all telecommunications carriers
(including ILECs and CLECs (such as the Company)): (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. It also
requires incumbent ILECs to provide interconnection (a) for the transmission and
routing of telephone exchange service and exchange access, (b) at any
technically feasible point within the ILEC's network, (c) that is at least equal
in quality to that provided by the ILEC to itself, its affiliates or any other
party to which the ILEC provides interconnection, and (d) at rates, terms and
conditions that are just, reasonable and nondiscriminatory. ILECs 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 their
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.
In addition, the Federal Telecommunications Act requires RBOCs to comply with
certain safeguards and offer interconnections that satisfy a prescribed 14-point
checklist before the RBOCs are permitted to provide in-region interLATA (i.e.
long distance) services. Subject to FCC approval, RBOCs may manufacture
telecommunications equipment, originate interLATA telecommunications services,
and provide interLATA information services. The safeguards are designed to
ensure that the RBOC's competitors have access to local exchange and exchange
access services on nondiscriminatory terms and that subscribers of regulated
non-competitive RBOC services do not subsidize their provision of competitive
services. The safeguards also are intended to promote competition by preventing
RBOCs from using their market power in local exchange services to obtain an
anti-competitive advantage in the provision of other services. On December 24,
1996, the FCC adopted a number of procedures to provide greater protection
against cross-subsidization and clarified the use of the prevailing price method
for transaction valuation.
<PAGE> 25
FCC Rules Implementing the Local Competition Provisions of the Federal
Telecommunications Act-On August 8, 1996, the FCC released both a First Report
and Order and a Second Report and Order and Memorandum Opinion and Order in its
CC Docket 96-98 (combined, the "Interconnection Orders") that established a
framework of minimum, national rules enabling state Public Service Commissions
("PSCs") and the FCC to begin implementing many of the local competition
provisions of the Federal Telecommunications Act. In its Interconnection Orders,
the FCC prescribed certain minimum points of interconnection necessary to permit
competing carriers to choose the most efficient points at which to interconnect
with the ILECs' networks. The FCC also adopted a minimum list of unbundled
network elements that ILECs must make available to competitors upon request and
a methodology for states to use in establishing rates for interconnection and
the purchase of unbundled network elements. The FCC also adopted a methodology
for states to use when applying the Federal Telecommunications Act's "avoided
cost standard" for setting wholesale prices with respect to retail services.
Most provisions of the Interconnection Decisions have been appealed, and
application of most of the pricing and costing provisions of the Interconnection
Decisions discussed below have been stayed by the U.S. Court of Appeals for the
Eighth Circuit. The FCC's appeal of this stay was denied by the U.S. Supreme
Court. Within the next several months, the Court of Appeals for the Eighth
Circuit is expected to rule on the various appeals of the Interconnection
Orders, at which time the Court could approve, reverse or partially reverse the
Interconnection Orders.
The following summarizes the key issues addressed in the Interconnection Orders.
Interconnection. ILECs are required to provide interconnection for telephone
exchange or exchange access service, or both, to any requesting
telecommunications carrier at any technically feasible point. The
interconnection must be at least equal in quality to that provided by the ILEC
to itself or its affiliates and must be provided on rates, terms and conditions
that are just, reasonable and nondiscriminatory.
Access to Unbundled Elements. ILECs are required to provide requesting
telecommunications carriers with nondiscriminatory access to network elements on
an unbundled basis at any technically feasible point on rates, terms, and
conditions that are just, reasonable and nondiscriminatory. At a minimum, ILECs
must unbundle and provide access to network interface devices, local loops,
local and tandem switches (including all software features provided by such
switches), interoffice transmission facilities, signaling and call-related
database facilities,
<PAGE> 26
operations support systems and information and operator and directory assistance
facilities. Further, ILECs may not impose restrictions, limitations or
requirements upon the use of any unbundled network elements by other carriers.
Methods of Obtaining Interconnection and Access to Unbundled Elements. ILECs are
required to provide physical collocation of equipment necessary for
interconnection or access to unbundled network elements at the ILEC's premises,
except that the ILEC may provide virtual collocation if it demonstrates to the
PSC that physical collocation is not practical for technical reasons or because
of space limitations.
Pricing Methodologies. New entrants are required to pay for interconnection and
unbundled elements at rates based on the ILEC's Total Element Long-Run
Incremental Cost ("TELRIC") of providing a particular network element plus a
reasonable share of forward-looking joint and common costs, and may include a
reasonable profit. If TELRIC cost information is not available for consideration
within the statutory time frame for arbitrating interconnection disputes, PSCs
are authorized to use certain maximum default rates for local interconnection
and unbundled network element pricing and a range of rates for switching
services, all of which rates must be replaced with TELRIC-based rates once a
review of the TELRIC cost studies can been completed.
Access Charges for Unbundled Switching and Access Charge Reform. IXCs which
order unbundled switching elements temporarily will be required to pay an access
charge to an ILEC when the ILEC provides exchange access service. Access charges
also must be paid when an IXC originates or terminates interexchange traffic to
a customer to which it provides local services by reselling ILEC exchange
services. Access charge reform was proposed by the FCC on December 24, 1996.
Resale Pricing. ILECs are required to offer for resale any telecommunications
service that the carrier provides at retail to subscribers who are not
telecommunications carriers. PSCs are required to identify which marketing,
billing, collection and other costs will be avoided or that are avoidable by
ILECs when they provide services wholesale and to calculate the portion of the
retail rates for those services that is attributable to the avoided and
avoidable costs.
Transport and Termination Charges. The LEC charges for transport and termination
of local traffic delivered to them by competing LECs must be cost-based and
should be based on the LECs' TELRIC cost of providing that service, although
additional reciprocal charges are permitted if termination is through a tandem
switch.
<PAGE> 27
Access to Rights-of-Way. The FCC established procedures and guidelines designed
to facilitate the negotiation and mutual performance of nondiscriminatory access
by telecommunications carriers and poles, ducts, conduits, and rights-of-way
owned by utilities or LECs. Additionally, expedited dispute resolution
procedures are set forth should good faith negotiations fail.
Universal Service Reform. All telecommunications carriers, including the
Company, are required to contribute funding for universal service support, on an
equitable and nondiscriminatory basis, in an amount sufficient to preserve and
advance universal service pursuant to a specific or predictable universal
service funding mechanism. The Company cannot at this time predict the level or
form of its mandatory contribution, but the Company believes that it will likely
be a significant expenditure. The FCC has opened a proceeding (CC Docket No.
96-45) which is intended to implement these requirements. On November 8, 1996, a
Federal-State Joint Board formed by the FCC released extensive recommendations
for regulatory changes which redefine the services to be included in universal
service support programs, how affordability of eligible services would be
determined, which carriers are eligible for universal service support, the terms
of programs for low income consumers, support for rural, insular and high cost
areas, the future of subscriber line charges and carrier common-line charges and
the administration of the universal service support mechanisms. The proceeding
must be concluded by May 8, 1997 and may have a significant impact on future
operations, expenses and pricing of the Company.
Other 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. Therefore, the FCC has established
different levels of regulation for dominant carriers and nondominant carriers.
For domestic common carrier telecommunications regulation, large ILECs such as
GTE and the RBOCs are currently considered dominant carriers, while CLECs such
as the Company are considered nondominant carriers.
Tariffs. 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. With the exception of informational tariffs
for operator-assisted services, on October 31, 1996, the FCC announced that all
nondominant IXCs may cancel their tariffs for domestic, interstate interexchange
services within nine
<PAGE> 28
months of the effective date of the order. Tariffs are still required to be
filed for international services. Tariffs also must be filed for interexchange
access services. Moreover, nondominant carriers like the Company must offer
interstate services on a nondiscriminatory basis, at just and reasonable rates,
and remain subject to FCC complaint procedures. The FCC's interexchange
de-tariffing order was stayed by the U.S. Court of Appeals for D.C. on February
13, 1997.
Pursuant to these FCC requirements, the Company has filed and maintains tariffs
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
believes that its enhanced voice and Internet services are "enhanced" services
which need not be tariffed.
ILEC Price Cap Regulation. In 1991, the FCC replaced traditional rate of return
regulation for large ILECs with price cap regulation. Under price caps, ILECs
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 ILEC services that are competitive with those of
CLECs. On September 14, 1995, the FCC proposed a three-stage plan that would
substantially reduce ILEC price cap regulation as local markets become
increasingly competitive and ultimately would result in granting ILECs
nondominant status. The FCC proposed immediate elimination of the lower service
band index limit on price reductions within service categories, modification of
tariff filing requirements and revision of the structure of price cap baskets.
The FCC also sought comment on whether ILECs should be permitted to expand use
of volume and term discount plans. Adoption of the FCC's proposal to reduce
significantly its regulation of ILEC pricing would significantly enhance the
ability of ILECs to compete against the Company and could have a material
adverse effect on the Company. The FCC released an order on December 24, 1996
which adopted certain of these proposals, including the elimination of the lower
service band index limits on price reductions within the access service
category. The FCC's December 1996 order also eased the requirements necessary
for the introduction of new services.
Access Charges. The FCC has granted ILECs significant flexibility in pricing
their interstate special and switched access services on a specific central
office by central office basis. Under this pricing scheme, ILECs 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
ILECs lowering their prices in high traffic density areas, the probable area of
competition with the Company. The Company also anticipates that the FCC will
grant ILECs increasing pricing
<PAGE> 29
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 ILEC switched transport rates in order to
facilitate competition for switched access.
On February 15, 1996, the FCC partially waived its access charge rules for
Ameritech Corporation (one of the seven RBOCs), thereby giving Ameritech certain
access charge pricing flexibility which will likely make it more difficult for
CLECs to compete against Ameritech in the affected areas. The FCC had previously
approved alternative access charge billing plans proposed by NYNEX. The Company
does not currently provide service in the Ameritech or NYNEX operating regions.
However, on December 24, 1996, in its Notice of Proposed Rulemaking, Third
Report and Order, and Notice of Inquiry ("NPRM"), the FCC proposed and sought
comment on far-reaching reforms to its access charge rules, including granting
all ILECs additional access charge pricing flexibility. These proposals could,
if implemented, make it more difficult for the Company to compete for access
traffic.
In the (NPRM), the FCC proposed a set of reforms to its existing access charge
rules which are intended to (i) take account of the local competition and RBOC
reentry provisions of the Federal Telecommunications Act, state PSC actions to
open local networks for competition and implicit universal service subsidies;
(ii) establish fair rules of competition; (iii) address perceived inequities and
inefficiencies in the current ILEC access charge structure and (iv) generally
lower access charge levels. The FCC proposed making significant changes to the
current rules which govern the common carrier elements subscriber, line charge,
local switching transport, tandem switching and transport interconnection charge
components, of the current ILEC access charge rate structure. In addition, in
the NPRM, the FCC proposed even more fundamental reforms the current ILEC access
charge structure by using either (i) the "market-based" approach, which would
result in gradual relaxation and ultimate removal of existing federal access
rate structure requirements and price cap restrictions as competition develops
and prices are naturally driven toward economic cost; or (ii) the "prescriptive
"approach, where the FCC would specify the nature and timing of changes to
existing access charge rate levels. Finally, in the NPRM, the FCC also sought
comment on whether ISPs, enhanced service providers and Internet access
providers should pay access charges. Requiring such service providers to pay
access charges could have a significant adverse impact on both the Company's
wholesale access services business and its enhanced voice services, high-speed
data and Internet access services.
<PAGE> 30
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
are in the process of addressing issues relating to the regulation of CLECs.
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 Federal
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 Federal
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.
As of February 28, 1997 the Company had obtained intrastate authority for the
provision of dedicated services in Alabama, Arkansas, Colorado, Florida,
Georgia, Kentucky, Maryland, Mississippi, Nevada, New Mexico, South Carolina,
Tennessee, Texas and Virginia. As of that date, the Company also had
applications pending before PSCs in Arizona, Louisiana, Missouri and Oklahoma
for intrastate dedicated services authority. To the extent the Company expands
the scope of its intrastate services in the future in these states to include
the full range of local switched services, the Company is required to seek
additional authorization from such PSCs. As of February 28, 1997, the Company
had applied for authorization to provide local switched voice services in
Arizona, Kentucky, Louisiana, Mississippi, Missouri, New Mexico and Oklahoma and
had been granted such authority in Alabama, Arkansas, Colorado, Florida,
Georgia, Maryland, Nevada, South Carolina, Tennessee, Texas and Virginia. There
can be no assurances that the Company will receive the authorizations it is
currently seeking, or will seek, from these PSCs. In most states, the Company is
required to file tariffs setting forth the terms, conditions and prices for
services that are classified as intrastate.
The Company believes that, as the degree of intrastate competition increases,
the states will offer the ILECs increasing pricing flexibility. This flexibility
may present the ILECs with an opportunity to subsidize services that compete
with the Company's services with revenues generated from non-competitive
services, thereby allowing ILECs to offer competitive services at prices below
the cost of providing
<PAGE> 31
the service. The Company cannot predict the extent to which this may occur or
its impact on the Company's business.
Local Interconnection-The Federal Telecommunications Act imposes a duty upon
all ILECs to negotiate in good faith with potential interconnectors to provide
interconnection to the ILEC network, exchange local traffic, make unbundled
basic local network elements available, and permit resale of most local
services. In the event that negotiations do not succeed, the Company has a right
to seek state PSC arbitration of any unresolved issues. The state PSC must
conclude the arbitration within nine months of the date upon which the ILEC
received the Company's initial request for interconnection. Although the Company
found it necessary to seek state PSC arbitration of some material issues, the
Company negotiated partial agreements for local interconnection and access to
unbundled elements with BellSouth in South Carolina, Georgia, Florida, Kentucky,
North Carolina, Tennessee, Alabama, Mississippi and Florida; and with
Southwestern Bell in Arkansas and Texas. Unsuccessful interconnection
negotiations caused the Company to file petitions with state PSCs seeking
arbitrated agreements with US West in New Mexico and Arizona; with GTE in Texas,
Kentucky and Florida; and with Sprint/Central Telephone in Nevada. Southwestern
Bell has filed lawsuits in both federal and state courts in Texas seeking to
overturn the Texas PUC arbitration award and prevent implementation of the
anticipated ACSI interconnection agreement. The state action has been removed to
federal court. GTE and US West have filed similar lawsuits in federal courts in
Kentucky and Arizona, respectively, seeking to reverse the state commission
arbitration awards in those states, and prevent implementation of the arbitrated
interconnection agreements there. Similar court challenges to the state
commission arbitration decisions involving US West in New Mexico and GTE in
Texas also are expected. If successful, these lawsuits could delay or interrupt
ACSI's interconnection arrangements with the ILECs in the affected states.
Moreover, since ACSI purchases ILEC local services for resale pursuant to the
terms of the interconnection agreements at issue, any adverse outcome in these
lawsuits could impede ACSI's plans to resell ILEC local services in the affected
markets. The Company is unable to predict the likely outcome of the lawsuits
described above, or the probable timeframe for decision. As of February 28,
1997, state commission arbitration of ACSI requests for interconnection remained
underway in Florida (GTE) and Nevada (Sprint/Central). In addition, the Company
has initiated formal interconnection negotiations with Bell Atlantic for
Maryland, Virginia and the District of Columbia. The Company has also initiated
formal requests to expand its interconnection arrangements with US West to
include Colorado and with Southwestern Bell to include Oklahoma, Missouri and
Kansas.
<PAGE> 32
Local Government Authorizations-The Company is required to obtain street use
and construction permits and licenses and/or franchises to install and expand
its fiber optic networks using municipal rights-of-way. In some municipalities
where the Company has installed or anticipates constructing networks, it will be
required to pay license or franchise fees based on a percentage of gross
revenues or on a per linear foot basis, as well as post performance bonds or
letters of credit. There can be no assurance that the Company will not be
required to post similar bonds in the future, nor is there any assurance that,
following the expiration of existing franchises, fees will remain at their
current levels. In many markets, the ILECs 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, 1996, the Company employed a total of 322 individuals all of
whom were full time employees. The Company believes that its future success will
depend on its continued ability to attract and retain highly skilled and
qualified employees. None of the Company's employees is subject to a collective
bargaining agreement. The Company believes that its relations with its employees
are good.
Item 2. Properties
The Company leases a 23,925 square foot office space in Annapolis Junction,
Maryland for its corporate headquarters and network management center for
$28,647 per month as of December 31, 1996, subject to periodic increases in
specified amounts. The lease expires in 2002, but may be renewed for two
additional five-year terms. The Company leases a 1,358 square foot field office
in Lombard, Illinois which houses its local network development and real estate
development operations. This lease expires on January 31, 1999.
<PAGE> 33
As of December 31, 1996, the Company's various operating subsidiaries have
leased facilities for their offices and network nodes. The aggregate monthly
rent on these properties is approximately $285,000. The various leases expire on
dates ranging from February 28, 1998, to April 1, 2007. 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.
Item 3. Legal Proceedings
On July 24, 1996, the Company was notified that a complaint against a subsidiary
had been filed in the District Court of El Paso County, Texas wherein the
plaintiff alleged permanent paraplegia resulting from his fall into a concealed
basement during construction of the Company's El Paso network. At the time of
the incident giving rise to the lawsuit, the plaintiff was an employee of the
subcontractor hired by the Company's general contractor for this project. The
plaintiff seeks recovery from the Company's subsidiary and the general
contractor of at least $25 million in damages (plus punitive damages). Both the
Company and the general contractor have begun investigations into the facts
surrounding the incident and intend to defend against this suit vigorously.
Based on the facts known as of the date hereof, the Company does not believe it
is likely, although it is possible, that the Company will be liable for held
payment of all or a portion of the requested damages. This potential liability
could materially, adversely affect the results of operation and financial
condition of the Company.
Additionally, the Company and its subsidiaries are currently parties to routine
litigation incidental to their business, none of which, individually or in the
aggregate, are expected to have a material adverse effect on the Company. The
Company and its subsidiaries are parties to various court appeals and regulatory
proceedings relating to certain of the Company's interconnection agreements
and other regulatory matters and continue to participate in regulatory
proceedings before the FCC and state regulatory agencies concerning the
authorization of services and the adoption of new regulations.
Item 4. Submission of Matters to a Vote of Security Holders
On November 15, 1996, the Company held its annual meeting to consider five
proposals.
<PAGE> 34
The first proposal was to elect the seven nominees forth in the Proxy Statement.
Pursuant to the Certificate of Incorporation, the Board is currently comprised
of seven members, four of whom shall be elected by the holders of the Company's
Common Stock and three of whom shall be elected by the holders of the Company's
Preferred Stock.
The nominees for directorship by holders of the Common Stock were: Anthony J.
Pompliano, Peter C. Bentz, Benjamin P. Giess and George M. Middlemas. There
were 5,636,252 votes cast For and 10,170 Abstentions for Anthony J. Pompliano;
there were 5,618,752 votes cast For and 27,670 Abstentions for Peter C. Bentz;
there were 5,632,252 votes cast For and 14,170 Abstentions for Benjamin P.
Giess; and there were 5,636,252 votes cast For and 10,170 Abstentions for
George M. Middlemas.
The nominees for directorship by holders of the Preferred Stock were: Edwin M.
Banks, Christopher L. Rafferty and Olivier L. Trouveroy. There were 448,931
votes cast For and no Abstentions for Edwin M. Banks, there were 448,931 votes
cast For and no Abstentions for Christopher L. Rafferty and there were 448,931
votes cast For and no Abstentions for Olivier L. Trouveroy.
The second proposal was to approve an amendment to the Company's 1994 Stock
Option Plan, as amended, to increase the number of shares of common stock
reserved for issuance upon exercise of option grants from 1,910,000 to
3,000,000. There were 4,881,312 votes cast For, 70,271 votes cast Against and
11,170 Abstentions for Proposal No. 2.
The third proposal was to approve the 1996 Employee Stock Purchase Plan. There
were 4,818,482 votes cast For, 41,626 votes cast Against and 4,250 Abstentions
for Proposal No. 3.
The fourth proposal was to amend the company's Certificate of Incorporation to
increase the number of authorized shares of Preferred Stock from 813,336 to
1,500,000. There were 4,844,117 votes cast For, 25,871 votes cast Against and
3,370 Abstentions for Proposal No. 4.
The fifth proposal was to ratify the selection of KPMG Peat Marwick LLP to audit
the consolidated financial statements of the Company for the transition period
ending December 31, 1996 and for the fiscal year ending December 31, 1997. There
were 5,640,682 votes cast For, 5,420 votes cast Against and 320 Abstentions for
Proposal No. 5.
<PAGE> 35
Part II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock is traded under the symbol "ACNS" in the
over-the-counter market. The Company's Common Stock has been quoted on the
Nasdaq National Market since May 22, 1996. From March 3, 1995 to May 21, 1996,
the Company's Common Stock was quoted on the Nasdaq SmallCap Market. Prior to
that time the Common stock was quoted in the pink sheets, although it was not
consistently quoted therein. On March 18, 1997, the high and the low bid prices
for the Company's Common Stock as reported by the Nasdaq National Market were
$8.40 and $8.00, respectively. As of March 18, 1997, there were approximately
278 stockholders of record of the Company's Common Stock.
The following table sets forth, for the periods indicated, the range of high and
low closing bid quotations for the Common Stock obtained from the National
Quotation Bureau for periods prior to March 3, 1995 and from The Nasdaq SmallCap
Market for the period March 3, 1995 through May 21, 1996 and high and low
closing sales prices for the Common Stock obtained from the Nasdaq Stock Market
after May 21, 1996. No quotations for the Common Stock were available from the
National Quotation Bureau for the first quarter of the fiscal year ended June
30, 1994, or any preceding period. The quotations as set forth below for periods
prior to March 3, 1995, are believed to be representative of inter-dealer
quotations, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
<PAGE> 36
<TABLE>
<CAPTION>
High Bid Low Bid
Fiscal Year Ended June 30, 1995
<S> <C> <C>
First Quarter $ 4.50 $ 2.50
Second Quarter $ 4.25 $ 3.50
Third Quarter $ 3.75 $ 3.50
Fourth Quarter $ 4.38 $ 3.25
Fiscal Year Ended June 30, 1996
First Quarter $ 7.50 $ 3.63
Second Quarter $ 6.75 $ 5.00
Third Quarter $ 9.00 $ 5.00
Fourth Quarter $ 15.38 $ 8.00
Fiscal Period Ended December 31, 1996
First Quarter $ 13.25 $ 8.50
Second Quarter $ 12.38 $ 9.88
Fiscal Year Ending December 31, 1997
First Quarter (through March 27, 1997) $ 11.13 $ 7.00
</TABLE>
The Company has paid no dividends on its Common Stock since its inception and
does not plan to pay dividends on its Common Stock in the foreseeable future.
Except utilization to pay dividends payable on the Series A-1 Preferred Stock
and the Series B Preferred Stock, any earnings which the Company may realize
will be retained to finance the growth of the Company. The agreements relating
to the Company's secured debt financing prohibits the Company from paying any
dividends on its capital stock, except the Series A-1 Preferred Stock and the
Series B Preferred Stock, and restrict the ability of the Company's subsidiaries
to transfer funds to the Company, unless in each case certain financial
covenants are met. The indentures relating to the Company's Senior Notes
prohibit the Company from paying any dividend on its capital stock unless
certain financial covenants are met. The Company's certificate of incorporation
prohibits the payment of dividends on the Common Stock unless all dividends due
and payable (including accrued dividends) on the Series A-1 Preferred Stock and
the Series B Preferred Stock have been paid in full.
<PAGE> 37
Item 6. Management's Discussion and Analysis of Financial Condition and Results
and Operations
Overview
ACSI is a provider of integrated local voice and data communications services to
commercial customers primarily in mid-size metropolitan markets in the southern
United States. The Company is a rapidly growing CLEC, supplying businesses with
advanced telecommunications services through its digital SONET-based fiber optic
local networks. To date, the Company has derived substantially all of its
revenues from the sale of dedicated services, generally at a discount to the
price of the ILECs. The Company's dedicated services include special access,
switched transport and private line services.
