<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 31, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AMERICAN COMMUNICATIONS SERVICES, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 4813 52-1947746
(STATE OR OTHER JURISDICTION OF (PRIMARY SIC CODE NUMBER) (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NO.)
</TABLE>
131 NATIONAL BUSINESS PARKWAY
ANNAPOLIS JUNCTION, MARYLAND 20701
(301) 617-4200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
RILEY M. MURPHY, ESQ.
EXECUTIVE VICE PRESIDENT -- LEGAL AND REGULATORY AFFAIRS, GENERAL COUNSEL AND
SECRETARY
AMERICAN COMMUNICATIONS SERVICES, INC.
131 NATIONAL BUSINESS PARKWAY
ANNAPOLIS JUNCTION, MARYLAND 20701
(301) 617-4215
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
------------------------
with copies to:
<TABLE>
<S> <C>
RICHARD C. TILGHMAN, JR., ESQ. GERALD S. BACKMAN, P.C.
PIPER & MARBURY L.L.P. WEIL, GOTSHAL & MANGES LLP
36 SOUTH CHARLES STREET 767 FIFTH AVENUE
BALTIMORE, MARYLAND 21201-3018 NEW YORK, NEW YORK 10153-0119
(410) 576-1678 (212) 310-8348
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
---------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
============================================================================================================
PROPOSED
MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED OFFERING PRICE FEE(1)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $.01 per share............. $50,000,000 $15,152
=============================================================================================================
</TABLE>
(1) Calculated in accordance with Rule 457(o) under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
JANUARY 31, 1997
SHARES
AMERICAN COMMUNICATIONS SERVICES, INC.
COMMON STOCK
------------------
All of the shares of Common Stock offered hereby are being sold
by American Communications Services, Inc. ("ACSI" or the "Company"). The Common
Stock is traded on the Nasdaq Stock Market under the symbol "ACNS." On January
30, 1997 the last reported sales price of the Common Stock on the Nasdaq Stock
Market was $11.13 per share. See "Price Range of Common Stock."
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=========================================================================================================
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS COMPANY(1)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................. $ $ $
- ---------------------------------------------------------------------------------------------------------
Total(2).................................. $ $ $
=========================================================================================================
</TABLE>
(1) Before deducting expenses estimated at $ , payable by the Company.
(2) The Company has granted to the Underwriters a 30-day option to purchase up
to additional shares of Common Stock solely to cover
over-allotments, if any. To the extent the option is exercised, the
Underwriters will offer the additional shares at the Price to Public shown
above. If the option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
------------------
The shares of Common Stock are offered hereby by the several Underwriters,
subject to prior sale, when, as and if delivered to and accepted by them, and
subject to the right of the Underwriters to reject any order in whole or in
part. It is expected that delivery of the shares of Common Stock will be made at
the offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland on or about
, 1997.
ALEX. BROWN & SONS DONALDSON, LUFKIN & JENRETTE
INCORPORATED SECURITIES CORPORATION
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE> 3
[MAP TO BE INSERTED.]
This Prospectus includes trademarks, trade names and service marks of the
Company and other companies.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS AND CERTAIN SELLING
GROUP MEMBERS, IF ANY, MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE
COMMON STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH
RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE
"UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and notes thereto appearing
elsewhere in this Prospectus.
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. 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 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 Internet service providers ("ISPs") and
local businesses. As of January 31, 1997, the Company had ACSINet data POPs in
33 markets, including all 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.
ACSI LOCAL NETWORKS
During 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, and, as of January 31, 1997, the Company had 15 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 January 31, 1997:
<TABLE>
<CAPTION>
ROUTE MILES TARGETED
------------------ DATE MARKETS UNDER INITIAL IN SERVICE
MARKETS IN OPERATION INITIAL CURRENT IN SERVICE CONSTRUCTION ROUTE MILES DATE
- ----------------------- ------- ------- ---------- ----------------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Albuquerque, NM........ 2.2 28.5 12-95 Austin, TX............. 2.2 9-97
Amarillo, TX........... 0.8 0.8 9-96 Baton Rouge, LA........ 1.2 3-97
Baltimore, MD.......... 2.8 12.0 10-96 Colorado Springs, CO... 1.0 3-97
Birmingham, AL......... 1.8 3.4 5-96 Corpus Christi, TX..... 2.5 3-97
Charleston, SC......... 1.9 1.9 4-96 Dallas, TX............. 1.5 6-97
Columbia, SC........... 2.2 18.5 10-95 Jacksonville, FL....... 1.4 3-97
Columbus, GA........... 2.2 31.5 9-96 Kansas City, KS........ 2.0 3-97
Chattanooga, TN........ 1.6 1.6 12-96 Knoxville, TN.......... 2.3 9-97
El Paso, TX............ 1.2 69.0 11-95 New Orleans, LA........ 3.9 6-97
Fort Worth, TX......... 1.6 99.3 6-95 Rio Rancho, TX......... 14.2 9-97
Greenville, SC......... 2.0 11.0 5-95 Roanoke, VA............ 1.2 9-97
Irving, TX............. 8.8 23.0 9-96 Savannah, GA........... 6.6 9-97
Jackson, MS............ 2.2 5.4 7-96 Shreveport, LA......... 1.2 3-97
Las Vegas, NV.......... 0.2 6.1 5-96 Tampa, FL.............. 1.6 9-97
Lexington, KY.......... 3.0 11.5 3-96 Tulsa, OK.............. 1.5 3-97
Little Rock, AR........ 1.6 5.5 2-95
Louisville, KY......... 2.8 45.7 11-94
Mobile, AL............. 1.2 31.3 4-96
Montgomery, AL......... 1.7 19.8 12-95
Spartanburg, SC........ 4.1 4.3 6-96
Tucson, AZ............. 6.3 109.0 12-95
</TABLE>
3
<PAGE> 5
TELECOMMUNICATIONS MARKET
Regulatory, technological, marketing, and competitive trends have
substantially expanded the Company's opportunities in the converging voice and
data communications services markets. Regulatory initiatives, such as the
Telecommunications Act of 1996 (the "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 from $1
billion in 1995.
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 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 a 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, enhanced 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
4
<PAGE> 6
companies, CATVs and cellular and other wireless communications
providers as an alternative means of distributing private label services
to these companies' customers.
- 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 three months ended September 30, 1996,
approximately 70.1% of the Company's revenues were billed to 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. 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
On January 23, 1997, the Company and MCI signed a non-binding letter of
intent that contemplates MCI naming ACSI as its preferred local provider for
dedicated and transport services in 21 ACSI markets for at least a five year
period (the "MCI Transaction"). Upon execution of a definitive agreement, MCI
plans to 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
letter of intent also provides for MCI's plans to initiate a wholesale agreement
to resell local switched services in at least 10 of the 21 identified markets.
According to the terms of the letter, MCI also would have the option to purchase
loop transport services from ACSI where ACSI has collocations with the ILEC and
MCI has deployed its own local switch. The letter of intent also provides for
ACSI to issue MCI warrants to purchase up to an aggregate of approximately 2.3
million shares of ACSI's Common Stock at fair market value, including warrants
to purchase 620,000 shares to be issued at the signing of the definitive
agreements, which is expected to occur before March 31, 1997, and the remaining
warrants to be issued in tranches every six months thereafter subject to
revenues generated by the agreements reaching certain levels. The letter of
intent also contemplates ACSI generally giving MCI the right to purchase
additional shares of ACSI's Common Stock at a 10% discount to fair market value
after the definitive agreements are signed so MCI can maintain its fully diluted
equity ownership interest in the Company. MCI will have certain registration
rights with respect to any shares of Common Stock it acquires. The letter of
intent is subject to standard contingencies, including Board approvals and
execution of a definitive agreement.
On January 17, 1997, the Company acquired 100% of the outstanding capital
stock of Cybergate, Inc. in exchange for 1,000,000 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 $815,000
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
5
<PAGE> 7
Internet access to end-user commercial 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 Custom 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. The Company is actively
searching for a Chief Financial Officer who will report directly to Mr. Reich.
Effective February 2, 1997, Richard A. Kozak, who was named President and Chief
Executive Officer -- Corporate Services and Acting Chief Financial Officer in
the management reorganization, will no longer be employed by the Company. See
"Management -- Executive Officers and Directors."
6
<PAGE> 8
THE OFFERING
Common Stock offered by the Company.....
Common Stock to be outstanding after the
Offering................................ (1)
Use of proceeds......................... To be applied principally toward
the completion of the Company's
50-city local network plan,
implementation of its
coast-to-coast broadband data
communications network and local
switched voice services, to fund
negative cash flow until breakeven
and to pay approximately $7.4
million of accrued dividends on the
Company's Preferred Stock. See "Use
of Proceeds."
Nasdaq Stock Market Symbol.............. ACNS
- ---------------
(1) Includes 17,377,278 shares issuable upon conversion of 464,164 shares of
Preferred Stock. Excludes 11,221,665 shares issuable upon exercise of
options and warrants outstanding on September 30, 1996, at a weighted
average exercise price of $3.44 per share.
RISK FACTORS
See "Risk Factors" beginning on page 9 of this Prospectus for certain
factors relating to an investment in the Common Stock that should be considered
by prospective investors.
------------------------
ACSI is a Delaware corporation. The Company's principal executive offices
are located at 131 National Business Parkway, Suite 100, Annapolis Junction,
Maryland 20701, and its telephone number is (301) 617-4200.
Please refer to the "Glossary" for the definitions of certain capitalized
terms used herein and elsewhere in this Prospectus. Unless otherwise indicated,
all information in this Prospectus assumes (i) that the 464,164 issued and
outstanding shares of the Company's Preferred Stock will be converted into
17,377,278 shares of Common Stock upon completion of this Offering and (ii) no
exercise of the Underwriters' over-allotment option.
Certain statements contained in "Risk Factors," "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. Factors that could cause actual results to differ materially
include, but are not limited to, those discussed under "Risk Factors."
7
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE, NETWORK AND STATISTICAL DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------------- ----------------------------------------
1995 1996 1995 1996
--------- ------------------------ ------------ ------------------------
ACTUAL PRO FORMA(1) ACTUAL PRO FORMA(1)
-------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................... $ 389 $ 3,415 $ 7,138 $ 399 $ 2,812 $ 4,057
Operating expenses..................... 14,797 24,543 28,997 3,813 11,959 13,434
Loss from operations................... (14,408) (21,128) (21,859) (3,414) (9,147) (9,377)
Interest and other income.............. 218 4,410 4,410 97 1,461 1,461
Interest and other expense............. (170) (10,477) (10,824) (140) (6,011) (6,106)
Loss before minority interest.......... (14,746) (27,195) (28,273) (3,457) (13,697) (14,022)
Minority interest(2)................... 48 413 413 67 96 96
Net loss............................... (14,698) (26,782) (27,860) (3,390) (13,601) (13,926)
Net loss per common share.............. $ (3.30) $ (4.96) $ (4.42) $ (0.74) $ (2.18) $ (1.94)
Weighted average shares outstanding.... 4,772 6,185 7,185 5,799 6,704 7,704
OTHER DATA:
EBITDA(3).............................. $ (13,862) $(17,636) $(17,154) $ (3,083) $ (6,649) $ (6,545)
Depreciation and amortization.......... 498 3,078 4,292 264 2,401 2,736
Capital expenditures................... 15,303 60,856 60,856 5,280 21,734 21,734
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(4) AS ADJUSTED(4)(5)
--------- ------------ -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 102,819 $ 99,411 $
Total assets........................................... 214,540 224,322
Long-term liabilities.................................. 204,721 205,308
Redeemable stock, options and warrants................. 2,155 2,155
Stockholders' equity................................... (5,680) 2,820
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1996 1996 1996 1996
------------ --------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
NETWORK AND SELECTED STATISTICAL DATA(6):
Total markets (in operation or under construction)..... 17 20 22 30 36
Networks in operation.................................. 9 11 15 18 21
Networks under construction............................ 8 9 7 12 15
Route miles............................................ 136 200 386 543 697
Fiber miles............................................ 5,957 9,466 28,476 32,774 48,792
Buildings connected.................................... 100 133 216 532 595
VGE circuits in service................................ 82,055 125,208 137,431 267,894 384,134
Employees.............................................. 111 142 199 272 322
</TABLE>
- ---------------
(1) Pro forma to give effect to the Cybergate Acquisition as if consummated at
the beginning of each of the periods presented.
(2) Minority interest represents a 7.25% ownership of AT&T Credit Corporation in
the Company's subsidiaries that operate its networks in Louisville, Fort
Worth, Greenville, Columbia and El Paso. See "Description of Certain
Indebtedness."
(3) EBITDA consists of net income (loss) before net interest, income taxes,
depreciation and amortization. It is a measure commonly used in the
telecommunications industry and is presented to assist in understanding the
Company's operating results. However, it is not intended to represent cash
flow or results of operations in accordance with Generally Accepted
Accounting Principles. The EBITDA calculation reflects the deduction of
noncash compensation expense associated with employee stock options of $6.4
million and $2.7 million in 1995 and 1996, respectively. See Note 6 of
"Notes to Consolidated Financial Statements."
(4) Pro forma to give effect to the Cybergate Acquisition as if consummated on
September 30, 1996.
(5) Adjusted to give effect to: (i) sale of the shares of Common Stock offered
hereby (at an assumed offering price of $ per share) and
application of the estimated net proceeds therefrom and (ii) conversion of
the Preferred Stock.
(6) Network and Selected Statistical Data are derived from ACSI's records.
8
<PAGE> 10
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. The following risk factors, together with the other information
set forth in this Prospectus, should be carefully considered in evaluating the
Company and its business before purchasing the shares offered by this
Prospectus.
Historical and Anticipated Future Losses; Negative Cash Flow. The Company
has never been profitable and has never generated positive cash flow from
consolidated operations. As of June 30, 1996, and September 30, 1996, the
Company had accumulated deficits of $47.5 million and $61.3 million,
respectively. Although the Company has begun to generate revenues from its 21
operational local networks, it has not yet generated revenues from any of its
other networks. Until December 1994, when it recorded its first operating
revenues, the Company was considered a development stage company for accounting
purposes. There can be no assurance that the Company will achieve or sustain
profitability or positive cash flow from operations in the future.
The Company has incurred significant net operating losses and negative cash
flow to date in connection with establishing its local networks and implementing
its local switched voice and data services. Losses and negative cash flow will
continue while the Company concentrates on the development and construction of
additional local networks and until its networks have established a sufficient
revenue-generating customer base. The Company will also incur losses during the
initial start-up phases of its local switched voice, high-speed data and other
services. There can be no assurance that an adequate revenue base will be
established or that any of these services will generate positive cash flow.
Continued losses and negative cash flow may prevent the Company from meeting its
debt obligations and pursuing its strategies for growth.
Rapid Expansion of Operations. ACSI plans to continue to expand its
business rapidly. The Company's goal is to have 50 local networks operating or
under construction by June 1998. As of January 31, 1997, 21 of the Company's
local networks were operational; its switched voice services were being offered
in only two markets; and the Company had just recently deployed its coast-to-
coast, leased broadband data communications network. Delays in constructing and
expanding any local network may require the Company to reduce the number of
other networks it expects to build within a given time frame. Furthermore, the
Company did not offer high-speed data or local switched voice services prior to
September 1996. There can be no assurance that a market will develop for these
services, that the Company's implementation of these services will be
technically or economically feasible, that the Company will be able to market
them successfully or that the Company will be able to operate these services
profitably. In addition to managing internal growth, the Company will have to
manage the growth, if any, of Cybergate's business and integrate that business
and new personnel into the Company's existing operations. Any failure of the
Company to implement its growth strategy or manage its expanded operations
effectively will have a material adverse effect on the Company's business,
operating results and financial condition.
Management of Rapid Growth. The Company's future performance will depend,
in large part, upon its ability to manage its growth effectively. The Company's
rapid growth has placed, and in the future will continue to place, a significant
strain on its administrative, operational and financial resources. The Company
anticipates that continued growth will require it to integrate its newest senior
management members successfully and to recruit and hire a substantial number of
new managerial, finance, accounting and support personnel. Failure to retain and
attract new members of management who can manage the Company's growth
effectively would have a material adverse effect on the Company and its growth.
To manage its growth successfully, the Company will also have to continue to
improve and upgrade operational, financial, accounting and informations systems,
controls and infrastructure as well as expand, train and manage its employee
base. In the event the Company is unable to upgrade its financial controls and
accounting and reporting systems adequately to support its anticipated growth,
the Company's business, results of operation and financial condition would be
materially adversely affected. In addition, the demands on the Company's
marketing and sales resources have grown rapidly with the Company's rapidly
expanding network
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and service offerings. The Company is taking steps to improve marketing support
of its expanded operations and plans to increase its existing sales force
significantly during 1997. There can be no assurance that the Company will be
successful in attracting, retaining or effectively managing and motivating such
personnel or that its expanded sales force can successfully market the Company's
services. The failure to do so would have a material adverse effect on the
Company's business, operating results and financial condition.
Substantial Leverage; Future Cash Obligations. Since inception, the
Company's consolidated cash flow from operations has been negative. As a result,
the Company has been required to pay its fixed charges (including interest on
existing indebtedness) and operating expenses with the proceeds from sales of
its debt and equity securities. With the issuance of $190.0 million principal
amount of the Company's 13% Senior Discount Notes due 2005 (the "2005 Notes")
and $120.0 million principal amount of the Company's 12 3/4% Senior Discount
Notes due 2006 (the "2006 Notes" and, collectively with the 2005 Notes, the
"Notes"), the Company will be required to satisfy substantially higher periodic
cash debt service obligations in the future. Commencing in the year 2001, cash
interest on the 2005 Notes and 2006 Notes will be payable semi-annually at the
rate of 13% per annum (approximately $24.7 million per year) and 12 3/4% per
annum (approximately $15.3 million per year), respectively. The full accreted
value of the 2005 Notes and 2006 Notes of $190.0 million and $120.0 million,
respectively, will become due on November 1, 2005 and April 1, 2006,
respectively. As of September 30, 1996, the Company (through five of its
subsidiaries) had approximately $23.3 million in debt outstanding under a $31.2
million secured credit facility (the "AT&T Credit Facility") with AT&T Credit
Corporation, a subsidiary of AT&T. The credit remaining under the AT&T Credit
Facility must be used, if at all, by the five subsidiaries (operating local
networks in Louisville, Fort Worth, Greenville, Columbia and El Paso) to which
funds have already been advanced. As of September 30, 1996, the Company had
approximately $204.7 million of outstanding long-term indebtedness. As of
September 30, 1996, the total consolidated liabilities of the Company (after the
elimination of loans and advances by the Company to its subsidiaries) were
approximately $27.6 million. It is expected that the Company and its
subsidiaries will incur additional indebtedness, including increasing borrowings
under the AT&T Credit Facility to the maximum amount, which would be possible
provided the Company can successfully raise additional equity capital. Many
factors, some of which are beyond the Company's control, will affect its
performance and, therefore, its ability to meet its ongoing obligations to repay
the Notes and its other debt. There can be no assurance that the Company will be
able to generate sufficient cash flow or otherwise obtain funds in the future to
cover interest and principal payments associated with the Notes and its other
debt. See "Description of Certain Indebtedness."
Significant Future Capital Requirements. 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. The Company's ability to fund these expenditures is
dependent upon the Company's raising substantial financing. As of September 30,
1996, the Company had raised approximately $221.5 million in debt and equity
financing, $23.3 million of which had been advanced under the AT&T Credit
Facility. The Company will use approximately $ million of the estimated net
proceeds from this offering principally toward completion of the Company's
50-city local network plan, implementation of its coast-to-coast, leased
broadband data communications network and local switched voice services and to
fund negative operating cash flow until cash flow breakeven. The Company has
estimated that from September 30, 1996 through December 31, 1998, remaining
capital required for implementation of its integrated networks and its other
services and to fund negative cash flow was approximately $390.0 million. At
September 30, 1996, the Company had approximately $102.8 million of cash and
cash equivalents available for this purpose. To meet its additional remaining
capital requirements, ACSI will be required to sell additional equity
securities, increase its existing credit facility, acquire additional credit
facilities or sell additional debt securities, any of which would require the
consent of the Company's debtholders. Before incurring additional indebtedness,
the Company may be required to seek
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<PAGE> 12
additional equity financing to maintain balance sheet and liquidity ratios
required under certain of its debt instruments. In addition, the Company
continues to consider potential acquisitions or other strategic arrangements
that may fit the Company's strategic plan. Any such acquisitions or strategic
arrangements that the Company might consider are likely to require additional
equity or debt financing, which the Company will seek to obtain as required.
Failure to raise sufficient capital could compel the Company to delay or abandon
some or all of its plans or expenditures, which could have a material adverse
effect on its business, results of operations and financial condition. Also, the
terms of any debt or equity capital raised by the Company in the future could
restrict the Company's operational flexibility and ability to raise additional
capital and thereby adversely affect the Company's business, results of
operations and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Certain Financial and Operating Restrictions. The Indenture dated November
14, 1995 pursuant to which the 2005 Notes were issued and the Indenture dated
March 21, 1996 pursuant to which the 2006 Notes were issued (collectively, the
"Indentures") and the AT&T Credit Facility impose operating and financial
restrictions on the Company and its subsidiaries. These restrictions affect, and
in certain cases significantly limit or prohibit, among other things, the
ability of the Company and its subsidiaries to incur additional indebtedness or
create liens on their assets, pay dividends, sell assets, engage in mergers or
acquisitions or make investments. Failure to comply with any of these
restrictions could limit the availability of borrowings or result in a default
thereunder. See "Description of Certain Indebtedness."
Dependence on a Small Number of Major Customers. The Company receives a
significant portion of its revenues from a small number of major customers,
particularly the IXCs that service the Company's markets. For the fiscal year
ended June 30, 1996 and for the three months ended September 30, 1996,
approximately 60% and 58% of the Company's revenues were attributable to access
services provided to three and four of the largest IXCs, respectively, including
services provided for the benefit of their customers. The Company is, and
expects to continue to be, dependent upon such customers, and the loss of any
one of them could have a material adverse effect on the Company's business,
results of operations and financial condition. Additionally, customers who
account for significant portions of the Company's revenues may have the ability
to negotiate prices for the Company's services that are more favorable to the
customer and that result in lower profit margins for the Company. The Federal
Telecommunications Act may also encourage IXCs to construct their own local
facilities and/or resell the local services of ACSI's competitors, which may
materially adversely affect the Company. See "-- Competition," above,
"Business -- Competition" and "-- Regulation."
Dependence Upon Network Infrastructure; Risk of System Failure; Security
Risks. The Company's success in marketing its services to business and
government users requires that the Company provide superior reliability,
capacity and security via its network infrastructure. The Company's networks are
subject to physical damage, power loss, capacity limitations, software defects,
breaches of security (by computer virus, break-ins or otherwise) and other
factors, certain of which may cause interruptions in service or reduced capacity
for the customers. Interruptions in service, capacity limitations or security
breaches could have a material adverse effect on the Company's business,
financial condition and results of operations.
Dependence on Rights-of-Way and Other Third Party Agreements. The Company
must obtain easements, rights-of-way, franchises and licenses (collectively,
"local approvals") from various private parties, actual and potential
competitors and local governments in order to construct and maintain its fiber
optic local networks. The Company has obtained the local approvals necessary to
construct and operate its local networks in the central business districts of
all of the markets in which the Company's local networks are presently operating
or are under construction. The Company does not yet have all of the local
approvals required to implement its local network business plan in prospective
new markets, and there can be no assurance that the Company will be able to
obtain and maintain local approvals on acceptable terms or that other CLECs will
not obtain
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<PAGE> 13
similar local approvals that will allow them to compete against the Company or
enter a market before the Company or to expand the Company's existing networks
to compete effectively. Some of the agreements for local approvals obtained by
the Company may be short-term, or revocable at will, and there can be no
assurance that the Company will have continued access to local approvals after
their expiration. If any of these agreements were terminated or could not be
renewed and the Company was forced to remove its fiber from the streets or
abandon its local network in place, such termination or non-renewal would be
likely to have a materially adverse effect on the Company's business, results of
operations and financial condition. Furthermore, certain of the Company's pole
attachment agreements with private entities are contingent on CLECs being
legally entitled to pole access. If ongoing litigation or legislative activity
alters current requirements, the Company may be denied access or required to
renegotiate the rates and other terms for access in these contracts. In this
event, the Company may have to consider alternative means for building out its
local networks.
Strategic Investments; Business Combinations. The Company from time to
time engages in discussions with (i) potential business partners looking toward
formation of business combinations or strategic alliances that would expand the
reach of the Company's networks or services and (ii) potential strategic
investors (i.e., investors in the same or related business) who have expressed
an interest in making an investment in or acquiring the Company. In addition to
providing additional growth capital, the Company believes that an alliance with
an appropriate strategic investor or business partner could provide operating
synergies to, and enhance the competitive position of, both ACSI and such
strategic investor/business partner within the rapidly consolidating
telecommunications industry. There can be no assurance that any agreement with
any potential strategic investor or business partner will be reached on terms
acceptable to the Company. An investment, business combination or strategic
alliance could constitute a Change of Control (as defined in the Indentures)
requiring the Company to offer to purchase all outstanding Notes. In the event
that such a Change of Control occurs at a time when the Company does not have
sufficient available funds to purchase all Notes tendered or at a time when the
Company is prohibited from purchasing the Notes, an Event of Default (as defined
in the Indentures) could occur under the Indentures. With the exception of the
MCI Transaction, however, the Company currently has no agreement, arrangement or
understanding with any potential strategic investor or potential business
partner with respect to any acquisition, business combination or strategic
alliance.
Effects of Regulation. As a common carrier, the Company is subject to
substantial federal, state and local regulation. The Company's local networks do
not require authorization from the FCC for construction or installation.
However, the Company must file tariffs stating its rates, terms and conditions
of service for access services and international traffic. State regulatory
agencies regulate intrastate communications, while local authorities control the
Company's access to and use of municipal rights-of-way. The Federal
Telecommunications Act preempted all state and local legal requirements which
prohibit or have the effect of prohibiting any entity from providing any
intrastate telecommunications service. However, many states continue to require
telecommunications carriers to obtain a certificate, license, permit or similar
approval before providing services. Thus, the Company's ability to provide
additional intrastate services is dependent upon its receipt of requisite state
regulatory approval. The inability to obtain the approvals necessary to provide
intrastate switched services could have a material adverse effect on the
Company's business, results of operations and financial condition. Moreover, the
Federal Telecommunications Act has increased local competition by IXCs, CATVs
and public utility companies, which may have a material adverse effect on the
Company. In addition, the Federal Telecommunications Act has granted important
benefits to the ILECs, including providing ILECs substantial new pricing
flexibility, restoring the ability of RBOCs to provide long distance services
and allowing RBOCs to provide certain cable television services. Moreover, the
FCC recently has taken a number of actions intended ultimately to reduce
regulation of ILECs, restructure the manner in which ILECs charge for
interexchange access services, reduce interexchange access service rate levels
and reform the current methods used to fund universal service goals. These
changes will tend to enhance the competitive position of the ILECs, which may
materially adversely affect the Company. Furthermore, no assurance can be given
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<PAGE> 14
that court decisions or changes in current or future federal or state
legislation or regulations would not materially adversely affect the Company.