As a supplement to its dedicated services, in January 1997, the Company
introduced local switched voice services in two of its markets and expects to
begin offering local switched voice services in two additional markets by March
31, 1997. The Company's local switched services include local exchange services
(dial tone), advanced ISDN and enhanced voice services. In late 1996, the
Company also deployed ACSINet, a coast-to-coast, leased broadband data
communications network through which the Company offers frame relay, ATM and
Internet access services to both ISPs and local businesses. As of February 28,
1997, the Company had ACSINet data POPs in 44 markets, including all but one of
the markets in which the Company has operational local networks. Additionally,
principally through the Cybergate acquisition, the Company has begun providing
Internet services. The Cybergate Acquisition provides a foundation to support
the Company's Internet service offerings to ISPs in existing ACSI markets and to
end users in targeted ACSI markets.
During 1996, the Company increased the number of its operational local networks
from 9 to 21 and increased its route miles in service from 136 to 697. As of
February 28, 1997, the Company had 24 operational local networks and had 12
additional local networks under construction. The Company is actively developing
marketing and engineering plans necessary to achieve its goal of 50 local
networks operating or under construction by June 1998.
The Company provides dedicated services to IXCs and to those business and
government end users whose volumes of voice and data traffic are large enough to
warrant paying a fixed monthly charge for a specific capacity requirement rather
than a usage-based variable charge. These monthly charges vary according to the
<PAGE> 38
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 ILECs for similar services, volumes and terms. For the fiscal period
ended December 31, 1996, 40% of the Company's revenues were generated by four of
the largest IXCs.
Beginning in the fiscal quarter ended December 31, 1996, the Company began
providing and plans to continue to provide, local switched voice services, such
as local dial tone, termination of local calling, Centrex services, PBX
trunking, switched access and enhanced voice services, initially to existing and
new corporate customers in buildings already connected to the Company's local
networks. Revenues from the Company's local switched voice services will be
generated from fixed and usage-based charges billed directly to the end user at
rates below those charged by ILECs for similar services. The Company expects to
begin generating revenues from its local switched voice services beginning in
the three months ending March 31, 1997.
In December 1996, the Company began providing high-speed data services to ISPs
and corporate, institutional and government customers. ACSI's data services
revenues are generated from either flat rate or usage-based recurring charges
based on network access speed and the data throughput rate of data requested by
the end user as well as from non-recurring charges for installation and
provisioning. Principally through the Cybergate Acquisition, ACSI has begun to
offer direct Internet access to commercial and consumer end users as well as
provide private label Internet services for the Company's strategic distribution
partners throughout all of the Company's markets. Revenues from the Company's
Internet services will be generated from usage-based variable rates charged
directly to the end user by the Company.
The Company believes that integration of its SONET-based fiber optic local
networks and its coast-to-coast, leased broadband data communications network
will provide a platform for the provision of a wide variety of voice, high-speed
data and other communications services at a reduced cost. While the Company may
offer its services to customers that are not directly connected to its
integrated network through resale of the ILEC's network, the Company believes
that it can gradually migrate many of these off-net customers to higher margin
on-net accounts as it increases penetration of all its services within a given
building. As a result, the capital investment of connecting additional buildings
and customers to ACSI's integrated network should become more cost-effective.
Over time, the Company believes it can increase its market share of all of its
service offerings as a result of the reliability and quality of its integrated
network, prompt customer service,
<PAGE> 39
competitive pricing, cross marketing/bundling synergies and new service
offerings over its target 50-city local network market area.
Where technically feasible and economically practicable, the Company's local
switched voice services will be offered through a hubbed switching strategy by
using 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, could reduce the cost
associated with installing a fully configured switch in markets which otherwise
may be too small to justify the investment. By aggregating switched traffic from
multiple small markets through a central hub switch, the Company also expects to
realize reduced operating expenses associated with switch engineering and
maintenance. As of February 28, 1997, the Company had long-term operating leases
for nine Lucent 5ESS switches. The use of operating leases, rather than the
acquisition of such equipment reduces the Company's capital requirements but
negatively impacts its EBITDA.
ACSI is operating its coast-to-coast, leased broadband data communications
network via high bandwidth (DS-3) longhaul circuits pursuant to multi-year
operating leases with various IXCs. Network connectivity within each node will
be via OC-3 bandwidth, enabling the transparent migration of longhaul circuits
to OC-3 capacity as needed. Ultimately, the platform technology is capable of
upgrading the backbone to OC-12 without further modification.
Initially, the Company expects to experience negative cash flow from operations
in each of its operating local networks. The Company estimates that because of
the reduced operating costs associated with its smaller local networks and its
single point of service sales force, it can achieve operating cash flow
breakeven (i.e., positive EBITDA before overhead allocations) on dedicated
access services provided on its local networks within ten to 15 months from the
start of those services. Thereafter, the Company anticipates that its profit
margins will increase as each local network is expanded to connect additional
customers directly to its network backbone and as off-net customers migrate to
on-net status (thus allowing the Company to retain the portion of customer
charges previously paid out to the ILEC for resale of ILEC facilities). The
Company will also experience initial negative cash flow from operations as its
data, local switched voice and Internet services are introduced and until
networks providing those services reach operating cash flow breakeven.
<PAGE> 40
Capital Expenditures; Operating Cash Flow
The costs associated with the initial construction and operation of local
networks may vary greatly, primarily due to market variations in geographic and
demographic characteristics and the types of construction technologies which can
be used to deploy the network. Management estimates that construction of the
initial one-to-three mile local network backbone and installation of related
network transmission equipment for dedicated services for each market will cost
generally between $3.5 million and $6.0 million, depending on the size of the
market served. Including planned expansion routes, total capital expenditures
per network are estimated to average $6.0 million. In addition to capital
expenditure requirements, the Company incurs sales and marketing (including
sales commissions) and operating expenses and other expenses such as property
taxes and, in certain markets, franchise fees. Prior to the completion of local
network construction, certain of these expenses, to the extent they are related
to pre-service construction, are capitalized. These capitalized expenses,
estimated by management to be between approximately $500,000 and $1.0 million
per local network, are amortized over the anticipated life of the network. These
costs vary depending on the size of the market, the length of time required to
build out the network and the rate of growth of the customer base.
The Company has never been profitable, has never generated positive cash flow
from consolidated operations and, since its inception has incurred significant
net operating losses and negative cash flow. The Company's continued
development, construction, expansion, operation and potential acquisition of
local networks, as well as the further development of new services, including
local switched voice and high-speed data services, will require substantial
capital expenditures and the Company expects to continue to incur operating
losses and negative cash flows from operations for at least the next several
years. The Company estimates that through December 31, 1997 and December 31,
1998, remaining capital required for implementation of its integrated networks
and its other services and to fund negative cash flow will be approximately $185
million and $335 million, respectively. At December 31, 1996, the Company had
approximately $78.6 million of cash and cash equivalents available for this
purpose. The Company has commenced a public offering of eight million shares and
filed a Form SB-2 Registration Statement with the SEC (Registration No.
333-20867) which should be completed by the end of the second fiscal quarter
(the "Offering"). Management anticipates that the Company's cash resources
following this Offering will be insufficient to fund the Company's continuing
negative cash flow and the capital expenditures required to complete the
Company's planned networks. Furthermore, without an infusion of additional cash
following this Offering, the Company will exhaust its cash resources during
1997.
<PAGE> 41
Results of Operations
Fiscal Period Ended December 31, 1996 Compared to Six Months Ended December 31,
1995
Revenues
During the fiscal period ended December 31, 1996, the Company recorded revenues
of $7.0 million as compared to revenues of $988,877 during the six months ended
December 31, 1995. Four of the largest IXCs accounted for approximately $2.8
million, or 40%, of revenues for the fiscal period ended December 31, 1996.
Total Operating Expenses
Network development and operating expenses for the fiscal period ended December
31, 1996 increased to $8.7 million from $2.9 million in the six months ended
December 31, 1995, reflecting significant increases in personnel, network
development and non-payroll operating expenses. Related personnel costs
increased to $3.9 million in the fiscal period ended December 31, 1996, from
approximately $1.5 million in the six months ended December 31, 1995. Other
operating expenses related to the development of prospective new markets, which
include expenses such as contract labor and legal expenses and certain franchise
fees, travel expenses, rent, utilities, charges and taxes increased to $4.8
million in the fiscal period ended December 31, 1996 from approximately $1.4
million in the six months ended December 31, 1995.
In the fiscal period ended December 31, 1996, selling, general and
administrative expenses increased to $20.3 million from $3.1 million in the six
months ended December 31, 1995. Related personnel costs increased to $6.6
million in the fiscal period ended December 31, 1996 from $1.5 million in the
six months ended December 31, 1995, and corresponding operating costs increased
to $13.7 million in the fiscal period ended December 31, 1996 from $1.6 million
in the six months ended December 31, 1995. This increase reflected costs
associated with the Company's efforts in the rapid expansion of its services
offered, network deployment and geographic coverage as well as significantly
increasing its national and local city sales, marketing and administrative
staffs and increased legal and other consulting expenses associated with its
programs for obtaining regulatory approvals and certifications and providing
quality network services.
<PAGE> 42
Depreciation and amortization expenses increased to $4.9 million in the fiscal
period ended December 31, 1996 from $762,657 in the six months ended December
31, 1995. The Company increased its capital assets to $144.4 million as of
December 31, 1996, from the $32.6 million in capital assets as of December 31,
1995. Non-cash stock compensation expense decreased to $549,545 for the fiscal
period ended December 31, 1996 from $1.2 million for the six months ended
December 31, 1995. This expense reflects the Company's accrual of non-cash costs
for options 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. Certain of
these options had put rights and other factors that required variable plan
accounting in both 1996 and 1995 but, on or about June 30, 1995, the Company
renegotiated contracts with certain of its officers, establishing a limit of
$2.5 million on the Company's "put right" obligations with respect to those
contracts. Between July 1, 1995 and June 30, 1996, the limit was further reduced
to $2.0 million.
During the fiscal period ended December 31, 1996, the Company incurred a net
operating loss of $27.4 million and generated negative cash flow from operations
of $6.7 million, compared to a net operating loss of $7.0 million and negative
cash flow from operations of $4.8 million in the six months ended December 31,
1995.
Interest and Other Expenses
Interest and other income increased to $2.8 million for the fiscal period ended
December 31, 1996 from $777,504 in the six months ended December 31, 1995.
Interest and other expense increased to $10.4 million in the fiscal period ended
December 31, 1996 from $2.8 million in the six months ended December 31, 1995.
The increase in interest and other income reflects the significant increase in
available funds from the Company's sale of its 9% Series B Preferred Stock in
June and November 1995, the 2005 Notes in November 1995 and the 2006 Notes in
March 1996. The increase in interest and other expenses reflected the accrual of
interest related to the 2005 Notes and 2006 Notes and the Company's increased
borrowings under the AT&T Credit Facility. Payments of principal and interest on
the AT&T Credit Facility will begin in calendar 1997, payments of interest on
the 2005 Notes will not begin until November 2000 and payments of interest on
the 2006 Notes will not begin until October 2001.
AT&T Credit Corporation's minority interest in certain of the Company's
operating subsidiaries, reduced operating losses by approximately $160,370 for
the fiscal period ended December 31, 1996, and by $155,861 for the six month
period ended December 31, 1995.
<PAGE> 43
Fiscal Year Ended June 30, 1996 Compared to Fiscal Year Ended June 30, 1995
Revenues
During the fiscal year ended June 30, 1996 ("fiscal 1996"), the Company recorded
revenues of $3.4 million as compared to revenues of $388,887 during the fiscal
year ended June 30, 1995 ("fiscal 1995"). Four of the largest IXCs accounted for
approximately $2.1 million, or 60%, of revenues for fiscal 1996 as compared to
fiscal 1995 when three of the largest IXCs accounts for approximately $331,000,
or 85% of revenues for fiscal 1995, reflecting the Company's increased sales to
end users during fiscal 1996.
Total Operating Expenses
Network development and operations expenses for fiscal 1996 increased to $5.3
million from $3.3 million in fiscal 1995, reflecting significant increases in
personnel, network development and non-payroll operating expenses. These
increased costs were associated with developing and establishing centralized
engineering, circuit provisioning and network management functions, constructing
and initially operating the Company's competitive access networks and performing
market feasibility, engineering, rights-of-way and regulatory evaluations in
additional target cities. Related personnel costs increased to $4.5 million in
fiscal 1996 from approximately $1.3 million in fiscal 1995. Other operating
expenses related to the development of prospective new markets, which include
expenses such as contract labor and legal expenses and certain franchise fees,
travel expenses, rent, utilities, charges and taxes, decreased to $800,212 in
fiscal 1996 from approximately $1.9 million in fiscal 1995.
In fiscal 1996, selling, general and administrative expenses increased to $13.5
million from $4.6 million in fiscal 1995. Related personnel costs increased to
$3.2 million in fiscal 1996 from $2.0 million in fiscal 1995, and corresponding
operating costs increased to $10.2 million in fiscal 1996 from $2.2 million in
fiscal 1995. This increase reflected costs associated with the Company's efforts
in expanding its national and local city sales, marketing and administrative
staffs, as well as increased legal and other consulting expenses associated with
its aggressive programs for obtaining regulatory approvals and certifications
and providing quality network services.
<PAGE> 44
Depreciation and amortization expenses increased to $3.1 million in fiscal 1996
from $497,811 in fiscal 1995. During fiscal 1996 the Company increased its
capital assets to approximately $80.2 million, representing an increase from
$15.9 million at the end of fiscal 1995. Non-cash stock compensation expense
decreased to $2.7 million for fiscal 1996 from $6.4 million for 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 $2.5 million on the Company's put right obligations with respect to
those contracts. During fiscal 1996, the limit was further reduced to $2.0
million.
Interest and Other Expenses
Interest and other income increased to $4.4 million for fiscal 1996 from
$217,525 in fiscal 1995. Interest expense and other costs increased to $10.5
million in fiscal 1996 from $170,095 in fiscal 1995. These increases in interest
income and expenses 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 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 its secured financing facility with AT&T Credit
Corporation (the "AT&T Credit Facility"). Payments of principal and interest on
the AT&T Credit Facility will begin in calendar 1997, payments of interest on
the 2005 Notes do not begin until November 2000 and payments of interest of the
2006 Notes do not begin until October 2001.
Debt conversion expense in fiscal 1995 totaled $385,000, reflecting expenses
incurred in connection with the conversion of certain of the Company's debt to
equity in September 1994. AT&T Credit Corporation's minority interest in the
Company's operating subsidiaries for which it provided funding, reduced
operating losses by approximately $412,606 for fiscal 1996, and by $48,055 for
fiscal 1995.
<PAGE> 45
Liquidity and Capital Resources
To date, the Company has funded the construction of its local networks and its
operations with external financing. Prior to November 1995, the primary sources
of funds used to finance the building of existing networks and the completion of
new targeted networks were two Preferred Stock private offerings completed in
October 1994 and June 1995, through which the Company raised an aggregate of
approximately $39.6 million before related expenses, and the AT&T Credit
Facility, through which the Company has financing commitments for $31.2 million.
On November 14, 1995, the Company completed a private offering of the 2005 Notes
and the Warrants from which the Company received approximately $96.1 million in
net proceeds. The 2005 Notes will accrete to an aggregate principal amount of
$190.0 million by November 1, 2000, after which cash interest will accrue and be
payable on a semi-annual basis. The Company also received net proceeds of
approximately $4.7 million from the private sale of an additional 50,000 shares
of its Preferred Stock to a principal stockholder and the exercise by that
stockholder of warrants to purchase 214,286 shares of Common Stock acquired in
the Company's June 1995 Preferred Stock private placement. On March 21, 1996,
the Company completed a private offering of the 2006 Notes from which the
Company received net proceeds of approximately $61.8 million. The 2006 Notes
will accrete to an aggregate principal amount of $120.0 million by April 1,
2001, after which cash interest will accrue and be payable on a semi-annual
basis.
The Company's continued development, construction, expansion, operation and
potential acquisition of local networks, as well as the further development of
new services, including local switched voice and high-speed data services, will
require substantial capital expenditures and the Company expects to continue to
incur operating losses and negative cash flows from operations for at least the
next several years. The Company will use approximately $57.0 million of the
estimated net proceeds from the Offering principally toward completion of the
Company's 50-city local network plan, operation of its coast-to-coast, leased
broadband data communications network and implementation of its local switched
voice services and to fund negative operating cash flow. The Company estimates
that through December 31, 1997 and December 31, 1998, remaining capital required
for implementation of its integrated networks and its other services and to fund
negative cash flow will be approximately $185 million and $335 million,
respectively. At December 31, 1996, the Company had approximately $78.6 million
of cash and cash equivalents available for this purpose. The Company's
expectations of required future capital expenditures are based on the Company's
current estimates and the current state and federal regulatory environment.
There can be no assurance that actual expenditures will not be significantly
higher or
<PAGE> 46
lower. In addition, there can be no assurance that the Company will be able to
meet its strategic objectives or that such funds, if available, will be
available on a timely basis or on terms that are acceptable to the Company. In
addition, the Company continues to consider potential acquisitions or other
strategic arrangements that may fit the Company's strategic plan. Although the
Company has had discussions concerning such potential acquisitions or
arrangements, with the exception of the MCI Transaction, to date no agreements
have been reached with regard to any particular acquisition. Any such
acquisitions or strategic arrangements that the Company might consider are
likely to require additional equity or debt financing, which the Company will
seek to obtain as required.
Management anticipates that the Company's cash resources following the Offering
will be insufficient to fund the Company's continuing negative cash flow and the
capital expenditures required to complete the Company's planned networks.
Furthermore, without an infusion of additional cash following the Offering, the
Company will exhaust its cash resources during 1997. To meet its additional
remaining capital requirements and to successfully implement its growth
strategy, ACSI will be required to sell additional equity securities, increase
its existing credit facility, acquire additional credit facilities or sell
additional debt securities, certain of which would require the consent of the
Company's debtholders. Furthermore, before incurring additional indebtedness,
the Company may be required to seek additional equity financing to maintain
balance sheet and liquidity ratios required under certain of its debt
instruments and, as a result of the registration rights of certain of the
Company's security holders, the Company's ability to raise capital through a
public offering of equity securities may be limited. Accordingly, there can be
no assurance that the Company will be able to obtain the additional financing
necessary to satisfy its cash requirements or to successfully implement its
growth strategy, in which event the Company will be forced to curtail its
planned network expansion and may be unable to fund its ongoing operations.
Preferred Stock-In October 1994, the Company completed the private placement
of 186,664 shares of its 9% Series A Convertible Preferred Stock, par value
$1.00 per share (which was later exchanged for Series A-1 Preferred Stock that
will convert into 7,466,560 shares of Common Stock simultaneous with the
completion of the Offering) with accompanying warrants to purchase an aggregate
of 2,674,506 shares of Common Stock, for an aggregate consideration of $16.8
million (before deduction of estimated offering expenses), including the
conversion of $4.3 million of outstanding debt. Of the warrants sold in October
1994, warrants to acquire 1,491,222 shares of Common Stock were exercised by a
principal stockholder for an aggregate exercise price of approximately $100,000.
<PAGE> 47
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 $22.8
million. In addition, in November 1995, the Company completed a private
placement of 50,000 shares of its Series B Preferred Stock together with the
exercise of accompanying warrants to purchase 214,286 shares of Common Stock to
a principal stockholder for an aggregate consideration of $4.7 million. The
Series B Preferred Stock will convert into an aggregate of 9,910,704 shares of
Common Stock simultaneous with the completion of the Offering.
Under the terms of the Preferred Stock, the Company is required to accrue
quarterly dividends at an annual rate of 9% of the face value of the Preferred
Stock outstanding. Such accrued dividends will be payable cumulatively beginning
January 1, 1998, or earlier upon conversion into Common Stock, subject to
certain covenants contained in the Indentures. The Preferred Stock will convert
into an aggregate of 17,377,264 shares of Common Stock upon completion of the
Offering, at which time the Company will pay accrued dividends on the Preferred
Stock of approximately $8.0 million.
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
local networks by five of the Company's subsidiaries. In connection with each
loan made under the AT&T Credit Facility, AT&T Credit Corporation purchased
7.25% of the capital stock of the funded subsidiary, and ACSI pledged the other
shares and the assets of the subsidiary to AT&T Credit Corporation as security
for the loan. During fiscal 1995, the Company's subsidiaries in Louisville, Fort
Worth, Greenville and Columbia entered into loan agreements under the AT&T
Credit Facility providing for AT&T Credit Corporation funding of up to $19.8
million in the aggregate, and, in September 1995, the Company's subsidiary in El
Paso entered into a loan agreement under the AT&T Credit Facility providing for
up to $5.5 million of AT&T Credit Corporation funding. As of December 31, 1996,
an aggregate of $30.2 million had been borrowed under these agreements.
Principal amounts payable on the AT&T Credit Facility during 1997 are
approximately $872,000.
<PAGE> 48
Effects of New Accounting Standards
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS No.
121, Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to Be Disposed Of, which requires the Company to review for the
impairment of long-lived assets and certain identifiable intangibles to be held
and used by the Company whenever events or changes in circumstances indicate
that the carrying amount of any asset may not be recoverable. Adoption of SFAS
No. 121 did not have a material impact on the Company's Consolidated Financial
Statements in the fiscal period ended December 31, 1996.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which establishes a fair value-based method for financial
accounting and reporting stock-based employee compensation plans. However, the
new standard allows compensation to continue to be measured by using the
intrinsic value-based method accounting prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, but requires
expanded disclosures. SFAS No. 123 is effective for fiscal years that begin
after December 15, 1995. The Company has elected to continue to apply the
intrinsic value-based method of accounting for stock options.
Forward Looking Statements
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," including
statements regarding the development of the Company's businesses, the markets
for the Company's services and products, the Company's anticipated capital
expenditures, regulatory reform and other statements contained herein regarding
matters that are not historical facts, are forward-looking statements (as such
term is defined in the Private Securities Litigation Reform Act of 1995).
Because such statements include risks and uncertainties, actual results may
differ materially from those expressed or implied by such forward-looking
statements.
Item 7. Financial Statements
The response to this Item is submitted as a separate section of this report
commencing on Page F-1.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
Not Applicable.
<PAGE> 49
Part III
The information required by Item 9 - Directors, Executive Officers,
Promotors and Control Persons; Compliance with Section 16(a) of the Exchange
Act; Item 10 - Executive Compensation; Item 11 - Security Ownership of Certain
Beneficial Owners and Management; and Item 12 - Certain Relationships and
Related Transactions is incorporated into Part III of this Annual Report on Form
10-KSB by reference to the Company's Proxy Statement for the Annual Meeting of
Stockholders tentatively scheduled to be held on May 14, 1997.
<PAGE> 50
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets as of June 30, 1995 and 1996 and December 31, 1996........ F-3
Consolidated Statements of Operations for the Years Ended June 30, 1995 and 1996 and
for the Six Months Ended December 31, 1996.......................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended June 30,
1995 and 1996 and for the Six Months Ended December 31, 1996........................ F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1995 and 1996 and
for the Six Months Ended December 31, 1996.......................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 51
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
American Communications Services, Inc.:
We have audited the accompanying consolidated balance sheets of American
Communications Services, Inc. and subsidiaries as of June 30, 1995 and 1996 and
December 31, 1996, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the years ended June 30, 1995
and 1996 and the six months ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American
Communications Services, Inc. and subsidiaries as of June 30, 1995 and 1996 and
December 31, 1996, and the results of their operations and their cash flows for
the years ended June 30, 1995 and 1996 and for the six months ended December 31,
1996 in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Washington, D.C.