See "-- Competition" above, and "Business -- Regulation."
Internet-related services are not currently subject to direct regulation by
the FCC or any other U.S. agency other than regulation applicable to businesses
generally. The FCC is considering a petition filed by the America's Carriers
Telecommunication Association which requests that the FCC regulate certain voice
transmissions over the Internet as telecommunications services. In addition, the
FCC is considering whether to make Internet providers subject to the payment of
interexchange access charges. Moreover, as discussed hereafter, the Federal
Telecommunications Act creates civil and criminal penalties for the knowing
transmission of "indecent" material over the Internet. These and other changes
in the regulatory environment relating to the telecommunications or Internet-
related services industry could have an adverse effect on the Company's
Internet-related services business. Additionally, the Federal Telecommunications
Act may permit telecommunications companies, RBOCs or others to increase the
scope or reduce the cost of their Internet access services. The Company cannot
predict the effect that the Federal Telecommunications Act or any future
legislation, regulation or regulatory changes may have on its business.
Competition. The Company operates in a highly competitive environment for
all of its services. An increasing trend toward strategic business alliances in
the telecommunications industry may create significant new competition for ACSI.
- Dedicated and Switched Voice Services. The Company's competitors in this
market are predominantly ILECs, other CLECs and CATVs and may potentially
include microwave carriers, satellite carriers, teleports, public
utilities, wireless telecommunications providers, IXCs, integrated
communications providers and private networks built by large end users.
With the passage of the Federal Telecommunications Act and the entry of
RBOCs into the long distance market, the Company believes that IXCs may
construct their own local facilities and/or resell local services in
order to compete with the bundled local and long distance services to be
offered by the ILECs as a result of the Federal Telecommunications Act.
Given that a substantial portion of the Company's revenues are billed to
IXCs for services provided for the benefit of their customers, such
action could have a material adverse effect on the Company. See
"Business -- Competition."
Currently, the Company does not have a significant market share in
any market. Most of the Company's actual and potential competitors have
substantially greater financial, technical and marketing resources than
the Company. In particular, ILECs have long-standing relationships with
their customers, have the potential to subsidize access services with
monopoly service revenue and benefit from certain existing federal, state
and local regulations that the Company believes, in certain respects,
favor ILECs over the Company. See "Business -- Regulation." For example,
the Interconnection Decisions issued by the FCC and the Federal
Telecommunications Act, which allow CLECs to interconnect with ILECs'
facilities, have been accompanied by increased pricing flexibility and
partially relaxed regulatory oversight of ILECs. The Company believes
that ILECs are offering and will continue to offer time and volume
discounts to customers, which will further increase competition for the
Company and other CLECs and which could significantly adversely affect
the Company's future dedicated services revenues. Moreover, some ILECs
impose reconfiguration charges and/or termination liabilities on
customers seeking to shift their traffic from ILEC facilities to CLEC
facilities, which may have an adverse effect on a CLEC's ability to
attract these customers and, in several instances, ILECs have delayed
converting customers who have requested conversion to the Company's local
networks. The Company may have to incur additional expense to acquire
customers if the Company has to reimburse their termination liabilities.
The Company expects that other CLECs may operate in most, if not
all, of the markets targeted by the Company and many of these markets may
not be able to support multiple CLECs. Additionally, delays in
constructing or expanding any network could adversely affect
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<PAGE> 15
the Company's competitive position in markets where another CAP or CLEC
has a network under construction or can provide services on an
already-existing network. There can be no assurance that the Company will
be able to achieve or maintain an adequate market share, maintain
construction schedules or compete effectively in any of its markets. See
"Business -- Competition."
- Data Services. The market for data communications services, including IP
switching, is extremely competitive. There are no substantial barriers to
entry, and the Company expects that competition will intensify in the
future. The Company believes that its ability to compete successfully
depends on a number of factors, including: market presence; the ability
to execute a rapid expansion strategy; the capacity, reliability and
security of its network infrastructure; ease of access to and navigation
of the Internet; the pricing policies of its competitors and suppliers;
the timing of the introduction of new services by the Company and its
competitors; the Company's ability to support industry standards; and
industry and general economic trends. The Company's success in this
market will depend heavily upon its ability to provide high quality
Internet connectivity and value-added Internet services at competitive
prices. See "Business -- Competition."
- 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.
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
competes or 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.
Impact of Technological Change. The telecommunications industry is subject
to rapid and significant technological change that could materially affect the
continued use of fiber optic cable or the electronics utilized in the Company's
networks. Future technological changes, including changes related to the
emerging wireline and wireless transmission and switching technologies and
Internet-related services and technologies, could have a material adverse effect
on the Company's business, results of operations and financial condition.
The market for the Company's telecommunications services is characterized
by rapidly changing technology, evolving industry standards, emerging
competition and frequent new product and service introductions. There can be no
assurance that the Company will successfully identify new service opportunities
and develop and bring new services to market. The Company is also at risk from
fundamental changes in the way telecommunications services are marketed and
delivered. The Company's data communications service strategy assumes that the
TCP/IP, frame relay and ATM protocols, utilizing fiber optic or copper-based
telecommunications infrastructures, will continue to be the primary protocols
and transport infrastructure for data communications services. The Company's
pursuit of necessary technological advances may require substantial time and
expense,
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<PAGE> 16
and there can be no assurance that the Company will succeed in adapting its
telecommunications services business to alternate access devices, conduits and
protocols.
As a condition to granting local approvals to the Company, certain local
governments have required the Company to post performance bonds or letters of
credit and to pay ongoing fees based upon the gross revenues generated by, or
linear footage of, the applicable network. In many markets, LECs are not
required to pay such fees or pay substantially less than those paid by the
Company which may put the Company at a competitive disadvantage in its markets.
In addition, as of September 30, 1996, the Company had posted approximately $2.3
million of performance bonds and letters of credit and expects to post
additional bonds or letters of credit in the future. As of September 30, 1996,
the Company had been required to pledge approximately $2.3 million in cash
collateral to obtain these bonds and letters of credit, and may be required to
pledge substantial collateral to obtain the bonds or letters of credit in the
future. See "Business -- Network Development -- Rights-of-Way" and
"-- Regulation."
Potential Liability of Internet Access Providers. The law governing the
liability of on-line services providers and Internet access providers for
participating in the hosting or transmission of objectionable materials or
information currently is unsettled. Under the terms of the Telecommunications
Act, both civil and criminal penalties can be imposed for the use of interactive
computer services for the transmission of certain indecent or obscene
communications. While this provision has been stayed by a federal court
(American Civil Liberties Union v. Janet Reno, C.A. No. 96-963 (U.S. Dist. Ct.,
P.O. Pa.)) while its constitutionality is being considered, many states have
adopted or are considering adopting similar requirements. In addition, several
private lawsuits have been filed seeking to hold Internet access providers
accountable for information which they transmit. In one such case (Religious
Technology Center v. NETCOM On-Line Communications Services, Inc. (U.S. Dist.
Ct., N.D. Cal.)), the court ruled that an Internet access provider is not
directly liable for copies that are made and stored on its computer but may be
held liable as a contributing infringer where, with knowledge of the infringing
activity, the Internet access provider induces, causes or materially contributes
to another person's infringing conduct. While the outcome of these activities is
uncertain, the ultimate imposition of potential liability on Internet access
providers for information which they host, distribute or transport could
materially change the way they must conduct business. To avoid undue exposure to
such liability, Internet access providers could be compelled to engage in
burdensome investigation of subscriber materials or even discontinue offering
the service altogether.
Dependence Upon Suppliers; Sole and Limited Sources of Supply. The Company
relies on other companies to supply certain key components of its network
infrastructure, including telecommunications services and networking equipment,
which, in the quantities and quality demanded by the Company, are available only
from sole or limited sources. The Company is also dependent upon ILECs to
provide telecommunications services to the Company and its customers. The
Company has from time to time experienced delays in receiving telecommunications
services facilities, and there can be no assurance that the Company will be able
to obtain such services on the scale and within the time frames required by the
Company at an affordable cost, or at all. Any failure to obtain such services or
additional capacity on a timely basis at an affordable cost, or at all, would
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company also is dependent on its suppliers'
ability to provide necessary products and components that comply with various
Internet and telecommunications standards, interoperate with products and
components from other vendors and function as intended when installed as part of
the network infrastructure. Any failure of the Company's sole or limited source
suppliers to provide products or components that comply with Internet standards,
interoperate with other products or components used by the Company in its
network infrastructure or by its customers or fulfill their intended function as
a part of the network infrastructure could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business."
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Dependence on Key Personnel. The Company is currently managed by a small
number of key management and operating personnel whose efforts will largely
determine the Company's success. The success of the Company also depends upon
its ability to hire and retain qualified operating, marketing, financial,
accounting and technical personnel. Competition for qualified personnel in the
telecommunications industry is intense and, accordingly, there can be no
assurance that the Company will be able to continue to hire or retain necessary
personnel. The loss of key management personnel would likely have a material
adverse impact on the Company. See "Management."
Control by Certain Stockholders and Management. Upon completion of this
offering, the Company's directors, executive officers and principal stockholders
will beneficially own approximately % of the outstanding Common Stock
(including shares issuable upon conversion of the Preferred Stock and exercise
of currently exercisable options and warrants), including %, % and
% of the then outstanding Common Stock which will be beneficially owned by
Huff Alternative Income Fund, L.P. ("Huff"), ING Equity Partners, L.P. ("ING")
and First Analysis Corporation, respectively. Accordingly, if they choose to act
together, these persons will be able to control the election of the Board of
Directors and other matters voted upon by the stockholders. A sale by one or
more of these principal stockholders to third parties could trigger the right of
the holders of the Notes to require the Company to repurchase the Notes (a
"Change of Control Offer"). In the event that a Change of Control Offer occurs
at a time when the Company does not have sufficient available funds to pay the
Change of Control Purchase Price (as defined in the Indentures) for all Notes
tendered, or at a time when the Company is prohibited from purchasing the Notes,
an Event of Default (as defined in the Indentures) could occur under the
relevant Indenture. See "Management," "Principal Stockholders" and "Description
of Certain Indebtedness -- 2005 Notes and 2006 Notes."
Limited Trading Market and Possible Volatility of Price of the Common
Stock. The Company's Common Stock has been listed on the Nasdaq Stock Market
since May 22, 1996 and is thinly traded. There can be no assurance that, after
the completion of this offering, the Company's Common Stock will be traded more
actively. From March 3, 1995 through May 21, 1996, the Company's Common Stock
was quoted on the Nasdaq SmallCap Market. The market price of the Common Stock
could be subject to wide fluctuations in response to quarterly variations in the
Company's results of operations, changes in earnings estimates by analysts,
conditions in the telecommunications industry (particularly among CAPs or CLECs)
or general market or economic conditions. In addition, in recent years, the
stock market has experienced price and volume fluctuations. These fluctuations
often have had a particularly substantial effect on the market prices for many
emerging growth companies, often unrelated to their specific operating
performances. Such market fluctuations could adversely affect the market price
of the Common Stock. See "Price Range of Common Stock."
Shares Eligible for Future Sale; Registration Rights. Upon completion of
this offering and the simultaneous conversion of the Preferred Stock into Common
Stock, the Company will have outstanding 25,371,620 shares of Common Stock
(excluding the shares offered hereby). The shares offered hereby and 2,996,376
of the shares outstanding prior to this offering are freely transferable without
registration under the Securities Act of 1933, as amended (the "Securities Act")
unless acquired by affiliates of the Company. The 22,375,244 remaining shares
outstanding prior to this offering are "restricted securities" as that term is
defined in Rule 144 of the Securities Act. Of these restricted shares,
10,038,533 shares are saleable subject to certain volume and manner of sale
restrictions under Rule 144 (of which shares are subject to the Lock-Up
Agreements described below). Of these 10,038,533 shares, 805,885 shares and
169,017 shares will have become freely transferable under Rule 144(k) on
September 1, 1997 and January 1, 1998, respectively, assuming such shares are
still held by non-affiliates of the Company on each of those dates. By September
1, 1997, an additional 10,477,156 restricted shares will have become saleable
subject to Rule 144 limitations. By January 1, 1998, an additional 679,673
restricted shares will have become saleable subject to Rule 144 limitations.
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<PAGE> 18
The holders of shares of Common Stock and shares of Common
Stock (including, in each case, shares issuable upon conversion of the Preferred
Stock and exercise of options and warrants which are or will have become vested
during the applicable lock-up period) have agreed not to sell or otherwise
dispose of any of their shares of Common Stock for a period of 180 days and 90
days, respectively, from the date of this Prospectus without the prior written
consent of Alex. Brown & Sons Incorporated (the "Lock-up Agreements").
Holders of substantially all of the shares of Common Stock (i) outstanding
(other than the shares being offered hereby), (ii) issuable upon conversion of
the Preferred Stock and (iii) issuable upon exercise of outstanding options and
warrants have either piggy-back or demand registration rights relating to those
shares. Holders of outstanding shares and shares issuable upon
conversion of the Preferred Stock and exercise of options and warrants have
waived their rights to "piggyback" on this offering or prior Company offerings
and/or to demand registration of their shares until 180 days after consummation
of this offering. The Company has agreed to use its commercially reasonable
efforts to register all shares as to which piggyback and demand rights were
waived on or before the 210th day following consummation of this Offering (in
which all security holders with registration rights may have the right to
include their shares). There can be no assurance that persons with piggyback and
demand registration rights who have not waived those rights (holding up to
approximately shares of outstanding Common Stock and up to shares
of Common Stock issuable upon conversion of Preferred Stock or exercise of
options and warrants) will not request the Company to file a registration
statement for their shares prior to 180 days after this offering or that such
security holders will not seek damages from the Company for any alleged breach
of such security holders' registration rights in connection with this offering
or past Company offerings. Additionally, the Company has an obligation to
register under the Securities Act the 1,000,000 shares of Common Stock issued in
the Cybergate Acquisition no later than 210 days after the consummation of this
Offering but in no event later than December 31, 1997 and is required to
register up to 150,000 additional shares which may be issued in connection with
the Cybergate Acquisition no later than 60 days after such issuance. These
shares will be freely transferable upon such registration.
Of the 11,221,665 shares reserved for issuance upon exercise of options and
warrants outstanding on September 30, 1996 and in connection with the Company's
Employee Stock Purchase Plan, shares have been registered under the
Securities Act. Accordingly, the shares issued upon exercise of such options or
warrants or in connection with the Employee Stock Purchase Plan, will be freely
transferable unless held by affiliates of the Company.
The future sale pursuant to Rule 144 or pursuant to a registration
statement for the outstanding restricted shares of Common Stock or the Common
Stock underlying the options and warrants, the future sale of Common Stock for
the Company's own account, or the exercise of registration rights by any
security holder or the perception that such sales or exercise could occur, could
have an adverse effect on the market price of the Common Stock and could impair
the Company's ability to raise capital through an offering of Common Stock. See
"Shares Eligible for Future Sale."
USE OF PROCEEDS
The net proceeds to the Company from this offering are estimated to be
approximately $ million ($ million if the Underwriters'
over-allotment option is exercised in full). The Company intends to use
approximately $ million of the net proceeds towards the completion of its
50-city local network plan, implementation of its coast-to-coast, leased
broadband data communications network and its local switched voice services and
to fund negative cash flow until breakeven. The Company has estimated that as of
September 30, 1996, the total remaining capital required for implement
integrated networks and its other services and to fund negative cash flow
through December 31, 1998 was approximately $390.0 million. In addition, the
Company will
17
<PAGE> 19
use approximately $7.4 million of net proceeds from this offering to pay the
accrued dividends on its Preferred Stock, which will be converted into
17,377,278 shares of Common Stock upon completion of this offering.
Upon completion of this offering, the Company will have obtained
approximately $ million in net proceeds or commitments from debt and
equity financings that have been or will be applied toward the development and
initial construction of its planned local networks, offering of its other
services and to support working capital needs, sales functions and network data
and voice services. To meet additional remaining capital requirements, ACSI will
consider the sale of additional debt or equity securities or increases in
existing credit facilities. In addition, the Company from time to time considers
potential acquisitions or other strategic arrangements that may fit the
Company's strategic plan, although the Company is not currently negotiating any
material transaction of this type. Any acquisitions are likely to require
additional equity or debt financing, which the Company will seek to obtain, as
required.
Pending such uses, the Company intends to invest the net proceeds from this
offering in short-term U.S. government securities.
18
<PAGE> 20
PRICE RANGE OF COMMON STOCK
From March 3, 1995 until May 21, 1996, the Company's Common Stock traded
under the symbol "ACNS" on The Nasdaq SmallCap Market. Since May 22, 1996, the
Company's Common Stock has been included on the Nasdaq Stock Market.
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.
<TABLE>
<CAPTION>
HIGH PRICE LOW PRICE
---------- ---------
<S> <C> <C>
Fiscal Year Ended June 30, 1994
Second Quarter............................... $ 4.00 $3.00
Third Quarter................................ 4.75 3.00
Fourth Quarter............................... 3.25 2.50
Fiscal Year Ended June 30, 1995
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 Year Ending June 30, 1997
First Quarter................................ $13.25 $8.50
Second Quarter............................... 12.38 9.88
Third Quarter (through January 30)........... 11.13 8.38
</TABLE>
On January 30, 1997, the last reported sales price for the Company's Common
Stock as reported on The Nasdaq Stock Market was $11.13. As of December 31,
1996, there were approximately 269 holders of record of the Company's Common
Stock.
DIVIDEND POLICY
The Company has never paid dividends on its Common Stock and does not
expect to declare any dividends on its Common Stock in the foreseeable future.
The Company is, however, required to accrue quarterly dividends at an annual
interest rate of 9% on its issued Preferred Stock. Such accrued dividends will
be paid in cash cumulatively upon the consummation of this Offering, at which
time the Preferred Stock will be converted into shares of Common Stock. The
Company may not pay or declare any dividend or distribution in respect of its
Common Stock unless all accrued and unpaid dividends on all outstanding shares
of its Preferred Stock have been paid or declared and set apart for payment. In
addition, the Indentures and a pledge agreement between the Company and AT&T
Credit Corporation made in connection with the AT&T Credit Facility contain
certain covenants that restrict the Company's ability to declare or pay
dividends on its Common Stock. See "Description of Certain Indebtedness" and
"Description of Capital Stock."
19
<PAGE> 21
CAPITALIZATION
The following table sets forth the total cash and cash equivalents and
capitalization of the Company (i) as of September 30, 1996, (ii) after giving
pro forma effect to the Cybergate Acquisition and (iii) as further adjusted to
give effect to the Cybergate Acquisition, the sale of the shares of
Common Stock offered hereby and application of the estimated net proceeds
therefrom, and the conversion of 464,164 shares of Preferred Stock into
17,377,278 shares of Common Stock. See "Use of Proceeds" and "Unaudited Pro
Forma Condensed Consolidated Financial Data." This table should be read in
conjunction with the Consolidated Financial Statements and related notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................... $102,819 $ 99,411 $
======== ========= ==========
Long term debt
12 3/4% Senior Discount Notes due 2006.................. $ 68,700 $ 68,700 $
13% Senior Discount Notes due 2005...................... 106,138 106,138
Notes payable(1)........................................ 23,520 23,935
Other long-term liabilities............................. 414 586
Dividends payable....................................... 5,949 5,949 --(5)
-------- --------- ----------
Total long term debt............................... 204,721 205,308
Redeemable stock, options & warrants........................ 2,155 2,155 2,155
Minority interest........................................... 65 65 65
Stockholders' equity (deficit):
9% Series A-1 convertible preferred stock, par value
$1.00 per share, 186,664 shares issued and
outstanding; no shares, as adjusted(2)............... 187 187 --
9% Series B convertible preferred stock, par value $1.00
per share, 277,500 shares issued and outstanding; no
shares, as adjusted.................................. 278 278 --
Common Stock, par value $0.01 per share, 75,000,000
shares authorized, 6,761,466 shares issued and
outstanding at September 30, 1996; 7,761,466 shares
pro forma; shares pro forma, as
adjusted(3)(4)....................................... 67 77
Additional paid-in capital.............................. 55,080 63,570
Accumulated deficit..................................... (61,292) (61,292) (61,292)
-------- --------- ----------
Total stockholders' equity (deficit)............... (5,680) 2,820
-------- --------- ----------
Total capitalization.......................... $201,261 $210,348 $
======== ========= ==========
</TABLE>
- ---------------
(1) Consists primarily of the AT&T Credit Facility totalling $31.2 million, of
which approximately $23.3 million had been drawn as of September 30, 1996.
(2) As of September 30, 1996, 813,336 shares of Preferred Stock, par value $1.00
per share, were authorized, of which 186,664 shares were designated as 9%
Series A-1 Convertible Preferred Stock, 100,000 shares were designated as 9%
Series B-1 Convertible Preferred Stock, 102,500 shares were designated as 9%
Series B-2 Convertible Preferred Stock, 25,000 shares were designated as 9%
Series B-3 Convertible Preferred Stock and 50,000 shares were designated as
9% Series B-4 Convertible Preferred Stock. As adjusted for this offering and
the conversion of the outstanding Preferred Stock, the Company will have
1,500,000 shares of Preferred Stock authorized, none of which will have been
designated as any specific class or series.
(3) Excludes 7,340,560 and 3,881,105 shares reserved for issuance upon exercise
of options and warrants, respectively, outstanding at September 30, 1996, at
a weighted average exercise price of $3.44.
(4) The aggregate proceeds from the exercise of all warrants and options
outstanding at September 30, 1996, would be approximately $38.7 million.
(5) Reflects payment of accrued dividends on the Preferred Stock.
20
<PAGE> 22
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL DATA
The following Unaudited Pro Forma Condensed Consolidated Financial Data
consist of Unaudited Pro Forma Condensed Consolidated Statements of Operations
for the year ended June 30, 1996 and for the three months ended September 30,
1996 and an Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
September 30, 1996 (collectively, the "Pro Forma Statements"). The Unaudited Pro
Forma Condensed Consolidated Statements of Operations give effect to the
Cybergate Acquisition as if it occurred on July 1, 1995 and the Unaudited Pro
Forma Condensed Consolidated Balance Sheet gives effect to the Cybergate
Acquisition as if it occurred on September 30, 1996.
Management believes that, on the basis set forth herein, the Pro Forma
Statements reflect a reasonable estimate of the Cybergate Acquisition based on
currently available information. The pro forma financial data are presented for
informational purposes only and do not purport to represent what the Company's
financial position or results of operations would have been had the Cybergate
Acquisition in fact occurred on the dates assumed or that may result from future
operations. The pro forma data should be read in conjunction with the Company's
Consolidated Financial Statements and related notes thereto which are included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, 1996 SEPTEMBER 30, 1996
---------------------------------------------- ----------------------------------------------
THE THE
THE COMPANY THE COMPANY
COMPANY CYBERGATE ADJUSTMENTS PRO FORMA COMPANY CYBERGATE ADJUSTMENTS PRO FORMA
-------- --------- ----------- --------- -------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue......................... $ 3,415 $ 3,723 $ 7,138 $ 2,812 $ 1,245 $ 4,057
Operating expenses:
Network development and
operations.................. 5,265 1,762 $ -- 7,027 3,710 503 $ -- 4,213
Selling, general and
administrative.............. 13,464 1,378 100 (1) 14,942 5,674 612 25 (1) 6,311
Noncash stock and
compensation................ 2,736 -- -- 2,736 174 -- -- 174
Depreciation and
amortization................ 3,078 372 842 (2) 4,292 2,401 124 211 (2) 2,736
-------- ------- ------- -------- -------- ------- ----- --------
Total operating
expenses................ 24,543 3,512 942 28,997 11,959 1,239 236 13,434
-------- ------- ------- -------- -------- ------- ----- --------
Operating income (loss)......... (21,128) 211 (942) (21,859) (9,147) 6 (236) (9,377)
Non-operating income (expense).. (6,067) (27) (320)(3) (6,414) (4,550) (15) (80)(3) (4,645)
-------- ------- ------- -------- -------- ------- ----- --------
Income (loss) before minority
interest...................... (27,195) 184 (1,262) (28,273) (13,697) (9) (316) (14,022)
Minority interest............... 413 -- -- 413 96 -- -- 96
-------- ------- ------- -------- -------- ------- ----- --------
Net income (loss)............... (26,782) 184 (1,262) (27,860) (13,601) (9) (316) (13,926)
Preferred stock dividends and
accretion..................... (3,871) -- -- (3,871) (1,007) -- -- (1,007)
-------- ------- ------- -------- -------- ------- ----- --------
Net income (loss) to common
stockholders.................. $(30,653) $ 184 $(1,262) $(31,731) $(14,608) $ (9) $(316) $(14,933)
======== ======= ======= ======== ======== ======= ===== ========
Net loss per common
stockholder................... $ (4.96) $ (4.42) $ (2.18) $ (1.94)
======== ======== ======== ========
Weighted average number of
common shares outstanding..... 6,185 1,000(4) 7,185 6,704 1,000(4) 7,704
</TABLE>
- ---------------
(1) Represents expense related to a consulting agreement entered into by the
Company with a former shareholder of Cybergate.
(2) Reflects amortization of goodwill over a 10 year period and accounting
software over a three year period.
(3) Reflects amortization of consent solicitation fees over the remaining terms
of the Notes.
(4) Excludes adjustment for shares of Common Stock issuable if Cybergate meets
certain performance measures. Inclusion of such shares would be
anti-dilutive.
21
<PAGE> 23
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL DATA -- (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------------------------
THE
THE COMPANY
COMPANY CYBERGATE ADJUSTMENTS PRO FORMA
-------- --------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
ASSETS
Current assets:
Cash and cash equivalents..................... $102,819 $ 92 $ (500)(1) $ 99,411
(3,000)(2)
Restricted cash............................... 2,392 -- -- 2,392
Accounts receivable........................... 1,871 100 -- 1,971
Other current assets.......................... 2,196 124 -- 2,320
-------- ------ ------- --------
Total current assets..................... 109,278 316 (3,500) 106,094
Networks, furniture and equipment, net.......... 96,477 1,772 100(3) 98,349
Goodwill........................................ 8,094(1) 8,094
Deferred financing fees......................... 8,235 -- 3,000(2) 11,235
Other assets.................................... 550 -- -- 550
-------- ------ ------- --------
Total assets............................. $214,540 $ 2,088 $ 7,694 $224,322
======== ====== ======= ========
LIABILITIES, REDEEMABLE STOCK, OPTIONS AND
WARRANTS, MINORITY INTEREST AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable and accrued expenses......... $ 10,703 $ 413 $ -- $ 11,116
Customer deposits and advanced billings....... 2,474 282 -- 2,756
Other......................................... 103 -- -- 103
-------- ------ ------- --------
Total current liabilities................ 13,280 695 -- 13,975
Notes payable................................... 198,358 315 100(3) 198,773
Advances due to affiliates...................... -- 141 -- 141
Dividends payable............................... 5,949 -- -- 5,949
Other........................................... 414 31 -- 445
-------- ------ ------- --------
Total liabilities........................ 218,001 1,182 100 219,283
Redeemable stock, options, and warrants......... 2,155 341 (341)(1) 2,155
Minority interest............................... 65 -- -- 65
Stockholders' equity............................ (5,680) 565 7,935(1) 2,820
-------- ------ ------- --------
Total liabilities, redeemable
stock, options and warrants,
minority interest and
stockholders' equity........... $214,540 $ 2,088 $ 7,694 $224,322
======== ====== ======= ========
</TABLE>
- ---------------
(1) Records the Cybergate Acquisition for a purchase price of $8,500,000
(1,000,000 shares of Common Stock at $8.50 per share, the per share closing
sales price of the Common Stock on January 17, 1997) plus estimated
transaction expenses of $500,000. Excludes 150,000 additional shares of
Common Stock which may be issued in 50,000 share increments (or a percentage
thereof) on March 1, 1998, 1999 and 2000 if Cybergate achieves certain
performance measures. In determining the cost of the identifiable assets and
liabilities acquired, it has been assumed that an independent appraisal will
result in fair values equal to the recorded book values as of the date of
the Cybergate Acquisition. In the opinion of management, due to the nature
of the assets and liabilities acquired, the fair values will approximate the
book values. The preliminary allocation of the purchase price results in
goodwill of approximately $8.1 million which will be amortized over 10
years.
(2) Records the payment of $3.0 million, including related transaction expenses
for solicitation fees payable to holders of the Notes in order to obtain
their consent to amend the Indentures. The amendments permit the Company to
enter into certain acquisition transactions, including the Cybergate
Acquisition.
(3) Reflects the non-exclusive assignment to Cybergate of certain accounting
software for $100,000, payable over a three year period.
22
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of and for the
period ended June 30, 1995 and 1996 are derived from and qualified by reference
to the audited Consolidated Financial Statements of the Company contained herein
and the related notes thereto, and should be read in conjunction therewith and
in conjunction with Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere in this Prospectus. The Company's
Consolidated Financial Statements as of and for the periods ended June 30, 1995
and June 30, 1996 have been audited by KPMG Peat Marwick LLP, independent
auditors. The consolidated financial data of the Company as of and for the three
months ended September 30, 1995 and September 30, 1996 have been derived from
the unaudited Consolidated Financial Statements of the Company appearing
elsewhere herein and which, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments which the Company
considers necessary for a fair presentation of the results of operations and the
financial condition for those periods. The consolidated financial data for the
three months ended September 30, 1996 are not necessarily indicative of results
for a full fiscal year.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
JUNE 30, SEPTEMBER 30,
---------------------- ---------------------
1995 1996 1995 1996
--------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................ $ 389 $ 3,415 $ 399 $ 2,812
Operating expenses.............................. 14,797 24,543 3,813 11,959
--------- --------- -------- ---------
Income (loss) from operations................... (14,408) (21,128) (3,414) (9,147)
Interest and other income....................... 218 4,410 97 1,461
Interest and other expense...................... (170) (10,477) (140) (6,011)
Debt conversion expense......................... (385) -- -- --
--------- --------- -------- ---------
Net income (loss) before minority interest...... (14,746) (27,195) (3,457) (13,697)
Minority interest(1)............................ 48 413 67 96
--------- --------- -------- ---------
Net income (loss)............................... (14,698) (26,782) (3,390) (13,601)
Preferred stock dividends and accretion......... (1,071) (3,871) (898) (1,007)
--------- --------- -------- ---------
Net income (loss) to common stockholders........ $ (15,769) $ (30,653) $ (4,288) $ (14,608)
========= ========= ======== =========
Net income (loss) per common share.............. $ (3.30) $ (4.96) $ (0.74) $ (2.18)
========= ========= ======== =========
Weighted average shares outstanding............. 4,772 6,185 5,799 6,704
OTHER DATA:
EBITDA(2)....................................... $ (13,862) $ (17,636) $ (3,083) $ (6,649)
Depreciation and amortization................... 498 3,078 264 2,401
Capital expenditures............................ 15,303 60,856 5,280 21,734
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents....................... $ 20,351 $ 132,706 $ 14,045 $ 102,819
Total assets.................................... 37,627 223,600 36,626 214,540
Long-term liabilities........................... 4,723 189,072 10,104 204,721
Redeemable stock, options and warrants.......... 2,931 2,155 2,564 2,155
Stockholders' equity............................ 22,141 8,982 19,145 (5,680)
</TABLE>
- ---------------
(1) Minority interest represents a 7.25% ownership of AT&T Credit Corporation in
the Company's subsidiaries that operate its networks in Louisville, Fort
Worth, Greenville, Columbia and El Paso. See "Description of Certain
Indebtedness."
(2) EBITDA consists of net income (loss) before net interest, income taxes,
depreciation and amortization. It is a measure commonly used in the
telecommunications industry and is presented to assist in understanding the
Company's operating results. However, it is not intended to represent cash
flow or results of operations in accordance with Generally Accepted
Accounting Principles. The EBITDA calculation reflects the deduction of
noncash compensation expense associated with employee stock options of $6.4
million and $2.7 million in 1995 and 1996, respectively. See Note 6 of
"Notes to Consolidated Financial Statements."
23
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Prospective investors are cautioned that such
statements are only predictions and that actual events or results may differ
materially. In evaluating such statements, prospective investors should
specifically consider the various factors identified in this Prospectus,
including the matters set forth under the caption "Risk Factors," which could
cause actual results to differ materially from those indicated by such forward-
looking statements. The following discussion should be read in conjunction with
the consolidated financial statements and the related notes thereto included
elsewhere in this Prospectus.
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 the 1996 and 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 January
31, 1997, the Company had ACSINet data POPs in 33 markets, including all 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 nine to 21 and increased its route miles in service from 136 to
697, and, as of January 30, 1997, the Company had 15 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
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 three months ended
September 30, 1996, 70.1% of the Company's revenues were generated by 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
24
<PAGE> 26
similar services. The Company expects to generate 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, 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 January 31, 1997, the Company had long-term operating leases
for eight 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 implementing its coast-to-coast 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
25
<PAGE> 27
services are introduced and until networks providing those services reach
operating cash flow breakeven.
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.
Although the Company was generating revenues from 21 of its local networks
as of January 31, 1997, it is still incurring negative cash flows due, in part,
to the significant ongoing funding requirements for completion of its 50-city
local network plan and implementation of its high-speed data, local switched
voice and Internet services. The amount of these costs will vary based on the
actual number of customers served and the services provided to customers. The
Company expects to continue to incur negative cash flow for at least the next
several years.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995
Revenues
During the three month period ended September 30, 1996, the Company
recorded revenues of $2.8 million as compared to revenues of $399,034 during the
three month period ended September 30, 1995. Four of the largest IXCs accounted
for approximately $1.6 million, or 58%, of revenues for the quarter ended
September 30, 1996.
Other network information is as follows:
<TABLE>
<CAPTION>
NETWORKS VOICE
AS OF THE PERIOD IN ROUTE FIBER BUILDINGS GRADE FULL TIME
ENDED: OPERATION MILES MILES CONNECTED EQUIVALENTS EMPLOYEES
--------------------- ---------- ------- ------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
September 30, 1995 4 92 4,373 112 54,431 100
September 30, 1996 18 543 32,774 532 267,894 272
</TABLE>
Total Operating Expenses
Network development and operating expenses for the three month period ended
September 30, 1996 increased to $3.7 million from $1.6 million in the three
month period ended September 30, 1995, reflecting significant increases in
personnel, network development and non-payroll operating expenses. Related
personnel costs increased to $2.0 million in the quarter ended September 30,
1996, from approximately $956,214 in the quarter ended September 30, 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
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<PAGE> 28
and taxes increased to $756,766 in the quarter ended September 30, 1996 from
approximately $105,344 in the quarter ended September 30, 1995.
In the three month period ended September 30, 1996, selling, general and
administrative expenses increased to $5.7 million from $1.2 million in the three
month period ended September 30, 1995. Related personnel costs increased to $1.5
million in the quarter ended September 30, 1996 from $936,015 in the quarter
ended September 30, 1995, and corresponding operating costs increased to $4.2
million in the quarter ended September 30, 1996 from $234,457 in the quarter
ended September 30, 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.
Depreciation and amortization expenses increased to $2.4 million in the
three month period ended September 30, 1996 from $263,988 in the three month
period ended September 30, 1995. During the quarter ended September 30, 1996,
the Company increased its capital assets to $101.9 million as of September 30,
1996, from the $20.6 million in capital assets as of September 30, 1995.
Non-cash stock compensation expense decreased to $174,099 for the quarter ended
September 30, 1996 from $793,869 for the quarter ended September 30, 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 both 1996 and 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 $1.5 million for the three month
period ended September 30, 1996 from $97,370 in the three month period ended
September 30, 1995. Interest and other expense increased to $6.0 million in the
quarter ended September 30, 1996 from $140,021 in the quarter ended September
30, 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 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 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 $95,757 for
the three month period ended September 30, 1996, and by $67,267 for the three
month period ended September 30, 1995.
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
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<PAGE> 29
$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.
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
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<PAGE> 30
funding, reduced operating losses by approximately $412,606 for fiscal 1996, and
by $48,055 for fiscal 1995.
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, and the AT&T Credit Facility, through
which the Company has financing commitments for $31.2 million. On November 14,
1995, the Company completed a private offering of 190,000 Units consisting of
the 2005 Notes and warrants to purchase 2,432,000 shares of Common Stock at
$7.15 per share (the "Warrants"), from which the Company received approximately
$96.8 million in net proceeds. The 2005 Notes will accrete to an aggregate
principal amount of $190.0 million by November 1, 2000, after which cash
interest will accrue and be payable on a semi-annual basis. 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 $120.0
million in principal amount of the 2006 Notes. The 2006 Notes will accrete to an
aggregate principal amount of $120.0 million by April 1, 2001, after which cash
interest will accrue and be payable on a semi-annual basis. The Company received
net proceeds of approximately $61.8 million from the sale of the 2006 Notes.
The Company intends to continue to use these funds toward completion of its
50-city local network plan, implementation of its coast-to-coast, leased
broadband data communications network and switched voice services and to fund
negative operating cash flow until cash flow break even. The Company has
estimated that from September 30, 1996 through December 31, 1998, additional
capital requirements for implementation of its 50-city local network plan and
its other services and to fund negative cash flow until cash flow break even
will be approximately $390.0 million. At September 30, 1996, the Company had
approximately $102.8 million in cash and cash equivalents available for these
purposes. To meet additional capital requirements, ACSI will be required to sell
additional debt or equity securities or increase its existing credit facility or
acquire additional credit facilities. The Company may also need to seek such
additional equity financing to maintain balance sheet and liquidity ratios
required under certain of its debt instruments. 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 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.
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 this 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
29
<PAGE> 31
Common Stock were exercised by a principal stockholder for an aggregate exercise
price of approximately $100,000. See "Principal Stockholders."
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 $5.0 million. The
Series B Preferred Stock will convert into an aggregate of 9,910,718 shares of
Common Stock simultaneous with the completion of this 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 17,377,278 shares of Common Stock upon completion of this
offering, at which time the Company will pay accrued dividends on the Preferred
Stock of approximately $7.4 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 purchases
7.25% of the capital stock of the funded subsidiary, and ACSI pledges the other
shares and the assets of the subsidiary to AT&T Credit Corporation as security
for the loan. During fiscal 1995, the Company's subsidiaries in Louisville, Fort
Worth, Greenville and Columbia entered into loan agreements under the AT&T
Credit Facility providing for AT&T Credit Corporation funding of up to $19.8
million in the aggregate, and, in September 1995, the Company's subsidiary in El
Paso entered into a loan agreement under the AT&T Credit Facility providing for
up to $5.5 million of AT&T Credit Corporation funding. As of September 30, 1996,
an aggregate of $23.3 million had been borrowed under these agreements.
EFFECTS OF NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to Be Disposed Of, which 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 had no impact on the Company's Consolidated Financial Statements in the
three months ended September 30, 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 in fiscal year 1997. The Company
has elected to continue to apply the intrinsic value-based method of accounting
for stock options.
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<PAGE> 32
BUSINESS
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 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 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 represents 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
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<PAGE> 33
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). 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.
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 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 a substantial demand for an
integrated package of communica-
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<PAGE> 34
tions 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.
- 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 three months ended September 30, 1996,
approximately 70.1% of the Company's revenues were billed to 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. 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.
SALES AND MARKETING
The Company generated substantially all of its fiscal 1996 revenues 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.
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 representa-
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<PAGE> 35
tives 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, ACSI has signed agreements
with AT&T Communications, Inc. 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 September
30, 1996, 12 sales professionals targeted IXC and ISP customers. For the three
months ended September 30, 1996, approximately 70.1% of the Company's revenues
were billed to IXCs for services provided for the benefit of their customers.
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 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 fiscal 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 terminations, 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
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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.
- 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 January 31, 1997 the Company offered
local switched voice services in Columbus, Georgia and Montgomery, Alabama. The
Company expects to begin offering local switched voice services in two more of
its local network markets during the three months ending March 31, 1997.
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.
During the three months ending March 31, 1997, the Company expects to begin
offering enhanced voice services to small and mid-sized business and government
end users in a limited number of its local network markets, during and after
which 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.
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
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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.
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
permitting and franchise requirements. The market or end-user survey,
also done by independent telecommunications consultants, identifies the
significant commercial and government end users in the target service
areas. Individual telephone and/or face-to-face interviews are then
conducted with potential end users, focusing on those anticipated to have
the largest business volume. The interviews determine the end user's
receptiveness to using a competitor to the 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 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
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these municipal approvals, once granted, may range from as few as five
years to as many as 25 years, and such approvals typically may be renewed
for additional terms. See "Risk Factors -- Dependence on Rights-of-Way
and Other Third Party Agreements" and "-- Effect of Regulation."
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, 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
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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 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 January 31, 1997, the Company had installed central office switching
facilities in Columbus, Georgia and Montgomery, Alabama, was in the process of
installing switches in three additional markets and expects to have switches in
24 more markets installed by December 1999, with switches in 12 of those market
expected to be installed by December 1997. Toward this end, the Company had
long-term lease commitments for eight initial switches as of January 31, 1997.
The Company has recently deployed ACSINet, a coast-to-coast broadband data
communications backbone network via leased inter-city fiber connections on which
customers' high-speed data and multimedia traffic may be transported at a
high-quality level on a cost-effective basis. ACSI believes its ATM-based high
bandwidth network will be capable of simultaneously supporting IP switching,
frame relay and multimedia applications. This technology will allow network
customers to migrate transparently from lower speed services to high bandwidth
services, as 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. See "-- Regulation."
Competition for dedicated services is based on price, quality, network
reliability, customer service, service features and responsiveness to the
customer's needs. The Company believes that its management expertise, coupled
with its highly reliable, state-of-the-art digital networks, which offer
significant transmission capacity at competitive prices, will allow it to
compete effectively with the ILECs, which may have not yet fully deployed fiber
optic networks in many of the Company's target markets. The Company currently
prices its services at a modest discount compared to the prices of
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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. See "Risk Factors -- Competition."
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 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 a significant
savings over traditional private lines. Other frame relay service
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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.
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.
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.
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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 as the Federal Telecommunications Act on February 8, 1996. 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 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. See "Risk Factors --
Competition."
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-
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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.
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, 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
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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. See "-- Other Regulation -- Access Charges"
below.
- 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.
- 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.
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- 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
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.
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. Consistent with the
requirements of the FCC's October 1996 order, the Company expects to
cancel any tariffs for interstate interexchange services in 1997.
"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
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.
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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.
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 January 31, 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 January 31, 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
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authorizations it is currently seeking, or will seek, from these PSCs. See "Risk
Factors -- Rapid Expansion of Operations." 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 the service. The Company cannot predict the extent to
which this may occur or its impact on the Company's business.
Local Interconnection. The Telecommunications Act imposes a duty upon all
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. The state
commission arbitrations with BellSouth and Southwestern Bell have been
completed, as has the state commission arbitration with US West in New Mexico
and the state commission arbitration with GTE in Texas and Kentucky. As of
January 31, 1997, each of the arbitration results in cases involving
Southwestern Bell, US West and GTE remained subject to reconsideration on
appeal. Southwestern Bell and GTE have filed lawsuits in Texas seeking to
prevent enforcement of the PSC arbitration awards issued there. State commission
arbitration of ACSI requests for interconnection remain underway in Arizona (US
West) and Texas, Florida and Kentucky (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.
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.
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EMPLOYEES
As of December 31, 1996, the Company employed a total of 322 individuals
full time. The Company believes that its future success will depend on its
continued ability to attract and retain highly skilled and qualified employees.
None of the Company's employees is subject to a collective bargaining agreement.
The Company believes that its relations with its employees are good.
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.
However, based on the facts known as of the date hereof, the Company does not
believe it is likely, although it is possible, that the Company could be liable
for payment of all or a portion of the requested damages, which potential
liability could materially adversely affect the results of operation and
financial condition of the Company.
Additionally, the Company and its subsidiaries are currently parties to
routine litigation incidental to their business, none of which, individually or
in the aggregate, are expected to have a material adverse effect on the Company.
The Company and its subsidiaries continue to participate in regulatory
proceedings before the FCC and state regulatory agencies concerning the
authorization of services and the adoption of new regulations.
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 September 30, 1996, subject to periodic increases in
specified amounts. The lease expires in 2002, but may be renewed for two
additional five-year terms. The Company 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.
As of September 30, 1996, the Company's various operating subsidiaries have
leased facilities for their offices and network nodes. The aggregate monthly
rent on these properties is approximately $130,061. The various leases expire on
dates ranging from February 28, 1998, to October 30, 2005. Most have renewal
options. A subsidiary of the Company leases shared office space in Greenville,
SC. Additional office space and equipment rooms will be leased as additional
networks are constructed and the Company's operations are expanded.
The Company believes that its insurance coverage on these properties is
adequate and in compliance with the related leases.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as of the date of this
Prospectus regarding the directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Anthony J. Pompliano...................... 57 Executive Chairman of the Board of
Directors
Jack E. Reich............................. 46 President and Chief Executive Officer --
Communications Services
George M. Tronsrue, III................... 40 President and Chief Operating Officer --
Strategy and Technology Development
Riley M. Murphy........................... 41 Executive Vice President -- Legal and
Regulatory Affairs, General Counsel and
Secretary
George M. Middlemas(1).................... 50 Director
Edwin M. Banks(2)......................... 34 Director
Christopher L. Rafferty(1)................ 48 Director
Benjamin P. Giess......................... 34 Director
Olivier L. Trouveroy(1)(2)................ 41 Director
Peter C. Bentz............................ 31 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Anthony J. Pompliano, Executive Chairman of the Board of Directors, has
more than 30 years of experience in the telecommunications industry. Mr.
Pompliano was elected a director of the Company in November 1993. He was
co-founder and President of Metropolitan Fiber Systems, the predecessor
organization to MFS Communications, a publicly-traded CLEC that was acquired by
WorldCom, Inc. in December 1996. Mr. Pompliano served as President, CEO and Vice
Chairman of MFS Communications from April 1988 until March 1991. He joined ACSI
in August 1993 after the expiration of his non-competition agreement with MFS
Communications. Before his association with MFS and its predecessor, he was Vice
President -- Operations and Sales for MCI Telecommunications International from
1981 to 1987, and prior thereto, was Vice President -- National Operations for
Western Union International, Inc. from 1960 to 1981.
Jack E. Reich, President and Chief Executive Officer -- Communications
Services, had 22 years of telecommunications industry and management experience
before joining ACSI in December 1996. For two and one-half years prior to
joining ACSI, Mr. Reich was employed by Ameritech, Inc. as President of its
Custom Business Service Organization, where Mr. Reich was responsible for full
business marketing to Ameritech's largest customers for telecommunications
services, advanced data services, electronic commerce and managed
services/outsource initiatives. Prior to that, he served as President of MCI's
Multinational Accounts organization and also served as MCI's Vice President of
Products Marketing. Mr. Reich has also held sales and marketing positions at
AT&T and ROLM Corp. Mr. Reich has a B.S. degree from St. Louis University and an
MBA from the University of Chicago.
George M. Tronsrue, III, President and Chief Operating Officer -- Strategy
and Technology Development, had 17 years of telecommunications industry and
management experience before joining ACSI in February 1994. Mr. Tronsrue served
the Company as Executive Vice President -- Strategic Planning and Business
Development from February 1994 until January 31, 1996. From 1993 until he joined
ACSI in February 1994, Mr. Tronsrue was the Regional Vice President for the
Central Region for Teleport Communications Group and the Vice President of
Emerging Markets, responsible for start-up and profit and loss management of
joint ventures with major cable television
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providers in eight major markets. From 1987 until 1992, he was a member of the
initial management team at MFS, where he held senior positions in planning and
market development, served as Vice President of Sales and the Vice
President/General Manager for the initial start-up of MFS' New York operations,
and served as the Executive Vice President for MFS-Intelenet. Prior to joining
MFS, he was a Director of Operations for MCI Telecommunications International.
Mr. Tronsrue has a B.S. degree in Applied Sciences and Engineering from the
United States Military Academy at West Point.
Riley M. Murphy, Executive Vice President -- Legal and Regulatory Affairs
and Secretary, had twelve years of experience in the private practice of
telecommunications regulatory law for inter-exchange, cellular, paging and other
competitive telecommunication services prior to joining the Company. Since
February 1995, she has served as an officer and director of The Association for
Local Telecommunications Services. Ms. Murphy joined ACSI on a full-time basis
in April 1994 and was senior counsel to Locke Purnell Rain Harrell, a
Dallas-based law firm through December 1994. From 1987 to 1992, Ms. Murphy was a
partner of Wirpel and Murphy, a telecommunications law firm she co-founded, and
from 1992 to 1993 she was a sole practitioner. She holds a B.A. degree from the
University of Colorado and a J.D. from the Catholic University of America and is
admitted to practice law in the District of Columbia and Louisiana.
George M. Middlemas, Director, was elected a director of the Company in
December 1993. Mr. Middlemas is a general partner of Apex Management
Partnership, which is the general partner of Apex Investment Fund I, L.P. and
Apex Investment Fund II, L.P., both of which are venture capital funds, and
affiliates of First Analysis Corporation, a principal stockholder of the
Company. See "Principal Stockholders." From March 1991 to December 1991, Mr.
Middlemas acted as an independent consultant providing fund raising and other
advisory services. From 1985 until March 1991, Mr. Middlemas was a Senior Vice
President and Principal of Inco Venture Capital Management, a venture capital
firm. He also serves on the Board of Directors of PureCycle Corporation,
Security Dynamics Technologies, Inc. and several privately held companies.
Edwin M. Banks, Director, was elected a director of the Company in October
1994. Since 1988, Mr. Banks has been employed by W. R. Huff Asset Management
Co., L.L.C. and currently serves as a portfolio manager concentrating in the
healthcare, communications, food and food services industries. From 1985 until
he joined W. R. Huff Asset Management Co., L.L.C., Mr. Banks was employed by
Merrill Lynch & Company. Mr. Banks received his B.A. degree from Rutgers College
and his MBA degree from Rutgers University. Mr. Banks also serves as a director
of Charter Medical Corporation, Del Monte Foods Company and ABCO Food Service.
Christopher L. Rafferty, Director, was elected a director of the Company in
October 1994. Mr. Rafferty has been employed by WRH Partners, L.L.C., the
general partner of Huff since June 1994. From January 1993 to February 1994, Mr.
Rafferty was Vice President -- Acquisitions for Windsor Pet Care, Inc., a
venture capital-backed firm focusing on consolidating the pet care services
industry. From October 1990 to January 1993, Mr. Rafferty was a consultant
specializing in merchant banking, leveraged acquisitions and venture capital
transactions. From June 1987 to the time he started his consulting business, Mr.
Rafferty was a Managing Director of Chase Manhattan Capital Corporation, the
merchant banking and private equity investment affiliate of Chase Manhattan
Corporation. Mr. Rafferty also serves as a director of Del Monte Foods Company.
Mr. Rafferty received his undergraduate degree from Stanford University and his
law degree from Georgetown University.
Benjamin P. Giess, Director, was elected a director of the Company in June
1995. Since 1992, Mr. Giess has been employed by ING and its predecessors and
affiliates and currently serves as a Vice President responsible for originating,
structuring and managing equity and debt investments. From 1991 to 1992, Mr.
Giess worked in the Corporate Finance Group of ING Capital. From 1990 to 1991,
Mr. Giess was employed by the Corporate Finance Group of General Electric
Capital Corporation where he worked in the media and entertainment group. Prior
to attending business school, from 1986 to 1988, Mr. Giess was the Credit
Department Manager of the Boston Branch of ABN Amro North America, Inc. From
1984 to 1986, Mr. Giess was employed at the Shawmut Bank of Boston.
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Mr. Giess also serves as a director of Matthews Studio Equipment Group and CMI
Holding Corp. Mr. Giess received his undergraduate degree from Dartmouth College
and his MBA from the Wharton School of the University of Pennsylvania.
Olivier L. Trouveroy, Director, was elected a director of the Company in
June 1995. Since 1992, Mr. Trouveroy has been employed by ING and its
predecessors and affiliates and currently serves as a Managing Director
responsible for originating, structuring and managing equity and debt
investments. From 1990 to 1992, Mr. Trouveroy was a Managing Director in the
Corporate Finance Group ("CFG") of General Electric Capital Corporation in
charge of CFG's office in Paris, France. From 1984 to 1990, Mr. Trouveroy held
various positions in the Mergers and Acquisitions department of Drexel Burnham
Lambert in New York, most recently as a First Vice President. Mr. Trouveroy also
serves as a director of AccessLine Technologies, Inc. and Cost Plus, Inc. Mr.
Trouveroy holds B.S. and Masters degrees in Economics from the University of
Louvain in Belgium, as well as an MBA from the University of Chicago.
Peter C. Bentz, Director, was elected a director of the Company in June
1995. Since 1992, Mr. Bentz has been employed by W. R. Huff Asset Management
Co., L.L.C. as a research analyst specializing in telecommunications, media and
healthcare. Mr. Bentz received his Bachelor of Science degree from Boston
College in 1987 and his MBA from the Wharton School of the University of
Pennsylvania in 1992.
As part of the December 1996 management reorganization, Richard A. Kozak,
who had previously served as the Company's President and Chief Executive
Officer, was named President and Chief Executive Officer -- Corporate Services.
Mr. Kozak was also appointed as ACSI's Acting Chief Financial Officer, replacing
Harry D'Andrea who had resigned as ACSI's Chief Financial Officer in November
1996. On January 3, 1997, Mr. Kozak notified the Company that it was allegedly
in breach of his employment agreement and, accordingly, he would be terminating
his employment after the expiration of the applicable 30-day cure period. On
January 22, 1997, the Company notified Mr. Kozak that it was terminating his
employment with ACSI effective February 2, 1997. See "-- Employment Agreements."
The Board is comprised of seven members, four of whom were elected by the
holders of the Company's Common Stock and three of whom were elected by the
holders of the Company's Preferred Stock. Following conversion of the Preferred
Stock upon completion of this offering, the Board will be elected by the holders
of the Company's Common Stock. All directors of the Company hold office until
the next annual meeting of stockholders and until their successors are duly
elected and qualified.