February 14, 1997
F-2
<PAGE> 52
AMERICAN COMMUNICATIONS SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
1995 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (note 1).................................... $ 20,350,791 $134,115,981 $ 78,618,544
Restricted cash (note 1).............................................. 752,000 2,342,152 2,342,152
Trade accounts receivable, net of allowance for doubtful accounts of
$8,600, $189,500, and $432,400 at June 30, 1995, June 30, 1996 and
December 31, 1996, respectively..................................... 350,436 735,260 2,429,077
Other current assets.................................................. 92,325 1,003,465 1,202,711
------------ ----------- -----------
Total current assets.................................................... 21,545,552 138,196,858 84,592,484
Networks, equipment and furniture, gross (note 2)....................... 15,897,562 80,147,964 144,403,123
Less: accumulated depreciation and amortization....................... (330,272) (3,408,698) (8,320,372)
------------ ----------- -----------
15,567,290 76,739,266 136,082,751
Deferred financing fees, net of accumulated amortization of $64,458,
$732,775 and $1,070,670, at June 30, 1995, June 30, 1996 and December
31, 1996, respectively................................................ 292,113 8,334,183 8,380,283
Other assets............................................................ 222,010 329,584 982,649
------------ ----------- -----------
Total assets............................................................ $ 37,626,965 $223,599,891 $230,038,167
============ =========== ===========
LIABILITIES, REDEEMABLE STOCK, OPTIONS AND WARRANTS, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable -- current portion (note 4)............................. $ 146,083 $ 252,809 $ 872,031
Accounts payable...................................................... 3,843,167 21,317,346 33,587,407
Accrued financing fees................................................ 1,542,255 -- --
Accrued employee costs................................................ 836,509 774,262 2,057,187
Other accrued liabilities............................................. 1,269,484 886,692 2,074,945
------------ ----------- -----------
Total current liabilities............................................... 7,637,498 23,231,109 38,591,570
Long term liabilities:
Notes payable, less current portion (notes 4 and 6)................... 3,652,085 184,129,361 209,538,226
Dividends payable (note 3)............................................ 1,070,985 4,942,313 6,945,943
------------ ----------- -----------
Total liabilities....................................................... 12,360,568 212,302,783 255,075,739
------------ ----------- -----------
Redeemable stock, options and warrants (notes 6, 9 and 11).............. 2,930,778 2,155,025 2,000,000
------------ ----------- -----------
Minority interest (note 4).............................................. 194,402 160,270 --
------------ ----------- -----------
Stockholders' equity (deficit) (notes 3, 4, 5 and 6):
Preferred stock, $1.00 par value, 186,664 shares designated as 9%
Series A-1 Convertible Preferred Stock authorized, issued and
outstanding at June 30, 1995, June 30, 1996 and December 31, 1996,
respectively, convertible into 7,466,560 shares of common stock
(notes 3 and 4)..................................................... 186,664 186,664 186,664
Preferred stock, $1.00 par value, 277,500 shares authorized and
designated as 9% Series B Convertible Preferred Stock; 227,500,
277,500 and 277,500 shares issued and outstanding at June 30, 1995,
June 30, 1996 and December 31, 1996, respectively, convertible into
9,910,718 shares of common stock (notes 3 and 5).................... 227,500 277,500 277,500
Common stock, $.01 par value, 75,000,000 shares authorized, 5,744,782,
6,645,691 and 6,784,996 shares issued and outstanding at
June 30, 1995, June 30, 1996 and December 31, 1996, respectively
(note 5)............................................................ 56,827 65,837 67,850
Additional paid-in capital............................................ 42,411,448 55,975,078 54,870,194
Accumulated deficit................................................... (20,741,222) (47,523,266) (82,439,780)
------------ ----------- -----------
Total stockholders' equity (deficit).................................... 22,141,217 8,981,813 (27,037,572)
------------ ----------- -----------
Commitments and contingencies (notes 1, 4, 6, 7, 8, and 9)
Total liabilities, redeemable stock, options and warrants, minority
interest and stockholders' equity (deficit)........................... $ 37,626,965 $223,599,891 $230,038,167
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 53
AMERICAN COMMUNICATIONS SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX
----------------------------- MONTHS ENDED
JUNE 30, JUNE 30, DECEMBER 31,
1995 1996 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenues (note 1)................................ $ 388,887 $ 3,415,137 $ 6,990,452
------------ ------------ ------------
Operating expenses:
Network development and operations............. 3,282,183 5,264,570 8,703,057
Selling, general and administrative............ 4,597,615 13,463,775 20,269,991
Noncash stock compensation (note 6)............ 6,419,412 2,735,845 549,645
Depreciation and amortization.................. 497,811 3,078,426 4,911,674
------------ ------------ ------------
Total operating expenses......................... 14,797,021 24,542,616 34,434,367
Non-operating income (expenses):
Interest and other income...................... 217,525 4,409,733 2,757,461
Interest and other expense (note 4)............ (170,095) (10,476,904) (10,390,330)
Debt conversion expense (note 4)............... (385,000) -- --
------------ ------------ ------------
Loss before minority interest.................... (14,745,704) (27,194,650) (35,076,784)
Minority interest................................ 48,055 412,606 160,270
------------ ------------ ------------
Net loss......................................... (14,697,649) (26,782,044) (34,916,514)
Preferred stock dividends and accretion (note
3)............................................. (1,070,985) (3,871,328) (2,003,630)
------------ ------------ ------------
Net loss to common stockholders.................. $ (15,768,634) $ (30,653,372) $ (36,920,144)
============ ============ ============
Net loss per common share........................ $ (3.30) $ (4.96) $ (5.48)
============ ============ ============
Average number of common shares outstanding...... 4,771,689 6,185,459 6,733,759
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 54
AMERICAN COMMUNICATIONS SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996 AND THE SIX MONTHS ENDED DECEMBER 31,
1996
<TABLE>
<CAPTION>
PREFERRED STOCK
--------------------
SHARES AMOUNT
------ -----------
<S> <C> <C>
Balances at June 30, 1994.......................... 1,700 $ 1,700,000
Preferred Stock exchange (note 12)............... (1,700) (1,700,000)
Set par value for common stock (note 5).......... -- --
Acquisition of Piedmont Teleport, Inc. (note
13)............................................ -- --
Write-off of note receivable for common stock.... -- --
Series A Preferred private placement, net of
related costs (note 3)......................... -- --
Series B Preferred private placement, net of
related costs (note 3)......................... -- --
Issuance of put right obligations (notes 6
and 9)......................................... -- --
Cancellation of put right obligation (note 9).... -- --
Warrant and stock option exercises and stock
grant (note 6)................................. -- --
Establish limitation on common stock put right
obligation (note 6)............................ -- --
Series A Preferred Stock dividends accrued
(note 3)....................................... -- --
Net loss......................................... -- --
------ -----------
Balances at June 30, 1995.......................... -- $ --
Issuance of Series B-4 Preferred Stock
(note 3)....................................... -- --
Issuance of detachable warrants (notes 4 and
6)............................................. -- --
Warrants and stock options exercised (note 6).... -- --
Series A and B Preferred Stock dividends accrued
(note 3)....................................... -- --
Cancellation of and adjustments to put right
obligations (note 6)........................... -- --
Stock compensation expense....................... -- --
Net loss......................................... -- --
------ -----------
Balances at June 30, 1996.......................... -- $ --
Warrants and stock options exercised (note 6).... -- --
Series A and B Preferred Stock dividends accrued
(note 3)....................................... -- --
Accretion of consulting agreement credit to
exercise price of warrants (note 9)............ -- --
Cancellation of and adjustments to put right
obligations (note 6)........................... -- --
Stock compensation expense....................... -- --
Net loss......................................... -- --
------ -----------
Balances at December 31, 1996...................... -- $ --
====== ===========
<CAPTION>
SERIES A-1 SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------- ------------------ -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- -------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1994.......................... -- $ -- -- $ -- 2,755,005 $ --
Preferred Stock exchange (note 12)............... -- -- -- -- 548,387 --
Set par value for common stock (note 5).......... -- -- -- -- -- 33,033
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 9).... -- -- -- -- -- --
Warrant and stock option exercises and stock
grant (note 6)................................. -- -- -- -- 2,379,390 23,794
Establish limitation on common stock put right
obligation (note 6)............................ -- -- -- -- -- --
Series A Preferred Stock dividends accrued
(note 3)....................................... -- -- -- -- -- --
Net loss......................................... -- -- -- -- -- --
--------- -------- ------- -------- --------- -------
Balances at June 30, 1995.......................... 186,664 $186,664 227,500 $227,500 5,744,782 $56,827
Issuance of Series B-4 Preferred Stock
(note 3)....................................... -- -- 50,000 50,000 -- --
Issuance of detachable warrants (notes 4 and
6)............................................. -- -- -- -- -- --
Warrants and stock options exercised (note 6).... -- -- -- -- 900,909 9,010
Series A and B Preferred Stock dividends accrued
(note 3)....................................... -- -- -- -- -- --
Cancellation of and adjustments to put right
obligations (note 6)........................... -- -- -- -- -- --
Stock compensation expense....................... -- -- -- -- -- --
Net loss......................................... -- -- -- -- -- --
--------- -------- ------- -------- --------- -------
Balances at June 30, 1996.......................... 186,664 $186,664 277,500 $277,500 6,645,691 $65,837
Warrants and stock options exercised (note 6).... -- -- -- -- 139,305 1,393
Series A and B Preferred Stock dividends accrued
(note 3)....................................... -- -- -- -- -- --
Accretion of consulting agreement credit to
exercise price of warrants (note 9)............ -- -- -- -- --
Cancellation of and adjustments to put right
obligations (note 6)........................... -- -- -- -- -- 620
Stock compensation expense....................... -- -- -- -- -- --
Net loss......................................... -- -- -- -- -- --
--------- -------- ------- -------- --------- -------
Balances at December 31, 1996...................... 186,664 $186,664 277,500 $277,500 6,784,996 $67,850
======== ========= ======== ========= ========= ========
<CAPTION>
NOTES
RECEIVABLE TOTAL
ADDITIONAL ON SALE OF STOCKHOLDERS'
PAID-IN COMMON ACCUMULATED EQUITY
CAPITAL STOCK DEFICIT (DEFICIT)
----------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
Balances at June 30, 1994..........................$ 1,080,566 $ (2,750) $ (6,043,573) $ (3,265,757)
Preferred Stock exchange (note 12)............... 1,700,000 -- -- --
Set par value for common stock (note 5).......... (33,033) -- -- --
Acquisition of Piedmont Teleport, Inc. (note
13)............................................ -- -- -- --
Write-off of note receivable for common stock.... (2,750) 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 9).... 487,500 -- -- 487,500
Warrant and stock option exercises and stock
grant (note 6)................................. 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..........................$42,411,448 $ -- $(20,741,222) $ 22,141,217
Issuance of Series B-4 Preferred Stock
(note 3)....................................... 4,950,000 -- -- 5,000,000
Issuance of detachable warrants (notes 4 and
6)............................................. 8,684,000 -- -- 8,684,000
Warrants and stock options exercised (note 6).... 289,360 -- -- 298,370
Series A and B Preferred Stock dividends accrued
(note 3)....................................... (3,871,328) -- -- (3,871,328)
Cancellation of and adjustments to put right
obligations (note 6)........................... 775,753 -- -- 775,753
Stock compensation expense....................... 2,735,845 -- -- 2,735,845
Net loss......................................... -- -- (26,782,044) (26,782,044)
----------- ---------- ------------ -------------
Balances at June 30, 1996..........................$55,975,078 $ -- $(47,523,266) $ 8,981,813
Warrants and stock options exercised (note 6).... 175,945 -- -- 177,338
Series A and B Preferred Stock dividends accrued
(note 3)....................................... (2,003,630) -- -- (2,003,630)
Accretion of consulting agreement credit to
exercise price of warrants (note 9)............ 18,750 18,750
Cancellation of and adjustments to put right
obligations (note 6)........................... 154,405 -- -- 155,025
Stock compensation expense....................... 549,646 -- -- 549,646
Net loss......................................... -- -- (34,916,514) (34,916,514)
----------- ---------- ------------ -------------
Balances at December 31, 1996......................$54,870,194 $ -- $(82,439,780) $(27,037,572)
=========== ========== ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 55
AMERICAN COMMUNICATIONS SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE YEARS ENDED MONTHS
----------------------------- ENDED
JUNE 30, JUNE 30, DECEMBER 31,
1995 1996 1996
------------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................................. $ (14,697,649) $ (26,782,044) $(34,916,514)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization...................................... 497,811 3,078,426 4,911,674
Interest deferral and accretion.................................... -- 10,447,687 10,041,189
Amortization of deferred financing fees............................ 323,900 668,317 334,671
Provision for doubtful accounts.................................... 8,570 180,940 242,915
Loss from impairment of assets..................................... -- -- 318,737
Loss attributed to minority interest............................... (48,055) (412,606) (160,270)
Noncash compensation, consultants and other expenses............... 6,419,412 2,735,845 549,645
Accretion of consulting agreement credit to exercise price of
warrants......................................................... -- -- 18,750
Noncash debt conversion expense.................................... 385,000 -- --
Changes in operating assets and liabilities:
Trade accounts receivable........................................ (359,007) (565,764) (1,936,732)
Restricted cash related to operating activities.................. 200,000 -- --
Other current assets............................................. (92,325) (911,140) (199,246)
Other assets..................................................... (26,545) (107,574) (653,065)
Accounts payable................................................. 3,170,885 17,474,179 12,270,061
Accrued financing fees........................................... 1,542,255 (1,542,255) --
Accrued employee costs........................................... 719,333 (62,247) 1,282,925
Other accrued liabilities........................................ 1,055,673 (382,792) 1,188,253
------------ ------------ -----------
Net cash (used in) provided by operating activities.................... (900,742) 3,818,972 (6,707,007)
------------ ------------ -----------
Cash flows from investing activities:
Purchase of net assets of Piedmont Teleport, Inc. ................... (19,135) -- --
Purchase of equipment and furniture.................................. (306,454) (2,966,987) (1,827,119)
Restricted cash related to network activities........................ (752,000) (1,590,152) --
Network development costs............................................ (14,996,303) (57,889,227) (62,746,777)
------------ ------------ -----------
Net cash used in investing activities.................................. (16,073,892) (62,446,366) (64,573,896)
------------ ------------ -----------
Cash flows from financing activities:
Issuance of notes payable............................................ 3,510,349 166,888,210 16,329,923
Payment of deferred financing fees................................... (310,175) (8,710,387) (380,771)
Warrant and stock option exercises................................... 372,824 298,370 177,338
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 5,000,000 --
Issuance of warrants with 2005 Notes................................. -- 8,684,000 --
Issuance of notes payable -- stockholders............................ 250,000 -- --
Proceeds from sale of minority interest in subsidiaries.............. 242,457 378,474 --
Payment of equipment financing....................................... -- -- (343,024)
Payments of notes payable -- stockholders............................ (481,692) (146,083) --
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.............................. 34,055,028 172,392,584 15,783,466
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents................... 17,080,394 113,765,190 (55,497,437)
Cash and cash equivalents, beginning of year........................... $ 3,270,397 $ 20,350,791 $134,115,981
------------ ------------ -----------
Cash and cash equivalents, end of year................................. $ 20,350,791 $ 134,115,981 $ 78,618,544
============ ============ ============
Supplemental disclosure of cash flow information -- interest paid on
all debt obligations................................................. $ 219,554 $ 29,217 $ 14,470
============ ============ ============
Supplemental disclosure of noncash investing and financing activities:
Equipment financing.................................................... $ -- $ 343,024 --
============ ============ ============
Dividends declared in connection with Series A Preferred Stock......... $ 1,070,985 $ 3,871,328 $ 2,003,630
============ ============ ============
Bridge financing, secured convertible notes, and notes payable --
stockholders converted to equity in connection with private
placements........................................................... $ 4,080,079 $ -- $ --
============ ============ ============
Cancellation of and adjustments to put right obligations............... $ (487,500) $ (775,753) $ (155,025)
============ ============ ============
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 $ -- $ --
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 56
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996
(1) BASIS OF PRESENTATION AND RELATED MATTERS
FISCAL YEAR
Effective December 31, 1996, the Company changed its fiscal year from a
twelve-month period ending June 30 to a twelve-month period ending December 31.
The consolidated statements of operations, stockholders' equity (deficit) and
cash flows are presented for the twelve month period ended June 30, 1995, the
twelve month period ended June 30, 1996 and the six month period ended December
31, 1996.
The Unaudited Condensed Consolidated Statement of Operations information for the
six months ended December 31, 1995 is as follows:
<TABLE>
<S> <C>
Revenues...................................................... $ 988,877
Operating expenses............................................ 7,966,463
Non-operating expenses........................................ 2,057,410
------------
Loss before minority interest................................. (9,034,996)
Minority interest............................................. 155,861
------------
Net loss...................................................... (8,879,135)
Preferred stock dividends and accretion....................... (1,854,495)
------------
Net loss to common stockholders............................... (10,733,630)
------------
Net loss per common share..................................... (1.82)
Average number of common shares outstanding................... 5,900,606
============
</TABLE>
ORGANIZATION
The consolidated financial statements include the accounts of American
Communications Services, Inc. and its majority-owned subsidiaries (ACSI or the
Company). As discussed in note 4 to the consolidated financial statements, all
of the Company's subsidiaries are wholly owned with the exception of the
Louisville, Fort Worth, El Paso, Greenville, and Columbia subsidiaries, in which
the Company has a 92.75% controlling ownership interest. All material
intercompany accounts and transactions have been eliminated in consolidation.
BUSINESS AND OPERATING ENVIRONMENT
ACSI constructs and operates digital fiber optic networks and offers local
telecommunications services to long distance companies and business and
government end users in selected target markets, principally in the southern
United States. The Company provides nonswitched dedicated services, including
special access, switched transport and private line services. In addition to
these dedicated services, the Company is developing and has begun offering high
speed data services to business, government and other communications carriers,
including Internet service providers. The Company has also begun offering, on a
limited basis, enhanced voice messaging services and plans to begin offering
local switched voice services in the future. The Company is a competitive local
exchange carrier and is referred to as a competitive access provider with
respect to provision of dedicated services.
To date, the Company has funded the construction of its networks and its
operations with external financing. Prior to November 1995, the primary sources
of funds were two Preferred Stock private offerings completed in October 1994
and June 1995 (see note 3), and a credit facility from AT&T
F-7
<PAGE> 57
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) BASIS OF PRESENTATION AND RELATED MATTERS -- (CONTINUED)
Credit Corporation (see note 4). During the fiscal year ended June 30, 1996, the
Company raised additional funds through an additional sale of Preferred Stock
(see note 3), two private offerings of Senior Notes, one of which included
detachable warrants and further borrowings under the AT&T Credit Corporation
Credit Facility (see note 4).
The Company has never been profitable, has never generated positive cash flow
from consolidated operations and, since its inception has incurred significant
net operating losses and negative cash flow. In accordance with the terms of its
debt facilities the Company has also deferred payment of most of its interest
charges. The Company's continued development, construction, expansion, operation
and potential acquisition of local networks, as well as the further development
of new services, including local switched voices and high-speed data services,
will require substantial capital expenditures. The Company's ability to fund
these expenditures is dependent upon the Company's raising substantial
financing. To meet its remaining capital requirements and to fund operations and
cash flow deficiencies, ACSI will be required to sell additional equity
securities, increase its existing credit facility, acquire additional credit
facilities or sell additional debt securities, certain of which would require
the consent of the Company's debtholders. Before incurring additional
indebtedness, the Company may be required to seek additional equity financing to
maintain balance sheet and liquidity ratios under certain of its debt
instruments. There can be no assurance that the Company will be able to obtain
the additional financing necessary to satisfy its cash requirements or to
successfully implement its growth strategy. 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.
CASH EQUIVALENTS AND RESTRICTED CASH
Pursuant to SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", the Company's short and long-term debt securities and marketable
equity securities are accounted for at market value. The fair market value of
short- and long-term investments is determined based on quoted market prices for
those investments. The Company's marketable securities have been classified as
available for sale and are recorded at current market value with an offsetting
adjustment to stockholders' equity (deficit).
The Company's investments consist of commercial paper, U.S. Government
Securities and money market instruments, all with original maturities of 90 days
or less. The fair market value of such securities approximates amortized cost.
At June 30, 1995 and 1996 and December 31, 1996, cash equivalents consists of
government securities and overnight investments.
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, $2,342,000 and $2,342,000 at June 30, 1995, June 30, 1996
and December 31, 1996, respectively. The face amount of all bonds and letters of
credits was approximately $6,200,000 as of December 31, 1996.
NETWORKS, EQUIPMENT AND FURNITURE
Networks, equipment and furniture are stated at cost less accumulated
depreciation and amortization. Costs capitalized during the network development
stage include expenses associated with network engineering, design and
construction, negotiation of rights-of-way, obtaining legal and regulatory
authorizations and the amount of interest costs associated with the network
development.
F-8
<PAGE> 58
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) BASIS OF PRESENTATION AND RELATED MATTERS -- (CONTINUED)
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....................... 3-10 years
Leasehold improvements........................................ Life of lease
Furniture and fixtures........................................ 5 years
Capitalized network development costs......................... 3-20 years
</TABLE>
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" on
January 1, 1996. This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.
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. Billings to customers for
services in advance of providing such services are deferred and recognized as
revenue when earned. The Company also enters into managed services agreements
with certain customers. Under such agreements the Company provides use of
Company owned equipment, collocation and network access services. Revenue is
recognized on a monthly basis as these services are provided to the customer.
EARNINGS (LOSS) PER COMMON SHARE
The computation of earnings (loss) per common share is based upon the weighted
average number of common shares outstanding. The effect of including common
stock options and warrants as common stock equivalents would be anti-dilutive
and is excluded from the calculation of loss per common share.
F-9
<PAGE> 59
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) BASIS OF PRESENTATION AND RELATED MATTERS -- (CONTINUED)
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 June 30, 1995 and 1996
consolidated financial statements to conform to the December 31, 1996
presentation. Such reclassifications had no effect on net loss or total
stockholders' equity (deficit).
STOCK OPTION PLAN
Prior to July 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees", and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
July 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock Based
Compensation", which permits entities to recognize as expense over the vesting
period the fair value of all stock based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosure for employee stock option grants as if the
fair-value based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results may differ from those estimates.
CONCENTRATION OF CREDIT RISK
The Company receives a significant portion of its revenues from a small number
of major customers, particularly the long distance telecommunications companies
that service the Company's markets. For the years ended June 30, 1995 and June
30, 1996 and the six months ended December 31, 1996 approximately 85%, 60% and
40% of the Company's revenues were attributable to services provided to three,
four and four of the largest long distance telecommunications companies,
respectively. The loss of any one of these customers could have an adverse
material impact on the Company's revenues.
The Company provides managed services to certain Internet service providers.
Such companies operate in a highly competitive and uncertain environment.
Approximately 19% of the Company's
F-10
<PAGE> 60
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) BASIS OF PRESENTATION AND RELATED MATTERS -- (CONTINUED)
revenues for the six months ended December 31, 1996 were attributed to these
companies. At December 31, 1996, the Company had trade accounts receivable of
$923,000 from Internet service providers. The Company also has approximately
$4.5 million in equipment dedicated to providing service to these companies. The
Company believes that, if necessary, this equipment could be redeployed
throughout the Company's data network.
(2) NETWORKS, EQUIPMENT AND FURNITURE
Networks, equipment and furniture consists of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
1995 1996 1996
----------- ----------- ------------
<S> <C> <C> <C>
Networks and telecommunications
equipment............................... $15,570,450 $76,853,865 $139,129,495
Furniture and fixtures.................... 188,534 1,982,910 3,334,147
Computer software......................... 56,485 948,848 1,558,384
Leasehold improvements.................... 82,093 362,341 381,097
----------- ----------- ------------
15,897,562 80,147,964 144,403,123
Less -- accumulated depreciation and
amortization............................ 330,272 3,408,698 8,320,372
----------- ----------- ------------
Total, net of accumulated depreciation and
amortization............................ $15,567,290 $76,739,266 $136,082,751
============ ============ =============
</TABLE>
For the years ended June 30, 1995 and 1996, the Company capitalized interest of
approximately $536,000 and $3,051,000, respectively. For the six months ended
December 31, 1996, the Company capitalized interest of approximately $2,268,000.
(3) PRIVATE PLACEMENTS
In October 1994, the Company completed a private placement of its 9% Series A
Convertible Preferred Stock, $1.00 par value (the "Series A Preferred Stock").
There were 138,889 shares issued for cash at $90 per share resulting in proceeds
of $10,962,046, net of placement agent commissions and related placement fees
and costs.
In addition, bridge financing was converted and several other obligations were
retired with proceeds of the offering. See note 4 to the consolidated financial
statements. Further, as discussed in note 6 to the consolidated financial
statements, certain parties obtained warrants to purchase shares of the
Company's common stock. In June 1995, the Series A Preferred Stock was exchanged
for an identical number of 9% Series A-1 Convertible Preferred Stock, $1.00 par
value. (the "Series A-1 Preferred Stock").
In June 1995, the Company completed a private placement of its 9% Series B-1
Convertible Preferred Stock (the "Series B-1 Preferred"), 9% Series B-2
Convertible Preferred Stock (the "Series B-2 Preferred") and 9% Series B-3
Convertible Preferred Stock (the "Series B-3 Preferred"), each having a par
value of $1.00 per share. There were 227,500 shares issued for cash at $100 per
share with proceeds of $20,661,500, net of placement agent commissions and
related placement fees and costs. In November 1995, 50,000 shares of 9% Series
B-4 Convertible Preferred Stock (the "Series B-4 Preferred") were issued for
cash of $100 per share resulting in proceeds of $5,000,000. The Series B-1
Preferred, the Series B-2 Preferred, the Series B-3 Preferred and the Series B-4
Preferred
F-11
<PAGE> 61
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) PRIVATE PLACEMENTS -- (CONTINUED)
are hereafter collectively referred to as the "Series B Preferred Stock." The
Series A-1 Preferred Stock and the Series B Preferred Stock are hereafter
collectively referred to as the "Preferred Stock." Further, as discussed in note
6 to the consolidated financial statements, certain parties obtained warrants to
purchase shares of the Company's common stock.
The Company's Preferred Stock and common stock vote as a single class (except
with respect to the election of directors and certain other transactions and
matters) with the common stock entitled to one vote per share and the Preferred
Stock entitled to one vote for each share of common stock into which it is
convertible. At December 31, 1996, the outstanding Series A-1 Preferred Stock
was convertible into 7,466,560 shares of common stock and the outstanding Series
B Preferred Stock was convertible into 9,910,704 shares of common stock.
Pursuant to the Company's certificate of incorporation, the board of directors
is currently comprised of seven directors. The holders of common stock are
entitled to elect four directors and the holders of the Preferred Stock are
entitled to elect three directors. In addition, certain transactions and matters
require the consent of the holders of at least 75% of the shares of Preferred
Stock voting as a separate class.
Certain holders of the Company's Preferred Stock and common stock have entered
into a Voting Rights Agreement pursuant to which such stockholders have agreed
to vote their shares of Preferred Stock and common stock for the election of
directors designated by the majority Preferred stockholders.
In connection with its Series A-1 and Series B Preferred Stock, the Company has
recorded approximately $1,071,000, $4,942,000 and $6,946,000 as of June 30,
1995, June 30, 1996 and December 31, 1996, respectively, as a reduction in
additional paid-in capital, for the payment of anticipated dividends. The
Company's certificate of incorporation requires the Company to accrue dividends,
on a quarterly basis, at an annual rate of 9% of the face value of the Series
A-1 and B Preferred Stock.
Although the Board of Directors of the Company has not taken any formal action
as of December 31, 1996, as a condition of the aforementioned provisions of the
certificate of incorporation, the dividends have been deemed declared and
properly reflected in the accompanying consolidated financial statements.
Pursuant to the Company's certificate of incorporation, dividends accrued shall
be paid cumulatively, beginning January 1, 1998, or earlier upon conversion.
Upon a voluntary conversion on or before December 31, 1997, the Company shall,
in lieu of accrued and unpaid dividends, issue promissory notes to the holders
of the Preferred Stock. The Company expects to issue promissory notes to the
holders on January 1, 1998 for dividends accrued, if conversion has not
occurred, subject to restrictions included in the Senior Discount Note
Indentures. Conversion may occur at any time at the holder's option or
automatically, upon a certain qualifying issuance of common stock. As of
December 31, 1996, no conversions had occurred.
F-12
<PAGE> 62
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
1995 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
Notes payable-stockholders at 10-15%,
maturing September 15, 1995............ $ 146,083 -- --
AT&T Credit Corporation equipment and
working capital financing facility..... 3,652,085 $ 14,971,122 $ 30,183,264
2006 Senior Discount notes, interest at
12 3/4%, maturing April 1, 2006........ -- 66,635,887 70,824,922
2005 Senior Discount notes, interest at
13% maturing November 1, 2005.......... -- 102,432,137 109,402,071
Secured equipment note payable, interest
of 9.98%, payable in 36 equal monthly
installments of $2,766, including
interest commencing March 1, 1996...... -- 343,024 --
------------ ------------ ------------
Total long-term debt..................... 3,798,168 184,382,170 210,410,257
Less current portion..................... 146,083 252,809 872,031
------------ ------------ ------------
$3,652,085 $184,129,361 $209,538,226
=========== ============= =============
</TABLE>
Principal payments for each of the years from 1997 to 2001 and thereafter, are
due as follows at December 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1997.................................................... $ 872,031
1998.................................................... 1,190,150
1999.................................................... 2,124,721
2000.................................................... 3,250,483
2001.................................................... 4,618,260
Thereafter.............................................. 198,354,612
-------------
$ 210,410,257
=============
</TABLE>
NOTES PAYABLE -- STOCKHOLDERS
At June 30, 1995, the Company had a total of $146,083 in notes payable to
stockholders which matured and were repaid on September 14, 1995.
AT&T CREDIT CORPORATION EQUIPMENT AND WORKING CAPITAL FINANCING FACILITY
In October 1994, the Company entered into the AT&T Credit Facility pursuant to
which AT&T Credit Corporation has agreed to provide financing for the
development and construction of fiber optic networks by certain of the Company's
subsidiaries. In accordance with the terms of the facility, the Company is
obligated to use at least 10% of the borrowed funds for purchases of equipment
manufactured by AT&T or its affiliates. Pursuant to the AT&T Credit Facility,
during fiscal 1995 the Company's subsidiaries in Louisville, Fort Worth,
Greenville and Columbia entered into loan agreements with AT&T Credit
Corporation providing for up to $19.8 million in loans collateralized 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
F-13
<PAGE> 63
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) DEBT -- (CONTINUED)
subsidiary in E1 Paso entered into a separate loan agreement with AT&T Credit
Corporation pursuant to the AT&T Credit Facility providing for up to an
aggregate of approximately $5.5 million in loans collateralized by its assets.
During the fiscal year ended June 30, 1996, the existing loan agreements were
amended to increase the aggregate credit available under such agreements to
$31.2 million. As of June 30, 1996 and December 31, 1996, outstanding borrowings
under the AT&T Credit Facility totaled approximately $15 million and $30
million, respectively, including accrued interest of approximately $1.4 million
and $2.7 million, respectively. Interest rates currently applicable to the loans
range from 11.93% to 14.47%.
The loans under the AT&T Credit Facility are collateralized by all of the assets
of the respective borrowing subsidiary, including its installed fiber optic
system and other equipment. The principal is payable in 28 consecutive quarterly
installments, beginning with the ninth quarter after the date of the loan. The
principal may be prepaid in certain circumstances, and must be prepaid along
with a premium in other circumstances. Interest is due quarterly. At the
borrowing subsidiary's option, the interest rate may be fixed or variable. The
borrowing subsidiary has a one-time option to convert all variable rate loans to
fixed rate loans. Upon certain events of default, additional interest ranging
from 2% to 4% will become payable. Interest may generally be deferred so long as
it would not cause the outstanding principal balance to exceed the commitment
amounts for Capital Loans and for Equipment Loans (as defined in the loan
documents). To date, the Company has elected to defer all interest due under the
loans. In addition, the AT&T Credit Facility includes covenants, some of which
impose certain restrictions on the Company and its restricted subsidiaries
including restrictions on the declaration or payment of dividends, the conduct
of certain activities, certain capital expenditures, the creation of additional
liens or indebtedness, the disposition of assets, transactions with affiliates
and extraordinary corporate transactions. The AT&T Credit Facility imposes
restrictions on the ability of those subsidiaries of ACSI that incur
indebtedness thereunder to transfer funds to ACSI in the form of dividends or
other distributions. The AT&T Credit Facility also imposes restrictions on the
ability of such subsidiaries to raise capital by incurring additional
indebtedness. These restrictions could limit ACSI's ability to meet its
obligations with respect to the 2005 and 2006 Senior Discount Notes.
Pursuant to the AT&T Credit Facility, AT&T Credit Corporation purchased 7.25% of
the outstanding capital stock of each of the Company's operating subsidiaries
for which it provided financing. The Company was required to pledge its interest
in these subsidiaries to AT&T Credit Corporation as a condition to each loan.
Under certain circumstances, this pledge agreement also restricts the Company's
ability to pay dividends on its capital stock.
2005 SENIOR DISCOUNT NOTES AND 2006 SENIOR DISCOUNT NOTES
On November 14, 1995, the Company completed an offering of 190,000 Units (the
"Units") consisting of $190,000,000 principal amount of 13% Senior Discount
Notes due 2005 (the "2005 Notes") and warrants to purchase 2,432,000 shares of
the Company's common stock at a price of $7.15 per share (the "Warrants"). The
2005 Notes will accrete at a rate of 13% compounded semi-annually to an
aggregate principal amount of $190,000,000 by November 1, 2000. Thereafter,
interest on the 2005 Notes will accrue at the annual rate of 13% and will be
payable in cash semi-annually. The Company received net proceeds of
approximately $96,105,000 from the sale of the Units. The value ascribed to the
Warrants was $8,684,000.
On March 21, 1996, the Company completed an offering of $120,000,000 of 12 3/4%
Senior Discount Notes due 2006 (the "2006 Notes") resulting in net proceeds of
approximately $61,800,000. The
F-14
<PAGE> 64
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) DEBT -- (CONTINUED)
2006 Notes will accrete at a rate of 12 3/4% compounded semi-annually, to an
aggregate principal amount of $120,000,000 by April 1, 2001. Thereafter,
interest on the 2006 Notes will accrue at the annual rate of 12 3/4% and will be
payable in cash semi-annually on April 1 and October 1, commencing on October 1,
2001. The 2006 Notes will mature on April 1, 2006.
The 2005 Notes and 2006 Notes (collectively the "Notes") are general,
unsubordinated and unsecured obligations of the Company. The Company's
subsidiaries have no obligation to pay amounts due on the Notes and do not
guarantee the notes. Therefore, the Notes are effectively subordinated to all
liabilities of ACSI's subsidiaries, including trade payables. Any rights of the
Company and its creditors, including the holders of the Notes, to participate in
the assets of any of the Company's subsidiaries upon any liquidation or
reorganization of any such subsidiaries will be subject to the prior claims of
that subsidiary's creditors.
The Notes are subject to certain covenants which, among other things, restrict
the ability of ACSI and certain of its subsidiaries to incur additional
indebtedness, pay dividends or make distributions.
DEBT CONVERSION
On June 28, 1994, the Company issued a total of $4,300,720 principal of its 15
percent convertible bridge notes due December 31, 1994, including $1,300,720
issued to then existing stockholders. During 1995, the holders of $3,300,720 of
these convertible bridge notes converted the notes plus accrued interest thereon
of $35,754 into 37,073 shares of Series A Preferred Stock. The remaining
$1,000,000 principal amount was retired by cash payment from the proceeds of the
Series A Preferred Stock private offering (see note 3). The Company recorded
noncash debt conversion expense of $231,000 associated with the related
unamortized financing fees.
At June 30, 1994, the Company had outstanding loans from affiliates with an
aggregate principal balance of $606,640, which were notes secured by certain
assets of the Company. These loans bore interest at 15% per annum and had a
scheduled maturity date of December 31, 1994.
In October 1994, the holders of $529,359 principal amount of these notes, plus
accrued interest thereon of $29,368, converted the notes into 7,924 shares of
Series A Preferred Stock. The remaining principal on the secured convertible
notes of $77,281 was retired by a cash payment from the proceeds of the Series A
Preferred Stock private placement offering (see note 3). The Company recorded
noncash debt conversion expense of $154,000 equal to the premium to induce
conversion.
In August 1994, the Company borrowed $250,000, at a rate of 15% per annum from
an affiliate that was payable on demand. In October 1994, this note was
converted into 2,778 shares of Series A Preferred Stock.
(5) STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
In fiscal 1995, the Company established a par value of $.01 for its issued and
outstanding common stock.
F-15
<PAGE> 65
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) STOCKHOLDERS' EQUITY -- (CONTINUED)
PREFERRED STOCK
Pursuant to the Series B Preferred Stock offerings, as described in note 3, four
classes of Series B Preferred Stock have been designated and issued. The
composition of the Series B Preferred Stock at December 31, 1996 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 designated as 9%
Series B-4 Convertible Preferred Stock authorized, issued and
outstanding.................................................... 50,000
--------
Total............................................................ $277,500
=========
</TABLE>
(6) STOCK OPTIONS AND STOCK PURCHASE WARRANTS
The Company has a stock option plan which provides for the granting of options
to officers, employees, directors and consultants of the Company to purchase
shares of its common stock within prescribed periods.
In 1994, the Company entered into employment agreements with five executive
officers. Pursuant to the agreements, as amended, such officers have been
granted options to purchase an aggregate of 4,149,834 shares of common stock of
the Company at exercise prices ranging from $.875 to $3.40 per share. The
options vest at various dates as specified in the employment agreements with
4,069,834 of the options vesting on specific dates ranging from November 1, 1993
to November 4, 2001, and 80,000 of such options which vested upon the occurrence
of certain specified performance milestones. When the employment of these
individuals with the Company terminates, these individuals have the right to
sell certain of their shares to the Company (the put right) for a price equal to
fair market value. On June 26, 1995, the employment agreements were amended to
limit the purchase price paid by the Company pursuant to the put right to a
maximum of $2,500,000, which amount is subject to further reductions based on
the employees' sales of stock. During the year ended June 30, 1996, the limit
was further reduced to $2,000,000.
The Company has also issued 500,000 options to a supplier to purchase stock at
90% of the fair value at the date of exercise. Such options give the supplier
the right to sell the stock acquired back to the Company at fair value under
certain circumstances. None of the options have been exercised to date and they
expire in December, 1997.
The Company applies APB Opinion 25 and related Interpretations in accounting for
its plans. Accordingly, compensation cost has been recognized for its stock
option plans based on the intrinsic value of the option at the date of grant.
The compensation cost that has been charged against income was approximately
$6.4 million, $2.7 million and $550,000 for the years ended June 30, 1995 and
June 30, 1996 and for the six months ended December 31, 1996, respectively. Had
compensation cost for the Company's plan been determined based on the fair value
at the grant dates consistent with the method of FASB Statement 123 for all
options granted after June 30, 1995, and the intrinsic
F-16
<PAGE> 66
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) STOCK OPTIONS AND STOCK PURCHASE WARRANTS -- (CONTINUED)
value for all options granted prior to July 1, 1995, the Company's net loss and
loss per share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1996 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C> <C>
Net loss..................................... As reported: $ (26,782,044) $ (34,916,514)
Pro forma: (27,533,636) (36,828,677)
Loss per common share........................ As reported: (4.96) (5.48)
Pro forma: (5.08) (5.77)
</TABLE>
Pro forma net loss reflects compensation cost under SFAS No. 123 only for
options granted for the year ended June 30, 1996 and for the six months ended
December 31, 1996. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro forma net loss
amounts presented above because compensation cost is reflected over the vesting
period and compensation cost under SFAS No. 123 for options granted prior to
July 1, 1995 is not considered.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in the year ended June 30, 1996 and the six months
ended December 31, 1996, respectively: dividend yield of 0% for both periods;
expected volatility of 50% and 50%, risk-free interest rates of 5.97% and 6.4%
and expected lives of 4.74 and 4.37 years.
A summary of the status of the Company's stock options as of June 30, 1995, June
30, 1996 and December 31, 1996 and changes during the period ending on those
dates is presented below:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
-------------------------------------------------------- --------------------------
JUNE 30, 1995 JUNE 30, 1996 DECEMBER 31, 1996
-------------------------- -------------------------- --------------------------
SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
------ ---------------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year........................ 859 $ 2.22 5,042 $ 1.72 6,095 $ 2.21
Granted....................... 4,283 1.64 1,228 4.30 1,433 9.45
Exercised..................... -- -- (105) 2.46 (48) 2.02
Forfeited..................... (100) 2.51 (70) 3.57 (23) 3.54
------ ------ ------
Outstanding at end of year.... 5,042 1.72 6,095 2.21 7,457 3.60
Options exercisable at
year-end.................... 2,387 3,461 4,140
Weighted-average fair value of
options granted during the
year........................ $ 1.16 $ 3.35 $ 5.95
</TABLE>
The following table summarizes information about fixed stock options at December
31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------- -------------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
RANGE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISABLE
EXERCISE PRICE AT 12/31/96 CONTRACTUAL LIFE PRICE AT 12/31/96 PRICE
------------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.875 to 2.25..... 4,038,777 2.2 years $ 1.46 3,596,275 $ 1.35
2.80 to 4.78....... 1,672,974 3.4 3.31 496,058 3.21
6.00 to 9.375...... 1,662,000 4.7 8.53 47,500 6.00
15.00.............. 83,334 4.9 15.00 -- --
----------- ---------------- ------- ----------- ------
$0.875 to 15.00.... 7,457,085 3.1 3.60 4,139,833 1.64
</TABLE>
F-17
<PAGE> 67
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) STOCK OPTIONS AND STOCK PURCHASE WARRANTS -- (CONTINUED)
During fiscal years ended June 30, 1995 and 1996, in connection with the Series
A-1 and Series B Preferred Stock private placements and related bridge note
conversions, warrants for 4,367,078 shares of common stock were issued at prices
ranging from $.01 to $3.10. In fiscal 1996, as part of the issuance of the 2005
Notes, detachable warrants to purchase 2,432,000 shares of the Company's common
stock at a price of $7.15 per share were issued. These warrants include certain
anti-dilution provisions.
At December 31, 1996, unexercised warrants outstanding are as follows:
<TABLE>
<CAPTION>
NUMBER PRICE PER SHARE
--------- ----------------
<S> <C> <C>
Series A and Series B Preferred Stock
placements..................................... 1,474,836 $ 0.01-3.10
2005 Senior Discount Notes offering.............. 2,432,000 7.15
Other............................................ 865,000 0.01-9.68
--------- -------------
Total............................................ 4,771,836 $ 0.01-9.68
========= =============
</TABLE>
The gross proceeds that would be received by the Company on the exercise of all
outstanding options and warrants is approximately $53,400,000.
(7) COMMITMENTS AND CONTINGENCIES
CERTAIN AGREEMENTS
The Company has signed nonexclusive license agreements with various utility and
inter-exchange carrier companies, including an affiliate of one of the country's
three largest long distance carriers, to install and maintain fiber cable
systems for the Company's use for periods up to 15 years or more, upon
exercising of extensions available to the parties. Under these agreements, the
Company has use of these rights-of-way for its telecommunications systems, and
may be entitled to certain payments for providing telecommunications service,
subject to its satisfactory performance of certain agreed upon requirements.
RETIREMENT PLAN
On February 1, 1996, the Company began sponsoring the American Communications
Services, Inc. 401(k) Plan (the "Plan"), a defined contribution plan. All
individuals employed on February 1, 1996 were eligible to participate.
Participation to all other employees is available after three months of
full-time equivalent service. The Company contributions under the Plan are
discretionary and may be as much as 6% of an employee's gross compensation
subject to certain limits. Total expense under the Plan amounted to
approximately $30,000 and $95,000 for the year ended June 30, 1996 and for the
six months ended December 31, 1996, respectively.
LEGAL PROCEEDINGS
On July 24, 1996, the Company was named as a codefendant in a lawsuit arising
from a personal injury sustained during the construction of one of its networks.
At the time of the incident giving rise to the lawsuit, the plaintiff was an
employee of a subcontractor hired by the Company's general contractor for the
construction project. The lawsuit seeks recovery from the Company and the
general contractor of at least $25 million plus punitive damages. The Company,
the general contractor, and the Company's insurance carrier have begun
investigations into the facts surrounding the incident and intend to defend
against this suit vigorously.
F-18
<PAGE> 68
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
In addition, the Company is a party to certain litigation and regulatory
proceedings arising in the ordinary course of business. In the opinion of
management, based upon the advice of counsel, the ultimate disposition of these
matters will not have a material adverse effect on the Company's consolidated
financial position.
(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 December 31, 1996 are
approximately as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
-------------------------------------------------------------- -----------
<S> <C>
1997.......................................................... $ 3,980,000
1998.......................................................... 4,320,000
1999.......................................................... 4,560,000
2000.......................................................... 4,051,000
2001.......................................................... 3,078,000
Thereafter.................................................... 13,640,000
-----------
$33,629,000
===========
</TABLE>
Rent expense for the years ended June 30, 1995 and June 30, 1996 and for the six
months ended December 31, 1996 was approximately $200,000, $1,166,000 and
$1,700,000, respectively.
(9) RELATED-PARTY TRANSACTIONS
In October 1993, the Company executed a financial consulting and advisory
agreement with a related party for a period of six months. In consideration, the
related party received warrants to purchase 300,000 shares of ACSI common stock
exercisable at $.875 per share if a future equity financing was successfully
completed. The related party had the right to resell the shares to ACSI for
$2.50 per share two years from the date of the agreement. At June 30, 1994, the
Company provided an accrual of $487,500 for this redemption privilege at the
redemption price net of the exercise price. In June 1995, the Company's
obligations to repurchase the shares were assumed by a stockholder of the
Company. Accordingly, as of June 30, 1995, the $487,500 share value has been
transferred from redeemable stock, options, and warrants to additional
paid-in-capital.
On June 16, 1994, the Company entered into a financial consulting agreement for
capital raising activities with an entity controlled by significant stockholders
of the Company. Under this agreement, the Company paid $153,750 for consulting
services rendered through the date of the agreement relating to placement of the
Convertible Bridge Notes. Additionally, the Company agreed to pay a $7,500
monthly consulting fee for a two year period beginning on the closing date of
the first private placement. During the six months ended December 31, 1996 and
the years ended June 30, 1996 and 1995, the Company paid $22,500, $90,000 and
$67,500 under this arrangement, respectively.
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 a
former director of the Company. Pursuant to the agreement, the Company will
compensate SGC as follows: (1) a monthly fee of $5,000; and (2) options to
purchase up to 50,000 shares of the Company's Common Stock which vest on July 1,
F-19
<PAGE> 69
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) RELATED-PARTY TRANSACTIONS -- (CONTINUED)
1997, and are exercisable on or before July 1, 1999. At the end of each month of
the term of the agreement, SGC earns a credit against the exercise price of
those options equal to 1/36th of the exercise price. The shares issued upon
exercise of the options will be priced at $2.25 per share and the shares issued
will have piggy back registration rights.