OTHER SIGNIFICANT EMPLOYEES
John R. Polchin, Director of Corporate Finance, joined the Company in May
1996. Prior to joining the Company, Mr. Polchin served as Corporate Controller
for ISA Corporation, a development state software company. From 1993 through
1995, Mr. Polchin was the Assistant Treasurer at PaineWebber, Inc. Prior
thereto, Mr. Polchin held corporate finance positions within UNC Incorporated, a
publicly-traded aviation company, and NationsBank. As Director -- Corporate
Finance, Mr. Polchin's responsibilities include treasury management, fund
raising, strategic planning and financial analysis. Mr. Polchin received his
B.S. degree in Economics from the University of North Carolina.
Robert F. Ryan, President -- Advanced Data Services, joined the Company in
August 1996. Prior to joining the Company, Mr. Ryan served for five years as
President of EOS, Inc., a privately held company specializing in developing
wireless networks in the former Soviet Union. Prior to his tenure with EOS, Mr.
Ryan was a consultant to British Aerospace Communications, Ltd., where he
directed that company's mergers and acquisitions operations in the United
States. During the period 1986 through 1989, Mr. Ryan was the President of TCOM,
Inc., an electronic mail company. Starting in 1970 and through 1985, Mr. Ryan
was the founder, President and Chairman of Dialcom, Inc.
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Mr. Ryan sold Dialcom to ITT in 1982. Concurrent with his role in Dialcom, in
1979 Mr. Ryan co-founded "The Source", a consumer based information service
company. "The Source" was sold to Readers Digest in 1980. Mr. Ryan received a
B.S. degree from New York University in 1965.
Richard B. Robertson, Executive Vice President -- Operations and
Engineering, joined the Company in April 1996. Prior to joining the Company,
Mr. Robertson was employed by BellSouth for 16 years where, since 1991, he
directed marketing activities for its network interconnection business. In that
role, Mr. Robertson was responsible for negotiating interconnection agreements
with competitive local exchange companies, development and implementation of
BellSouth's advanced intelligent network (AIN) services for the interconnection
market and also formulating the company's plan for and entry into the customer
premise equipment (CPE) market in the mid-1980s. In other assignments during his
28-year career in the telecommunications industry, Mr. Robertson's experience
included outside plant, manufacturing, finance, purchasing and strategy
development and R&D positions with Western Electric, Bellcore, and the U.S.
Army. Robertson received a B.S. in Electrical Engineering from Virginia Tech and
an MBA from the University of Virginia.
Douglas R. Hudson, Executive Vice President/General Manager -- Network
Services, has ten years of sales and marketing experience within the
telecommunications industry. For seven years prior to joining ACSI in May 1994,
Mr. Hudson had been with MFS Communications, having served as a director of
field sales from September 1987 to September 1989, Vice President of Industry
Sales and Marketing from September 1989 to July 1992 and as Vice President and
General Manager in charge of MFS's Mid-Atlantic region from July 1992 until May
1994. Prior to joining MFS, Mr. Hudson was a regional sales manager for Microtel
International, Inc., a national telecommunications company providing competitive
long distance and private line services.
Michael H. Mansouri, Executive Vice President -- Data Network Operations,
joined the Company in August 1995. Before joining ACSI, Mr. Mansouri spent
nearly ten years at Sprint International, serving as director of international
multimedia services, director of global messaging, director of global
value-added systems and director of business development. Prior to that, Mr.
Mansouri was a manager of Applied Communications Systems at Tymshare/Tymnet,
Inc. He received a B.S. in Computer Science and Statistics from Utah State
University and an M.S. in Operations Research from The George Washington
University.
Robert H. Ottman, Executive Vice President -- Customer Care, joined the
Company in May 1995. Mr. Ottman has 30 years of experience in telecommunications
and has been involved in network services, operations, quality assurance, human
resources and labor relations within the telecommunications industry. Prior to
joining ACSI, he was the Vice President of Operations and Quality Assurance for
MCI International and directly responsible for the New York City, Washington,
Atlanta, Boston, Miami, Chicago, Detroit, San Francisco, Los Angeles, Puerto
Rico, Hawaii and Guam Networks from 1993 to 1995. From 1981 to 1982, Mr. Ottman
was Assistant Vice President of Operations and Labor Relations for Western Union
International, Inc. (which was acquired by MCI in 1982). From 1982 to 1993, Mr.
Ottman held various positions with MCI International, including: Director of
Metro Operations from 1982 to 1983, Director of Administration and Labor
Relations from 1983 to 1988, and Vice President of Administration and Labor
Relations from 1988 to 1993. While at MCI International, in 1989, Mr. Ottman
initiated Quality Programs for the support and assistance of MCI customers.
Dennis J. Ives, Senior Vice President -- Network Development, joined the
Company's predecessor in 1992 as Vice President -- Operations. From 1990 to
1992, Mr. Ives was involved in the planning and implementation of other fiber
optic networks and Broadband Systems in Illinois and Wisconsin at DigiNet
Communications, Inc. Mr. Ives spent over 30 years with AT&T in various
engineering and operations management positions and has 37 years of
telecommunications industry and management experience.
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Martin F. McDermott, Senior Vice President -- Marketing, joined the Company
in April 1996. From July 1995 until he joined the Company, Mr. McDermott served
as chief operating officer for American Wireless Communications Corporation.
Prior thereto, Mr. McDermott spent four years at WilTel Inc. following his
service as Chief Operating Officer of the National Telecommunications Network, a
coalition of long distance carriers. Mr. McDermott attended Georgetown
University, is active in industry associations such as ACTA, NATA and Comptel
and has 30 years of telecommunications industry experience.
Richard Kingston, Regional Vice President/General Manager -- Western
Region, joined the Company in 1994. Prior to joining ACSI, Mr. Kingston was with
TCG where he had responsibility for the MCI account for the central region of
the U.S. Mr. Kingston's other professional experience includes management of
carrier accounts for MFS and a two year period during which he ran his own
telecommunications marketing firm. In December, 1996, Kingston received the
Chairman's award for the outstanding performance of his region. Prior to
assuming his position as RVP, Kingston was Vice President of Carrier Sales.
Terry Kokinda, Regional Vice President -- Central Region, joined the
Company in 1993. Mr. Kokinda had more than 18 years of telecommunications
experience before joining ACSI. Prior to joining the Company, Mr. Kokinda was a
District Sales Manager for AT&T where he had management and administrative
responsibility for a large account territory. Before joining AT&T, Mr. Kokinda
was employed at ATTIS where he held the positions of Account Executive and Sales
Manager, and was extensively involved with account teams, customers and vendors
as well as the design and development of proposals and business solutions. Mr.
Kokinda received his B.A. degree from Western Kentucky University.
Joseph Isaksen, Vice President/Controller, joined the Company in April
1996. Prior to joining the Company, Mr. Isaksen was employed by Concert
Communications (Concert), a joint venture company between MCI Communications
Corporation and British Telecommunications plc, for three years. Mr. Isaksen
served as Director of Financial Services in London, England, for Concert's
subsidiaries in 13 European and Asian countries. During the period 1987 through
1993, Mr. Isaksen spent most of his career at MCI Telecommunications in the
Corporate Financial Reporting area. His background also includes experience as
an accounting instructor and audit supervisor. Mr. Isaksen received a B.S.
degree in accounting from the University of Maryland and holds a CPA.
52
<PAGE> 54
EXECUTIVE COMPENSATION
The following table provides a summary of compensation for each of the last
three fiscal years ended June 30, 1996, 1995 and 1994, with respect to the
Company's Chief Executive Officer, and the other four most highly compensated
officers of the Company during the fiscal year ended June 30, 1996 whose annual
salary and bonus during such fiscal year exceeded $100,000 (collectively, the
"Named Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------------------- NUMBER OF
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS(2) COMPENSATION
- ------------------------------------- ------ --------- -------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Pompliano................. 1996 $ 239,583 $175,000(3) $ -- - 0 - $ 6,187(4)
Executive Chairman of the Board of 1995 219,500 175,000(3) -- 500,000 6,977(4)
Directors 1994 110,000 -- 25,000(5) 1,349,899 61,507(6)
George M. Tronsrue................... 1996 191,128 54,116(7) -- 50,000 4,800(4)
President and Chief Operating 1995 150,000 135,417(7) 68,800(8) 350,001(9) --
Officer -- Strategy and Technology 1994 53,827 50,000 -- - 0 - --
Development
Riley M. Murphy...................... 1996 162,499 81,500(10) 37,004(8) 50,000 3,536(4)
Executive Vice President -- Legal 1995 150,000 81,500(11) -- 250,001(9) 9,783(4)
and Regulatory Affairs, General 1994 37,500 -- 48,620(12) - 0 - --
Counsel and Secretary
Robert H. Ottman..................... 1996 170,000 50,000(3) 100,000(8) - 0 - --
Executive Vice President/Network 1995 28,333(13) -- -- 250,000 --
Services and Technical Support
Richard A. Kozak..................... 1996 232,885 200,000(3) -- - 0 - 5,400(4)
President and Chief Executive 1995 184,378 175,000(3) -- 399,999 3,750(4)
Officer -- Corporate Services and 1994 87,500 -- 39,728(5) 899,932 --
Acting Chief Financial Officer(14)
</TABLE>
- ---------------
(1) Excludes perquisites and other personal benefits that in the aggregate do
not exceed 10% of the Named Officers' total annual salary and bonus.
(2) See information provided in "Option Grants in Last Fiscal Year," and
"Option Exercises and Fiscal Year-End Values."
(3) Represents cash bonuses received for attainment of certain performance
goals, in accordance with the Executive's employment agreement.
(4) Represents payments received for medical or disability insurance in excess
of that provided to other employees and/or car allowances and, for Ms.
Murphy, includes payments of $6,423 of premiums in connection with
professional liability insurance for the period prior to her employment
with the Company.
(5) Consists of amounts paid to Messrs. Pompliano and Kozak as consultants for
services rendered prior to their employment by the Company in August 1993
and November 1993, respectively.
(6) Consists of $20,000 received as compensation in connection with the
Company's November 1993 sale of 400,000 shares of Common Stock and $41,507
received as compensation in connection with the Company's June 1994
issuance of $4,300,720 principal amount of 15% convertible notes.
(7) Represents an installment of a $244,500 bonus, $54,116 of which is due on
February 24, 1997.
(8) Includes $65,000, $100,000 and $37,004 paid to Messrs. Tronsrue and Ottman
and Ms. Murphy, respectively, in connection with relocation and moving
expenses relating to the relocation of the Company's headquarters from Oak
Brook, Illinois to Annapolis Junction, Maryland.
(9) 150,000 of these options were originally granted in the fiscal year ended
June 30, 1994 at an exercise price of $2.50 per share and such exercise
price was subsequently reduced to $2.25 per share in connection with the
Company's October 1994 private placement.
(10) Represents an installment of a $244,500 cash bonus, $81,500 of which was
paid in January 1997.
(11) This payment represents the first installment of a $244,500 cash bonus.
(12) Consists of $43,620 received for performing legal services for the Company
as outside counsel and $5,000 received pursuant to a relocation agreement.
(13) Mr. Ottman commenced employment with the Company in May 1995.
(14) Mr. Kozak served as the Company's President and Chief Executive Officer
during fiscal year 1996. He became Acting Chief Financial Officer in
December 1996 upon the resignation of the Company's previous Chief
Financial Officer. In connection with the Company's December 1996
management reorganization, Mr. Kozak became President and Chief Executive
Officer -- Corporate Services. Effective February 2, 1997, Mr. Kozak's
employment with the Company will be terminated.
53
<PAGE> 55
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of stock
options to the Named Officers during the fiscal year ended June 30, 1996.
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS MARKET PRICE
UNDERLYING GRANTED TO EXERCISE OR OF UNDERLYING
OPTIONS EMPLOYEES IN BASE PRICE SECURITIES ON EXPIRATION
NAME GRANTED FISCAL YEAR (PER/SHARE) DATE OF GRANT DATE
- --------------------------- ------------ ------------ ------------ -------------- ----------
<S> <C> <C> <C> <C> <C>
Anthony J. Pompliano....... None -- -- -- --
George M. Tronsrue, III.... 25,000(1) 2.2% $ 3.40 $ 3.875(i) 2/22/03
25,000(2) 2.2 3.40 3.875(i) 2/22/04
Riley M. Murphy............ 25,000(1) 2.2 3.40 3.875(i) 3/30/03
25,000(2) 2.2 3.40 3.875(i) 3/30/04
Robert H. Ottman........... None -- -- -- --
Richard A. Kozak........... None -- -- -- --
</TABLE>
- ---------------
(i) Underlying market price is based on the average bid and ask price on the
date of grant as reported by the Nasdaq SmallCap Market.
(1) These options were granted on July 6, 1995, with an exercise price of $3.40.
Mr. Tronsrue's options will vest on February 23, 1998 and Ms. Murphy's
options will vest on March 31, 1998 provided, in each case, that he or she
does not voluntarily terminate his or her employment with the Company or is
not terminated for cause prior to the applicable vesting date.
(2) These options were granted on July 6, 1995, with an exercise price of $3.40.
Mr. Tronsrue's options will vest on February 23, 1999 and Ms. Murphy's
options will vest on March 31, 1999 provided, in each case, that he or she
does not voluntarily terminate his or her employment with the Company or is
not terminated for cause prior to the vesting date.
FISCAL YEAR-END OPTION VALUES
The following table sets forth the value of unexercised options held by the
Named Officers as of June 30, 1996. None of the Named Officers exercised options
during the fiscal year ended June 30, 1996.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR- END(1)
---------------------------- ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Anthony J. Pompliano..................... 1,599,899 250,000 $ 19,055,025 $ 2,550,000
George M. Tronsrue, III.................. 250,000 150,001 2,687,500 1,555,011
Riley M. Murphy.......................... 137,500 162,501 1,478,125 1,689,386
Robert H. Ottman......................... 175,000 75,000 1,750,000 750,000
Richard A. Kozak......................... 1,133,265 166,666 13,374,172 1,699,993
</TABLE>
- ---------------
(1) Represents the difference between the per share exercise price of the
unexercised options and $13.00, the last sale price on June 28, 1996, the
last trading day in the fiscal year ended June 30, 1996, as reported by the
Nasdaq Stock Market.
DIRECTORS' COMPENSATION
Members of the Board do not receive cash compensation for acting as members
of the Board or Committees of the Board, other than reimbursement for reasonable
out-of-pocket expenses incurred in connection with their attendance at meetings
of the Board and its committees. The Company is obligated to pay the reasonable
fees and expenses of two counsel selected by the directors elected by the
Preferred Directors from time to time to represent them in their capacity as
directors. During fiscal 1995, the Company paid no such counsel fees. Directors
who also serve as executive officers
54
<PAGE> 56
receive cash compensation for acting in their capacity as executive officers.
See "-- Summary Compensation Table." From time to time the Board has granted
options to purchase shares of Common Stock to members of the Board who are not
also officers of the Company in consideration for their service as directors.
However, other than "formula grants" under the Company's 1994 Stock Option Plan,
no formal arrangement exists. For fiscal year ended June 30, 1996, no directors
were granted options.
EMPLOYMENT AGREEMENTS
Anthony J. Pompliano. The Company is party to an employment agreement with
Anthony J. Pompliano, its Executive Chairman, which terminates on August 23,
1998. Under the terms of the agreement, as amended, Mr. Pompliano is entitled to
an annual base salary of $250,000 and a cash bonus of up to $175,000 for each
fiscal year through 1998 based upon the Company's achievement of certain
performance goals for the relevant fiscal year. Under this employment agreement,
Mr. Pompliano has been granted options to purchase an aggregate of 1,849,899
shares of the Company's Common Stock at exercise prices ranging from $.875 per
share to $2.80 per share. 1,599,899 of these options are currently vested. Mr.
Pompliano has the right to obtain a 30-day loan from the Company for the purpose
of paying the aggregate exercise price of the options granted to him.
Mr. Pompliano has the right, for 90 days after termination of his
employment (unless he is terminated by the Company "for cause" or he voluntarily
resigns), to sell to the Company up to $1.0 million in then market value of
shares of Common Stock issued or issuable pursuant to the options granted to Mr.
Pompliano under his employment agreement, at a price equal to the publicly-
traded price of the Common Stock, less the exercise price of the options with
respect to unexercised options; provided, however, this right cannot be
exercised unless at least 5,000,000 shares of Common Stock are owned by
non-affiliates of the Company at the time of his request and the market value of
the outstanding Common Stock is at least $300 million. Mr. Pompliano's
employment agreement also contains non-compete, non-solicitation and
confidentiality provisions.
Jack E. Reich. The Company is party to an employment agreement with Jack
E. Reich, its President and Chief Executive Officer -- Communications Services,
which terminates on December 31, 2000, extendable for one year by mutual
agreement. Under the terms of this agreement, Mr. Reich is entitled to a minimum
annual base salary of $250,000, a cash bonus of $100,000 in 1997 and annual
bonuses of between $150,000 and $350,000 based on the Company's achievement of
certain performance goals. Under this employment agreement, Mr. Reich was
granted an option to purchase 1,200,000 shares of Common Stock at an exercise
price $9.375 per share. These options vest in installments between December 1997
and December 2001, subject to Mr. Reich's continued employment. Mr. Reich's
employment also contains a two year non-compete/non-solicit provision.
George M. Tronsrue, III. The Company is party to an employment agreement
with George M. Tronsrue, III, its President and Chief Operating
Officer -- Strategy and Technology Development, which terminates on February 23,
1999. The agreement, as amended, calls for an annual salary $200,000, a $400 per
month car allowance and a guaranteed bonus of $244,500 payable in annual
installments through February 1997. Under the terms of this employment
agreement, Mr. Tronsrue has been granted stock options to purchase an aggregate
of 400,001 shares of Common Stock at prices ranging from $2.25 per share to
$3.40. 250,000 of these options were exercisable as of December 31, 1996. Mr.
Tronsrue's employment agreement also contains a two year non-compete/non-solicit
provision.
Riley M. Murphy. The Company is party to an employment agreement with
Riley M. Murphy, its Executive Vice President for Legal and Regulatory Affairs,
which terminates on March 31, 1999. This agreement, as amended, calls for an
annual salary of $175,000 and a guaranteed bonus of $244,500, payable in annual
installments through January 1997. Under this employment agreement, Ms. Riley
was granted options to purchase an aggregate of 300,001 shares of Common Stock
at prices ranging
55
<PAGE> 57
from $2.25 per share to $3.40 per share. 137,500 of these options are currently
vested. Ms. Murphy's employment agreement also contains a two year
non-compete/non-solicit provision.
Robert H. Ottman. The Company has entered into an employment agreement
with Robert Ottman, its Executive Vice President/Network Services and Technical
Support, which terminates on April 30, 1998, pursuant to which Mr. Ottman
receives an annual salary of $179,000 and additional compensation based on the
Company's performance as well as Mr. Ottman's individual contribution to that
performance, as determined by the Company's Chief Executive Officer and Board of
Directors. Under this employment agreement, Mr. Ottman was granted options to
purchase 250,000 shares of Common Stock at a price of $3.00 per share. 175,000
of these options are currently vested. Mr. Ottman's employment agreement also
contains a two year non-compete/non-solicit provision.
Richard A. Kozak. The Company is party to an employment agreement with
Richard A. Kozak, which has been terminated, effective February 2, 1997. Each of
the parties claims the termination is the result of a breach of the employment
agreement by the other party. The terms of Mr. Kozak's severance depends on
whether the Company or Mr. Kozak breaches the employment agreement. Under this
employment agreement, Mr. Kozak has been granted stock options to purchase an
aggregate of 1,299,931 shares of the Company's Common Stock at exercise prices
ranging from $0.875 per share to $2.80 per share. As of December 31, 1996,
options to purchase 1,133,265 shares had been vested. Mr. Kozak's agreement
contains non-compete, non-solicitation and confidentiality provisions.
The shares of Common Stock underlying the stock options held by Messrs.
Pompliano, Kozak and Tronsrue and Ms. Murphy which are discussed above are the
subject of a registration rights agreement with the Company, pursuant to which
these executive officers have been granted certain demand and piggyback
registration rights with respect to the shares of Common Stock underlying these
options. Either Mr. Pompliano or Mr. Kozak can demand an underwritten
registration of at least 300,000 shares of Common Stock beginning 120 days after
this offering. Mr. Pompliano has waived this right. The Company has agreed to
use its best efforts to have Mr. Reich's shares included in this registration
rights agreement.
1994 STOCK OPTION PLAN
On November 15, 1994, the Board adopted and on December 16, 1994,
stockholders approved the 1994 Stock Option Plan. On January 26, 1996 and
November 15, 1996, the Company's stockholders approved amendments to the 1994
Stock Option Plan (the "1994 Plan"). The 1994 Plan will terminate no later than
November 15, 2004, ten years after adoption by the Board of Directors and after
such termination no additional options may be granted. The 1994 Plan is
administered by the Compensation Committee which makes discretionary grants
("discretionary grants") of options to employees (including employees who are
officers and directors of the Company), directors who are not employees of the
Company ("Outside Directors") and consultants. The 1994 Plan also provides for
formula grants of options to Outside Directors ("formula grants"). Under the
1994 Plan, 2,790,000 shares of Common Stock have been reserved for discretionary
grants and 210,000 shares of Common Stock have been reserved for formula grants.
As of September 30, 1996, 845,350 discretionary and 20,000 formula options had
been granted under the 1994 Plan.
Options granted pursuant to discretionary grants may be nonqualified
options or incentive options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended. The selection of participants, allotment of
shares, determination of price and other conditions of purchase of such options
will be determined by the Compensation Committee, in its sole discretion.
Options granted pursuant to discretionary grants are exercisable for a period of
up to ten years, except that incentive options granted to optionees who, at the
time the option is granted, own stock representing greater than 10% of the
voting power of all classes of stock of the Company or any parent or subsidiary,
are exercisable for a period of up to five years. The per-share exercise price
of incentive options granted pursuant to discretionary grants must be no less
than 100% of the fair
56
<PAGE> 58
market value of the Common Stock on the date of grant, except that the per share
exercise price of incentive options granted to optionees who, at the time the
option is granted, own stock representing greater than 10% of the voting power
of all classes of stock of the Company or any parent or subsidiary, must be no
less than 110% of the fair market value of the Common Stock. The per share
exercise price of nonqualified stock options granted pursuant to discretionary
grants must be no less than 85% of the fair market value of the Common Stock on
the date of grant. To the extent options are granted at less than fair market
value, the Company incurs a non-cash cost for financial reporting purposes.
Under the formula grants, each Outside Director will be granted
automatically a nonqualified option to purchase 50,000 shares (subject to
adjustment as provided in the 1994 Plan). Each such director may decline such
grant. Each option granted pursuant to a formula grant will vest and become
exercisable as to 10,000 shares on the date such option is granted (the "Grant
Date"), as to 10,000 shares on the date of the first annual meeting of
stockholders held at least eight months after the Grant Date (the "First Annual
Meeting") and as to 10,000 shares on the date of each of the next three annual
meetings of stockholders held after the First Annual Meeting, provided that the
option will only vest on the relevant annual meeting of stockholders date if the
Outside Director is re-elected to the Board at such meeting. Each such option
shall have a term of five years from the relevant vesting date. The exercise
price per share of Common Stock for options granted pursuant to a formula grant
shall be 100% of the fair market value as determined under the terms of the 1994
Plan.
Options granted under the 1994 Plan are nontransferable, other than by will
or by the laws of descent and distribution, and may be exercised during the
optionee's lifetime, only by the optionee, or in the event of the optionee's
legal incapacity to do so, by the optionee's guardian or legal representative.
As of December 31, 1996, there were 322 employees eligible to participate
and approximately 107 actual participants in the 1994 Plan. During the fiscal
year ended June 30, 1996 there were no grants of options pursuant to the 1994
Plan to any director or executive officer of the Company, including the Named
Officers. There were grants of options pursuant to the 1994 Plan to all other
employees as a group to acquire an aggregate of 535,500 shares of Common Stock,
at an average exercise price of $4.73 per share.
EMPLOYEE STOCK PURCHASE PLAN
On November 15, 1996, the Company's stockholders approved the Company's
adoption of an Employee Stock Purchase Plan (the "Stock Purchase Plan"). The
Stock Purchase Plan is intended to qualify as an "employee stock purchase plan"
under Section 423 of the Code. All regular full-time employees of the Company
(including officers), and all other employees whose customary employment is for
more than 20 hours per week, who in either case have been employed by the
Company for at least three months are eligible to participate in the Stock
Purchase Plan. Directors who are not employees are not eligible. A maximum of
500,000 shares of the Company's Common Stock are reserved for offering under the
Stock Purchase Plan and available for purchase thereunder, subject to
anti-dilution adjustments in the event of certain changes in the capital
structure of the Company.
Under the Stock Purchase Plan, offerings will be made at the commencement
of each offering period ("Offer Period"). During each Offer Period, deductions
are to be made from the pay of participants (in accordance with their
authorizations) and credited to their accounts under the Stock Purchase Plan.
Payroll deductions may be from 1% to 15% (in whole percentage increments) of a
participant's regular base pay. Participants may not make direct cash payments
to their accounts.
The price per share at which shares of Common Stock are to be purchased
pursuant to the Stock Purchase Plan for any Offer Period is the lesser of (a)
85% of the fair market value of Common Stock on the commencement of the Offer
Period or (b) 85% of the fair market value of Common Stock on the last business
day of an Offer Period. On the last business day of each Offer Period, amounts
57
<PAGE> 59
credited to the accounts of participants who have been neither terminated from
the employ of the Company nor withdrawn from the Stock Purchase Plan for such
Offer Period are used to purchase shares of Common Stock in accordance with the
elections of such participants. Any amounts remaining in the accounts of
participants at the end of any Offer Period are refunded to the participants.
Only amounts credited to the accounts of participants may be applied to the
purchase of shares of Common Stock under the Stock Purchase Plan.
If for any Offer Period the number of shares of Common Stock available for
Stock Purchase Plan purposes shall be insufficient, the Board of Directors of
the Company is authorized to apportion the remaining available shares pro rata
among participating employees on the basis of their payroll deductions in effect
for such Offer Period.
The Company makes no cash contributions to the Stock Purchase Plan, but
bears the expenses of its administration. The Stock Purchase Plan is
administered by the Compensation Committee, which has authority to establish and
change the number and duration of the Offer Periods during the term of the Stock
Purchase Plan, and to make rulings and interpretations thereunder.
The Stock Purchase Plan will terminate when all available shares have been
purchased, or earlier in the discretion of the Compensation Committee. The first
Offer Period commenced on December 2, 1996 and will end on June 30, 1997. New
Offer Periods will commence on each July 1 and January 1 thereafter until the
Stock Purchase Plan is terminated. At December 31, 1996, there were
approximately 272 employees (including officers and directors) who were eligible
to participate in the Stock Purchase Plan.
CERTAIN TRANSACTIONS
Effective July 1, 1994, the Company engaged SGC Advisory Services, Inc.
("SGC") as a financial and business consultant for three years. SGC is an
affiliate of Steven G. Chrust, a former director of the Company. Pursuant to the
agreement, the Company will compensate SGC as follows: (1) a monthly fee of
$5,000; (2) options to purchase up to 50,000 shares of the Company's Common
Stock that vest on July 1, 1997, and are exercisable on or before July 1, 1999;
and (3) a fee equal to 4% of the total aggregate consideration received by the
Company or its shareholders, in any transaction that the Company completes with
a strategic partner, merger partner or buyer if SGC is the finder of such
entity; or in the case where SGC is not the finder but proves instrumental in
completing the transaction then a fee of 2% will be payable to SGC. In either
case, 50% of the fee will be payable in cash at the time of closing and 50% will
be payable in warrants to purchase securities or instruments similar to those
received by the Company or its shareholders, unless the entire purchase price is
paid in cash. In the latter case, the entire fee will be payable in cash at
closing. Any warrants will have an exercise life of five years from date of
issuance or vesting whichever is later and will be exercisable at the same price
as established by the transaction that generates the warrant fee. At the end of
each month of the term of the agreement, SGC earns a credit against the exercise
price of the options referred to in (2) above equal to 1/36th of the exercise
price. The shares issued upon exercise of the options were priced at the average
of the high bid and low asked price on the closing date of the October 1994
private placement and have piggy-back registration rights.
In August 1994, Apex loaned the Company $250,000. The terms of this loan
were 15% per annum interest on a note due December 31, 1994, the grant of a
security interest in the tangible assets of the Company's operating subsidiary
that was then constructing a CAP network, and the issuance of the Company's
warrants in the amount of $250,000 to purchase shares of Preferred Stock at $90
per share. Apex converted the principal of this loan into 2,778 shares of Series
A Preferred at $90 per share as part of the October 1994 private placement. In
addition, Apex received warrants to purchase 3,333 shares of Common Stock at
$1.125 per share and warrants to purchase 3,333 shares of Common Stock at $0.01
per share in connection with this conversion. All of these warrants were
exercised.
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<PAGE> 60
In October 1994, the Company completed a private placement in which it sold
an aggregate of 186,664 shares of its Series A Preferred Stock and issued
warrants to purchase an aggregate of 2,674,506 shares of Common Stock for an
aggregate consideration of $16.8 million, including the conversion of $4.3
million of outstanding debt. Each share of the Series A Preferred Stock is
convertible into 40 shares of Common Stock, subject to anti-dilution
adjustments, generally at the option of the holder. Huff acquired control of the
Company through its purchase of 138,889 shares of the Series A Preferred Stock
for an aggregate purchase price of $12.5 million and its receipt of warrants to
purchase 77,000 and 1,414,222 shares of Common Stock at prices of $1.125 and
$0.01 per share, respectively, all of which were exercised in November 1994.
Huff is an investment limited partnership and the consideration for the Series A
Preferred Stock was obtained from its general and limited partners through
capital calls for investments by the fund. Upon completion of these
transactions, Huff owned approximately 55.1% of the Company's outstanding voting
stock.
In June 1995, the Company completed a private placement of its Series B
Preferred Stock, of which ING purchased an aggregate of 100,000 shares of
Preferred Stock, warrants to purchase 428,571 shares of Common Stock at an
exercise price of $0.01 per share and a warrant to purchase 100,000 shares of
Common Stock at an exercise price of $2.50 per share. Huff and certain of its
affiliates purchased an aggregate of 100,975 shares of the Preferred Stock,
warrants to purchase 432,749 shares of Common Stock at an exercise price of
$0.01 per share, a warrant to purchase 100,000 shares of Common Stock at an
exercise price of $1.79 per share and a warrant to purchase 100,000 shares at an
exercise price of $2.50 per share. Apex and certain of its affiliates purchased
an aggregate of 21,000 shares of the Preferred Stock and warrants to purchase an
aggregate of 90,000 shares of Common Stock at an exercise price of $0.01 per
share. The price per unit in the June 1995 private placement was $100. Pursuant
to the Series B Purchase Agreement, in November 1995, ING purchased 50,000
additional shares of the Series B Preferred Stock and exercised a warrant
entitling ING to purchase 214,286 shares of Common Stock at an exercise price of
$0.01 per share. In connection with these private placements, the Company
entered into the Registration Rights Agreement dated June 26, 1995, among the
holders of the Preferred Stock, certain holders of Common Stock and certain
holders of options or warrants convertible into Common Stock (the "Registration
Rights Agreement") wherein the parties were granted piggy-back registration
rights with respect to any registration statements (other than Registration
Statements filed on Forms S-4 or S-8) filed by the Company with the Commission
at any time prior to the sixth anniversary of the Registration Rights Agreement,
and certain demand registration rights following the occurrence of, among other
things, a Qualifying Offering.
The Company also has entered into the Stockholders' Agreement, dated as of
June 26, 1995, with the holders of 414,164 shares of the Series A-1 and June
1995 Preferred Stock, Anthony J. Pompliano and Richard A. Kozak. The
Stockholders' Agreement, among other things, generally restricts the transfer of
Common and Preferred Stock owned by the parties to the agreement, with the
exception of stock sold: (i) in a public offering pursuant to an effective
registration statement under the Securities Act or (ii) in the public market
pursuant to Rule 144 under the Securities Act. The agreement further provides
the stockholders with rights of first refusal in the case of sales initiated by
stockholders that are parties to the agreement and certain "tag-along" rights
which allow the stockholders to sell a proportionate amount of their stock in
the event a stockholder proposes to sell such stock to an unrelated purchaser.
In response to voting rights issues raised by the NASDAQ Stock Market staff
concerning the Company's governance structure, the Company amended its
Certificate of Incorporation, which amendments were approved by the stockholders
of the Company on January 26, 1996, such that the Board will be comprised of
seven members, four of whom will be elected by the holders of the Company's
Common Stock and three of whom will be elected by the holders of the Company's
Preferred Stock (a "Standard Board"). However, in the event of certain
triggering events set forth in the Company's Certificate of Incorporation occur,
the Board shall be increased to eleven members and the additional four directors
shall be elected by holders of the Company's Preferred Stock (a
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<PAGE> 61
"Triggering Event Board"). Pursuant to the Governance Agreement dated November
8, 1995 between the Company and certain holders of its Preferred Stock (the
"Governance Agreement"), until June 26, 1996, the Board was to consist of eleven
members, four of whom were elected by holders of the Common Stock and seven of
whom were elected by holders of the Preferred Stock. On February 26, 1996, the
Company and the other parties to the Governance Agreement signed the
Supplemental Governance Agreement pursuant to which the Board was reduced to
seven members, four of whom were elected by holders of the Common Stock and
three of whom were elected by holders of the Preferred Stock. When the Board was
reduced to seven members on February 26, 1996, Richard A. Kozak, Steven G.
Chrust, Frederick Galland and Cathy Markey, all of whom had been elected by the
holders of the Company's Preferred Stock, resigned.
On December 28, 1995, the Company entered into an agreement with Gerard
Klauer Mattison & Co., LLC ("GKM"), wherein the Company agreed to pay to GKM
approximately $1.4 million in full satisfaction of claims and as payment for
past services provided by GKM to the Company and issue GKM a Warrant exercisable
for 96 shares of the Company's Common Stock at an exercise price of $0.01 per
share at any time before June 28, 1996 ("GKM Warrant I"), and Warrant, which
will allow GKM to purchase 62,473 shares of the Company's Common Stock at an
exercise price of $2.80 per share (subject to certain adjustments) at any time
after 5:00 p.m. New York City time on December 28, 1996, until 5:00 p.m. New
York City time on December 28, 2000 (collectively, the "GKM Warrants"). See
"Business -- Legal Proceedings." The GKM Warrants were earned as a result of
services that GKM performed in connection with the June 1995 private placement.
The Common Stock issuable upon the exercise of the GKM Warrants have certain
registration rights. The GKM Warrant I was exercised.
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PRINCIPAL STOCKHOLDERS
The following table sets forth as of December 31, 1996, certain information
regarding the beneficial ownership of the Company's Common Stock outstanding
(assuming the exercise of options and warrants exercisable on or within 60 days
of such date and the conversion of the Preferred Stock) by (i) each person who
is known to the Company to own 5% or more of the Common Stock, (ii) each
director of the Company, (iii) the Chief Executive Officer and each of the Named
Officers and (iv) all executive officers and directors of the Company as a
group.
Unless otherwise indicated, the named persons exercise sole voting and
investment power over the shares that are shown as beneficially owned by them.
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL(3)
---------------------
NUMBER BEFORE AFTER
NAME OF BENEFICIAL OWNER(1) OF SHARES(2) OFFERING OFFERING
- --------------------------------------------------------------- ------------ -------- --------
<S> <C> <C> <C>
Anthony J. Pompliano(4)........................................ 1,599,999 6.2%
Jack E. Reich(5)............................................... 300,000 1.2
George M. Tronsrue, III(5)..................................... 300,000 1.2
Riley M. Murphy(6)............................................. 137,500 *
Robert H. Ottman(7)............................................ 100,000 *
George M. Middlemas(8)......................................... 1,433,679 5.9
Christopher Rafferty(9)........................................ 8,000 *
Edwin M. Banks(9).............................................. 0 *
Peter C. Bentz(9).............................................. 0 *
Olivier L. Trouveroy(10)....................................... 0 *
Benjamin P. Giess(10).......................................... 0 *
Richard A. Kozak(11)........................................... 1,133,465 4.5
The Huff Alternative Income Fund, L.P.(12)..................... 11,246,782 46.2
ING Equity Partners, L.P. I(13)................................ 6,100,000 25.3
First Analysis Corporation(14)................................. 2,840,185 11.8
Russell T. Stern, Jr.(15)...................................... 1,239,731 5.1
All executive officers and directors as a group (12 persons)... 4,712,643 17.2
</TABLE>
- ------------
* Less than one percent.
(1) The address of all officers and directors listed above is in the care of
the Company.
(2) Gives effect to conversion of 186,664 shares of Series A-1 Preferred Stock
into 7,466,560 shares of Common Stock and conversion of 277,500 shares of
Series B Preferred Stock into 9,910,704 shares of Common Stock.
(3) The percentage of total outstanding for each stockholder is calculated by
dividing (i) the number of shares of Common Stock deemed to be beneficially
owned by such stockholder as of December 31, 1996 (assuming conversion of
preferred stock into common stock) by (ii) the sum of (A) the number of
shares of Common Stock outstanding as of December 31, 1996 plus (B) the
number of shares of Common Stock into which all the shares of Preferred
Stock outstanding as of December 31, 1996, are convertible plus (C) the
number of shares of Common Stock issuable upon the exercise of options or
warrants held by such stockholder which were exercisable as of December 31,
1996 or will become exercisable within 60 days after December 31, 1996
("currently exercisable").
(4) Includes currently exercisable options to purchase 1,599,899 shares.
(5) Includes currently exercisable options to purchase 300,000 shares.
(6) Includes currently exercisable options to purchase 137,500 shares.
(7) Includes currently exercisable options to purchase 100,000 shares. Mr.
Ottman is a Named Officer but not an executive officer of the Company.
(8) Includes 20,000 shares of Common Stock and currently exercisable options to
purchase 20,000 shares. Also includes 245,560 shares of Common Stock,
16,803 shares of Series A-1 Preferred Stock convertible into 672,120 shares
of Common Stock and 3,269.9 shares of Series B-3 Preferred Stock
convertible into
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<PAGE> 63
116,785 shares of Common Stock currently owned by Apex II. Includes 2,595
shares of Series A-1 Preferred Stock convertible into 103,800 shares of
Common Stock, 4,904.85 shares of Series B-3 Preferred Stock convertible
into 175,173 shares of Common Stock and 80,241 shares of Common Stock
currently owned by Apex I. Mr. Middlemas is a general partner of Apex
Management Partnership which is the general partner of Apex I and Apex II.
Mr. Middlemas disclaims beneficial ownership of the shares owned by Apex I
and Apex II, except to the extent of his ownership in the general partner
of Apex I and in the general partner of Apex II.
(9) Messrs. Banks and Bentz are employees of W.R. Huff Asset Management Co.,
L.L.C., an affiliate of Huff. Mr. Rafferty is an employee of WRH Partners,
L.L.C., the general partner of Huff. Messrs. Rafferty, Bentz and Banks
disclaim beneficial ownership of all shares held by Huff. Mr. Rafferty's
amounts include 200 shares of Series B-2 Preferred Stock convertible into
7,143 shares of Common Stock and 857 shares of Common Stock.
(10) Mr. Trouveroy is a Managing Partner of ING and Mr. Giess is a Partner of
ING. Messrs. Trouveroy and Giess disclaim beneficial ownership of all
shares held by ING.
(11) Includes currently exercisable options to purchase 1,133,265 shares. Mr.
Kozak's employment with the Company has been terminated effective February
2, 1997. See "Management -- Employment Agreements."
(12) Includes 138,889 shares of Series A-1 Preferred Stock convertible into
5,555,560 shares of Common Stock, 100,000 shares of Series B-2 Preferred
Stock convertible into 3,571,429 shares of Common Stock and currently
exercisable warrants to purchase 200,000 shares. The address for Huff is
1776 On the Green, 67 Park Place, Morristown, NJ 07960.
(13) Includes 100,000 shares of Series B-1 Preferred Stock convertible into
3,571,429 shares of Common Stock, 50,000 shares of Series B-4 Preferred
Stock convertible into 1,785,714 shares of Common Stock and currently
exercisable warrants to purchase 100,000 shares. The address for ING is 135
East 57th Street, 16th Floor, New York, NY 10022.
(14) Includes 245,560 shares of Common Stock, 16,803 shares of Series A-1
Preferred Stock convertible into 672,120 shares of Common Stock and 3,269.9
shares of Series B-3 Preferred Stock convertible into 116,785 shares of
Common Stock currently owned by Apex II. Includes 2,595 shares of Series
A-1 Preferred Stock convertible into 103,800 shares of Common Stock,
4,904.85 shares of Series B-3 Preferred Stock convertible into 175,173
shares of Common Stock and 80,241 shares of Common Stock currently owned by
Apex I. Includes 272,945 shares of Common Stock, 10,249 shares of Series
A-1 Preferred Stock convertible into 409,960 shares of Common Stock and
1,380.61 shares of Series B-3 Preferred Stock convertible into 49,308
shares of Common Stock currently owned by The Productivity Fund II, L.P.
("Productivity"). Includes 6,056 shares of Series A-1 Preferred Stock
convertible into 242,240 shares of Common Stock, 11,444.64 shares of Series
B-3 Preferred Stock convertible into 408,737 shares of Common Stock and
63,316 shares of Common Stock currently owned by Environmental Private
Equity Fund II, L.P. ("EPEF"). First Analysis Corporation ("FAC") is an
ultimate general partner of Apex I, Apex II, Productivity and EPEF and may
be deemed to be the beneficial owner of the shares owned by them. FAC
disclaims beneficial ownership of these shares. This information was
obtained from a Schedule 13D filed with the Securities and Exchange
Commission on August 4, 1995, as amended in October 1995. The address for
First Analysis Corporation is 233 South Wacker Drive, Suite 9600, Chicago,
IL 60093.
(15) Includes currently exercisable options to purchase 30,000 shares and
199,677 shares of the Company's Common Stock owned by The Thurston Group,
Inc., of which Mr. Stern is a principal. The address for Mr. Stern is 660
Mews, Winnetka, IL 60093.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
AT&T CREDIT FACILITY
In October 1994, the Company entered into the AT&T Credit Facility pursuant
to which AT&T Credit Corporation has agreed to provide up to $31.2 million in
financing for the development and construction of fiber optic networks by the
Company's subsidiaries. Pursuant to the AT&T Credit Facility, during fiscal 1995
the Company's subsidiaries in Louisville, Fort Worth, Greenville and Columbia
entered into loan agreements with AT&T Credit Corporation providing for up to
$19.8 million in loans secured by the assets of such subsidiaries, and in
September 1995, the Company's subsidiary in El Paso entered into a separate loan
agreement with AT&T Credit Corporation pursuant to the AT&T Credit Facility
providing for up to an aggregate of approximately $5.5 million in loans secured
by its assets. During fiscal 1996, the existing loan agreements were amended to
increase the aggregate credit available under such agreements to the $31.2
million credit availability under the AT&T Credit Facility. As of September 30,
1996, outstanding borrowings under the AT&T Credit Facility totalled
approximately $23.3 million, including accrued interest of approximately $1.9
million. Interest rates currently applicable to the loans range from 11.93% to
14.47%.
The loans under the AT&T Credit Facility are secured by all of the assets
of the respective borrowing subsidiary, including its installed fiber optic
system and other equipment. The principal of borrowed amounts is payable in 28
consecutive quarterly installments, beginning with the ninth quarter after the
date of the loan. The principal of borrowed amounts may be prepaid in certain
circumstances, and must be prepaid along with a premium in other circumstances.
Interest is due quarterly. At the borrowing subsidiary's option, the interest
rate may be fixed or variable. The borrowing subsidiary has a one-time option to
convert all variable rate loans to fixed rate loans. Upon certain events of
default, additional interest ranging from 2% to 4% will become payable. Interest
may generally be deferred so long as it would not cause the outstanding
principal balance to exceed the commitment amounts for Capital Loans and for
Equipment Loans (as defined in the loan documents). To date, the Company has
elected to defer all interest due under the loans. In addition, the AT&T Credit
Facility includes covenants, some of which impose certain restrictions on the
Company and its subsidiaries including restrictions on the declaration or
payment of dividends, the conduct of certain activities, certain capital
expenditures, the creation of additional liens or indebtedness, the disposition
of assets, transactions with affiliates, and extraordinary corporate
transactions. The AT&T Credit Facility imposes restrictions on the ability of
those subsidiaries of ACSI that incur indebtedness thereunder to transfer funds
to ACSI in the form of dividends or other distributions. The AT&T Credit
Facility also imposes restrictions on the ability of such subsidiaries to raise
capital by incurring additional indebtedness. These factors could limit ACSI's
ability to meet its obligations with respect to the Notes.
Pursuant to the AT&T Credit Facility, the Company has contributed
approximately $20.5 million in capital to its subsidiaries through September 30,
1996, and AT&T Credit Corporation received 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 the respective
subsidiaries to AT&T Credit Corporation as a condition to each loan. Under
certain circumstances, this pledge agreement also restricts the Company's
ability to pay dividends on its capital stock.
2005 NOTES AND 2006 NOTES
The 2005 Notes were issued under an Indenture, dated as of November 14,
1995 (the "2005 Note Indenture"), between the Company and Chemical Bank, as
trustee thereunder; and the 2006 Notes were issued under an Indenture dated as
of March 21, 1996 (the "2006 Note Indenture" and, together with the 2005 Note
Indenture, the "Indentures") between the Company and Chemical Bank, as trustee
thereunder. The terms of the 2005 Notes and the 2006 Notes include those stated
in the applicable Indenture and those made a part of the applicable Indenture by
reference to the Trust
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<PAGE> 65
Indenture Act of 1939 as in effect on the date of that Indenture. The terms of
the Indentures are substantially similar. The following summaries of certain
provisions of the Indentures do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, all of the provisions of
the applicable Indenture. A copy of each of the Indentures is incorporated into
the Registration Statement by reference.
The Notes are general unsubordinated and unsecured obligations of ACSI and
will rank pari passu with all other unsubordinated and unsecured indebtedness of
ACSI. As a holding company that conducts virtually all of its business through
subsidiaries, ACSI currently has no source of operating cash flow other than
from dividends and distributions from its subsidiaries. ACSI's subsidiaries will
have no obligation to pay amounts due on the Notes and will not guarantee the
Notes. Therefore, the Notes will be effectively subordinated to all liabilities
of ACSI's subsidiaries, including trade payables. Any rights of ACSI and its
creditors, including the holders of the Notes, to participate in the assets of
any of ACSI's subsidiaries upon any liquidation or reorganization of any such
subsidiary will be subject to the prior claims of that subsidiary's creditors
(including trade creditors).
Upon a Change of Control (as defined in the Indentures), each holder of the
Notes will have the right to require ACSI to repurchase all or any part of such
holder's Notes at 101% of the Accreted Value (as defined in the Indenture)
thereof, or, in the case of any such repurchase on or after November 1, 2000 in
the case of the 2005 Notes and on or after April 1, 2001 in the case of the 2006
Notes, 101% of the principal amount thereof, plus accrued and unpaid interest,
if any, thereon, to the date of repurchase. A Change of Control would occur if,
among other things, any person or group, other than Mr. Pompliano, Mr. Kozak or
Huff, acquires more than 35% of the total voting power of the Company.
Each of the Indentures contains 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 in respect of
ACSI's capital stock or make certain other restricted payments, create
restrictions on the ability of certain subsidiaries to make distributions on
their capital stock, create liens, enter into transactions with affiliates or
related persons, sell assets, or consolidate, merge or sell all or substantially
all of their assets.
The 2005 Notes
The 2005 Notes mature on November 1, 2005. The yield on the 2005 Notes
equals 13% per annum, computed on a semi-annual bond equivalent basis and
calculated from November 9, 1995. 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. Cash interest will not accrue on the 2005 Notes prior to
November 1, 2000. Thereafter, interest on the 2005 Notes will accrue at the rate
of 13% per annum and will be payable in cash semi-annually on May 1 and November
1, commencing May 1, 2001. The 2005 Notes will be redeemable, at the option of
ACSI at any time, in whole or in part, on or after November 1, 2000, at 110%,
106 2/3% and 103 1/3% of the principal amount for the twelve months following
November 1, 2000, 2001 and 2002, respectively, plus accrued and unpaid interest,
if any, to the date of redemption.
The 2006 Notes
The 2006 Notes mature on April 1, 2006. The yield on the 2006 Notes equals
12 3/4% per annum, computed on a semi-annual bond equivalent basis and
calculated from March 21, 1996. The 2006 Notes will accrete at a rate of
12 3/4%, compounded semi-annually, to an aggregate principal amount of
$120,000,000 by April 1, 2001. Cash interest will not accrue on the 2006 Notes
prior to April 1, 2001. Thereafter, interest on the 2006 Notes will accrue at
the rate of 12 3/4% per annum and will be payable in cash semi-annually on April
1 and October 1, commencing October 1, 2001. The 2006 Notes will be redeemable,
at the option of ACSI at any time, in whole or in part, on or after April 1,
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<PAGE> 66
2001 at 106 3/8%, 104 1/4% and 102 1/8% of the principal amount for the twelve
months following April 1, 2001, 2002 and 2003, respectively, plus accrued and
unpaid interest, if any, thereon, to the date of repurchase.
DESCRIPTION OF CAPITAL STOCK
ACSI's authorized capital stock consists of 76,500,000 shares of capital
stock, consisting of 75,000,000 shares of Common Stock, par value $.01 per
share, and 1,500,000 shares of Preferred Stock, par value $1.00 per share. On
September 30, 1996, there were 6,761,466 shares of Common Stock issued and
outstanding and held of record by approximately 271 persons. The Company has
designated 186,664 shares of its authorized Preferred Stock as 9% Series A-1
Convertible Preferred Stock, 100,000 shares as its 9% Series B-1 Convertible
Preferred Stock, 102,500 shares as its 9% Series B-2 Convertible Preferred
Stock, 25,000 shares as its 9% Series B-3 Convertible Preferred Stock, and
50,000 shares as its 9% Series B-4 Convertible Preferred Stock. Upon completion
of this Offering, the 464,164 issued and outstanding shares of Preferred Stock
will be converted into 17,377,278 shares of Common Stock and will again become
authorized but unissued shares of Preferred Stock.
PREFERRED STOCK
The authorized but unissued Preferred Stock may be issued by the Board of
Directors of the Company from time to time in one or more series with such
preferences, terms and rights as the Board of Directors may determine without
further action by the stockholders of the Company. Accordingly, the Board of
Directors has the power to fix the dividend rate and to establish the
provisions, if any, relating to dividends, voting rights, redemption rates,
sinking funds, liquidation preferences and conversion rights for any series of
Preferred Stock issued in the future.
It is not possible to state the actual effect of the authorization of any
particular series of Preferred Stock upon the rights of holders of the Common
Stock until the Board of Directors determines the specific rights of the holder
of Preferred Stock of any further series. The issuance of Preferred Stock may
have the effect of delaying, deferring or preventing a change in control of the
Company without further action by the stockholders.
COMMON STOCK
ACSI is authorized to issue 75,000,000 shares of Common Stock. Under the
Company's By-Laws, at least a majority of the issued and outstanding voting
securities of the Company present at a duly called stockholders' meeting
constitutes a quorum. Generally, if a quorum is present the affirmative vote of
the majority of the voting securities represented at the meeting constitutes an
act of the stockholders.
Subject to the rights of holders of the Preferred Stock, certain covenants
contained in the Indentures which restrict the Company's ability to declare
dividends on its Common Stock, and the restrictions on dividends contained in an
agreement between the Company and AT&T Credit Corporation, holders of the
Company's Common Stock are entitled to receive dividends, on a pro rata basis,
as may from time to time be declared by the Board of Directors. The holders of
Common Stock are entitled to one vote per share, voting together with the
holders of Preferred Stock (voting on an as-converted basis) as a single class
(except with respect to the election of directors and certain transactions and
matters), on every question submitted to them at a meeting of shareholders. In
the event of liquidation, dissolution or winding up, the holders of Common Stock
are, subject to the liquidation preference of the holders of Preferred Stock,
entitled to share ratably in all assets of the Company available for
distribution to stockholders along with the holders of the Preferred Stock, any
other series or class of preferred stock entitled to a share of the remaining
assets of the Company pro rata based on the number of shares of Common Stock
held by each (assuming full conversion of all such Preferred Stock or such other
series or class of preferred stock). The holders of the
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<PAGE> 67
Company's Common Stock do not have pre-emptive rights or cumulative voting
rights with respect to the election of directors.
ANTI-TAKEOVER STATUTE
Section 203 of the DGCL prohibits certain transactions between a Delaware
corporation and an interested stockholder, which is defined therein as a person
who, together with any affiliates and/or associates of such person, beneficially
owns, directly or indirectly, 15% or more of the outstanding voting shares of a
Delaware corporation. This provision prohibits certain business combinations
(defined broadly to include mergers, consolidations, sales or other dispositions
of assets having an aggregate value in excess of 10% of the consolidated assets
of the corporation, and certain transactions that would increase the interested
stockholder's proportionate share ownership in the corporation) between an
interested stockholder and a corporation for a period of three years following
the time the interested stockholder acquired its stock unless (i) the business
combination is approved by the corporation's Board of Directors prior to the
date the interested stockholder acquired shares, (ii) the interested stockholder
acquired at least 85% of the voting stock of the corporation in the transaction
in which it becomes an interested stockholder or (iii) the business combination
is approved by a majority of the Board of Directors and by the affirmative vote
of 66 2/3% of the votes entitled to be cast by disinterested stockholders at an
annual or special meeting. The Charter and By-laws do not exclude the Company
from the restrictions imposed under Section 203 of the DGCL.