(10) INCOME TAXES
Temporary differences and carryforwards that give rise to deferred tax assets
and liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
1995 1996 1996
----------- ---------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Capitalized start-up and other costs.............. $ 4,163,941 $3,733,898 $ 3,972,981
Stock options -- noncash compensation............. 2,768,488 3,848,128 4,085,146
Net operating loss carryforwards.................. 1,149,755 12,181,162 31,310,726
Other accrued liabilities......................... 454,391 496,634 964,786
----------- ---------- ------------
Total gross deferred assets......................... 8,536,575 20,259,822 40,333,639
Less: valuation allowance......................... 8,291,380 18,304,754 31,990,518
----------- ---------- ------------
Net deferred tax assets............................. 245,195 1,955,068 8,343,121
Deferred tax liabilities -- fixed assets
depreciation and amortization..................... 245,195 1,955,068 8,343,121
----------- ---------- ------------
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 years ended
June 30, 1995 and June 30, 1996 and for the six months ended December 31, 1996
was an increase of $5,916,053, $10,013,374 and $13,685,764, respectively. The
valuation allowances at June 30, 1996 and December 31, 1996 are a result of the
uncertainty regarding the ultimate realization of the tax benefits related to
the deferred tax assets. The utilization of the tax benefits associated with net
operating losses of approximately $80,000,000 at December 31, 1996 is dependent
upon the Company's ability to generate future taxable income. The net operating
loss carryforward period expires commencing in 2008 through the year 2012.
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
June 30, 1996 and the six months ended December 31, 1996 as the aforementioned
deferred tax assets have provided no tax benefit.
(11) ACQUISITION
On September 12, 1994 the Company executed a Stock Purchase Agreement with
Piedmont Teleport, Inc. under which the Company acquired certain assets,
liabilities, and certain right-of-way agreements for $20,000 in cash and the
issuance of 62,000 shares of the Company's common stock. The Company accounted
for the acquisition as a purchase and, accordingly, the purchase price was
allocated to the assets acquired and liabilities assumed based upon their
estimated fair values at September 12, 1994. The seller had 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 was recorded as redeemable stock until
November 1996 at which time it was reclassed to additional paid in capital.
F-20
<PAGE> 70
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following notes summarize the major methods and assumptions used in
estimating the fair value of financial instruments:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value due to the relatively short period
to maturity of these instruments.
LETTERS OF CREDIT
The fair value of the Letters of credit is based on fees currently charged for
similar agreements.
SHORT-TERM AND LONG-TERM DEBT
The fair value of the Company's long-term debt is estimated based on the quoted
market prices for the same or similar issues if available or based on the
present value of expected cash flows at rates currently available to the Company
for borrowings with similar terms.
The carrying amounts and fair values of the Company's financial instruments at
December 31, 1996 were:
<TABLE>
<CAPTION>
1996
--------------------------
CARRYING FAIR
VALUE VALUE
----------- -----------
<S> <C> <C>
Cash and cash equivalents (including restricted
cash) 80,960,696 80,960,696
Letters of credit............................... -- 25,000
Long-term debt.................................. 210,410,259 208,583,264
</TABLE>
(13) SUBSEQUENT EVENT
On January 17, 1997, the Company acquired 100% of the outstanding capital stock
of Cybergate, Inc. in exchange for 1,030,000 shares of common stock plus up to
an additional 150,000 shares if certain performance goals are achieved.
Cybergate, a Florida based Internet services provider, delivers high-speed data
communications services. The acquisition will be recorded using the purchase
method of accounting.
F-21
<PAGE> 71
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
a) EXHIBITS (Numbered in accordance with Item 601 of Regulation S-B)
<TABLE>
<CAPTION>
EXHIBIT NO. OR
EXHIBIT INCORPORATION
NO. DESCRIPTION BY REFERENCE
======= =========== ==============
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of the Company. #
3.2 Certificate of Designations of the Company's 9% Series A-l, Series
B-1, Series B-2, Series B-3 and Series B-4 Convertible Preferred Stock. **
3.3 Certificate of Elimination regarding the 9% Series A Preferred Stock **
3.4 Amended and Restated By-Laws of the Company, as amended. *
3.5 Governance Agreement dated November 8, 1995, between the Company and
the holders of its Preferred Stock. ++
3.8 Certificate of Correction dated March 11, 1996. #
3.9 Supplemental Governance Agreement dated February 26, 1996. #
4.1 Specimen Certificate of the Company's Common Stock. *
4.2 Specimen Certificate of the Company's 9% Series A-l Preferred Stock. ****
4.3 Specimen Certificate of the Company's 9% Series B-1 Preferred Stock. ****
4.4 Specimen Certificate of the Company's 9% Series B-2 Preferred Stock. ****
4.5 Specimen Certificate of the Company's 9% Series B-3 Preferred Stock. ****
4.6 Certificate of the Company's 9% Series B-4 Preferred Stock dated
November 14, 1995. ++
4.7 Indenture dated November 14, 1995, between the Company and Chemical
Bank, as trustee, relating to $190,000,000 in principal amount of
13% Senior Discount Notes due 2005, including the form of global note. ++
4.8 Initial Global Note dated November 14, 1995. ++
4.9 Warrant Agreement dated November 14, 1995, between the Company and
Smith Barney Inc. and Salomon Brothers Inc. +++
4.10 Initial Global Warrant dated November 14, 1995. +++
4.11 Indenture dated March 21, 1996, between the Company and Chemical Bank,
as trustee, relating to $120,000,000 in principal amount of 12 3/4%
Senior Discount Notes due 2006, including the form of global note. +++++
4.12 Warrant Agreement dated March 6, 1997 between the Company and MCI metro
Access Transmission Services, Inc. E-1
9.1 Standstill Agreement dated June 26, 1995, between the Company and
certain of its Preferred Stockholders. ****
9.2 Standstill Agreement dated November 8, 1995, between the Company and
certain of its Preferred Stockholders. ++
9.3 Voting Rights Agreement dated November 8, 1995, between the Company and
certain of its Preferred Stockholders. ++
9.4 Amendment to Voting Rights Agreement dated December 14, 1995. #
10.1 Exchange Agreement, dated June 1, 1994, between the Company and certain of
its Preferred Shareholders. *
10.2 Exchange Agreement, dated June 26, 1995, between the Company and its 9%
Series A Preferred Shareholders. **
10.3 Company's amended 1994 Stock Option Plan. ++
10.4 Registration Rights Agreement dated July 1, 1992, between American
Lightwave, Inc. and persons named therein. *
10.5 Supplemental Registration Rights Agreement dated June 26, 1995. ****
10.6 Management Registration Rights Agreement dated June 30, 1995. ****
10.7 Registration Rights Agreement dated June 26, 1995, between the Company
and certain Preferred Stockholders. **
10.8 Form of Warrant Agreement issued to certain Preferred Stockholders on
June 26, 1995. ****
10.9 Form of $.01 Warrant Agreement. ****
10.10 Form of $1.79 Warrant Agreement. ****
10.11 Form of $2.25 Warrant Agreement. ****
10.12 Stockholders Agreement dated June 26, 1995, between the Company and
certain Preferred Stockholders. ****
10.13 Third Amended and Restated Employment Agreement between the Company
and Anthony J. Pompliano. ****
10.14 Third Amended and Restated Employment Agreement between the Company
and Richard A. Kozak. ****
10.15 Third Amended and Restated Employment Agreement between the Company
and George M. Tronsrue, III. ****
10.16 Third Amended and Restated Employment Agreement between the Company
and Riley M. Murphy. ****
10.17 Third Amended and Restated Employment Agreement between the Company
and Douglas R. Hudson. ****
10.18 Second Amended and Restated Employment Agreement between the Company
and Ronald W. Kaiser. ****
10.19 Employment Agreement between the Company and Robert Ottman ****
10.20 Form of Non-Qualified Stock Option Certificates, as amended, issued to
Richard A. Kozak. ****
</TABLE>
<PAGE> 72
<TABLE>
<S> <C>
10.21 Form of Stock Option Certificates, as amended, issued to George M.
Tronsrue, III under employment agreement. ****
10.22 Form of Stock Option Certificates, as amended, issued to Riley M.
Murphy under employment agreement. ****
10.23 Form of Stock Option Certificates, as amended, issued to Douglas R.
Hudson under employment agreement. ****
10.24 Form of Stock Option Certificates, as amended, issued to Ronald W.
Kaiser under employment agreement. ****
10.25 Form of Stock Option Certificates, as amended, issued to Robert Ottman. ****
10.26 Agreement, dated March 2, 1994, between the Company and Gerard Klauer
Mattison & Co., as amended. *
10.27 Agreement, dated March 20, 1995, between the Company and Gerard Klauer
Mattison & Co., as amended. ****
10.28 Agreement, dated October 19, 1994, between the Company and Marvin
Saffian & Company. *
10.29 Lease Agreement for the Company's executive offices at 131 National
Business Parkway, Suite 100, Annapolis Junction, Maryland, as amended. ****
10.30 Loan and Security Agreement, dated October 17, 1994, between AT&T Credit
Corporation and American Communication Services of Louisville, Inc. *
10.31 Loan and Security Agreement, dated February 28, 1995, between AT&T Credit
Corporation and American Communication Services of Fort Worth, Inc. ****
10.32 Loan and Security Agreement, dated June 30, 1995, between AT&T Credit
Corporation and American Communication Services of Greenville, Inc. and
American Communication Services of Columbia, Inc. ****
10.33 Amendment No. 1 to Parent Support and Pledge Agreement (Louisville)
between the Company and AT&T Credit Corporation. ****
10.34 Amendment No. 1 to Parent Support and Pledge Agreement (Fort Worth)
between the Company and AT&T Credit Corporation. ****
10.35 Amendment No. 1 to Loan and Security Agreement between American
Communications Services of Louisville, Inc. and AT&T Credit Corporation. ****
10.36 Consulting Agreement, dated October 25, 1993, between the Company and
Thurston Partners, Inc. *
10.37 Consulting Agreement, effective July 1, 1994, between the Company and SGC
Advisory Services, Inc. *
10.38 Consulting Agreement, dated June 16, 1994, between the Company and Thurston
Partners. Inc. and Global Capital, Inc. *
10.39 Note Purchase Agreement, dated June 28, 1994. *
10.40 Investment Agreement dated October 21, 1994, between the Company and the
Purchasers named therein. *
10.41 Stock Purchase Agreement, dated October 17, 1994, between the Company and
AT&T Credit Corporation. *
10.41 American Communication Services of Louisville, Inc. Common Stock Purchase
Agreement, dated October 17, 1994. *
10.42 Stock Purchase Agreement, dated November 28, 1994, by and among the
Company, CitiLink Corp., and the former directors and shareholders of
CitiLink Corp., as amended August 3, 1995. ****
10.43 Stock Purchase Agreement, dated May 12, 1995, by and among the Company,
Piedmont Teleport, Inc., Randal Holcombe and Karen Holcombe, as amended. ****
10.44 Stock and Warrant Purchase Agreement, dated June 26, 1995, between the
Company and the Purchasers named therein. **
10.45 Form of Indemnity Agreement between the Company and its Director, as
amended. ****
10.46 Assignment and Assumption Agreement dated June 21, 1995, between the
Company and Apex Investment Fund II, L.P. ****
10.47 Registration Agreement dated November 9, 1995, between the Company and
the Initial Purchasers. ++
10.48 Loan and Security Agreement, dated September 8, 1995, between AT&T Credit
Corporation and American Communications Services of E1 Paso, Inc. ++
10.49 Parent Support and Pledge Agreement (E1 Paso) dated September 8, 1995,
between the Company and AT&T Credit Corporation. ++
10.50 Letter Agreement dated November 14, 1995, between the Company and ING
Equity Partners, L.P.I, with respect to the purchase of 50,000 shares of
the Company's 9% Series B-4 Convertible Preferred Stock and warrants to
purchase 214,286 shares of Common Stock. ++
10.51 Warrant to Purchase Shares of American Communications Services, Inc.
Common Stock dated December 28, 1995, between the Company and Gerard Klauer, Mattison & Co.
("GKM Warrant I"). ++
10.52 Warrant to Subscribe For and Purchase Common Stock of American Communications Services, Inc.
dated December 28, 1995, between the
Company and Gerard Klauer, Mattison & Co. ("GKM Warrant II"). ++
10.53 Amended 1994 Stock Option Plan of the Company. ++
10.54 Parent Pledge and Support Agreement dated as of October 17, 1994 between
the Company and AT&T Credit Corporation. *
10.55 American Communication Services of E1 Paso Inc. Common Stock Purchase
Agreement dated September 8, 1995. #
10.56 Form of Non-Qualified Stock Option Certificates, as amended, issued to ++++
Anthony J. Pompliano.
10.57 Employment Agreement between the Company and David L. Piazza. E-2
</TABLE>
<PAGE> 73
<TABLE>
<S> <C>
10.58 Master Amendment to Loan and Security Agreements dated November 30, 1995, ++++
among American Communication Services of Louisville, Inc., American
Communication Services of Fort Worth, Inc., American Communication
Services of Columbia, Inc., American Communication Services of
Greenville, Inc., American Communication Services of El Paso and AT&T
Credit Corporation.
10.59 Master Reaffirmation of Parent Pledge and Support Agreements dated E-4
November 30, 1995, between the Company and AT&T Credit Corporation.
10.60 Letter of Amendment to Loan and Security Agreements dated December 19, 1995, ++++
among American Communication Services of Fort Worth, Inc., American
Communication Services of Columbia, Inc., American Communication Services
of Greenville, Inc., American Communication Services of El Paso and AT&T
Credit Corporation.
10.61 Second Master Amendment to Loan and Security Agreements, Waiver and ++++
Equipment Notes Modification Agreement dated September 6, 1996 among
American Communication Services of Louisville, Inc., American
Communication Services of Fort Worth, Inc., American Communication
Services of Columbia, Inc., American Communication Services of
Greenville, Inc., American Communication Services of El Paso and AT&T
Credit Corporation.
10.62 Second Master Reaffirmation of Parent Pledge and Support Agreements ++++
dated September 6, 1996 between the Company and AT&T Credit
Corporation.
10.63 Master Equipment Lease Agreement dated August 26, 1996, between the Company ++++
and AT&T Credit Corporation.
10.64 Registration Rights Agreement dated March 6, 1997 between the Company and MCI metro ++++
Access Transmission Services, Inc.
11.1 Statement re: computation of per share earnings (loss). E-3
16.1 Letter re: change in certifying accountant. ***
21.1 Subsidiaries of the Registrant. ++++
23.1 Consent of KPMG Peat Marwick LLP. E-4
27.1 Financial Data Schedules. E-5
</TABLE>
- ------------------
* Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (File No. 33-87200) and incorporated herein by reference
thereto.
** Previously filed as an exhibit to the Company's Current Report on Form
8-K dated June 26, 1995, and incorporated herein by reference thereto.
*** Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the fiscal quarter ended March 31, 1995, and
incorporated herein by reference thereto.
**** Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1995, and incorporated herein
by reference thereto.
+ Previously filed as an exhibit to the Company's Annual Report on Form
10-QSB for the fiscal year ended June 30, 1995, and the Company's
Quarterly Report on Form 10-QSB for the fiscal quarter ended September
30, 1995, both of which are incorporated herein by reference thereto.
++ Previously filed as an exhibit to the Company's Registration Statement
on Form S-4 (File No. 33-80305) and incorporated herein by reference
thereto.
+++ Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (File No. 33-80673) and incorporated herein by reference
thereto.
++++ Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (File No. 33-20867) and incorporated herein by reference
thereto.
+++++ Previously filed as an exhibit to the Company's Current Report on Form
8-K dated March 26, 1996 and incorporated herein by reference thereto.
# Previously filed as an exhibit to the Company's Registration Statement
on Form S-4 (File No. 333-3632) and incorporated herein by reference
thereto.
<PAGE> 74
b) Reports on Form 8-K
On October 15, 1996, the Company filed with the Securities and Exchange
Commission (the "Commission") a Current Report on Form 8-K dated October 7, 1996
relating to the change in the Company's fiscal year from July 1 through June 30
to January 1 through December 31. (Item 4).
On December 10, 1996, the Company filed with the Commission a Current Report
on Form 8-K dated November 26, 1996 relating to organizational changes at the
Company, and relating to the employment agreement dated as of November 26, 1996
between the Company and Jack Reich. (Item 1).
<PAGE> 75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 28, 1997.
AMERICAN COMMUNICATIONS SERVICES, INC.
/s/ Anthony J. Pompliano
-------------------------------
By: Anthony J. Pompliano
Executive Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ ANTHONY J. POMPLIANO Chairman of the Board of Directors March 28, 1997
------------------ (Principal Executive Officer)
Anthony J. Pompliano
/s/ DAVID L.PIAZZA Chief Financial Officer March 28, 1997
------------------ (Principal Financial and Accounting
David Piazza Officer)
/s/ EDWIN M. BANKS Director March 28, 1997
------------------
Edwin M. Banks
/s/ PETER C. BENTZ Director March 28, 1997
------------------
Peter C. Bentz
/s/ BENJAMIN P. GIESS Director March 28, 1997
---------------------
Benjamin P. Giess
/s/ GEORGE M. MIDDLEMAS Director March 28, 1997
-----------------------
George M. Middlemas
/s/ CHRISTOPHER L. RAFFERTY Director March 28, 1997
---------------------------
Christopher L. Rafferty
/s/ OLIVIER L. TROUVEROY Director March 28, 1997
------------------------
Olivier L. Trouveroy
</TABLE>
<PAGE> 1
EXHIBIT 4.12
WARRANT AGREEMENT
This WARRANT AGREEMENT (this "Agreement") dated as of March 6,
1997 is by and between American Communications Services, Inc., a Delaware
corporation ("ACSI"), and MCImetro Access Transmission Services, Inc., a
Delaware corporation ("MCI").
WHEREAS, ACSI and MCI are parties to that certain Master
Capacity Agreement dated as of June 23, 1994 (the "MCA");
WHEREAS, ACSI and MCI wish to amend the MCA (such amendment,
the "Preferred Provider Amendment") as provided in that certain letter of
intent between ASCI and MCI dated January 23, 1997 (the "LOI");
WHEREAS, ACSI and MCI wish to enter into an agreement with
respect to wholesale local switched services (such agreement, the "Local
Services Agreement") on the terms described in the LOI;
WHEREAS, as an inducement for MCI to enter into the Preferred
Provider Amendment and the Local Services Agreement, ASCI has agreed to enter
into this Agreement and to issue to MCI warrants to purchase shares of ACSI's
Common Stock, subject to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of premises set forth herein,
the mutual terms, covenants and conditions contained herein, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE 1 -- DEFINITIONS
1.1 Definitions. The following capitalized terms shall have the
meanings set forth below:
"Additional Initial Warrant" shall have the meaning set forth in
Section 2.2 hereof.
"Aggregate Market Value" as of any date with respect to all shares of
Capital Stock of ACSI or any other Person shall mean the sum of the Market
Value as of such date of the shares of each
<PAGE> 2
class or series of Capital Stock of such Person on a Fully Diluted Basis.
"Business Day" means any day that is not a Saturday, a Sunday or a
legal holiday in New York City.
"Capital Stock" means any and all shares, interests, participations,
or other equivalents (however designated) of capital stock, or any and all
equivalent ownership interests.
"Cash Merger Transaction" shall have the meaning set forth in Section
4.2.
"Common Stock" means the Common Stock of ACSI, $.01 par value per
share, or any other class of Capital Stock of ACSI into which such Common Stock
may be converted or for which such Common Stock may be exchanged.
"Communications Act" means the Communications Act of 1934, as amended.
"Cut-Off Date" means the earlier of (i) July 23, 1997 and (ii) the
date of execution of the Local Services Agreement.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excluded Issuance" shall mean the issuance of shares of Common Stock
or warrants, options or other similar rights to purchase shares of Common
Stock, (i) in the Qualifying Offering contemplated by ACSI as of the date of
this Agreement, (ii) in a private placement effected in lieu of the Qualifying
Offering described in the preceding clause (i), provided that the gross
proceeds per share received by ACSI is equal to or greater than the per share
exercise price of the Initial Warrant, (iii) pursuant to stock option plans and
other stock based benefit plans and arrangements benefitting the directors,
officers, employees and consultants of ACSI in effect on the date of the LOI
(giving effect to all options outstanding, and all options authorized under
ACSI's Stock Option Plan and Stock Purchase Plan on the date of the LOI), or
(iv) shares issued in connection with an acquisition of the business or
properties of another Person, by
- 2 -
<PAGE> 3
merger or otherwise, including shares issued in connection with the formation
of a joint venture.
"Excluded Service Revenue" means ACSI's billings to MCI and/or MCI
Telecommunications Corporation for originating and terminating long distance
switched access service, exclusive of long distance access costs associated
with wholesale local switched services which MCI has re-sold using ACSI
services.
"Fully Diluted Basis" means, at any date as of which the number of
shares thereof of any Person is to be determined, (a) all shares of Capital
Stock of such Person outstanding at such date, and (b) the maximum number of
shares of Capital Stock of such Person issuable pursuant to warrants, options
or other rights to purchase or acquire (whether or not such warrants, options
or other rights are then exercisable), or pursuant to securities convertible
into or exchangeable (whether or not such securities are then convertible or
exchangeable) for, shares of Capital Stock of such Person, outstanding on such
date (including any shares issuable pursuant to any outstanding Warrants and
any Warrants being issued on such date but not including shares of a Person
issuable under a "poison pill" stockholder rights plan so long as such Person
has the power, without the payment of more than nominal consideration, to
prevent the issuance of such shares) (the Capital Stock, warrants, options,
rights and securities described in clauses (a) and (b) are referred to herein
as "Equity Securities").
"Holders" shall mean MCI and any other Person which, at the time,
holds any Warrant.
"Initial Exercise Price" shall have the meaning set forth in Section
2.2 hereof.
"Initial Warrant" shall have the meaning set forth in Section 2.1
hereof.
"Listed Markets" means the geographical areas listed and defined in
the attached EXHIBIT B.
"Local Services Agreement" shall have the meaning as set forth in the
recitals to this Agreement.
- 3 -
<PAGE> 4
"Market Price" as of any date with respect to any security means the
average of the Quoted Prices of such security for the twenty (20) consecutive
trading days (or, if such security is publicly traded but has been so traded
for less than twenty (20) consecutive trading days, such shorter period in
which such security has been publicly traded) immediately preceding such date.
"Quoted Price" of any security for any date shall be the last reported sales
price (or, in case no such sale takes place on such date, the average of the
reported closing bid and ask prices) of such security as reported by the
principal national securities exchange on which such security is listed or
traded, or as reported by the NASDAQ National Market, or if such security is
neither so reported nor listed or traded, the average of the reported high bid
and low ask prices of such security in the over-the-counter market on such
date, or, if there shall be no bid and ask prices on such date, the average of
the high bid and low ask prices as so reported on the most recent day (not more
than 10 days prior to the date in question) for which prices have been so
reported. If such security is not listed or traded on any national securities
exchange or the NASDAQ National Market or quoted in the over-the-counter
market, the Market Price shall be deemed an amount mutually agreed upon between
ACSI and MCI, and if no agreement can be reached, then the Market Price of such
security as of any date shall be the fair market value thereof as determined by
an independent nationally recognized investment banking firm selected by
investment banking firms representing each of ACSI and MCI. ACSI and MCI shall
bear equally all costs of all determinations of fair market value by such
nationally recognized investment banking firm.
"Market Value" as of any date with respect to the shares of any class
or series of Capital Stock of any Person shall mean the product of (a) the
Market Price of such security as of such date and (b) the sum of (i) the number
of shares of such class or series outstanding at such date and (ii) the number
of shares of such class or series issuable pursuant to warrants, options or
other rights to purchase or acquire, or pursuant to securities convertible into
or exchangeable for, shares of such class or series (including any shares
issuable pursuant to any outstanding Warrants and any Warrants being issued on
such date).
- 4 -
<PAGE> 5
"New Monthly Recurring Revenue" with respect to any Performance
Measurement Month means the excess of (y) ACSI's billings to MCI or any
affiliate of MCI for services (other than Excluded Service Revenue) within the
Listed Markets for such Performance Measurement Month as determined by
reference to the invoices representing billings for such month delivered by
ACSI and its subsidiaries to MCI and such affiliates over (z) Old Monthly
Recurring Revenue.