LIMITATION OF LIABILITY OF DIRECTORS
The Charter provides that a director of the Company will not be personally
liable for monetary damages to the Company or its stockholders for breach of
fiduciary duty as a director, except for liability, (i) for any breach of the
director's duty of loyalty to such corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for unlawful payments of dividends or unlawful
stock repurchases or redemption as provided in Section 174 of the DGCL or (iv)
for any transaction from which the director derived an improper personal
benefit.
This provision is intended to afford directors additional protection and
limit their potential liability from suits alleging a breach of the duty of care
by a director. As a result of the inclusion of such a provision, stockholders
may be unable to recover monetary damages against directors for actions taken by
them that constitute negligence or gross negligence or that are otherwise in
violation of their fiduciary duty of care, although it may be possible to obtain
injunctive or other equitable relief with respect to such actions. If equitable
remedies are found not to be available to stockholders in any particular
situation, stockholders may not have an effective remedy against a director in
connection with such conduct.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Amended and Restated Certificate of Incorporation and the By-laws
provide that directors and officers of the Company (as well as agents and
employees of the Company at the discretion of the Board) shall, to the fullest
extent authorized by the DGCL or any other applicable laws then in effect, be
indemnified against liabilities arising from their service as directors and
officers. Additionally, the Company has entered into indemnification agreements
with each of its executive officers and directors to reimburse them for certain
liabilities incurred in connection with the performance of their fiduciary
duties. Section 145 of the DGCL empowers a corporation to indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise, against expenses (includ-
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<PAGE> 68
ing attorneys' fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in, or not opposed to, the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful.
Section 145 also empowers a corporation to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that such person acted in any of the
capacities set forth above, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted under similar standards, except
that no indemnification may be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the corporation
unless, and only to the extent that, the Delaware Court of Chancery or the court
in which such action was brought shall determine that despite the adjudication
of liability such person is fairly and reasonably entitled to indemnity for such
expenses which the Delaware Court of Chancery or such other court shall deem
proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to above or in the defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith; that indemnification provided for by Section 145 shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled;
and that the corporation is empowered to purchase and maintain insurance on
behalf of any person who is a or was a director, officer, employee or agent of
the corporation against any liability asserted against him in any such capacity,
or arising out of his status as such, whether or not the corporation would have
the power to indemnify him against such liabilities under Section 145.
There has not been in the past and there is not presently pending any
litigation or proceeding involving a director, officer, employee or agent of the
Company which could give rise to an indemnification obligation on the part of
the Company. In addition, except as described herein, the Board of Directors is
not aware of any threatened litigation or proceeding which may result in a claim
for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Company will, unless in the opinion of counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The foregoing summary of certain material provisions of ACSI's Charter and
By-laws is qualified in its entirety by reference to the complete text of those
documents.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar of ACSI's Common Stock is The Bank of New
York, 101 Barclay Street, New York, New York 10286.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering and the simultaneous conversion of the
Preferred Stock into Common Stock, the Company will have outstanding 25,371,620
shares of Common Stock (excluding the shares offered hereby). The shares offered
hereby and 2,996,376 of the shares outstanding prior to this offering are freely
transferable without further registration under the Securities Act of 1933, as
amended (the "Securities Act") unless acquired by affiliates of the Company. The
22,375,244 remaining shares outstanding prior to this offering are "restricted
securities" as that term is defined in Rule 144 of the Securities Act. Of these
restricted shares, 10,038,533 shares are saleable subject to certain volume and
manner of sale restrictions under Rule 144 (of which shares are subject
to the Lock-Up Agreements described below). Of these 10,038,533 shares, 805,885
shares and 169,017 shares will have become freely transferable under Rule 144(k)
on September 1, 1997 and January 1, 1998, respectively, assuming such shares are
still held by non-affiliates of the Company on each of those dates. By September
1, 1997, an additional 10,477,156 restricted shares will have become saleable
subject to Rule 144 limitations. By January 1, 1998, an additional 679,673
restricted shares will have become saleable subject to Rule 144 limitations.
The holders of shares of Common Stock and shares of Common
Stock (including, in each case, shares issuable upon conversion of the Preferred
Stock and exercise of options and warrants which are or will have become vested
during the applicable lock-up period) have agreed not to sell or otherwise
dispose of any of their shares of Common Stock for a period of 180 days and 90
days, respectively, from the date of this Prospectus without the prior written
consent of Alex. Brown & Sons Incorporated (the "Lock-up Agreements").
Holders of substantially all of the shares of Common Stock (i) outstanding
(other than the shares being offered hereby), (ii) issuable upon conversion of
the Preferred Stock and (iii) issuable upon exercise of outstanding options and
warrants have either piggy-back or demand registration rights relating to those
shares. Holders of outstanding shares and shares issuable upon
conversion of the Preferred Stock and exercise of options and warrants have
waived their rights to "piggyback" on this offering or prior Company offerings
and/or to demand registration of their shares until 180 days after consummation
of this offering. The Company has agreed to use its commercially reasonable
efforts to register all shares as to which piggyback and demand rights were
waived on or before the 210th day following consummation of this Offering (in
which all security holders with registration rights may have the right to
include their shares). There can be no assurance that persons with piggyback and
demand registration rights who have not waived those rights (holding up to
approximately shares of outstanding Common Stock and up to shares
of Common Stock issuable upon conversion of Preferred Stock or exercise of
options and warrants) will not request the Company to file a registration
statement for their shares prior to 180 days after this offering or that such
security holders will not seek damages from the Company for any alleged breach
of such security holders' registration rights in connection with this offering
or past Company offerings. Additionally, the Company has an obligation to
register under the Securities Act the 1,000,000 shares of Common Stock issued in
the Cybergate Acquisition no later than 210 days after the consummation of this
Offering but in no event later than December 31, 1997 and is required to
register up to 150,000 additional shares which may be issued in connection with
the Cybergate Acquisition no later than 60 days after such issuance. These
shares will be freely transferable upon such registration.
Of the shares reserved for issuance upon exercise of options and
warrants outstanding on January 31, 1997 and in connection with the Company's
Employee Stock Purchase Plan, shares have been registered under the
Securities Act. Accordingly, the shares issued upon exercise of such options or
warrants or in connection with the Employee Stock Purchase Plan, will be freely
transferable unless held by affiliates of the Company.
68
<PAGE> 70
The future sale pursuant to Rule 144 or pursuant to a registration
statement for the outstanding restricted shares of Common Stock or the Common
Stock underlying the options and warrants, the future sale of Common Stock for
the Company's own account, or the exercise of registration rights by any
security holder or the perception that such sales or exercise could occur, could
have an adverse effect on the market price of the Common Stock and could impair
the Company's ability to raise capital through an offering of Common Stock. See
"Certain Relationships and Related Transactions."
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose securities are aggregated) who (together with predecessor
holders who are not affiliates of the Company) has beneficially owned shares of
Common Stock which are treated as restricted securities for at least two years
from the date such shares were acquired from the Company or an affiliate
thereof, is entitled to sell, within any three-month period, a number of shares
that does not exceed the greater of (i) 1% of the then outstanding shares of
Common Stock or (ii) the average weekly trading volume of the then outstanding
shares of Common Stock during the four calendar weeks preceding the date on
which notice of such sale was filed with the Commission under Rule 144. Sales
under Rule 144 are also subject to certain provisions relating to the manner and
notice of sale and the availability of current public information about the
Company. In addition, affiliates of the Company must comply with the
restrictions and requirements of Rule 144 (other than the two-year holding
period requirement) in order to sell shares of Common Stock that are not
restricted securities (such as shares acquired by affiliates of the Company in
the public market). Furthermore, commencing three years after the acquisition of
restricted securities from the Company or an affiliate of the Company, a holder
of such restricted securities who is not an affiliate of the Company at the time
of the sale and has not been an affiliate for at least three months prior to
such sale would be entitled to sell such securities immediately without regard
to the volume limitations and other conditions described above.
69
<PAGE> 71
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated and Donaldson, Lufkin & Jenrette Securities
Corporation, have severally agreed to purchase from the Company the following
respective numbers of shares of Common Stock at the public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- -------------------------------------------------------------------------------- ---------
<S> <C>
Alex. Brown & Sons Incorporated.................................................
Donaldson, Lufkin & Jenrette Securities Corporation.............................
---------
Total...........................................................................
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of the Common Stock offered hereby if any
of such shares are purchased.
The Company has been advised by the Representatives of the Underwriters
that the Underwriters propose to offer the shares of Common Stock to the public
at the public offering price set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share to certain other dealers. After the public
offering, the offering price and other selling terms may be changed by the
Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to , and the Company
will be obligated, pursuant to the option to sell such shares to the
Underwriters. The Underwriters may exercise such option from time to time only
to cover over-allotments made in connection with the sale of Common Stock
offered hereby. If purchased, the Underwriters will offer such additional shares
on the same terms as those on which the shares are being offered.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. In addition, the
Company has agreed to indemnify the Underwriters against certain liabilities
with respect to registration rights of certain of the Company's security
holders.
Stockholders of the Company, holding in the aggregate and
shares of Common Stock and warrants and options to purchase and
shares of Common Stock, have agreed not to offer, sell or otherwise dispose of
any of such Common Stock for a period of 180 and 90 days,
70
<PAGE> 72
respectively, after the date of this Prospectus without the prior written
consent of the Representatives of the Underwriters. See "Shares Eligible for
Future Sale."
In connection with this Offering, certain Underwriters and selling group
members (and any of their affiliated purchasers) who are qualified registered
market makers on the Nasdaq National Market, may engage in passive market making
transactions in the Common Stock on the Nasdaq National Market in accordance
with Rule 10b-6A under the Exchange Act during the two business day period
before commencement of offers or sales of the Common Stock in this Offering.
Passive market making consists of, among other things, displaying bids on the
Nasdaq National Market limited by the bid prices of independent market makers
and making purchases limited by such prices and effected in response to order
flow. Net purchases by a passive market maker on each day are limited to a
specified percentage of the passive market maker's average daily trading volume
in the Common Stock during a specified prior period, and all passive market
making activity must be discontinued when such limit is reached. Passive market
making may stabilize the market price of the Common Stock at a level above that
which might otherwise prevail and, if commenced, may be discontinued at any
time.
In the past, Donaldson, Lufkin & Jenrette Securities Corporation has
performed certain investment banking and other financial advisory services for
the Company, including in connection with the solicitation of consents from the
Company's noteholders for the Cybergate Acquisition, for which they have
received customary compensation.
LEGAL MATTERS
Certain legal matters with respect to the shares of Common Stock offered
hereby will be passed upon for the Company by Piper & Marbury L.L.P., Baltimore,
Maryland and for the Underwriters by Weil, Gotshal & Manges LLP, New York, New
York.
EXPERTS
The consolidated financial statements of the Company as of and for the
fiscal years ended June 30, 1995 and 1996, have been included in this Prospectus
and in the registration statement of which this Prospectus forms a part in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS
On April 21, 1995, pursuant to authorization of its Board of Directors and
approval of its Audit Committee, the Company dismissed the firm of Coopers &
Lybrand L.L.P. ("Coopers & Lybrand") as its auditors and retained KPMG Peat
Marwick LLP ("KPMG Peat Marwick"). Coopers & Lybrand's report for each of the
fiscal years ended June 30, 1993, and June 30, 1994, indicated uncertainties as
to the Company's ability to continue as a going concern. However, Coopers &
Lybrand's report for these years did not contain an adverse opinion or a
disclaimer of opinion and was not qualified or modified as to audit scope or
accounting principles.
During the fiscal years ended June 30, 1993, and June 30, 1994, and the
subsequent interim periods immediately preceding the change in accountants,
there were no disagreements with Coopers & Lybrand on any matter of accounting
principles or practice, financial statement disclosure, or auditing scope or
procedure, which if not resolved to the satisfaction of Coopers & Lybrand would
have caused them to make reference to the subject matter of the disagreement in
connection with their reports on the Company's financial statements. During the
fiscal years ended June 30, 1993, and June 30, 1994, and the subsequent interim
periods immediately preceding the change in accountants, there were no
reportable events (as that term is used in Regulation S-K, Item 304(a)(1)(v)(A)
through (D) of the Exchange Act), except that at the March 30, 1994, meeting of
the Audit Committee at which representatives of Coopers & Lybrand were present,
Coopers &
71
<PAGE> 73
Lybrand communicated to the Audit Committee that through approximately August
1993, documentation of equity or other non-cash transactions and controls over
cash were less than adequate. This matter was then discussed. The Company has
authorized Coopers & Lybrand to respond fully to the inquiries of KPMG Peat
Marwick concerning such reportable events.
ADDITIONAL INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy and information statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy and information statements and other information may be inspected
and copied at the public reference facilities of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, or at its
regional offices located at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material can be obtained from the Commission by
mail at prescribed rates. Requests should be directed to the Commission's Public
Reference Section, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Company's Common Stock is quoted on the Nasdaq
National Market and material filed by the Company can be inspected at the
offices of the National Association of Securities Dealers, Inc., 1735 K Street
N.W., Washington, D.C. 20006.
The Company has filed with the Commission a registration statement on Form
SB-2 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the
securities offered hereby. This Prospectus, which forms a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the
securities offered hereby, reference is made to the Registration Statement. This
Prospectus contains summaries of the material terms and provisions of certain
documents and, in each instance, reference is made to the copy of such the
document filed as an exhibit to the Registration Statement. Copies of the
Registration Statement and the exhibits thereto may be inspected, without
charge, at the offices of the Commission, at the address set forth above.
72
<PAGE> 74
GLOSSARY
ACCESS CHARGES -- The fees paid by IXCs to LECs for originating and
terminating long distance calls on their local networks.
ATM (Asynchronous Transfer Mode) -- A recently commercialized switching and
transmission technology that is one of a general class of packet technologies
that relay traffic by way of an address contained within the first five bits of
a standard fifty-three bit-long packet or cell. ATM switching was specifically
developed to allow switching and transmission of mixed voice, data and video
(sometimes referred to as "multi-media" information) at varying rates. The ATM
format can be used by many different information systems, including LANs.
BROADBAND -- Broadband communications systems can transmit large quantities
of voice, data and video by way of digital or analog signals. Examples of
broadband communication systems include DS-3 fiber optic systems, which can
transmit 672 simultaneous voice conversations, or a broadcast television station
that transmits high resolution audio and video signals into the home. Broadband
connectivity is also an essential element for interactive multimedia
applications.
CAP (Competitive Access Provider) -- A company that provides its customers
with an alternative to the local telephone company for local transport of
private line, special access and interstate transport of switched access
telecommunications services. CAPs are also referred to in the industry as
alternative local telecommunications service providers (ALTs) and metropolitan
area network providers (MANs) and were formerly referred to as alternative
access vendors (AAVs).
CATVS -- Cable television service providers.
CENTRAL OFFICES -- The switching centers or central switching facilities of
the LECs.
CENTREX -- Centrex is a service that offers features similar to those of a
Private Branch Exchange (PBX), except the equipment is located at the carrier's
premises and not at the premises of the customer. These features include direct
dialing within a given phone system, direct dialing of incoming calls, and
automatic identification of outbound calls. This is a value-added service that
carriers can provide to a wide range of customers who do not have the size or
the funds to support their own on-site PBX.
CO-CARRIER STATUS -- A relationship between competitive local exchange
carriers (CLEC) that affords the same access and rights to the other's network,
and provides access and services on an equal basis.
COLLOCATION -- The ability of a CAP such as the Company to connect its
network to the LEC's central offices. Physical collocation occurs when a CAP
places its network connection equipment inside the LEC's central offices.
Virtual collocation is an alternative to physical collocation pursuant to which
the LEC permits a CAP to connect its network to the LEC's central offices at
competitive prices, even though the CAP's network connection equipment is not
physically located inside the central offices.
DEDICATED LINES -- Telecommunications lines dedicated or reserved for use
exclusively by particular customers along predetermined routes (in contrast to
telecommunications lines within the LEC's public switched network).
DEDICATED SERVICES -- Special access, switched transport and private line
services generally offered by CAPs, including the Company.
DIGITAL -- A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary code digits 0 and 1. Digital transmission and switching technologies
employ a sequence of these pulses to represent information as opposed to the
continuously variable analog signal. Digital transmission and switching
technologies offer a threefold improvement in speed and capacity over analog
techniques, allowing much more efficient and cost-effective transmission of
voice, video and data.
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<PAGE> 75
DS-0, DS-1, DS-3 -- Standard telecommunications industry digital signal
formats, which are distinguishable by bit rate (the number of binary digits (0
and 1) transmitted per second). DS-0 service has a bit rate of 64 kilobits per
second. DS-1 service has a bit rate of 1.544 megabits per second and DS-3
service has a bit rate of 45 megabits per second.
EBITDA -- Net income (loss) before net interest, income taxes, depreciation
and amortization.
FCC -- Federal Communications Commission.
FIBER MILES -- The number of route miles installed (excluding pending
installations) along a telecommunications path multiplied by the number of
fibers along that path. See the definition of "Route Miles" below.
FIBER OPTICS -- Fiber optic cable is the medium of choice for the
telecommunications and cable industries. Fiber is immune to electrical
interference and environmental factors that affect copper wiring and satellite
transmission. Fiber optic technology involves sending laser light pulses across
glass strands in order to transmit digital information. A strand of fiber optic
cable is as thick as a human hair yet has significantly greater bandwidth
capacity than copper cable, which is many times greater in size.
FIBER OPTIC RING NETWORK -- Most CAPs have built their networks in ring
configurations in order to ensure that, if one segment of a network is damaged
or cut, the traffic is simply re-routed and sent to its destination in the
opposite direction. The Company uses a "self-healing" optical fiber ring
architecture in its networks.
FRAME RELAY -- Frame relay is a high-speed data packet switching service
used to transmit data between computers. Frame Relay supports data units of
variable lengths at access speeds ranging from 56kbs to 1.5 mbs. This service is
ideal for connecting LANs, but is not appropriate for voice and video
applications due to the variable delays that can occur. Frame Relay was designed
to operate at higher speeds on modern fiber optic networks.
ILEC -- An incumbent CAP that also provides switched local
telecommunications services.
INTERCONNECTION DECISIONS -- Rulings by the FCC announced in September 1992
and August 1993, which require the RBOCs and most other LECs to provide
interconnection in LEC central offices to any CAP, long distance carrier or end
user seeking such interconnection for the provision of interstate special access
and switched access transport services.
INTERNET PROTOCOL (IP) -- A compilation of network- and transport-level
protocols that allow computers with different architectures and operating system
software to communicate with other computers on the Internet.
ISDN -- An internationally agreed upon standard which, through special
equipment, allows two-way, simultaneous voice and data transmission in digital
formats over the same transmission line. ISDN permits videoconferencing over a
single line, for example, and also supports a multitude of value-added
networking capabilities, reducing costs for end-users and results in more
efficient use of available facilities. ISDN combines standards for highly
flexible customers to network signaling with both voice and data within a common
facility.
ISP -- An Internet service provider provides customers with access to the
Internet by linking its network directly or through other ISPs to the Internet
backbone network.
IXC (Interexchange Carriers) -- See Long Distance Carrier.
LANS (Local Area Networks) -- The interconnection of computers for the
purpose of sharing files, programs and various devices such as work stations,
printers and high-speed modems. LANs may include dedicated computers or file
servers that provide a centralized source of shared files and programs.
LATAS (Local Access and Transport Areas) -- The geographically defined
areas in which LECs are authorized by the MFJ to provide local switched
services.
LEC (Local Exchange Carrier) -- A company providing local telephone
services.
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<PAGE> 76
LOCAL EXCHANGE AREAS -- A geographic area determined by the appropriate
state regulatory authority in which local calls generally are transmitted
without toll charges to the calling or called party.
LONG DISTANCE CARRIERS OR IXCS (Interexchange Carriers) -- Long distance
carriers provide services between local exchanges on an interstate or intrastate
basis. A long distance carrier may offer services over its own or another
carrier's facilities. Long distance carriers include, among others, AT&T, MCI,
Sprint, WorldCom and LCI, as well as resellers of long distance capacity.
MFJ (Modified Final Judgment) -- The MFJ was an agreement made in 1982
between AT&T and the Department of Justice that forced the breakup of the old
Bell System. This judgment, also known as the Divestiture of AT&T, established
seven separate Regional Bell Operating Companies (RBOCs) and created two
distance segments of telecommunications service: local and long distance. This
laid the ground work for intense competition in the long distance industry, but
essentially created seven separate regionally-based local switched service
monopolies.
NAP -- Network Access Points are points where the national ISPs
interconnect their networks, allowing a multitude of local and regional ISPs to
exchange data and access the Internet globally.
NODE -- An individual point of origination and termination of data on the
network transported using frame relay or similar technology.
OFF-NET -- A customer that is not physically connected to one of the
Company's networks but who is accessed through interconnection with a LEC
network.
ON-NET -- A customer that is physically connected to one of the Company's
networks.
PBX (Private Branch Exchange) -- A switching system within an office
building which allows calls from outside to be routed directly to the individual
instead of through a central number. This PBX also allows for calling within an
office by way of four digit extensions. Centrex is a service which can simulate
this service from an outside switching source, thereby eliminating the need for
a large capital expenditure on a PBX.
PCS (Personal Communications Service) -- A type of wireless telephone
system that uses light, inexpensive handheld sets and communicates via low power
antennas.
POPS (Points of Presence) -- Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long distance carrier.
PRIVATE LINE -- A private, dedicated telecommunications connection between
end-user locations (excluding long distance carrier POPs).
RBOCS (Regional Bell Operating Companies) -- The seven local telephone
companies established by the MFJ. These RBOCs are prohibited from providing
interLATA services and from manufacturing telecommunications equipment.
ROUTE MILES -- The number of miles of the telecommunications path in which
fiber optic cables are installed as it would appear on a network map.
SPECIAL ACCESS SERVICES -- The lease of private, dedicated
telecommunications lines or "circuits" along the network of a LEC or a CAP (such
as the Company), whose lines or circuit run to or from the long distance carrier
POPs. Examples of special access services are telecommunications lines running
between POPs of a single long distance carrier, from one long distance carrier
POP to the POP of another long distance carrier or from an end user to its long
distance carrier POP. Special access services do not require the use of
switches.
SWITCH -- A sophisticated computer that accepts instructions from a caller
in the form of a telephone number. Like an address on an envelope, the numbers
tell the switch where to route the call. The switch opens or closes circuits or
selects the paths or circuits to be used for transmission of information.
Switching is a process of interconnecting circuits to form a transmission path
between
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<PAGE> 77
users. Switches allow local telecommunications service providers to connect
calls directly to their destination, while providing advanced features and
recording connection information for future billing.
SWITCHED ACCESS SERVICES -- The origination or termination of long distance
traffic between a customer premise and an IXC POP via shared local trunks using
a local switch.
SWITCHED TRANSPORT SERVICES -- Transportation of switched traffic along
dedicated lines between the LEC central offices and IXC POPs.
SWITCHED TRAFFIC -- Telecommunications traffic along a switched network.
VGE (Voice Grade Equivalent Circuits) -- A measure of service equivalent to
one telephone line (64 kilobits of bandwidth) actually billed to a customer.
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<PAGE> 78
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets as of June 30, 1995, and 1996............................. F-3
Consolidated Statements of Operations for the Years Ended June 30, 1995, and 1996..... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended June 30,
1995, and 1996...................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1995, and 1996..... F-6
Notes to Consolidated Financial Statements............................................ F-7
Condensed Consolidated Balance Sheet as of June 30, 1996 and as of September 30, 1996
(unaudited)......................................................................... F-20
Condensed Consolidated Statements of Operations for the Three Months Ended September
30, 1995, and September 30, 1996 (unaudited)........................................ F-21
Condensed Consolidated Statements of Cash Flows for the Three Months Ended September
30, 1995, and September 30, 1996 (unaudited)........................................ F-22
Notes to Unaudited Condensed Consolidated Interim Financial Statements................ F-23
</TABLE>
F-1
<PAGE> 79
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
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
Communications Services, Inc. and subsidiaries as of June 30, 1995 and 1996, and
the results of their operations and their cash flows for the years then ended,
in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Washington, D.C.
September 27, 1996
F-2
<PAGE> 80
AMERICAN COMMUNICATIONS SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (note 1).................................... $ 20,350,791 $ 132,706,427
Restricted cash (note 1).............................................. 752,000 3,751,706
Trade accounts receivable, net of allowance for doubtful accounts of
$8,570 and $189,510 at June 30, 1995 and 1996, respectively......... 350,436 735,260
Other current assets.................................................. 92,325 1,003,465
------------ -------------
Total current assets........................................... 21,545,552 138,196,858
Networks, equipment and furniture, net (note 2)......................... 15,567,290 76,739,266
Deferred financing fees, net of accumulated amortization of $64,458 and
$732,775 at June 30, 1995 and 1996, respectively...................... 292,113 8,334,183
Other assets............................................................ 222,010 329,584
------------ -------------
Total assets................................................... $ 37,626,965 $ 223,599,891
============ =============
LIABILITIES, REDEEMABLE STOCK, OPTIONS AND WARRANTS, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable...................................................... $ 3,843,167 $ 21,317,346
Accrued financing fees................................................ 1,542,255 --
Accrued employee costs................................................ 836,509 774,262
Other accrued liabilities............................................. 1,269,484 886,692
Notes payable -- current portion (note 4)............................. 146,083 252,809
------------ -------------
Total current liabilities...................................... 7,637,498 23,231,109
Long term liabilities:
Notes payable (note 4)................................................ 3,652,085 184,129,361
Dividends payable (note 3)............................................ 1,070,985 4,942,313
------------ -------------
Total liabilities.............................................. 12,360,568 212,302,783
------------ -------------
Redeemable stock, options and warrants (notes 6 and 11)................. 2,930,778 2,155,025
------------ -------------
Minority interest (note 4).............................................. 194,402 160,270
------------ -------------
Stockholders' equity (deficit) (notes 4, 5 and 6):
Preferred stock, $1.00 par value, 186,664 shares designated as 9%
Series A-1 Convertible Preferred Stock authorized, issued and
outstanding at June 30, 1995 and 1996, respectively, convertible
into 7,466,560 shares of common stock (notes 3 and 4)............... 186,664 186,664
Preferred stock, $1.00 par value, 277,500 shares authorized and
designated as 9% Series B Convertible Preferred Stock; 227,500
shares issued and outstanding at June 30, 1995 and 1996,
respectively, convertible into 9,910,718 shares of common stock
(notes 3 and 5)..................................................... 227,500 277,500
Common stock, $.01 par value, 75,000,000 shares authorized, 5,744,782
and 6,645,691 shares issued and outstanding at June 30, 1995 and
1996, respectively (note 5)......................................... 56,827 65,837
Additional paid-in capital............................................ 42,411,448 55,975,078
Accumulated deficit................................................... (20,741,222) (47,523,266)
------------ -------------
Total stockholders' equity (deficit)........................... 22,141,217 8,981,813
------------ -------------
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
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 81
AMERICAN COMMUNICATIONS SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Revenues (note 1).............................................. $ 388,887 $ 3,415,137
------------- -------------
Operating expenses:
Network development and operations........................... 3,282,183 5,264,570
Selling, general and administrative.......................... 4,597,615 13,463,775
Noncash stock compensation (note 6).......................... 6,419,412 2,735,845
Depreciation and amortization................................ 497,811 3,078,426
------------- -------------
Total operating expenses....................................... 14,797,021 24,542,616
Non-operating income (expenses):
Interest and other income.................................... 217,525 4,409,733
Interest and other expense (note 4).......................... (170,095) (10,476,904)
Debt conversion expense (note 4)............................. (385,000) --
------------- -------------
Loss before minority interest.................................. (14,745,704) (27,194,650)
Minority interest.............................................. 48,055 412,606
------------- -------------
Net loss....................................................... (14,697,649) (26,782,044)
Preferred stock dividends and accretion (note 3)............... (1,070,985) (3,871,328)
------------- -------------
Net loss to common stockholders................................ $ (15,768,634) $ (30,653,372)
============= =============
Net loss per common share...................................... $ (3.30) $ (4.96)
============= =============
Average number of common shares outstanding (note 3)........... 4,771,689 6,185,459
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 82
AMERICAN COMMUNICATIONS SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(DEFICIT)
YEARS ENDED JUNE 30, 1995 AND 1996
<TABLE>
<CAPTION> SERIES A-1 SERIES B
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
-------------------- ------------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ----------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <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)........ -- -- 186,664 186,664 -- --
Series B Preferred private placement,
net of related costs (note 3)........ -- -- -- -- 227,500 227,500
Issuance of put right obligations
(notes 6
and 9)............................... -- -- -- -- -- --
Cancellation of put right obligation
(note 7)............................. -- -- -- -- -- --
Warrant and stock option exercises and
stock grant (note 6)................. -- -- -- -- -- --
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
Issuance of Series B-4 Preferred Stock
(note 3)............................. -- -- -- -- 50,000 50,000
Issuance of detachable warrants (note
4)................................... -- -- -- -- -- --
Warrants and stock options exercised
(note 5)............................. -- -- -- -- -- --
Series A and B Preferred Stock
dividends accrued (note 3)........... -- -- -- -- -- --
Cancellation of and adjustments to put
right obligations (note 6)........... -- -- -- -- -- --
Stock compensation expense............. -- -- -- -- -- --
Net loss............................... -- -- -- -- -- --
------ ----------- --------- -------- ------- --------
Balances at June 30, 1996................ -- $ -- 186,664 $186,664 277,500 $277,500
====== =========== ========= ======== ======= ========
<CAPTION>
NOTES
RECEIVABLE TOTAL
COMMON STOCK ADDITIONAL ON SALE OF STOCKHOLDERS'
------------------- PAID-IN COMMON ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL STOCK DEFICIT (DEFICIT)
--------- ------- ----------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1994................ 2,755,005 $ -- $ 1,080,566 $ (2,750) $ (6,043,573) $(3,265,757)
Preferred Stock exchange (note 12)..... 548,387 -- 1,700,000 -- -- --
Set par value for common stock (note
5)................................... -- 33,033 (33,033) -- -- --
Acquisition of Piedmont Teleport, Inc.
(note 13)............................ 62,000 -- -- -- -- --
Write-off of note receivable for common
stock................................ -- -- (2,750) 2,750 -- --
Series A Preferred private placement,
net of related costs (note 3)........ -- -- 15,009,461 -- -- 15,196,125
Series B Preferred private placement,
net of related costs (note 3)........ -- -- 20,434,000 -- -- 20,661,500
Issuance of put right obligations
(notes 6
and 9)............................... -- -- (53,303) -- -- (53,303)
Cancellation of put right obligation
(note 7)............................. -- -- 487,500 -- -- 487,500
Warrant and stock option exercises and
stock grant (note 6)................. 2,379,390 23,794 349,030 -- -- 372,824
Establish limitation on common stock
put right obligation (note 6)........ -- -- 4,510,962 -- -- 4,510,962
Series A Preferred Stock dividends
accrued (note 3)..................... -- -- (1,070,985) -- -- (1,070,985)
Net loss............................... -- -- -- -- (14,697,649) (14,697,649)
--------- ------- ----------- ---------- ------------ ------------
Balances at June 30, 1995................ 5,744,782 $56,827 $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 (note
4)................................... -- -- 8,684,000 -- -- 8,684,000
Warrants and stock options exercised
(note 5)............................. 900,909 9,010 289,360 -- -- 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................ 6,645,691 $65,837 $55,975,078 $ -- $(47,523,266) $ 8,981,813
========= ======= =========== ======== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 83
AMERICAN COMMUNICATIONS SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................................................ $ (14,697,649) $ (26,782,044)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization..................................................... 497,811 3,078,426
Interest deferral and accretion................................................... -- 10,447,687
Amortization of deferred financing fees........................................... 323,900 668,317
Provision for doubtful accounts................................................... 8,570 180,940
Loss attributed to minority interest.............................................. (48,055) (412,606)
Noncash compensation, consultants and other expenses.............................. 6,419,412 2,735,845
Noncash debt conversion expense................................................... 385,000 --
Changes in operating assets and liabilities:
Trade accounts receivable....................................................... (359,007) (565,764)
Restricted cash related to operating activities................................. 200,000 --
Other current assets............................................................ (92,325) (911,140)
Other assets.................................................................... (26,545) (107,574)
Accounts payable................................................................ 3,170,885 17,474,179
Accrued financing fees.......................................................... 1,542,255 (1,542,255)
Accrued employee costs.......................................................... 719,333 (62,247)
Other accrued liabilities....................................................... 1,055,673 (382,792)
------------ ------------
Net cash used in operating activities................................................. (900,742) 3,818,972
------------ ------------
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)
Restricted cash related to network activities....................................... (752,000) (2,999,706)
Network development costs........................................................... (14,996,303) (57,889,227)
------------ ------------
Net cash used in investing activities................................................. (16,073,892) (63,855,920)
------------ ------------
Cash flows from financing activities:
Issuance of notes payable........................................................... 3,510,349 166,888,210
Payment of deferred financing fees.................................................. (310,175) (8,710,387)
Warrant and stock option exercises.................................................. 372,824 298,370
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
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
------------ ------------
Net increase in cash and cash equivalents............................................. 17,080,394 112,355,636
Cash and cash equivalents, beginning of year.......................................... 3,270,397 20,350,791
------------ ------------
Cash and cash equivalents, end of year................................................ $ 20,350,791 $ 132,706,427
============ ============
Supplemental disclosure of cash flow information -- interest paid on all debt
obligations......................................................................... $ 219,554 $ 29,217
============ ============
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
============ ============
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)
============ ============
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> 84
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996
(1) BASIS OF PRESENTATION AND RELATED MATTERS
Organization
The consolidated financial statements include the accounts of American
Communications Services, Inc. and its majority-owned subsidiaries (ACSI or the
Company). As discussed in note 4 to the consolidated financial statements, all
of the Company's subsidiaries are wholly owned with the exception of the
Louisville, Fort Worth, El Paso, Greenville, and Columbia subsidiaries, in which
the Company has a 92.75% controlling ownership interest. All material
intercompany accounts and transactions have been eliminated in consolidation.
Business
ACSI constructs and operates digital fiber optic networks and offers local
telecommunications services to long distance companies and business and
government end users in selected target markets, principally in the southern
United States. The Company provides nonswitched dedicated services, including
special access, switched transport and private line services. In addition to
these dedicated services, the Company is developing and has begun offering high
speed data services to business, government and other communications carriers,
including Internet service providers. The Company has also begun offering on a
limited basis enhanced voice messaging services and plans to begin offering
local switched voice services in the future. The Company is a competitive local
exchange carrier and is referred to as a competitive access provider with
respect to provision of dedicated services.
To date, the Company has funded the construction of its networks and its
operations with external financing. Prior to November 1995, the primary sources
of funds were two Preferred Stock private offerings completed in October 1994
and June 1995 (see note 3), and a credit facility from AT&T Credit Corporation
(see note 4). During the fiscal year ended June 30, 1996, the Company raised
additional funds through an additional sale of Preferred Stock (see note 3), two
private offerings of Senior Notes, one of which included detachable warrants and
further borrowings under the AT&T Credit Corporation Credit Facility (see note
4).
The Company has utilized and intends to continue to utilize funds from its
existing equity and debt financings towards the completion of its business plan,
including the development and construction of fiber optic networks, the further
development and introduction of new services, including high speed data,
enhanced voice messaging and local switched voice services, for expansion of the
Company's existing networks and to fund negative operating cash flow until cash
flow break even. To meet its capital requirements, the Company may be required
to sell additional debt or equity securities or increase its existing credit
facility. The Company may also need to seek such additional financing to
maintain balance sheet and liquidity ratios required under certain of its debt
instruments.
Cash Equivalents
Cash equivalents generally consist of highly liquid debt instruments with
an initial maturity date of three months or less. At June 30, 1995 and 1996,
cash equivalents consisting of government securities and overnight investments
are approximately $20,945,000 and $137,938,000, respectively.
The Company has provided performance bonds and letters of credit in various
cities in connection with its operations, resulting in a restriction of cash
amounting to $752,000 and $2,342,000 at June 30, 1995 and 1996, respectively.
The face amount of all bonds and letters of credits was approximately $4,629,000
as of June 30, 1996.
F-7
<PAGE> 85
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) BASIS OF PRESENTATION AND RELATED MATTERS -- (CONTINUED)
In addition, as required under the AT&T Credit Facility (see note 4), the
Company has approximately $1,410,000 deposited in restricted cash accounts at
June 30, 1996.
Networks, Equipment and Furniture
Networks, equipment and furniture are stated at cost less accumulated
depreciation. Costs capitalized during the network development stage include
expenses associated with network engineering, design and construction,
negotiation of rights-of-way, obtaining legal and regulatory authorizations and
the amount of interest costs associated with the network development. In 1995
and 1996, the Company capitalized interest of approximately $536,000 and
$3,051,000, respectively.
Provision for depreciation of networks, equipment and furniture is computed
using the straight-line method over the estimated useful lives of the assets
beginning in the month a network is substantially complete and available for use
and equipment and furniture are acquired.
The estimated useful lives of the Company's principal classes of assets are
as follows:
<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
</TABLE>
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.
Earnings (Loss) Per Common Share
The computation of earnings (loss) per common share is based upon the
weighted average number of common shares outstanding. The effect of including
common stock options and warrants as common stock equivalents would be
anti-dilutive and is excluded from the calculation of loss per common share.
Income Taxes
Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities and loss
carryforwards and tax credit carryforwards for which income tax benefits are
expected to be realized in future years. A valuation allowance is established to
reduce deferred tax assets if it is more likely than not that all, or some
portion, of such deferred tax assets will not be realized. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.
F-8
<PAGE> 86
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) BASIS OF PRESENTATION AND RELATED MATTERS -- (CONTINUED)
Reclassifications
Certain reclassifications have been made to the 1995 consolidated financial
statements to conform to the 1996 presentation. Such reclassifications had no
effect on net loss or total stockholders' equity.
Effect of New Accounting Standards
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, which will require the Company to review for the
impairment of long-lived assets and certain identifiable intangibles to be held
and used by the Company whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Adoption of SFAS
No. 121 is required in fiscal year 1997.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which establishes a fair value based method for financial
accounting and reporting for stock-based employee compensation plans. However,
the new standard allows compensation to continue to be measured by using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, but requires
expanded disclosures. SFAS No. 123 is effective in fiscal year 1997.
While the Company does not know precisely the impact that will result from
adopting SFAS No. 121 and SFAS No. 123, the Company does not expect the adoption
of SFAS No. 121 or SFAS No. 123 to have a material effect on the Company's
consolidated financial position or results of operations.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the consolidated
financial statements and reported amounts of revenue and expenses during the
reporting period. Actual results may differ from those estimates.
Concentration of Credit Risk
The Company receives a significant portion of its revenues from a small
number of major customers, particularly the long distance telecommunications
companies that service the Company's markets. For the years ended June 30, 1995
and 1996, approximately 85% and 60%, respectively, of the Company's revenues
were attributable to services provided to four and three of the largest long
distance telecommunications companies, respectively. The loss of any one of
these customers could have an adverse material impact on the Company's revenues.
F-9
<PAGE> 87
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) NETWORKS, EQUIPMENT AND FURNITURE
Networks, equipment and furniture consists of the following at June 30:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Networks and telecommunications equipment.......... $ 15,570,450 $ 76,853,865
Furniture and fixtures............................. 188,534 1,982,910
Computer software.................................. 56,485 948,848
Leasehold improvements............................. 82,093 362,341
------------ ------------
15,897,562 80,147,964
Less -- accumulated depreciation and
amortization..................................... 330,272 3,408,698
------------ ------------
Total, net of accumulated depreciation and
amortization..................................... $ 15,567,290 $ 76,739,266
============ ============
</TABLE>
(3) PRIVATE PLACEMENTS
In October 1994, the Company completed a private placement of its 9% Series
A Convertible Preferred Stock, $1.00 par value (the "Series A Preferred Stock").
There were 138,889 shares issued for cash at $90 per share resulting in proceeds
of $10,962,046, net of placement agent commissions and related placement fees
and costs.
In addition, bridge financing was converted and several other obligations
were retired with proceeds of the offering. See note 4 to the consolidated
financial statements. Further, as discussed in note 6 to the consolidated
financial statements, certain parties obtained warrants to purchase shares of
the Company's common stock. In June 1995, the Series A Preferred Stock was
exchanged for an identical number of 9% Series A-1 Convertible Preferred Stock,
$1.00 par value. (the "Series A-1 Preferred Stock").
In June 1995, the Company completed a private placement of its 9% Series
B-1 Convertible Preferred Stock (the "Series B-1 Preferred"), 9% Series B-2
Convertible Preferred Stock (the "Series B-2 Preferred") and 9% Series B-3
Convertible Preferred Stock (the "Series B-3 Preferred"), each having a par
value of $1.00 per share. There were 227,500 shares issued for cash at $100 per
share with proceeds of $20,661,500, net of placement agent commissions and
related placement fees and costs. In November, 1995, 50,000 shares of 9% Series
B-4 Convertible Preferred Stock (the "Series B-4 Preferred") were issued for
cash of $100 per share resulting in proceeds of $5,000,000. The Series B-1
Preferred, the Series B-2 Preferred, the Series B-3 Preferred and the Series B-4
Preferred are hereafter collectively referred to as the "Series B Preferred
Stock." The Series A-1 Preferred Stock and the Series B Preferred Stock are
hereafter collectively referred to as the "Preferred Stock." Further, as
discussed in note 6 to the consolidated financial statements, certain parties
obtained warrants to purchase shares of the Company's common stock.
The Company's Preferred Stock and common stock vote as a single class
(except with respect to the election of directors and certain other transactions
and matters) with the common stock entitled to one vote per share and the
Preferred Stock entitled to one vote for each share of common stock into which
it is convertible. At June 30, 1996, the outstanding Series A-1 Preferred Stock
was convertible into 7,466,560 shares of common stock and the outstanding Series
B Preferred Stock was convertible into 9,910,718 shares of common stock.
Pursuant to the Company's certificate of incorporation, the board of
directors is currently comprised of seven directors. The holders of common stock
are entitled to elect four directors and the holders of the Preferred Stock are
entitled to elect three directors. In addition, certain
F-10
<PAGE> 88
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) PRIVATE PLACEMENTS -- (CONTINUED)
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 and $4,942,000 as of June 30, 1995 and
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 June 30, 1996, as a condition of the aforementioned provisions of
the certificate of incorporation, the dividends have been deemed declared and
properly reflected in the accompanying consolidated financial statements as of
June 30, 1995 and 1996. Pursuant to the Company's certificate of incorporation,
dividends accrued shall be paid cumulatively, beginning December 31, 1997, or
earlier upon conversion. Upon such conversion prior to December 31, 1997, the
Company may, in lieu of accrued and unpaid dividends, issue promissory notes to
the holders of the Preferred Stock. The Company expects to issue promissory
notes to the holders on January 1, 1998 for dividends accrued, if conversion has
not occurred, subject to restrictions included in the Senior Discount Note
Indentures. Conversion may occur at any time at the holder's option or
automatically, upon a certain qualifying issuance of common stock. As of June
30, 1996, no conversions had occurred.
(4) DEBT
Long-term debt at June 30 consists of the following:
<TABLE>
<CAPTION>
1995 1996
----------- -------------
<S> <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
2006 Senior Discount notes, interest at
12 3/4%, maturing April 1, 2006.............. -- 66,635,887
2005 Senior Discount notes, interest at 13%
percent, maturing November 1, 2005........... -- 102,432,137
Secured equipment note payable, interest of
9.98%, payable in 36 equal monthly
installments of $2,766, including interest
commencing March 1, 1996..................... -- 343,024
----------- -------------
Total long-term debt........................... 3,798,168 184,382,170
Less current portion........................... 146,083 252,809
----------- -------------
$ 3,652,085 $ 184,129,361
=========== =============
</TABLE>
F-11
<PAGE> 89
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) DEBT -- (CONTINUED)
Principal payments for each of the years from 1997 to 2001 and thereafter,
are due as follows at June 30, 1996:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, AMOUNT
----------------------------------------------------- -------------
<S> <C>
1997............................................ $ 252,809
1998............................................ 712,372
1999............................................ 861,939
2000............................................ 1,323,195
2001............................................ 1,902,943
Thereafter...................................... 179,328,912
-------------
$ 184,382,170
=============
</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 up to $31.2 million
(including a reserve for deferred interest) in financing for the development and
construction of fiber optic networks by the Company's subsidiaries. In
accordance with the terms of the facility, the Company is obligated to use at
least 10% of the borrowed funds for purchases of equipment manufactured by AT&T
or its affiliates. Pursuant to the AT&T Credit Facility, during fiscal 1995 the
Company's subsidiaries in Louisville, Fort Worth, Greenville and Columbia
entered into loan agreements with AT&T Credit Corporation providing for up to
$19.8 million in loans secured by the assets of such subsidiaries. As of June
30, 1995, an aggregate of approximately $3.7 million had been borrowed under
these agreements. Subsequent to June 30, 1995, the Company's subsidiary in El
Paso entered into a separate loan agreement with AT&T Credit Corporation
pursuant to the AT&T Credit Facility providing for up to an aggregate of
approximately $5.5 million in loans secured by its assets. As of June 30, 1996,
outstanding borrowings under the AT&T Credit Facility totaled approximately $15
million, including accrued interest of approximately $1.4 million. Interest
rates currently applicable to the loans range from 11.32% to 13.59%.
The loans under the AT&T Credit Facility are secured by all of the assets
of the respective borrowing subsidiary, including its installed fiber optic
system and other equipment. The principal of borrowed amounts is payable in 28
consecutive quarterly installments, beginning with the ninth quarter after the
date of the loan. The principal of borrowed amounts may be prepaid in certain
circumstances, and must be prepaid along with a premium in other circumstances.
Interest is due quarterly. At the borrowing subsidiary's option, the interest
rate may be fixed or variable. The borrowing subsidiary has a one-time option to
convert all variable rate loans to fixed rate loans. Upon certain events of
default, additional interest ranging from 2% to 4% will become payable. Interest
may generally be deferred so long as it would not cause the outstanding
principal balance to exceed the commitment amounts for Capital Loans and for
Equipment Loans (as defined in the loan documents). To date, the Company has
elected to defer all interest due under the loans. In addition, the AT&T Credit
Facility includes covenants, some of which impose certain restrictions on the
Company and its subsidiaries including restrictions on the declaration or
payment of dividends, the conduct of certain activities, certain capital
expenditures, the creation of additional liens or
F-12
<PAGE> 90
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) DEBT -- (CONTINUED)
indebtedness, the disposition of assets, transactions with affiliates' and
extraordinary corporate transactions. The AT&T Credit Facility imposes
restrictions on the ability of those subsidiaries of ACSI that incur
indebtedness thereunder to transfer funds to ACSI in the form of dividends or
other distributions. The AT&T Credit Facility also imposes restrictions on the
ability of such subsidiaries to raise capital by incurring additional
indebtedness. These restrictions could limit ACSI's ability to meet its
obligations with respect to the 2005 and 2006 Senior Discount Notes. The various
agreements which comprise the AT&T Credit Facility terminate on dates ranging
from October 1996 to May 1997.
Pursuant to the AT&T Credit Facility, AT&T Credit Corporation purchased
7.25% of the outstanding capital stock of each of the Company's operating
subsidiaries for which it provided financing. The Company was required to pledge
its interest in these subsidiaries to AT&T Credit Corporation as a condition to
each loan. Under certain circumstances, this pledge agreement also restricts the
Company's ability to pay dividends on its capital stock.
2005 Senior Discount Notes and 2006 Senior Discount Notes
On November 14, 1995, the Company completed an offering of 190,000 Units
(the "Units") consisting of $190,000,000 principal amount of 13% Senior Discount
Notes due 2005 (the "2005 Notes") and warrants to purchase 2,432,000 shares of
the Company's common stock at a price of $7.15 per share (the "Warrants"). The
2005 Notes will accrete at a rate of 13% compounded semi-annually to an
aggregate principal amount of $190,000,000 by November 1, 2000. Thereafter,
interest on the 2005 Notes will accrue at the annual rate of 13% and will be
payable in cash semi-annually. The Company received net proceeds of
approximately $96,826,000 from the sale of the Units. The value ascribed to the
Warrants was $8,684,000.
On March 21, 1996, the Company completed an offering of $120,000,000 of
12 3/4% Senior Discount Notes due 2006 (the "2006 Notes") resulting in net
proceeds of approximately $61,800,000. The 2006 Notes will accrete at a rate of
12 3/4% compounded semi-annually, to an aggregate principal amount of
$120,000,000 by April 1, 2001. Thereafter, interest on the 2006 Notes will
accrue at the annual rate of 12 3/4% and will be payable in cash semi-annually
on April 1 and October 1, commencing on October 1, 2001. The 2006 Notes will
mature on April 1, 2006.
The 2005 Notes and 2006 Notes (collectively the "Notes") are general
unsubordinated and unsecured obligations of the Company. The Company's
subsidiaries have no obligation to pay amounts due on the Notes and do not
guarantee the notes. Therefore, the Notes are effectively subordinated to all
liabilities of ACSI's subsidiaries, including trade payables. Any rights of the
Company and its creditors, including the holders of the Notes, to participate in
the assets of any of the Company's subsidiaries upon any liquidation or
reorganization of any such subsidiaries will be subject to the prior claims of
that subsidiary's creditors.
The Notes are subject to certain covenants which, among other things,
restrict the ability of ACSI and certain of its subsidiaries to incur additional
indebtedness, pay dividends or make distributions.
Debt Conversion
On June 28, 1994, the Company issued a total of $4,300,720 principal of its
15 percent convertible bridge notes due December 31, 1994, including $1,300,720
issued to then existing stockholders. During 1995, the holders of $3,300,720 of
these convertible bridge notes converted the notes plus accrued interest thereon
of $35,754 into 37,073 shares of Series A Preferred Stock.
F-13
<PAGE> 91
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) DEBT -- (CONTINUED)
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
Common Stock
In fiscal 1995, the Company established a par value of $.01 for its issued
and outstanding common stock.
Preferred Stock
Pursuant to the Series B Preferred Stock offering, as described in note 3,
four classes of Series B Preferred Stock have been designated and issued. The
composition of the Series B Preferred Stock at June 30, 1996 is as follows:
<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, 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
F-14
<PAGE> 92
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) STOCK OPTIONS AND STOCK PURCHASE WARRANTS -- (CONTINUED)
aggregate of 4,149,834 shares of common stock of the Company at exercise prices
ranging from $.875 to $3.40 per share. The options vest at various dates as
specified in the employment agreements with 4,069,834 of the options vesting on
specific dates ranging from November 1, 1993 to November 4, 2001, and 80,000 of
such options which vested upon the occurrence of certain specified performance
milestones. When the employment of these individuals with the Company
terminates, these individuals have the right to sell certain of their shares to
the Company (the put right) for a price equal to fair market value. On June 26,
1995, the employment agreements were amended to limit the purchase price paid by
the Company pursuant to the put right to a maximum of $2,500,000, which amount
is subject to further reductions based on the employee's sale of stock. During
fiscal 1996, the limit was further reduced to $2,000,000.
The Company has also issued 500,000 options to a supplier to purchase stock
at 90% of the fair value at the date of exercise. Such options give the supplier
the right to sell the stock acquired back to the Company at fair value under
certain circumstances. None of the options have been exercised to date and they
expire in December, 1997.
Stock option activity for the years ended June 30, 1995 and 1996 is as
follows:
<TABLE>
<CAPTION>
NUMBER PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Balances, June 30, 1994......................... 858,875 $ .875 - 3.10
Granted....................................... 4,935,314 .875 - 4.00
Exercised..................................... -- --
Canceled...................................... (100,000) .875 - 4.00
--------- --------------
Balances, June 30, 1995......................... 5,694,189 .875 - 4.00
Granted....................................... 1,225,786 2.25 - 6.27
Exercised..................................... (104,699) .875 - 4.57
Canceled...................................... (70,462) 2.25 - 6.27
--------- --------------
Balances, June 30, 1996......................... 6,744,814 $ .875 - 6.27
========= ==============
</TABLE>
As of June 30, 1996, a total of 4,681,343 options are vested and
exercisable. Noncash compensation expense associated with employee stock options
amounted to $6,382,000 and $2,735,845 in 1995 and 1996, respectively.
During 1995 and 1996 in connection with the Series A-1 and Series B
Preferred Stock private placements and related bridge note conversions, warrants
for 4,367,078 shares of common stock were issued at prices ranging from $.01 to
$3.10. In 1995 and 1996, 2,299,967 and 1,189,958 of such warrants were exercised
during the year for proceeds totaling approximately $305,000 and $11,899,
respectively. In 1996, as part of the issuance at the 2005 Notes, detachable
warrants to purchase 2,432,000 shares of the Company's common stock at a price
of $7.15 per share were issued.
At June 30, 1995, warrants for 408,391 shares at a price of $.875 per share
granted pursuant to consulting and subordinated note agreements, during 1994 and
1995, were outstanding. During 1996, 150 of such warrants were exercised.
F-15
<PAGE> 93
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) STOCK OPTIONS AND STOCK PURCHASE WARRANTS -- (CONTINUED)
At June 30, 1996, the remaining warrants outstanding are as follows:
<TABLE>
<CAPTION>
NUMBER PRICE PER SHARE
---------- ----------------
<S> <C> <C>
Pursuant to consulting and subordinated note
agreements, expiration through September 13,
1996......................................... 408,241 $0.875
Series A and Series B Preferred Stock
placements................................... 877,153 .01-3.10
2005 Senior Discount Notes offering............ 2,432,000 7.15
--------- -----------
Total.......................................... 3,717,394 $0.875-7.15
========= ===========
</TABLE>
The gross proceeds that would be received by the Company on the exercise of
all outstanding options and warrants is approximately $33,700,000.
(7) COMMITMENTS AND CONTINGENCIES
Certain Agreements
The Company has signed nonexclusive license agreements with various utility
and inter-exchange carrier companies, including an affiliate of one of the
country's three largest long distance carriers, to install and maintain fiber
cable systems for the Company's use for periods up to 15 years or more, upon
exercising of extensions available to the parties. Under these agreements, the
Company has use of these rights-of-way for its telecommunications systems, and
may be entitled to certain payments for providing telecommunications service,
subject to its satisfactory performance of certain agreed upon requirements.