"Old Monthly Recurring Revenue" with respect to any Performance
Measurement Month shall mean ACSI's billings to MCI or any affiliate of MCI for
services (other than Excluded Service Revenue) within the Listed Markets for
the immediately preceding Performance Measurement Month in which there was New
Monthly Recurring Revenue as determined by reference to the invoices
representing billings for such month delivered by ACSI and its subsidiaries to
MCI and such affiliates; provided, however, that "Old Monthly Recurring
Revenue" with respect to the first Performance Measurement Month during the
Performance Period shall mean ACSI's billings to MCI and its affiliates for
services (other than Excluded Service Revenue) within the Listed Markets for
the full calendar month immediately preceding the commencement of the
Performance Period as determined by reference to the invoices representing
billings for such month by ACSI and its subsidiaries to MCI and its affiliates.
"Performance Divisor" means the quantity two (2), subject to
adjustment as set forth in Section 3.5 hereof.
"Performance Grant Date" means the day that is the last day of each
Performance Measurement Month, provided that if such day is not a Business Day,
the next succeeding Business Day, provided, further, that the Performance
Warrants shall be delivered to MCI no later than ten (10) days after the
Performance Grant Date upon which such warrants are issued.
"Performance Grant Pool" means, as of any date of determination of
such amount, the excess of (y) one million five-hundred eighty thousand
(1,580,000) shares of Common Stock over (z) the number of shares of Common
Stock issued or issuable upon exercise of Performance Warrants issued prior to
such date, subject to adjustment as set forth in Section 3.5 hereof.
- 5 -
<PAGE> 6
"Performance Measurement Month" means each September and March {i.e.,
the sixth and twelfth full months after execution of the Preferred Provider
Amendment} occurring during the Performance Period.
"Performance Period" has the meaning set forth in Section 3.1 hereof.
"Performance Warrants" shall have the meaning set forth in Section 3.1
hereof.
"Person" means any individual, sole proprietorship, partnership, joint
venture, trust, incorporated organization, association, corporation,
institution, public benefit corporation, entity or government (whether federal,
state, county, city, municipal or otherwise, including, without limitation, any
instrumentality, division, agency, body or department thereof).
"Pro Forma Performance Warrant Percentage" as of any Performance Grant
Date means the result, expressed as a percentage, of dividing (a) the number of
shares of Common Stock obtainable upon exercise of the Performance Warrant that
would have been issuable pursuant to Article 3 hereof on such Performance Grant
Date if one of the events described in Sections 4.1(a) or (b) hereof had not
occurred prior to such Performance Grant Date by (b) the sum (without
duplication) of (i) the number of shares of Common Stock of ACSI on a Fully
Diluted Basis outstanding immediately prior to the occurrence of such event and
(ii) the number of shares of Common Stock obtainable upon exercise of the
Performance Warrants that would have been issuable pursuant to Article 3 hereof
on all preceding Performance Grant Dates if one of the events described in
Sections 4.1(a) or (b) hereof had not occurred prior to such Performance Grant
Date(s).
"Qualifying Offering" has the meaning set forth in the Amended and
Restated Certificate of Incorporation of ACSI as in effect on the date hereof,
as clarified by the Agreement of Preferred Stockholders as to Automatic
Conversion of Preferred Stock dated as of April 25, 1996.
"Secondary Performance Warrant Amount" means one hundred
- 6 -
<PAGE> 7
thousand (100,000) shares of Common Stock, subject to adjustment as set forth
in Section 3.5 hereof.
"Securities Act" means the Securities Act of 1933, as amended.
"Successor" shall have the meaning set forth in Section 4.1 hereof.
"Warrant" or "Warrants" shall mean the Initial Warrant, the Additional
Initial Warrant, and/or the Performance Warrants.
ARTICLE 2 -- INITIAL WARRANTS
2.1 Initial Grant.
(a) Grant. Concurrently with the execution and delivery
of this Agreement and the Preferred Provider Amendment, ACSI shall issue and
deliver to MCI a warrant to purchase shares of Common Stock, which warrant
shall be substantially in the form of EXHIBIT A attached hereto (the "Initial
Warrant"). The Initial Warrant shall not be exercisable until such time as
ACSI and MCI have executed the definitive agreement for loop transport services
as provided in Section 10 of the Preferred Provider Amendment (the "Loop
Transport Services Agreement") or MCI has confirmed in writing to ACSI that MCI
will not terminate ACSI's status as a preferred provider and/or ACSI's right of
first refusal under the Preferred Provider Amendment notwithstanding the fact
that the Loop Transport Services Agreement has not been executed by ACSI and
MCI (the "Loop Transport Services Waiver"). The Initial Warrant shall entitle
the Holder thereof to purchase up to three-hundred sixty thousand (360,000)
shares of Common Stock, subject to adjustment as set forth therein.
(b) Exercise Price. The initial exercise price for the
Initial Warrant shall be $9.86875 per share (representing the Market Price of
the Common Stock as of January 23, 1997), subject to adjustment as set forth
therein.
(c) Exercise Period. The Initial Warrant shall be
exercisable at any time and from time to time, in whole or in
- 7 -
<PAGE> 8
part, for a period of eighteen months (18) commencing on the date the Initial
Warrant first becomes exercisable, as such exercise period may be extended as
provided in the Initial Warrant for the purpose of obtaining any necessary
governmental approvals.
2.2 Additional Grant.
(a) Grant. Concurrently with the execution and delivery
of this Agreement and the Preferred Provider Amendment ACSI shall issue and
deliver to MCI a warrant, which warrant shall be substantially in the form
attached hereto as EXHIBIT A (the "Additional Initial Warrant"). The
Additional Initial Warrant shall not be exercisable until such time as (i) ACSI
and MCI execute the Local Services Agreement and (ii) ACSI and MCI have
executed the Loop Transport Services Agreement or MCI has delivered the Loop
Transport Services Waiver to ACSI; provided that the Additional Initial Warrant
shall terminate if the Local Services Agreement is not executed by ACSI and MCI
on or prior to March 6, 2002. The Additional Initial Warrant shall entitle the
Holder thereof to purchase up to such number of shares of Common Stock (subject
to adjustment as set forth therein) equal to the greater of (i) two-hundred
sixty thousand (260,000) shares, and (ii) if subsequent to January 23, 1997 and
prior to the Cut-Off Date, the number of shares of ACSI's outstanding Common
Stock on a Fully-Diluted Basis increases by more than two percent (2%) other
than as the result of Excluded Issuances, the number of shares determined
pursuant to the following formula:
A=.02Y-W
where:
A= the number of shares initially issuable upon exercise
of the Additional Initial Warrant;
Y= the total number of shares of Common Stock of ACSI on
a Fully-Diluted Basis as of the date the Additional
Initial Warrant first becomes exercisable, excluding
any shares attributable to Excluded Issuances; and
W= the number of shares issuable upon exercise of the
- 8 -
<PAGE> 9
Initial Warrant
(as such amount may be adjusted in the Additional Initial Warrant, the "Initial
Share Amount"). To the extent shares of Common Stock of ACSI which are
issuable upon the exercise or conversion of derivative securities are included
in "Y," which derivative securities are cancelled or expire prior to the
exercise or conversion thereof, there shall be a recalculation of this formula
based upon the deletion of the number of such shares of Common Stock from "Y."
(b) Exercise Price. The exercise price for the Common
Stock issuable under the Additional Initial Warrant (as such exercise price may
be adjusted therein, the "Initial Exercise Price"), shall be equal to the
greater of (i) $9.86875 per share, or (ii) if the Local Services Agreement is
executed after July 23, 1997 (other than as the result of ACSI's failure to
pursue the negotiation and execution of the Local Services Agreement diligently
and in good faith), the Market Price of the Common Stock on the date of
execution of the Local Services Agreement.
(c) Exercise Period. The Additional Initial Warrant
shall be exercisable at any time and from time to time, in whole or in part,
for a period eighteen (18) months commencing on the date the Additional Initial
Warrant first becomes exercisable, as such period may be extended as provided
in the Additional Initial Warrant for the purpose of obtaining any necessary
governmental approvals.
2.3 Termination of Preferred Provider Amendment. Notwithstanding
anything to the contrary contained herein, in the event (a) MCI terminates
ACSI's status as a preferred provider and/or ACSI's right of first refusal
under the Preferred Provider Amendment for any reason, other than ACSI's
default thereunder or ACSI's default under the MCA or due to a Change in
Control of ACSI (as defined in the Preferred Provider Amendment), or (b) MCI
fails to deliver the Loop Transport Services Waiver to ACSI, in each case, on
or before May 12, 1997, (in either case an "Early Termination Date"), (i) the
Initial Warrants, Additional Initial Warrants and Performance Warrants, to the
extent issued and not previously exercised, (ii) ACSI's obligations hereunder
to issue the Performance Warrants, (iii) Sections 4.1, 4.2, 5.4, 5.5, 5.14,
- 9 -
<PAGE> 10
and 5.15 and (iv) the Registration Rights Agreement of even date herewith by
and between ACSI and MCI shall terminate as of the Early Termination Date.
ARTICLE 3 -- PERFORMANCE WARRANTS
3.1 Primary Performance Warrants. On each Performance Grant Date
during the period beginning on the date the Preferred Provider Amendment is
executed and delivered by the parties through and including the date the
Preferred Provider Amendment is terminated in accordance with its terms (such
period, the "Performance Period"), ACSI shall issue and deliver to MCI a
warrant to purchase shares of Common Stock of ACSI, which warrants shall be
substantially in the form of EXHIBIT A attached hereto (such warrants and the
warrant issued pursuant to Section 3.2, below, the "Performance Warrants").
The Performance Warrant issued on each Performance Grant date shall entitle the
Holder thereof to purchase up to the number of shares of Common Stock (subject
to adjustment as set forth therein) equal to the lesser of (a) the number of
shares of Common Stock remaining in the Performance Grant Pool as of such date,
and (b) the number of shares of Common Stock determined by dividing (i) the New
Monthly Recurring Revenue for the immediately preceding Performance Measurement
Month by (ii) the Performance Divisor.
For example, assume ACSI bills MCI and MCI's affiliates $500,000
(exclusive of Excluded Service Revenue) for services delivered in the
Listed Markets during the first Performance Measurement Month and
$1,000,000 (exclusive of Excluded Service Revenue) for such services
during the second Performance Measurement Month. On the second
Performance Grant Date, ACSI would issue to MCI a Performance Warrant
initially exercisable for 250,000 shares of Common Stock, determined
as follows:
A=NMRR/PD
where
A= number of shares initially issuable upon exercise of
the Performance Warrant issued on the second
- 10 -
<PAGE> 11
Performance Grant Date:
NMRR= $500,000, which is the New Monthly Recurring Revenue
for the second Performance Measurement Month (i.e.,
$1,000,000 minus $500,000); and
PD= 2, which is the Performance Divisor (assuming no
adjustment of the Performance Divisor pursuant to
Section 3.5)
3.2 Secondary Performance Warrant. If the excess of (y) ACSI's
billings to MCI and its affiliates for services (other than Excluded Service
Revenue) within the Listed Markets for the second Performance Measurement Month
as determined by reference to the invoices representing billings for such month
delivered by ACSI and its subsidiaries to MCI and its affiliates over (z)
ACSI's billings to MCI and its affiliates for services (other than Excluded
Service Revenue) within the Listed Markets for the full calendar month
immediately preceding the commencement of the Performance Period as determined
by reference to the invoices representing billings for such month delivered by
ACSI and its subsidiaries to MCI and its affiliates, is equal to or greater
than $500,000, then, in addition to any other Performance Warrant issuable on
the second Performance Grant Date pursuant to Section 3.1, above, ACSI shall
issue and deliver to MCI on the second Performance Grant Date a warrant
exercisable for the Secondary Performance Warrant Amount (subject to adjustment
as provided therein), which warrant shall be substantially in the form of
EXHIBIT A attached hereto.
3.3 Exercise Price. The exercise price of the Performance
Warrant(s) issued on any Performance Grant Date for each share of Common Stock
shall be equal to the Market Price of the Common Stock as of such Performance
Grant Date, as such exercise price may be adjusted as set forth therein.
3.4 Exercise Period. Each Performance Warrant will be exercisable at
any time and from time to time, in whole or in part, for a period of
twenty-four (24) months commencing on the date of the issuance of such
Performance Warrant, as such period may be extended as provided in the
Performance Warrants for the purpose of obtaining any necessary governmental
approvals.
- 11 -
<PAGE> 12
3.5 Quantity Adjustments. The Performance Divisor, the
Performance Grant Pool, and the Secondary Performance Warrant Amount shall be
subject to adjustment as follows: if at any time commencing on the date the
Preferred Provider Amendment is executed and prior to the grant of any
Performance Warrant, ACSI shall (i) declare a dividend payable in, or other
distribution of, shares of Common Stock, (ii) subdivide its outstanding shares
of Common Stock into a larger number of shares of Common Stock, or (iii)
combine its outstanding shares of Common Stock into a smaller number of shares
of Common Stock, then the Performance Divisor shall be proportionately
decreased and the Performance Grant Pool and the Secondary Performance Warrant
Amount shall be proportionately increased in the case of clauses (i) or (ii)
above, and the Performance Divisor shall be proportionately increased and the
Performance Grant Pool and the Secondary Performance Warrant Amount shall be
proportionately decreased in the case of clause (iii) above; provided, that if
ACSI abandons its plan to effect such dividend, distribution, subdivision or
combination, the Performance Divisor, the Performance Grant Pool and the
Secondary Performance Warrant Amount shall be readjusted accordingly.
ARTICLE 4 -- CERTAIN MERGERS AND ASSET SALES
4.1 Non-Cash Merger. In case any of the following shall occur:
(a) the consummation of any consolidation or merger to
which ACSI is a party (other than (x) a merger in which ACSI is the
surviving corporation and which does not result in any
reclassification of, or change in, any of the outstanding shares of
Common Stock of ACSI or other Capital Stock of ACSI for which the
Warrants are then exercisable, or (y) a merger or consolidation which
results in the holders of all outstanding shares of Common Stock of
ACSI or other Capital Stock of ACSI for which the Warrants are then
exercisable, being entitled to receive solely cash and/or securities
that are not Equity Securities with respect to or in exchange for such
shares of Capital Stock of ACSI); or
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<PAGE> 13
(b) the consummation of any sale or conveyance to another
Person of the property of ACSI as an entirety or substantially as an
entirety which is effected in such a way that holders of any of the
outstanding shares of Common Stock of ACSI or other Capital Stock of
ACSI, for which the Warrants are then exercisable, are entitled to
receive stock, securities or property (including cash) with respect to
or in exchange for such shares of Capital Stock of ACSI (other than a
transaction which results in the holders of all such outstanding
shares of Capital Stock of ACSI being entitled to receive solely cash
and/or securities that are not Equity Securities with respect to or in
exchange for such shares of Capital Stock of ACSI),
then, and in each such case, the Person resulting from or surviving such
consolidation or merger or the Person purchasing or receiving such assets (or
the Person which is to be the issuer of shares of Capital Stock or other equity
securities to be issued or delivered with respect to or in exchange for shares
of Common Stock of ACSI or other Capital Stock of ACSI for which the Warrants
are then exercisable) shall, prior to or simultaneously with the consummation
of such transaction, enter into a written agreement with MCI, pursuant to which
such Person (the "Successor") shall assume all of the obligations of ACSI under
this Agreement, with the following modifications of the obligations of ACSI
under this Agreement:
(i) On each Performance Grant Date on which Performance
Warrants are to be issued pursuant to Article 3,
(A) such Performance Warrants shall be for the
purchase of shares of the class or series of the outstanding
Capital Stock of the Successor which was issued to the
holders of the Common Stock of ACSI or other Capital Stock of
ACSI for which the Warrants are then exercisable, in such
transaction;
(B) the number of shares to be subject to such
Performance Warrants shall be determined by the following
formula:
A= (V)(W/X)(Y)
------------------------
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<PAGE> 14
Z
where:
A = the number of shares to be subject to such
Performance Warrants
V = the Pro Forma Performance Warrant Percentage
as of such date
W = the Aggregate Market Value of all shares of
Common Stock of ACSI, on a Fully Diluted
Basis, immediately prior to the consummation
of such consolidation, merger, sale or
conveyance
X = the Aggregate Market Value of all Shares of
Capital Stock of the Successor, on a Fully
Diluted Basis, immediately after the
consummation of such consolidation, merger,
sale or conveyance
Y = the Aggregate Market Value as of the date on
which such Performance Warrants are issued
(i) of all shares of Capital Stock of the
Successor on a Fully Diluted Basis determined
as of immediately after the consummation of
such consolidation merger, sale or
conveyance, and (ii) the shares of Capital
Stock of the Successor issuable upon exercise
of such Performance Warrants
Z = the Market Price, as of such Performance
Grant Date of the class or series of Capital
Stock issuable upon the exercise of such
Performance Warrants
(C) the amount in Z under clause (B) above shall
be the initial exercise price per share of the Performance
Warrants issued on such date.
(iii) Unless the context otherwise requires, all references
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<PAGE> 15
to ACSI in this Agreement shall be deemed to be referenceto the
Successor.
ACSI shall not consummate any transaction described in clause (a) or clause (b)
of this Section 4.1 unless the Successor shall have entered into the agreement
required by this Section 4.1.
4.2 Cash Merger. In case any of the following shall occur:
(a) the consummation of any consolidation or merger to
which ACSI is a party, other than with MCI or an affiliate of MCI,
which results in the holders of all outstanding shares of Common Stock
of ACSI or other Capital Stock of ACSI for which the Warrants are then
exercisable being entitled to receive solely cash and/or securities
that are not equity securities with respect to or in exchange for
their shares of Capital Stock of ACSI; or
(b) the consummation of any sale or conveyance to another
Person, other than with MCI or an affiliate of MCI, of the property of
ACSI as an entirety or substantially as an entirety which results in
the holders of all outstanding shares of Common Stock of ACSI or other
Capital Stock of ACSI for which the Warrants are then exercisable,
being entitled to receive solely cash and/or securities that are not
Equity Securities with respect to or in exchange for their shares of
Capital Stock of ACSI,
ACSI shall pay or cause to be paid to MCI, prior to or simultaneously with the
consummation of such transaction (the "Cash Merger Transaction"), an amount in
cash computed in accordance with the following formula:
A = (X)(Y)(Z)
where:
A = the amount to be paid to MCI
X = the result, expressed as a percentage, of
dividing (i) the number of shares of Common
Stock obtainable upon the exercise of the
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<PAGE> 16
Performance Warrant which would be issuable
pursuant to Article 3 hereof immediately
prior to the consummation of such transaction
(the date such transaction is consummated
being deemed a Performance Grant Date and the
immediately preceding calendar month being
deemed a Performance Measurement Month for
purposes of this Section 4.2) by (ii) the
number of shares of Common Stock of ACSI on a
Fully Diluted Basis outstanding immediately
prior to the consummation of such transaction
Y = the amount (in cash and/or in market value of
securities that are not equity securities
(based on the Market Price of such securities
at the time of consummation of the Cash
Merger Transaction)) per share of Common
Stock that holders of Common Stock will be
entitled to receive with respect to or in
exchange for their shares of Common Stock
upon consummation of the Cash Merger
Transaction
Z = the total number of shares of Capital Stock
of ACSI, on a Fully Diluted Basis,
immediately prior to consummation of the Cash
Merger Transaction.
Subsequent to the consummation of the Cash Merger Transaction no further
Performance Warrants shall be issued.
ARTICLE 5 -- COVENANTS
5.1 Reservation of Shares; Preservation of Rights. ACSI hereby
agrees that prior to the issuance of any Warrants, and at all times thereafter,
ACSI shall reserve for issuance such number of shares of Common Stock and/or
other securities as shall be sufficient for the issuance and delivery thereof
upon exercise of all outstanding Warrants, and that ACSI shall take any and all
corporate action necessary for ACSI to validly and legally issue fully paid and
nonassessable shares of Common Stock and/or other
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<PAGE> 17
securities upon the exercise of such Warrants.
5.2 Deliveries. In connection with the issuance and delivery to
MCI of any Warrants, ACSI shall deliver, or arrange to deliver, the following:
(a) Officer's Certificates. A certificate, dated as of
the date of such issuance, duly executed on behalf of ACSI by one of its
officers, certifying that (i) such Warrants do entitle the holder thereof to
purchase the correct number of shares of Common Stock or other securities at
the correct exercise price, pursuant to the terms of this Agreement; (ii) ACSI
has reserved for issuance such number of shares of Common Stock or other
securities sufficient for the issuance and delivery to the holder thereof upon
exercise of the Warrants; and (iii) ACSI has taken all corporate action
necessary to validly and legally issue fully paid and nonassessable shares of
Common Stock or other securities upon the exercise of such Warrants. Each such
officer's certificate shall be accompanied by a detailed report setting forth
the calculation of the number of shares of Common Stock or other securities,
and the exercise price, determined under Article 2 or Article 3 hereof, as the
case may be. MCI may, at its reasonable discretion, require that any such
calculations be certified by ACSI's independent auditor. In addition, ACSI
shall deliver a certificate, dated as of the date of such issuance, duly
executed on behalf of ACSI by one of its officers whose title and signature
shall be certified by another officer, certifying as to (i) the Amended and
Restated Certificate of Incorporation and the By-Laws of ACSI; (ii) the
resolutions of the stockholders, if required, and Board of Directors of ACSI
authorizing the execution, delivery and performance of this Agreement, the
Warrants and any agreements relating thereto; (iii) the incumbency of the
officers executing the Warrants and any agreements relating thereto; and (iv)
the accuracy in all material respects of ACSI's representations and warranties
set forth in this Agreement and any other agreements in connection herewith and
ACSI's performance of all covenants and agreements required hereunder and under
the Warrants.
(b) Legal Opinion. An opinion of outside counsel for
ACSI in the form attached hereto as EXHIBIT C-1 in connection with the issuance
and delivery of the Initial Warrants and an opinion
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<PAGE> 18
of outside counsel for ACSI in the form attached hereto as EXHIBIT C-2 in
connection with the delivery of any other Warrants.
(c) Good Standing Certificates. A long form certificate
of good standing with respect to ASCI, dated within five days prior to the date
of issuance of the Warrants, of the Secretary of State of the State of Delaware
or of such state in which ACSI may then be incorporated.
5.3 Government Filings and Approvals. At the request of any
Holder, ACSI shall diligently make all filings with governmental authorities in
order to obtain any approval, waiver or consent that is necessary or required
for the exercise of any Warrants by any Holder thereof not to cause a violation
of Section 310 of the Communications Act or any other applicable law,
regulation, rule or order; provided that ACSI's obligation under this Section
5.3 shall be subject to such Holder providing ACSI or such governmental
authorities, as the case may be, with all information required in order for
ACSI to make the filings required hereunder.
5.4 Certain Covenants.
(a) Except to the extent otherwise provided for in
Sections 3.5, 4.1 and 4.2 hereof, in the event ACSI is a party to any
transaction which results in any reclassification of, or change in, the
outstanding shares of Common Stock or other Capital Stock of ACSI for which the
Warrants are then exercisable after the date hereof, then and in the case of
each such transaction, proper provision shall be made in any Performance
Warrants which are issued subsequent to the date such transaction is
consummated so that such Performance Warrants are exercisable, at the exercise
price thereof determined under Section 3.3 hereof, for such stock and other
securities, cash and property to which a holder of such Warrant would have been
entitled upon the consummation of such transaction if such holder had held such
Warrant and exercised the rights represented by such Warrant immediately prior
to the consummation of such transaction.
(b) ACSI shall not amend its certificate of incorporation
to create one or more series of common stock, other than the Common Stock, or
issue any shares of common stock, other
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<PAGE> 19
than the Common Stock, if the sole purpose and effect of such action would be
to materially impair the value of the Warrants.
5.5 Financial Statements and Other Reports. So long as ACSI has a
class of equity securities registered under Section 12 of the Exchange Act, and
so long as MCI and its affiliates own any of the issued and outstanding Capital
Stock of ACSI, after giving effect to the exercise of any Warrants by MCI and
its affiliates and the holding of any exercisable Warrants by MCI and its
affiliates, ACSI shall furnish to MCI promptly after the filing thereof copies
of all filings made by ACSI with the Securities and Exchange Commission. If at
any time ACSI does not have a class of equity securities registered under
Section 12 of the Exchange Act, and so long as MCI and its Affiliates own at
least five (5%) percent of the issued and outstanding Capital Stock of ACSI, on
a Fully Diluted Basis (assuming for this purpose that MCI and its Affiliates
have exercised all Warrants then owned by them), ACSI shall furnish to MCI:
(a) As soon as available and in any event within 45 days
after the end of each fiscal quarter of ACSI, the consolidated balance
sheets of ACSI and its subsidiaries as at the end of such fiscal
quarter and related consolidated statements of income and retained
earnings and cash flow statements for ACSI and its subsidiaries for
such fiscal quarter and for the period commencing at the end of the
previous fiscal year and ending with the end of such fiscal quarter
setting forth in each case in comparative form the corresponding
figures for the corresponding period of the preceding fiscal year, all
in reasonable detail and duly certified (subject to normal year-end
audit adjustment) by the chief financial officer of ACSI as having
been prepared in accordance with generally accepted accounting
principles.
(b) As soon as available and in any event within 90 days
after the end of each fiscal year of ACSI, a copy of the annual audit
report for such fiscal year for ACSI, including therein, the
consolidated balance sheets of ACSI and its subsidiaries as at the end
of such fiscal year and related consolidated statements of income and
retained earnings and cash flow statements for ACSI and its
subsidiaries for such fiscal year.
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<PAGE> 20
(c) If and so long as MCI in good faith believes that it may
then be required to account for its investment in ACSI in accordance
with the equity method of accounting and the same is requested by MCI,
as soon as available and in any event within 30 days after the end of
each month, the balance sheet of ACSI as at the end of such month and
statements of income and retained earnings and cash flow statements
for ACSI for such month and for the period commencing at the end of
the previous fiscal year and ending with the end of such month,
setting forth in each case in comparative form the corresponding
figures for the corresponding period of the preceding fiscal year, all
in reasonable detail and duly certified (subject to normal year-end
audit adjustment) by the chief financial officer of ACSI as having
been prepared in accordance with generally accepted accounting
principles consistently applied.
(d) Such other financial information which ACSI would
have been required to publicly disclose in filings with the Securities
and Exchange Commission or any successor agency thereto if, at all
times from and after the date hereof, ACSI had a class of equity
securities registered under Section 12 of the Exchange Act, as MCI may
from time to time reasonably request.
5.6 Licenses and Permits. So long as any Warrants shall remain
outstanding, ACSI shall use commercially reasonable efforts to preserve and
keep in full force and effect, and cause each of its subsidiaries to preserve
and keep in full force and effect, all licenses and permits necessary and
material to the conduct of its and their respective businesses (as determined
by the Board of Directors of ACSI), and shall use commercially reasonable
efforts to remain in compliance with respect to all applicable material
regulatory requirements, so that any business material to ACSI and its
subsidiaries (as determined by the Board of Directors of ACSI) carried on in
connection therewith may be properly and advantageously conducted at all times.
5.7 Listing of Shares. ACSI shall use its best efforts to
maintain its designation for quotation on the NASDAQ National Market or, in the
alternative, qualification for listing of the
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<PAGE> 21
shares of Common Stock on a national securities exchange, as the case may be.
5.8 Registration. ACSI shall maintain at its principal place of
business a register for the registration of the Warrants and registration of
transfer of Warrants.
5.9 Books and Accounts. So long as any of the Warrants shall
remain outstanding, ACSI shall, and shall cause each consolidated subsidiary
to, maintain proper books of record and account in which true and correct
entries shall be made of its transactions and set aside on its books from its
earnings for each fiscal year all such proper reserves as in each case shall be
required in accordance with generally accepted accounting principles.
5.10 Public Announcements. Except as otherwise permitted under the
MCA or unless required to be made pursuant to any applicable law, regulation or
other requirement of any governmental authority, neither ACSI nor MCI shall
make any public announcement regarding this Agreement without the prior written
consent of the other party hereto of such announcement or press release and its
contents; provided, that it is acknowledged and agreed that ACSI, as a company
registered under the Exchange Act, will be required to make public disclosures,
through public announcements and filings with the Securities and Exchange
Commission, regarding this Agreement and will be required to file a copy of
this Agreement and the form of Warrants as exhibits to its filings with the
SEC.
5.11 Cooperation; Further Assurances. Each of the parties hereto
shall cooperate fully with the other and shall use all reasonable efforts to
take, or cause to be taken, all action, and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations, or
otherwise to fulfill its obligations under this Agreement and to carry out
fully the transactions contemplated hereby.
5.12 Consents; Filings. ACSI shall make or cause to be made all
such filings and submissions under laws and regulations applicable to ACSI, if
any, as may be required of ACSI, in order to carry out the transactions
contemplated by this Agreement,
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<PAGE> 22
including the issuance of any of the Warrants. ACSI further agrees to take all
action and make all filings and submissions required to be made by ACSI that
would be necessary for the exercise of a Warrant not to violate any law or
regulation.
5.13 Confidentiality. Each of the parties and their respective
agents, accountants and attorneys shall keep confidential any information
obtained from the other parties hereto except to the extent that (i) such
information is or hereafter becomes lawfully obtainable from other sources,
(ii) it is necessary or appropriate to disclose such information in connection
with the regulatory filings necessary to carry out the transactions
contemplated herein or may otherwise be required by law or (iii) to the extent
such duty as to confidentiality is waived by the other party; provided, that it
is acknowledged and agreed that ACSI, as a company registered under the
Exchange Act, will be required to make public disclosures, through public
announcements and filings with the Securities and Exchange Commission,
regarding this Agreement and will be required to file a copy of this Agreement
and the form of Warrants as exhibits to its filings with the SEC. To the
extent possible ACSI will provide MCI with an opportunity its review and
comment upon such public disclosure prior to their public release.
5.14 Inconsistent Actions. ACSI agrees that it shall not take or
agree to take any of the actions prohibited by this Agreement for so long as
any Warrants are issuable or outstanding. ACSI further agrees that it will not
take or agree to take any action that is inconsistent with this Agreement or
that could impair the ability of ACSI to issue the Warrants or the exercise
thereunder by any holder thereof for so long as any Warrants are issuable or
outstanding. In addition, for so long as any Warrants are issuable or
outstanding, ACSI agrees that it will not have or adopt a "poison pill"
stockholder rights plan or similar plan which, at any time and whether or not
MCI holds any other securities of ACSI at such time or any time thereafter,
would have the effect of impairing the ability of MCI to receive, hold or
exercise Warrants or securities issuable or issued upon the exercise of
Warrants; provided that nothing contained herein shall prohibit ACSI from
adopting or having a "poison pill" stockholder rights plan or similar plan so
long as such plan would allow MCI to receive, hold or exercise the Warrants
issued hereunder or
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<PAGE> 23
securities issuable or issued upon the exercise of such Warrants, provided that
such plan might prevent, restrict or impair the ability of MCI or its
affiliates from otherwise acquiring additional securities of ACSI.
5.15 Preemptive Rights. ACSI will notify MCI as to the proposed
amount and terms of any issuance by ACSI of Equity Securities, in a transaction
or series of related transactions, that would increase by more than two percent
(2%) from the then outstanding Common Stock of ACSI on a Fully Diluted Basis,
the outstanding Common Stock of ACSI on a Fully Diluted Basis at least thirty
(30) days prior to the issuance of such Equity Securities. During such thirty
(30) day period, MCI shall have the right to elect to participate in such
issuance in such amount to maintain its then equity interest in ACSI on a Fully
Diluted Basis giving effect to Initial Warrants, Additional Initial Warrants
and Performance Warrants then held by MCI and which are then exercisable and
the shares of Common Stock of ACSI then held by MCI which were issued to MCI
pursuant to this Section 5.15 and upon the exercise of Initial Warrants,
Additional Initial Warrants and Performance Warrants issued to MCI. In order
to enable MCI to participate in the issuance by ACSI of Equity Securities
hereunder, ACSI may, but shall not be obligated to, issue additional Equity
Securities so as to enable (i) the other investors in such issuance to purchase
such number of Equity Securities as they shall request and (ii) MCI to
participate to the extent it is entitled and so requests hereunder. If MCI
elects to participate, closing of the issuance of such Equity Securities shall
occur concurrently with the closing of the transaction in which it has elected
to participate; provided, that if MCI does not send to ACSI its written
election to participate and the amount of such participation within thirty (30)
days of ACSI's notice to MCI, then MCI will be deemed to have elected not to
participate in such issuance and shall be deemed to have waived its rights
hereunder; and, provided further, that ACSI may close the issuance of the
securities which trigger MCI's rights under this Section 5.15 prior to the
termination of such thirty (30) day period if ACSI determines that it is
necessary or advisable to do so and so long as ACSI otherwise provides MCI with
the opportunity to exercise its right under this Section 5.15. The purchase
price of such Equity Securities purchased by MCI shall be (i) ninety percent
(90%) of the Market Price of such securities (provided that, except as
otherwise provided below, if such Equity
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Securities are derivative securities the conversion or exercise price of such
securities shall be equal to the conversion or exercise price of the derivative
securities, the issuance of which trigger MCI's rights under this Section
5.15), or (ii) if The Huff Alternative Income Fund, L.P. ("Huff") and/or ING
Equity Partners, L.P. I ("ING") purchase not less than five percent (5%) of
the Equity Securities issued, the price paid by Huff and/or ING. If MCI elects
not to participate, whether by notice or lapse of time, ACSI shall be free to
close such issuance with other investors on terms and conditions no more
favorable than those presented to MCI. If such issuance is not consummated
with other investors within one-hundred (120) days from the date of MCI's
election not to participate in such issuance, the Company may not consummate
such issuance without again complying with this Section 5.15. The provisions
of this Section 5.15 shall not apply to issuances of Equity Securities by ACSI
(i) prior to or as part of a Qualifying Offering, (ii) in connection with an
acquisition of the business or properties of another Person, through merger or
otherwise, including shares issued in connection with the formation of joint
ventures, (iii) to ACSI's executive officers, employees, consultants or
directors pursuant to any stock option or other stock-based plan or arrangement
in effect as of the date hereof (giving effect to all options outstanding, and
all options authorized under ACSI's Stock Option Plan and Stock Purchase Plan
as of the date hereof), (iv) in addition to issuances and grants pursuant to
(iii), to other grants of Equity Securities to executive officers, employees,
consultants and directors as approved by ACSI's board of directors or a duly
designated committee thereof, up to an aggregate total, in the case of
issuances described in clauses (iii) and (iv), of seven million (7,000,000)
shares of Common Stock on a Fully Diluted Basis, provided that in the event
MCI's rights under this Section 5.15 are triggered by the issuance or grant of
options or other derivative securities to executive officers, employees,
consultants or directors, in order to exercise such rights MCI shall be
required to purchase, not later than six (6) months after such option or
derivative security is granted, the Equity Securities underlying such options
or derivative securities at a price equal to 90% of the Market Price of such
Equity Securities, subject to the limitation set forth above relating to
purchases of at least 5% of such Equity Securities by Huff and/or ING and MCI
shall not be entitled to receive such options or derivative
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<PAGE> 25
securities, (v) upon the exercise or conversion of derivative securities
(including without limitation the conversion of preferred stock), or (vi) in
connection with dilution adjustments under the terms of derivative securities.
In addition, ACSI shall have the right to request MCI to waive its rights under
this Section 5.15 in connection with any public offering of Equity Securities
or in any private placement effected in connection with any public offering as
contemplated below, which waiver shall not be unreasonably withheld provided
that ACSI uses its commercially reasonable efforts to enable MCI to purchase a
portion of such Equity Securities on the terms otherwise applicable to such
purchase under this Section 5.15 before giving effect to the provisions of this
sentence; provided, that if MCI does not give written notice to the
underwriters of its election to participate prior to the second business day
immediately preceding the date that the underwriters "price" such Equity
Securities, MCI shall be deemed to have elected not to participate and shall be
deemed to have waived its rights hereunder with respect to such issuance. In
the case of a public offering MCI acknowledges that it might not be able to
purchase the Equity Securities offered at a price other than the price at which
they are offered to the public and thus might not be able to purchase such
Equity Securities at a ten (10%) per cent discount to the Market Price. In
such event, ACSI will use its best efforts to enable MCI to exercise its rights
under this Section 5.15, including its right to such ten (10%) discount,
through MCI's purchase of Equity Securities which are substantially similar to
those being offered to the public in the public offering in a private placement
effected at the same time as such public offering or as soon thereafter as is
practicable. Notwithstanding anything to the contrary contained herein, MCI's
purchase of Equity Securities hereunder may not be consummated (i) unless and
until all required regulatory approvals, including without limitation those
approvals required under the Communications Act, have been obtained and (ii) to
the extent such purchase would require stockholder approval under any
applicable law or regulation. ACSI shall use commercially reasonable efforts
to obtain such approvals.
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ARTICLE 6 -- REPRESENTATIONS AND WARRANTIES
6.1 ACSI hereby represents and warrants to MCI that the following
matters are true, correct and complete as of the date hereof and will also be
true, correct and complete as of each date a Warrant is issued:
(a) Authorization of Transaction. ACSI has the full
corporate power and authority to execute and deliver this Agreement, the
Warrants and any other agreements or instruments to be executed by ACSI
hereunder, and to perform its obligations hereunder. The execution and
delivery by ACSI of this Agreement, the Warrants, and any other agreements or
instruments to be executed by ACSI and the performance of ACSI's obligations
hereunder have been duly and validly authorized by all necessary corporate
action. This Agreement has been, and the Warrants and any other agreements and
instruments to be executed by ACSI will be, duly and validly executed and
delivered by ACSI and constitute, or will constitute, the legal, valid and
binding obligations of ACSI, enforceable against ACSI in accordance with their
terms.
(b) Noncontravention. Neither the execution, delivery or
performance of this Agreement, the Warrants and any other agreements or
instruments to be executed by ACSI hereunder will (i) conflict with or violate
any constitution, statute, regulation, rule, injunction, judgment, order,
decree, ruling, charge, or other restriction of any governmental authority to
which ACSI is subject; or (ii) conflict with or violate any provision of the
certificate of incorporation or bylaws of ACSI.
(c) Governmental and Third Party Consents. No consent,
approval, order or authorization of, or registration, qualification,
designation, declaration or filing with, any governmental authority on the part
of ACSI is required (subject to the representations of MCI contained in Section
6.2) in connection with the execution, delivery and performance of this
Agreement or the Warrants, except such as will have been obtained prior to the
execution hereof. No consent or waiver of any Person is required in connection
with the execution, delivery and performance of this Agreement or the Warrants,
except such as will have been obtained prior to the execution hereof.
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(d) Capitalization. ACSI has delivered to MCI true and
correct copies of its certificate of incorporation and by-laws, and all
amendments thereto, as in effect on the date hereof. As of the date hereof,
the issued and outstanding Capital Stock of ACSI is as set forth in SCHEDULE I
attached hereto and the number of shares of Capital Stock of ACSI on a Fully
Diluted Basis, together with a reasonably detailed calculation of such number,
is as set forth in SCHEDULE I.
(e) Disclosure. ACSI has fully provided MCI with all
documents and information which MCI has requested and all information material
to a decision to enter into this Agreement and the Preferred Provider
Amendment.
(f) Absence of Certain Events. During the period from
January 23, 1997 through the date hereof ACSI has not (i) declared a dividend
payable in, or made any other distribution of, shares of Common Stock, (ii)
subdivided its outstanding shares of Common Stock into a larger number of
shares of Common Stock, or (iii) combined its outstanding shares of Common
Stock into a smaller number of shares of Common Stock.
6.2 MCI represents, warrants and covenants that (i) it is an
"accredited investor" (as that term is defined in Regulation D under the Act),
(ii) it is acquiring the Warrants and the shares of Common Stock underlying the
Warrants for investment and not with a view towards distribution, and (iii) the
Warrants and the shares of Common Stock underlying such Warrants are
"restricted securities" as that term is defined in Rule 144 under the Act.
ARTICLE 7 -- MISCELLANEOUS
7.1 Notices. All notices, demands, requests, or other communications
which may be or are required to be given or made by any party to any other
party pursuant to this Agreement shall be in writing and shall be hand
delivered, or mailed first-class registered or certified mail, return receipt
requested, postage pre-paid, or delivered by overnight air courier, or
transmitted by telegram, telex, or facsimile transmission addressed as follows:
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<PAGE> 28
If to MCI:
MCImetro Access Transmission Services, Inc.
8521 Leesburg Pike
Vienna, VA 22182
Attn: Steven Mooney
Fax: (703) 918-6611
with a copy to:
MCI Telecommunications Corporation
1801 Pennsylvania Avenue, N.W.
Washington, D.C. 20006
Attn: General Counsel
Fax: (202) 887-2047
If to ACSI:
American Communications Services, Inc.
131 National Business Parkway, Suite 100
Annapolis Junction, Maryland 20701
Attn: George M. Tronsrue, III
Fax: (301) 490-7091
with a copy to:
America Communications Services, Inc.
131 National Business Parkway, Suite 100
Annapolis Junction, Maryland 20701
Attn: General Counsel
Fax: (301) 617-4277
Each party may designate by notice in writing a new address to which any
notice, demand, request or communication may thereafter be given, served or
sent. Each notice, demand, request or communication which shall be mailed,
delivered, or transmitted in the manner described above shall be deemed
sufficiently given, served, sent or received for all purposes as such time as
it is delivered to the addressees (with the return receipt, the facsimile
confirmed receipt, the delivery receipt or affidavit of messenger being deemed
conclusive evidence of such delivery) or at such time as delivery is refused by
the addressee upon
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<PAGE> 29
presentation.
7.2 Entire Agreement. This Agreement, together with the Preferred
Provider Amendment, including the schedules and exhibits hereto and thereto,
supersedes all prior discussions and agreements between the parties with
respect to the subject matter hereof and constitutes the sole and entire
agreement between the parties with respect to the subject matter hereof and
thereof.
7.3 Waiver. Any term or condition of this Agreement may be waived
at any time by the party that is entitled to the benefit thereof, but no such
waiver shall be effective unless set forth in a written instrument duly
executed by or on behalf of the party waiving such term or condition. No
waiver by any party of any term or condition of this Agreement, in any one or
more instances, shall be deemed to be or construed as a waiver of the same or
any other term or condition of this Agreement on any future occasion. All
remedies, either under this Agreement or by law or otherwise afforded, will be
cumulative and not alternative.
7.4 Amendment. This Agreement may be amended, supplemented or
modified only by a written instrument duly executed by or on behalf of each
party.
7.5 No Third Party Beneficiary. The terms and provisions of this
Agreement are intended solely for the benefit of each party hereto and their
respective permitted successors or assigns, and, except as specifically
provided in this Agreement, it is not the intention of the parties to confer
third-party beneficiary rights upon any other person.
7.6 Binding Effect. This Agreement shall be binding upon, inures
to the benefit of and is enforceable by the parties hereto and their respective
successors and assigns.
7.7 Headings. The headings used in this Agreement have been
inserted for convenience of reference only and do not define or limit the
provisions hereof.
7.8 Schedules and Exhibits. The schedules and exhibits
specifically referred to in and delivered pursuant to this Agreement are
incorporated herein and shall be part of this
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<PAGE> 30
Agreement for all purposes.
7.9 Severability; Reformation. Should any one or more of the
provisions of this Agreement or of any agreement entered into pursuant to this
Agreement be determined by an arbitrator or court of proper jurisdiction to be
illegal or unenforceable, then such illegal or unenforceable provision shall be
modified by the proper court or arbitrator to the extent necessary and possible
to make such provision enforceable, and such modified provision and all other
provisions of this Agreement and of each other agreement entered into pursuant
to this Agreement shall be given effect separately from the provision or
portion thereof determined to be illegal or unenforceable and shall not be
affected thereby.
7.10 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to the conflict of laws provisions thereof.
7.11 Counterparts. To facilitate execution, this Agreement may be
executed in as many counterparts as may be required; and it shall not be
necessary that the signatures of, or on behalf of, each party, or the
signatures of all persons required to bind a party, appear on each counterpart;
but it shall be sufficient that the signature of, or on behalf of, each party,
or the signatures of the persons required to bind any party, appear on one or
more of the counterparts. All counterparts shall collectively constitute a
single agreement.
7.12 Remedies. All rights, remedies, undertakings, obligations,
options, covenants, conditions and agreements contained in this Agreement or
provided by law shall be cumulative and no one of them shall be exclusive of
any other. A party may pursue any one or more of its rights, options or
remedies hereunder or may seek damages or specific performance in the event of
any other party's breach hereunder, or may pursue any other remedy by law or
equity, whether or not stated in this Agreement. MCI and ACSI recognize that
any breach of the terms of this Agreement may give rise to irreparable harm for
which money damages would not be an adequate remedy, and accordingly agree
that, in addition to other remedies any non-breaching party shall be entitled
to enforce the terms of this Agreement by a decree of specific performance
without the necessity of proving the
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<PAGE> 31
inadequacy of money damages as a remedy.
7.13 Further Assurances. Each party agrees to perform any further
acts and to execute and deliver any further documents reasonably necessary to
or in furtherance of the intent and purposes of this Agreement.
7.14 Attorneys' Fees. In the event any action is brought for
enforcement or interpretation of this Agreement, the prevailing party shall be
entitled to recover reasonable attorneys' fees and costs (including allocated
in-house attorney costs) incurred in said action, including enforcement and
collection of any judgment or award rendered therein. Said costs and
attorneys' fees shall be included as part of the judgment in any such action.
7.15 Registration Rights Agreement. Simultaneously with the
execution and delivery of this Agreement, MCI and ACSI are entering into a
Registration Rights Agreement in the form annexed hereto as EXHIBIT D.
7.16 Short Swing Transactions. ACSI agrees to take such steps as MCI
may from time to time reasonably request in order to avoid the occurrence of
short swing transactions which result in profits realized under Section 16 of
the Exchange Act, and the rules and regulations thereunder. Without limiting
the generality of the preceding sentence, ACSI will from time to time, if so
requested by MCI with respect to any Warrants to be granted hereunder, agree to
a delay for such period or periods of time (not exceeding 7 months in any
instance) as may be requested by MCI in the issue and delivery of such Warrants
and/or in the determination of the exercise price of such Warrants, except to
the extent that the same would cause (i) a violation of, or require stockholder
approval of the issuance of such Warrants under, the NASDAQ National Market
rules or the rules of any stock exchange on which the securities of ACSI may
then be traded or (ii) dilution under the terms of other ACSI derivative
securities.
IN WITNESS WHEREOF, the parties have entered into this Warrant
Agreement as of the date and year first above written.
AMERICAN COMMUNICATIONS SERVICES, INC.
- 31 -
<PAGE> 32
By:
--------------------------------
Name:
Title:
MCImetro ACCESS TRANSMISSION SERVICES, INC.
By:
---------------------------
Name:
Title:
- 32 -
<PAGE> 1
EXHIBIT 10.57
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Employment Agreement"), made
as of this 28th day of February, 1997 by and between AMERICAN COMMUNICATIONS
SERVICES, INC., a Delaware corporation, having its principal place of business
at 131 National Business Parkway, Suite 100, Annapolis Junction, Maryland 20701
(which, together with any affiliates or subsidiaries are hereinafter
collectively referred to as "Company") and David L. Piazza, an individual
residing at 3009 Fox Glen Ct., St. Charles, IL 60174 (hereinafter referred to
as "Employee").
WITNESSETH
WHEREAS, the Company desires to employ the services of
Employee as its Chief Financial Officer under the terms and conditions set
forth herein; and
WHEREAS, Employee desires to provide services as Chief
Financial Officer for the Company under the terms and conditions set forth
herein.
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants undertaken herein, and with the intent to be legally bound
hereby, the Company and Employee hereby agree as follows:
1. Employment. The Company hereby agrees to employ
Employee and Employee hereby agrees to said employment in accordance with the
terms and conditions hereinafter set forth.
2. Term. Employment hereunder shall be deemed to have
commenced as of March 24, 1997 (the "Effective Date") and continue through
March 23, 2001 (the "Termination Date"), unless otherwise terminated pursuant
to the terms hereof, or otherwise extended by written agreement or continuation
of this Employment Agreement upon such terms and conditions as are then
mutually acceptable to the Employee and the Company.
3. Location. The Company shall provide office space for
Employee at the Company's headquarters within the Annapolis, Maryland
metropolitan area or wherever the Company's headquarters may be located.
4. Duties. Employee shall serve as Chief Financial
Officer of the Company and each operating affiliate. Employee shall report to,
and take direction from the Chief Executive Officer, or in his absence, Jack E.
Reich, or the Executive Chairman of the Company (each of the foregoing, in the
designated order, the "Designated Officer"). Employee shall be responsible for
maintaining the Company's financial books and records and fulfilling all
financial reporting requirements to lenders, investors and government agencies,
as well as ensuring the
<PAGE> 2
integrity of the Company's financial systems and controls and other duties
commensurate with Employee's position as Chief Financial Officer as directed
by the Designated Officer. Employee shall devote his full business time to the
affairs of the Company.
5. Compensation.
a. Salary. Employee shall be compensated by the
payment of $175,000 per annum in accordance with the Company's standard payroll
practices for employees at his level, (as such amount may be increased from
time to time, "Base Salary"). Employee understands that all salary and bonus
compensation paid to Employee under this Employment Agreement shall be subject
to the usual and customary federal and state tax withholding and other
employment taxes as required by law. Except for the cash bonuses payable in
accordance with section 5(b) hereof, in the event Employee is terminated For
Cause as defined in paragraph 12 hereof or voluntarily leaves the Company's
employ, all compensation shall be prorated if employment is terminated other
than at the end of a calendar month. Employee will receive a salary review on
each anniversary of the Effective Date. Additional or increased compensation,
while not formalized, will be based on the Company's performance as well as his
individual contribution to that performance, and shall be determined at the
sole discretion of the Designated Officer and the Company's Board of Directors
(the "Board").
b. Cash Bonuses. On the effective date of this
agreement, Employee shall be entitled to receive, a one-time, lump-sum payment
of $30,000 as a signing bonus. In addition, Employee shall be eligible to
receive an annual cash bonus (the "Performance Bonus") equal to up to thirty
percent (30%) of his Base Salary based upon the achievement of certain
performance goals as reasonably determined by the Designated Officer. Such
Performance Bonus will be payable within sixty (60) days after the completion
of each fiscal year of the Company during the term hereof. The performance
goals for the fiscal year ending December 31, 1997, shall be determined within
thirty (30) days of the Effective Date and the performance goals for each
fiscal year thereafter will be determined no later than thirty (30) days after
the end of the preceding fiscal year. Notwithstanding the foregoing, if the
Company eliminates Performance Bonuses for officers of the Company, other than
for Jack E. Reich and Anthony J. Pompliano, the Company shall not be required
to pay the Performance Bonus to Employee. If, however, any officer (other than
Anthony J. Pompliano or Jack E. Reich) continues to be paid, or be eligible for
a similar type bonus, Employee will be entitled to the Performance Bonus on the
terms set forth in Paragraph 5.b.
c. Stock Options.
(i) In addition to the foregoing
compensation, Employee is hereby granted non-qualified options under the
Company's Amended 1994 Stock Option Plan (the "Plan") to purchase up to 200,000
shares of the common stock of the Company upon the following terms and
conditions (such options are referred to herein as the "Initial Stock
- 2 -
<PAGE> 3
Options"). Subject to the vesting requirements set forth herein, the Initial
Stock Options shall be exercisable as to each tranche of shares through the day
immediately preceding the fifth (5th) anniversary of the vesting date for such
tranche. The exercise price of the Initial Stock Options will be $7.33 per
share, which is not less than 85% of the last reported sale price of the common
stock on February 28, 1997, the date of grant as determined pursuant to the
terms of the Plan. The Initial Stock Options will vest on an "earn out" basis,
that is 50,000 Initial Stock Options will vest after completion of Employee's
first year of employment with the Company (March 23, 1998), 50,000 Initial
Stock Options will vest after completion of Employee's second year of
employment with the Company (March 23, 1999), 50,000 Initial Stock Options will
vest after completion of Employee's third year of employment with the Company
(March 23, 2000), and 50,000 Initial Stock Options will vest after completion
of Employee's fourth year of employment with the Company (March 23, 2001). The
Initial Stock Options shall not vest if prior to the relevant vesting date,
Employee voluntarily leaves the Company's employ or if Employee is terminated
For Cause as defined in paragraph 12 hereof. In the event of termination of
Employee's employment by the Company without Cause or pursuant to subparagraph
12 (b), (d), (e) or (f) hereof, all Initial Stock Options shall vest and become
immediately exercisable.
(ii) In addition to the issuance of the
Initial Stock Options as provided above, Employee is hereby granted additional
non-qualified options under the Plan to purchase an aggregate of 50,000 shares
of common stock (the "Performance Stock Options"), at the per share exercise
price of $7.33, which is not less than 85% of the last reported sale price of
the common stock on the date of grant. The Performance Stock Options shall
vest and become exercisable on March 23, 2003, if Employee shall then be
employed by the Company; provided, however, that the Performance Stock Options
immediately shall vest and become exercisable, at such time as Employee has met
the management business objectives (which are to be reasonably determined by
the Designated Officer within sixty (60) days of the Effective Date) provided
that Employee is then employed by the Company. It is the intent of Company for
the management business objectives to be met no later than one year from the
effective date. Once vested, the Performance Stock Options shall be
exercisable for a term of five years from the date of vesting. In the event of
termination of Employee's employment by the Company without Cause or pursuant
to subparagraphs 12 (e) or (f) hereof, the Performance Stock Options shall vest
and become immediately exercisable.
(iii) With respect to amendments to the Plan,
and with respect to future stock option plans or programs to be participated in
by senior officers or key employees of the Company or its successor companies,
Employee shall participate in an equitable manner, consistent with the
participation of other senior officers and key employees of the Company.
6. Other Payments and Benefits. In addition to the
compensation and other consideration provided in paragraph 5 above, Employee
will be given a one-time payment of $80,000 within thirty (30) days of the
Effective Date for payment of reasonable costs to relocate
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<PAGE> 4
his personal goods and family to the Annapolis Junction, MD area within a
reasonable time after the Effective Date, which is expected to be not later
than September 1, 1997. The Company will determine and also pay the amount
equal to the federal, state and local income taxes payable by Employee with
respect to such $80,000 payment based on the deductions taken by the Employee
for such relocation costs on his personal tax returns. In the event Employee
voluntarily leaves the Company's employ prior to completion of his first year
of employment (March 23, 1998), he will be required to reimburse the Company in
the amount of $80,000, plus any additional payments made by the Company to
Employee pursuant to the immediately preceding sentence.
7. Fringe Benefit Plans. Employee shall be entitled to
all benefits accorded to Company officers in general . Employee shall also be
entitled to participate in fringe benefit plans, including, but not limited to,
the Company's medical and dental insurance, life insurance, stock option plans,
or other benefit plans which may be adopted or amended by the Company from time
to time during the term of this Employment Agreement to the same extent and in
the same manner as other employees similarly situated. Employee's
participation in and coverage under such fringe benefits plans shall become
effective on the Effective Date. In addition to the aforementioned benefits,
the Company shall provide to the Employee, at the Company's expense,
incremental term life insurance coverage in the amount of $350,000, the
benefits from which shall be payable to Employees' beneficiaries provided that
Employee has no pre-existing condition which would make such insurance
unobtainable on commercially reasonable terms, if at all. This incremental
coverage will continue to be maintained by the Company throughout the term of
the Employment Agreement, until basic life insurance benefits available to
executive employees provide for basic term life insurance coverage up to
$500,000.
8. Employee and Company Representations. Employee
hereby represents and warrants to the Company that (i) the execution, delivery
and performance of this Employment Agreement by Employee do not and will not
conflict with, breach, violate or cause a default under any contract,
agreement, instrument, order, judgment or decree to which Employee is a party
or is presently bound; and (ii) Employee is not a party to or bound by any
employment agreementor non-competition agreement or confidentiality agreement
with any other person or entity except for the Non-Disclosure Agreement between
Employee and Chicago Fiber Optic Corporation signed October 3, 1987, and the
Non-Disclosure/Confidentiality Agreement between Employee and Metro Fiber
Systems of Chicago, Inc. signed April 29, 1988.
9. Business Expenses. The Company shall reimburse
Employee for all reasonable business and professional expenses incurred by
Employee in connection with his employment within thirty (30) days of the
Company's receipt of vouchers, receipts or other appropriate documentation
which conform to the requirements of the Company's expense reimbursement
procedures.
10. Vacation. Employee shall be entitled to an initial
annual vacation of two (2) weeks. Scheduling of each vacation shall be with
the reasonable consent of the Designated
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<PAGE> 5
Officer.
11. Professional Education. Employee's attendance at
professional seminars, and the payment and/or reimbursement of costs and
expenses associated therewith, shall be decided on an ad hoc basis by the
Company and Employee.
12. Term of Employment. The term of the Employee's
employment shall commence on the Effective Date and shall continue for the
period set forth in paragraph 2 above unless sooner terminated as hereunder
provided:
a. For "Cause", as that term is defined
below, upon ten (10) days' written
notice by the Company to Employee.
b. Upon the death of Employee.
c. Upon ten (10) days' written notice
to the Company of resignation by
Employee.
d. If Employee shall become disabled,
upon ten (10) days' written notice
by the Company to the Employee.
Employee shall be deemed disabled
within the meaning of this
Employment Agreement if as a result
of sickness (including mental or
related illnesses), accident or
injury, Employee is unable to
perform his duties to the Company
for a period of six (6) consecutive
months.
e. If the Company is in material breach
of any of its obligations hereunder
and such breach is not cured, within
thirty (30) days' after written
notice thereof from Employee, after
expiration of such notice period,
provided that the Company shall only
be entitled to one cure period per
calendar year.
f. Upon the event of an "Involuntary
Termination", as that term is
defined in this paragraph 12.
For purposes of this Employment Agreement, for "Cause" shall
mean (i) the commission of a felony, any crime involving moral turpitude or any
other act involving dishonesty, disloyalty or fraud with respect to the
Company; (ii) substantial failure to perform duties as reasonably directed by
the Company, which failure is not cured within fifteen (15) days' written
notice thereof to Employee from the Company (iii) gross negligence, intentional
or willful misconduct or (iv) any other material breach of this Employment
Agreement by Employee which is not cured within thirty (30) days' after written
notice thereof to Employee from the Company.
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<PAGE> 6
For purposes of this Employment Agreement, "Involuntary
Termination" shall mean either (i) the actual involuntary termination without
Cause of the Employee's employment with the Company, or (ii) the constructive
involuntary termination of the Employee's employment with the Company. The
term "constructive involuntary termination" shall include (a) material
reduction in the Employee's compensation, including applicable fringe benefits
from those in place as of the Effective Date to the extent such reduction is
not applicable generally to executive employees; or (b) a substantial change in
location of the office space provided for the Employee by the Company without
the Employee's written consent in the event the Company fails to pay reasonable
relocation costs; or (c) the Employee's material demotion or diminution in the
Employee's position, authority, duties or responsibilities without Cause or the
Employee's written consent. "Substantial change in location" means any change
in the location of the office space provided for the Employee by the Company
(new office), where the distance between the Employee's home (as determined in
connection with paragraph 6), and the new office, is more than fifty miles
greater than the distance between the Employee's home and the office space
provided for the employee on the Effective Date in accordance with paragraph 3.
Anything in this Employment Agreement to the contrary
notwithstanding, the Company reserves the right to terminate the term of
Employee's employment at any time, in its sole discretion, without Cause;
provided that if Employee's employment is terminated by the Company without
Cause or if Employee's employment is terminated pursuant to subparagraphs (b),
(d), (e) or (f) of paragraph 12 hereof, Employee or Employee's estate shall be
entitled to receive any previously awarded but unpaid bonus under paragraph 5
hereof and all Initial Stock Options shall vest and become immediately
exercisable. In the event of termination of Employee's employment by the
Company without Cause or pursuant to subparagraphs (b), (d), (e) or (f) of
paragraph 12 hereof Employee shall receive his then current Base Salary and
health and medical benefits coverage at the Company's expense for two (2) years
from the date of such termination, as severance compensation.
13. Termination of Compensation. Except as otherwise
provided in paragraph 12 hereof, if Employee's employment with the Company
terminates, Employee shall not be entitled to any compensation hereunder after
the date of such termination. Notwithstanding the foregoing, the parties shall
be required to carry out any provisions hereof which contemplate performance by
them subsequent to such termination, including: (i) the payment of any amounts
of compensation under paragraph 5 then accrued but unpaid to the effective date
of termination; (ii) the ability of Employee to exercise vested Initial Stock
Options and Performance Stock Options; and (iii) the covenants regarding
confidential information under paragraph 15 hereof, the covenants regarding
work product under paragraph 16 hereof;and (v) the covenants not to compete or
solicit under paragraph 17 hereof. In addition, termination of this Employment
Agreement shall not affect any liability or other obligation which shall have
accrued prior to termination, including but not limited to any liability for
borrowed money or loss or damage on account of default hereunder.
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<PAGE> 7
14. Loyalty. The performance of services hereunder shall
be Employee's exclusive employment relationship and Employee shall devote his
full business time and best efforts to the performance of services under this
Employment Agreement. During the term of this Employment Agreement, Employee
shall not at any time or place whatsoever, either directly or indirectly,
engage in business or render services to any extent whatsoever to any third
party, except under and pursuant to this Employment Agreement.
15. Confidential Information. Employee acknowledges that
the proprietary information, observations and data obtained by Employee while
employed by the Company concerning the business or affairs of the Company or
any affiliate or subsidiary thereof ("Confidential Information") is the
property of the Company. Therefore, Employee agrees not to disclose to any
unauthorized person or use for the Employee's account any Confidential
Information without the prior written consent of the Company unless and to the
extent that the aforementioned matters become generally known to and available
for use by the public other than as a result of Employee's acts or omissions.
Upon request, Employee shall deliver to the Company at the termination of this
Employment Agreement, or at any other time the Company may request, all
memoranda, notes, plans, records, reports and other documents (and copies
thereof) relating to the Confidential Information or the business of the
Company. This provision shall not apply to information deemed to be known by
Employee at the time of the execution of the Employment Agreement, including
information gained by virtue of his past experience and know-how, or to his
general expertise.
16. Work Product. Employee agrees that all methods,
analyses, reports, plans and all similar or related information which (i)
relate to the Company or any of its affiliates or subsidiaries and which (ii)
are conceived, developed or made by Employee in the course of his employment by
the Company ("Work Product") belong to the Company. Employee will promptly
disclose such Work Product to the Company and perform all actions reasonably
requested by the Company to establish and confirm such ownership by the
Company.
17. Covenants Not to Compete or Solicit. For two (2)
years following the termination of Employee's employment with the Company,
Employee covenants and agrees with the Company not to engage, either directly
or indirectly, as an equity owner or personally as an officer, director,
employee, partner, consultant or agent, in the rendering of any of the same
services as are provided by the Company at the time Employee's employment with
the Company is terminated, or which the Company has targeted to provide in its
written business plan which has been approved by the Board of Directors as of
the time of such termination, in any of the market areas in which the Company
is providing such services at the time of such termination, or in any of the
market areas in which the Company has targeted to provide such services in its
business plan at the time of such termination, provided that Employee may own
up to 2% of the outstanding equity securities of any publicly-traded company
regardless of whether any such company is a competitor of the Company, so long
as Employee's relationship to any such
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<PAGE> 8
company is that of a strictly passive investor.
For two (2) years following termination of employment under
the terms of this Employment Agreement, Employee covenants and agrees with the
Company not to, either directly or indirectly, whether acting on behalf of
himself or a corporation, partnership, joint venture or some other entity:
a. induce or attempt to induce any employee of
the Company to leave the Company's employ, or
in any way interfere with the relationship
between the Company and any employee thereof;
and/or
b. hire directly or through another entity any
person who was an employee of the Company at
any time during the twelve (12) months
preceding Employee's termination.
Employee represents that he has disclosed to the Company in
writing all obligations to third parties which might limit his ability to
perform services under this Employment Agreement.
18. Reimbursement for Attorney's Fees. The Company
agrees to reimburse Employee up to $3,000 for attorneys' fee incurred for
review of this Employment Agreement, within thirty (30) days of the Effective
Date.
19. Non-Assignability. Neither this Employment Agreement
nor any right or interest hereunder shall be assignable or subject to any
encumbrance, pledge, hypothecation, attachment, or anticipation of any kind by
Employee, his spouse or his legal representatives, without the Company's
written consent but shall inure to and be binding upon Employee's estate.
20. Entire Agreement. This Employment Agreement shall be
the entire agreement and understanding of the parties relating to the subject
matter hereof, and any prior negotiations, promises, agreements,
representations, warranties, or understandings relating to the same subject
matter, and except as specifically provided herein, shall be subject to
subsequent modification only by another mutually signed written instrument
which by its terms evidences an intention to modify or amend the provisions
hereof.
21. Choice of Law. This Employment Agreement shall be
construed in accordance with the internal laws of the State of Maryland. For
purposes of this Employment Agreement, the parties consent to jurisdiction in
the State of Maryland.
22. Cost of Enforcement. Each party shall bear its own
costs and attorneys' fees in connection with any suit or proceeding against the
other to enforce any provision of this Employment Agreement or to recover
damages resulting from a breach hereof, however, the
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<PAGE> 9
party which prevails in any such suit or proceeding shall be entitled to
receive from the non-prevailing party the costs and reasonable attorneys' fees
of the prevailing party incurred in such suit or proceeding.
23. Severability. In the event that any provision hereof
is determined to be illegal or unenforceable, such determination shall not
affect the validity or enforceability of the remaining provisions hereof, all
of which shall remain in full force and effect.
24. Counterparts. This Employment Agreement may be
executed in one or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument. This Employment Agreement shall become effective upon the
execution of a counterpart hereof by each of the parties hereto.
25. Interpretation. All masculine terms shall include
the feminine counterpart and all singular terms shall include plural and vice
versa, as necessary to interpret and enforce the intent of this Employment
Agreement. All captions are included only for reference and shall not
constitute substantive provisions hereof.
26. Notices. Any notice, request, claim, demand,
document and other communication hereunder to either party shall be effective
upon receipt (or refusal of receipt) and shall be in writing and delivered
personally or sent by telex or telecopy (with such telex or telecopy confirmed
promptly in writing sent by first class mail) or other similar means of
communications, as follows:
(i) If to the Company, addressed to American
Communications Services, Inc.,
131 National Business Parkway,
Suite 100,
Annapolis Junction, Maryland 20701
Attention: General Counsel; or
(ii) If to Employee, addressed to him at:
3009 Fox Glen Ct.
St. Charles, IL 60174
or, in each case, to such other address or telex or telecopy number as such
party may designate in writing to the other by written notice given in the
manner specified herein.
All such communications shall be deemed to have been given,
delivered or made when so delivered personally or sent by telex or telecopy
(confirmation received), or five business days after being so mailed.
INTENDING TO BE LEGALLY BOUND BY THIS EMPLOYMENT AGREEMENT,
the parties have signed below as of the date first written above.
- 9 -
<PAGE> 10
EMPLOYEE: AMERICAN COMMUNICATIONS SERVICES, INC.
- ----------------------- --------------------------------
David L. Piazza Anthony J. Pompliano
Executive Chairman
- 10 -
<PAGE> 1
EXHIBIT 11.1
COMPUTATION OF PER SHARE EARNINGS (LOSS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------- SIX MONTHS ENDED
JUNE 30, JUNE 30, DECEMBER 31,
1995 1996 1996
----------- ----------- ----------------
<S> <C> <C> <C>
NET LOSS
1. Net loss............................... $14,697,649 $26,782,044 $ 34,916,514
2. Less; preferred stock accretion........ 1,070,985 3,871,328 2,003,630
----------- ----------- ------------
3. Net loss to common stockholders........ 15,768,643 30,653,372 36,920,144
4. Add; effect on interest expense........ 170,095 2,301,864 2,719,685
Add; convertible preferred dividends
saved.................................. 1,070,985 3,871,328 2,003,630
----------- ----------- ------------
5. Net loss to common stockholders, anti-
dilutive basis......................... $14,527,554 $24,480,180 $ 32,196,829
=========== =========== ============
AVERAGE SHARES OUTSTANDING
6. Weighted average number of common
shares outstanding..................... 4,771,689 6,185,459 6,733,759
7. Net additional shares assuming stock
options and warrants exercised and
proceeds used first to purchase
treasury shares to 20% of shares
outstanding at year end, the balance to
reduce long-term debt.................. 4,078,907 9,133,070 10,871,922
Additional shares assuming conversion
of preferred shares.................... 5,264,492 17,377,264 17,377,264
----------- ----------- ------------
8. Weighted average number of common and
common equivalent shares outstanding... 14,115,088 32,695,793 34,982,945
=========== =========== ============
PER SHARE AMOUNTS
9. Net loss per common share as presented
in statement of operations (3/6)....... $ (3.30) $ (4.96) $ (5.48)
=========== =========== ============
10. Net loss per share as antidilutive
basis (5/8)............................ $ (1.03) $ (0.75) $ (0.92)
=========== =========== ============
</TABLE>
<PAGE> 1
EXHIBIT 23.1
ACCOUNTANT'S CONSENT
The Board of Directors
American Communications Services, Inc.:
We consent to incorporation by reference in the registration statements (No.
33-99964 and No. 333-19089) on Form S-8 of American Communications Services,
Inc. of our report dated February 14, 1997, relating to the consolidated
balance sheets of American Communications Services, Inc. and subsidiaries as of
June 30, 1995 and 1996 and December 31, 1996 and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
the years ended June 30, 1995 and 1996 and the six months ended December 31,
1996, which report appears in the December 31, 1996, annual report on Form
10-KSB of American Communications Services, Inc.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Washington, DC
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 80,960,696
<SECURITIES> 0
<RECEIVABLES> 2,861,477
<ALLOWANCES> (432,400)
<INVENTORY> 1,202,711
<CURRENT-ASSETS> 84,592,484
<PP&E> 144,403,123
<DEPRECIATION> (8,320,372)
<TOTAL-ASSETS> 230,038,167
<CURRENT-LIABILITIES> 38,591,570
<BONDS> 216,484,169
186,664
277,500
<COMMON> 67,850
<OTHER-SE> (27,569,586)
<TOTAL-LIABILITY-AND-EQUITY> 230,038,572
<SALES> 0
<TOTAL-REVENUES> 6,990,452
<CGS> 8,703,057
<TOTAL-COSTS> 20,027,091
<OTHER-EXPENSES> 2,703,858
<LOSS-PROVISION> 242,900
<INTEREST-EXPENSE> 10,390,330
<INCOME-PRETAX> (35,076,784)
<INCOME-TAX> 0
<INCOME-CONTINUING> (34,916,514)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,916,514)
<EPS-PRIMARY> (5.48)
<EPS-DILUTED> 0
</TABLE>