Retirement Plan
On February 1, 1996, the Company began sponsoring the American
Communications Services, Inc. 401(k) Plan (the "Plan"), a defined contribution
plan. All individuals employed on February 1, 1996 were eligible to participate.
Participation to all other employees is available after three months of
full-time equivalent service. The Company contributions under the Plan are
discretionary and may be as much as 6% of an employee's gross compensation
subject to certain limits. Total expense under the Plan amounted to
approximately $30,000 in 1996.
Legal Proceedings
On July 24, 1996, the Company was named as a codefendant in a lawsuit
arising from a personal injury sustained during the construction of one of its
networks. At the time of the incident giving rise to the lawsuit, the plaintiff
was an employee of a subcontractor hired by the Company's general contractor for
the construction project. The lawsuit seeks recovery from the Company and the
general contractor of at least $25 million plus punitive damages. The Company,
the general contractor, and the Company's insurance carrier have begun
investigations into the facts surrounding the incident and intend to defend
against this suit vigorously.
In addition, the Company is a party to certain litigation and regulatory
proceedings arising in the ordinary course of business. In the opinion of
management, based upon the advice of counsel, the ultimate disposition of these
matters will not have a material adverse effect on the Company's consolidated
financial position.
F-16
<PAGE> 94
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) LEASES
The Company is obligated under various noncancelable operating leases for
office and node space as well as office furniture. The minimum future lease
obligations under these noncancelable operating leases as of June 30, 1996 are,
approximately, as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, AMOUNT
------------------------------------------------------ -----------
<S> <C>
1997.................................................. $ 1,566,000
1998.................................................. 1,458,000
1999.................................................. 1,347,000
2000.................................................. 1,245,000
2001.................................................. 1,576,000
Thereafter............................................ 3,011,000
-----------
$10,203,000
===========
</TABLE>
Rent expense for the years ended June 30, 1995 and 1996 was approximately
$200,000 and $1,166,000, 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 1995 and 1996, the Company
paid $67,500 and $90,000 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 Steven G. Chrust, a former director of the Company. Pursuant to the
agreement, the Company will compensate SGC as follows: (1) a monthly fee of
$5,000; and (2) options to purchase up to 50,000 shares of the Company's Common
Stock which vest on July 1, 1997, and are exercisable on or before July 1, 1999.
At the end of each month of the term of the agreement, SGC earns a credit
against the exercise price of those options equal to 1/36th of the exercise
price. The shares issued upon exercise of the options will be priced at $2.25
per share and the shares issued will have piggy back registration rights.
F-17
<PAGE> 95
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) INCOME TAXES
Temporary differences and carryforwards that give rise to deferred tax
assets and liabilities at June 30 are as follows:
<TABLE>
<CAPTION>
1995 1996
----------- ------------
<S> <C> <C>
Deferred tax assets:
Capitalized start-up and other costs.......... $ 4,163,941 $ 3,733,898
Stock options -- noncash compensation......... 2,768,488 3,848,128
Net operating loss carryforwards.............. 1,149,755 12,181,162
Other accrued liabilities..................... 454,391 496,634
----------- ------------
Total gross deferred tax assets................. 8,536,575 20,259,822
Less: valuation allowance..................... 8,291,380 18,304,754
----------- ------------
Net deferred tax assets......................... 245,195 1,955,068
Deferred tax liabilities -- fixed assets
depreciation and amortization................. 245,195 1,955,068
----------- ------------
Net deferred tax assets (liabilities)........... $ -- $ --
=========== ============
</TABLE>
The valuation allowance for deferred tax assets as of July 1, 1994 and 1995
was $2,375,327 and $8,291,380, respectively. The net change in the total
valuation allowance for the year ended June 30, 1995 and 1996 was an increase of
$5,916,053 and $10,013,374, respectively. The valuation allowances at June 30,
1995 and 1996 are a result of the ultimate utilization of the tax benefits
related to the deferred tax assets. The utilization of the tax benefits
associated with net operating losses of approximately $31,000,000 at June 30,
1996 is dependent upon the Company's ability to generate future taxable income.
The net operating loss carryforward period expires commencing in 2008 through
the year 2011. Further, as a result of certain financing and capital
transactions, an annual limitation on the future utilization of the net
operating loss carryforward may have occurred.
No income tax provision has been provided for the years ended June 30, 1995
and 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 has the right to put
these shares back to the Company on November 1, 1996 for a price of $2.50 per
share. Accordingly, this obligation is recorded as redeemable stock in the
accompanying consolidated financial statements.
(12) 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.
F-18
<PAGE> 96
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)
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 issue if available or based on the
present value of expected cash flows at rates currently available to the Company
borrowing with similar terms.
The carrying amounts and fair values of the Company's financial instruments
at June 30, 1996 were:
<TABLE>
<CAPTION>
1996
---------------------------
CARRYING FAIR
VALUE VALUE
----------- -----------
<S> <C> <C>
Cash and cash equivalents (including restricted
cash)........................................ 136,458,133 136,458,133
Letters of credit.............................. -- 69,000
Long-term debt................................. 184,382,170 183,987,000
</TABLE>
F-19
<PAGE> 97
AMERICAN COMMUNICATIONS SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.................................. $ 132,706,427 $ 102,819,308
Restricted cash............................................ 3,751,706 2,392,152
Accounts receivable, net................................... 735,260 1,870,947
Other current assets....................................... 1,003,465 2,195,729
------------- -------------
Total current assets............................... 138,196,858 109,278,136
------------- -------------
Networks, furniture and equipment, gross..................... 80,147,964 101,881,877
(less: Accumulated depreciation)................... (3,408,698) (5,404,390)
------------- -------------
76,739,266 96,477,487
Deferred financing fees...................................... 8,334,183 8,235,262
Other assets................................................. 329,584 549,264
------------- -------------
Total assets....................................... $ 223,599,891 $ 214,540,149
============= =============
LIABILITIES, REDEEMABLE STOCK, OPTIONS AND WARRANTS,
MINORITY INTEREST AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable........................................... $ 21,317,346 $ 10,703,168
Accrued liabilities........................................ 1,660,954 2,473,656
Notes payable -- stockholders.............................. 252,809 103,169
------------- -------------
Total current liabilities.......................... 23,231,109 13,279,993
------------- -------------
Long term liabilities
Notes payable.............................................. 184,129,361 198,357,465
Other long term Liabilities................................ -- 413,954
Dividends payable.......................................... 4,942,313 5,949,183
------------- -------------
Total liabilities.................................. 212,302,783 218,000,595
------------- -------------
Redeemable stock, options and warrants....................... 2,155,025 2,155,025
------------- -------------
Minority interest............................................ 160,270 64,514
------------- -------------
Stockholders' equity
Preferred stock, $1.00 par value, 186,664 shares designated
as 9% Series A-1 Convertible Preferred Stock,
authorized, issued and outstanding...................... 186,664 186,664
Preferred stock, $1.00 par value, 277,500 shares designated
as 9% Series B Convertible Preferred Stock, authorized,
issued and outstanding.................................. 277,500 277,500
Common Stock, $0.01 par value, 75,000,000 shares
authorized, 6,645,691 and 6,761,466 shares,
respectively, issued and outstanding.................... 65,837 66,994
Additional paid-in-capital................................. 55,975,078 55,079,732
Accumulated deficit........................................ (47,523,266) (61,290,875)
------------- -------------
Total stockholders' equity/(deficit)......................... 8,981,813 (5,679,985)
------------- -------------
Total Liabilities, Redeemable Stock, Options and Warrants,
Minority Interest and Stockholders' Equity/(deficit)....... $ 223,599,891 $ 214,540,149
============= =============
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements.
F-20
<PAGE> 98
AMERICAN COMMUNICATIONS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
------------- -------------
<S> <C> <C>
Revenues.................................................... $ 399,034 $ 2,812,465
----------- -------------
Operating expenses
Network, development and operations....................... 1,584,872 3,709,449
Selling, general and administrative....................... 1,170,472 5,674,138
Non-cash compensation expense............................. 793,869 174,099
Depreciation and amortization............................. 263,988 2,401,188
----------- -------------
Total operating expenses.................................... 3,813,201 11,958,874
Non-operating income/expenses
Interest and other income................................. 97,370 1,460,669
Interest and other expense................................ (140,021) (6,011,315)
----------- -------------
Net loss before minority interest........................... (3,456,818) (13,697,055)
Minority interest........................................... 67,267 95,757
----------- -------------
Net loss.................................................... (3,389,551) (13,601,298)
----------- -------------
Preferred stock dividends/accretion......................... (898,133) (1,006,870)
----------- -------------
Net loss to common stockholders............................. $(4,287,684) $ (14,608,168)
=========== =============
Net loss per common/common equivalent share................. $ (0.74) $ (2.18)
=========== =============
Average number of common/common equivalent shares
outstanding............................................... 5,798,916 6,703,579
=========== =============
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements.
F-21
<PAGE> 99
AMERICAN COMMUNICATIONS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
------------- -------------
<S> <C> <C>
Cash flow from operating activities
Net loss.................................................... $(3,389,551) $ (13,601,298)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization............................. 263,988 1,995,692
Interest deferral and accretion........................... -- 5,541,118
Amortization of deferred financing fees................... -- 405,496
Provision for doubtful accounts........................... 10,572 25,944
Loss attributable to minority interest.................... (67,267) (95,757)
Noncash compensation...................................... 793,869 174,099
Changes in operating assets and liabilities
Restricted cash related to operating activities........ -- 1,359,554
Trade accounts receivable.............................. 96,007 (1,161,631)
Other current assets................................... (191,195) (1,192,264)
Other assets........................................... (73,388) (219,680)
Accounts payable....................................... (1,871,121) (10,614,178)
Other accrued liabilities.............................. (1,314,086) 1,226,656
----------- -------------
Net cash used in operating activities....................... (5,742,172) (16,156,249)
----------- -------------
Cash flows from investing activities
Purchase of furniture and equipment....................... (610,128) (1,095,079)
Network development costs................................. (4,669,793) (20,638,834)
----------- -------------
Net cash used in investing activities....................... (5,279,921) (21,733,913)
----------- -------------
Cash flows from financing activities
Issuance of notes payable................................. 4,483,286 8,198,094
Payment of deferred financing fees........................ -- (306,575)
Warrant and stock option exercises........................ 1,082 111,524
Proceeds from sale of minority interest in subsidiaries... 378,385 --
Payment of stockholder notes payable...................... (146,083) --
----------- -------------
Net cash flow from financing activities..................... 4,716,670 8,003,043
----------- -------------
Net increase/(decrease) in cash and cash equivalents........ (6,305,423) (29,887,119)
Cash and cash equivalents -- beginning of period............ 20,350,791 132,706,427
----------- -------------
Cash and cash equivalents -- end of period.................. $14,045,368 $ 102,819,308
=========== =============
Supplemental disclosure of cash flow information
Dividends declared with preferred stock................... $ 898,133 $ 1,006,870
=========== =============
(Decrease) in accrued redeemable warrant cost............. $ (496,679) --
=========== =============
Increase in right-of-way for option discount.............. $ 130,250 --
=========== =============
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements.
F-22
<PAGE> 100
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION AND RELATED MATTERS
Basis of Presentation
As of the end of and for the three month period ended September 30, 1996,
the accompanying unaudited condensed consolidated interim financial statements
include the accounts of American Communications Services, Inc. and its
subsidiaries, all of which, excluding the Louisville, Kentucky, Fort Worth and
El Paso, Texas, and Columbia and Greenville, South Carolina subsidiaries, are
wholly owned (the Louisville, Kentucky subsidiary was also not wholly owned for
the three month period ending September 30, 1995). The Company has a 92.75
percent ownership interest in these subsidiaries. Such statements, including
comparative information for the three month period ended September 30, 1995,
where applicable, have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and item 310(b) of Regulation S-B. The unaudited
condensed consolidated interim financial statements should be read in
conjunction with the financial statements and footnotes thereto included in the
Company's annual report on Form 10-KSB for the fiscal year ended June 30, 1996
filed with the Securities and Exchange Commission (the "SEC") on September 30,
1996, as amended. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. All material intercompany accounts and transactions have been
eliminated in consolidation. Results of the interim periods are not indicative
of the results to be expected for the full year.
Business
American Communications Services, Inc. ("ACSI" or the "Company") is a
competitive local exchange carrier ("CLEC") that constructs and operates digital
fiber optic networks and offers local telecommunications services to long
distance companies (interexchange carriers or "IXCs") and business and
government end users in the southern U.S.
The Company currently provides non-switched dedicated services including
special access, switched transport and private line services. These services
generally are offered by the Company in competition with incumbent local
exchange telephone companies ("ILEC's") and are delivered with a high level of
network reliability. The Company also offers high speed data services including
high speed LAN to LAN applications and multiple internet access services. In
addition to the data and non-switched dedicated services, the Company has begun
offering on a limited basis, enhanced voice messaging services to small and
mid-size business and government end users. Successful marketing of these
enhanced voice messaging and high-speed data services will not only provide the
Company with increased revenues, but will also provide an expanded end user
customer base and relevant marketing experience that can be leveraged into the
offering of local switched services, which the Company plans to begin offering
during the next quarter.
As of September 30, 1996, ACSI had eighteen operational networks and an
additional twelve networks under construction, half of which are expected to be
operational by the end of calendar 1996. As of September 30, 1996, the Company
had obtained intrastate authority for the provision of dedicated services in
Alabama, Arkansas, Florida, Georgia, Kentucky, Maryland, Nevada, New Mexico,
South Carolina, Tennessee and Texas, had applications pending before the Public
Service Commission ("PSC") in Arizona, Colorado, Louisiana, Missouri, Oklahoma
and Virginia. To the extent the Company expands the scope of its intrastate
services in these states to include the full range of local switch services, the
Company is required to seek additional authorization from such PSCs. As of
September 30, 1996, the Company had applied for authorization to provide local
switched services in Arizona, Arkansas, Colorado, Kentucky, Louisiana,
Mississippi, Missouri, New
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<PAGE> 101
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS (CONTINUED)
(1) BASIS OF PRESENTATION AND RELATED MATTERS -- (CONTINUED)
Mexico, Oklahoma, and Virginia and had been granted such authority in Alabama,
Florida, Georgia, Maryland, Nevada, South Carolina, Tennessee, and Texas.
As of September 30, 1996, the Company had negotiated partial agreements
with BellSouth for local interconnection and access to unbundled elements in
South Carolina, Georgia, Florida, Kentucky, Tennessee, Alabama and Mississippi.
Similar partial agreements have been reached with Southwestern Bell for Arkansas
and Texas, with US West for New Mexico and Arizona and with GTE for Texas,
Kentucky and Florida. In all instances, the Company was forced to seek state PSC
arbitration for some material issues. As of September 30, 1996, State commission
arbitration for interconnection were underway in the states listed above. In
addition, the Company has initiated formal interconnection negotiations with
Bell Atlantic and Sprint/Central Telephone. Subject to receipt of necessary
additional financing the Company intends to have 50 networks in service or under
construction by the middle of calendar year 1998. To date, management believes
that it has been able to deploy its capital most efficiently by constructing,
rather than acquiring, fiber optic networks. By constructing all of its
networks, ACSI believes it has realized significant cost savings, created
considerable networking efficiencies and ensured quality, reliability and high
operating standards.
Financing Activities
On March 26, 1996, the Company completed the private placement of
$120,000,000 of 12 3/4% Senior Discount Notes due 2006 (the "2006 Notes"). The
Company received net proceeds of approximately $61,800,000 from the sale of the
2006 Notes. On June 25, 1996, all outstanding 2006 Notes were exchanged by the
Company, in an exchange offer registered with the SEC, for identical 2006 Notes
which with certain exceptions, are freely transferable under the Securities Act
of 1933, as amended (the "Act"). The 2006 Notes will accrete at a rate of
12 3/4% compounded semi-annually, to an aggregate principal amount of
$120,000,000 by April 1, 2001. Thereafter, interest on the 2006 Notes will
accrue at the annual rate of 12 3/4% and will be payable in cash semi-annually
on April 1 and October 1, commencing on October 1, 2001. The Notes will mature
on April 1, 2006.
On November 14, 1995, the Company completed a private offering of 190,000
Units (the "Units") consisting of $190,000,000 principal amount of 13% Senior
Discount Notes due 2005 (the "2005 Notes") and warrants to purchase 2,432,000
shares of the Company's common stock at a price of $7.15 per share ("Warrants").
On March 27, 1996, all outstanding 2005 Notes were exchanged by the
Company, in an exchange offer registered with the SEC, for identical 2005 Notes
which with certain exceptions, are freely transferable under the Act. Resale of
the Warrants, and the issuance of common stock upon exercise of the Warrants,
have been registered with the SEC. 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 an
annual rate of 13% and be payable semi-annually in cash.
The Company received net proceeds of approximately $96,826,000 from the
sale of the Units. At the time of such closing of the Units, the Company also
received net proceeds of approximately $4,725,000 from the private sale to ING
Equity Partners, L.P.I. ("ING") of 50,000 shares of its 9% Series B-4
Convertible Preferred Stock and the exercise by ING of warrants to purchase
214,286 shares of its common stock pursuant to the June 1995 Series B
Convertible Preferred Stock private placement.
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<PAGE> 102
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS (CONTINUED)
(1) BASIS OF PRESENTATION AND RELATED MATTERS -- (CONTINUED)
The Company will continue to use the proceeds from the sale of the 2005
Notes and Warrants, and the Series B-4 Preferred Stock and the 2006 Notes
towards completion of its 50 city business plan, including the development and
construction of fiber optic networks, the further development and introduction
of new services, including high-speed data, enhanced voice messaging and local
switched services, for expenses of the Company's existing networks and to fund
negative operating cash flow until break-even.
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<PAGE> 103
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NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Summary Consolidated Financial and
Operating Data...................... 8
Risk Factors.......................... 9
Use of Proceeds....................... 17
Price Range of Common Stock........... 19
Dividend Policy....................... 19
Capitalization........................ 20
Unaudited Pro Forma Condensed
Consolidated Financial Data......... 21
Selected Consolidated Financial
Data................................ 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 24
Business.............................. 31
Management............................ 48
Certain Transactions.................. 58
Principal Stockholders................ 61
Description of Certain Indebtedness... 63
Description of Capital Stock.......... 65
Shares Eligible for Future Sale....... 68
Underwriting.......................... 70
Legal Matters......................... 71
Experts............................... 71
Change in Independent Public
Accountants......................... 71
Additional Information................ 72
Glossary.............................. 73
Index to Financial Statements......... F-1
</TABLE>
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SHARES
AMERICAN COMMUNICATIONS
SERVICES, INC.
COMMON STOCK
-------------------
PROSPECTUS
-------------------
ALEX. BROWN & SONS
INCORPORATED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
, 1997
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<PAGE> 104
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Amended and Restated Certificate of Incorporation provides that a
director of the Company will not be personally liable for monetary damages to
the Company or its stockholders for breach of fiduciary duty as a director,
except for liability, (i) for any breach of the director's duty of loyalty to
such corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) for unlawful payments of dividends or unlawful stock repurchases or
redemption as provided in Section 194 of the DGCL or (iv) for any transaction
from which the director derived an improper personal benefit.
The Amended and Restated Certificate of Incorporation and the By-laws
further provide that directors and officers of the Company (as well as agents
and employees of the Company at the discretion of the Board) shall, to the
fullest extent authorized by the DGCL or any other applicable laws then in
effect, be indemnified against liabilities arising from their service as
directors and officers. The Company has entered into indemnification agreements
with each of its executive officers and directors to reimburse them for certain
liabilities incurred in connection with the performance of their fiduciary
duties.
Section 145 of the DGCL empowers a corporation to indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Section 145 also empowers a corporation to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that such person acted in any of the
capacities set forth above, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted under similar standards, except
that no indemnification may be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the corporation
unless, and only to the extent that, the Delaware Court of Chancery or the court
in which such action was brought shall determine that despite the adjudication
of liability such person is fairly and reasonably entitled to indemnity for such
expenses which the Delaware Court of Chancery or such other court shall deem
proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to above or in the defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith, that indemnification provided for by Section 145 shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled;
and that the corporation is empowered to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation against any liability asserted against him in any such capacity or
arising out of his status as such, whether or not the corporation would have the
power to indemnify him against such liability under Section 145.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the
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<PAGE> 105
Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses payable by the Registrant in connection with the issuance and
distribution of the securities being registered (other than underwriting
accounts and commissions) are estimated to be as follows:
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 15,152
NASD Filing Fee................................................... 5,500
Nasdaq Listing Fee................................................ 15,000
Accounting Fees and Expenses...................................... *
Legal Fees and Expenses........................................... *
Blue Sky Fees and Expenses........................................ *
Printing Fees..................................................... *
Miscellaneous..................................................... *
--------
Total............................................................. $ *
========
</TABLE>
- ---------------
* To be completed by amendment.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In February 1994, the Company issued options to purchase 150,000 shares of
common stock to George M. Tronsrue, III, its President and Chief Operating
Officer -- Strategy and Technology Development. Of these options, 116,666 have
already vested. The remaining options vest over a thirteen month period and all
such options are exercisable at $2.25 per share and expire on the fifth
anniversary of the vesting date. Pursuant to an amendment to his employment
agreement, Mr. Tronsrue was granted five year options to purchase up to 100,001
shares of Common Stock at an exercise price of $2.25 per share. These options
vested with respect to 16,667 shares on February 23, 1995 and 1996, will vest as
to 16,667 shares on February 23, 1997, and as to the remaining 50,000 shares on
February 23, 1998. Mr. Tronsrue was granted Performance Stock Options to
purchase 20,000 shares of Common Stock exercisable at a price of $2.25 per share
through March 31, 2000, based upon the achievement of certain performance goals
on the occurrence of certain events prior to December 31, 1994, and June 30,
1995. Upon the achievement of certain performance goals, Mr. Tronsrue also
received five year Performance Stock Options to purchase up to 80,000 shares of
Common Stock at an exercise price of $2.25 per share. All of these options
vested in 1996 upon attaining certain performance goals. Options vested as to
20,000 shares on March 31, 1996, as to 20,000 on June 30, 1996, and as to 40,000
on September 1, 1996. On July 6, 1995, pursuant to the agreement, Mr. Tronsrue
was also granted Performance Stock Options to purchase 50,000 shares of Common
Stock at an exercise price of $3.40 per share. These options will vest as to
25,000 shares on each of February 23, 1998, and February 23, 1999. None of the
foregoing options granted to Mr. Tronsrue shall be deemed earned if, as to any
given year, Mr. Tronsrue's employment is terminated for cause or if he
voluntarily resigns. These were private transactions effected pursuant to
Section 4(2) of the Securities Act.
In April 1994, the Company issued options to purchase 150,000 shares of
common stock to Riley M. Murphy, its Executive Vice President for Legal and
Regulatory Affairs. Of these options, 108,333 have already vested and the
remaining options vest over a one-year period and all such options are
exercisable at $2.25 per share and expire on the fifth anniversary of the
vesting date. Pursuant to an amendment to her
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<PAGE> 106
employment agreement, Ms. Murphy also received options to purchase 100,002
shares which were granted on December 14, 1994, with an exercise price of $2.25.
These options vested with respect to 14,584 shares on March 31, 1995 and 1996,
and will vest as to 14,584 shares on March 31, 1997, and as to the remaining
56,250 shares on March 31, 1998. On July 6, 1995, pursuant to the agreement, Ms.
Murphy was also granted options to purchase 50,000 shares of Common Stock at an
exercise price of $3.40 per share. These options will vest as to 25,000 shares
on each of March 31, 1998, and March 31, 1999. None of the foregoing options
granted to Ms. Murphy shall be deemed earned if, as to any given year, Ms.
Murphy's employment is terminated for cause of if she voluntarily resigns. These
were private transactions effected pursuant to Section 4(2) of the Securities
Act.
On April 5, 1994, the Company entered into a right of way agreement
pursuant to which they granted the provider an option to the purchase 500,000
shares of common stock at 90% of the current market value at the time of
exercise. This option expires on June 28, 1997. This transaction was considered
a private sale pursuant to Section 4(2) of Securities Act.
In May 1994, the Company granted options to purchase 150,000 shares of its
common stock to Douglas R. Hudson, its Executive Vice President for Sales and
Marketing. Of these options, 108,333 have already vested and the remaining
options vest over a 16 month period and all such options are exercisable at
$2.25 per share and expire on the fifth anniversary of the vesting date.
Pursuant to an amendment to his employment agreement, Mr. Hudson also received
options to purchase 100,002 shares which were granted on December 14, 1994, with
an exercise price of $2.25. These options vested with respect to 14,584 shares
on May 31, 1995 and 1996, and will vest as to 14,584 shares on May 31, 1997, and
as to the remaining 56,250 shares on May 31, 1998. On July 6, 1995, pursuant to
the agreement, Mr. Hudson was also granted options to purchase 50,000 shares of
Common Stock at an exercise price of $3.40 per share. These options will vest as
to 25,000 shares on each of May 31, 1998, and May 31, 1999. None of the
foregoing options granted to Mr. Hudson shall be deemed earned if, as to any
given year, Mr. Hudson's employment is terminated for cause or if he voluntarily
resigns. These were private transactions effected pursuant to Section 4(2) of
the Securities Act.
In May and June 1994, the Company sold notes to Apex, Productivity, Russell
T. Stern, Jr. and Siar Corp. Purchase Money Pension Plan ("Siar") in the
original principal amount of $681,640. This transaction was effected as a
private sale in reliance on Section 4(2) of the Securities Act. In connection
with the purchase of its note, Siar was given 6,923 shares of common stock with
a then current market value of approximately $22,500. The terms of the notes to
Apex, Productivity and Stern provided that they were convertible into equity
securities at the holder's option and that if the notes were so converted, the
holders thereof would be entitled to conversion fees, also payable in equity
securities of the Company. On October 25, 1994, the Company repaid Mr. Stern's
note in the original principal amount of $77,281, along with accrued interest of
$4,256 in cash. In connection with the October 1994 Private Placement, Apex and
Productivity each converted their notes in the original principal amount of
$264,679.50, along with accrued interest of $14,684.27 and a conversion fee of
$77,250, into 3,962 shares of the Company's Series A Preferred Stock. In August
1994, Apex loaned the Company $250,000. The terms of this loan were 15% per
annum interest on a note due December 31, 1994, the grant of a security interest
in the tangible assets of the Company's operating subsidiary which was then
constructing a CAP network and the issuance of the Company's warrants in the
amount of $250,000 to purchase shares of Preferred Stock at $90 per share. Apex
converted the principal of this loan into 2,778 shares of Series A Preferred
Stock at $90 per share as part of the October 1994 Private Placement. In
addition, Apex received warrants to purchase 3,333 shares of Common Stock at
$1.125 per share and warrants to purchase 3,333 shares of Common Stock at $0.01
per share in connection with this conversion. All of these warrants were
exercised. These transactions were considered a part of the October 1994 Private
Placement and were effected in reliance on Section 4(2) of the Securities Act
and Rule 506 promulgated thereunder.
In June and July 1994 and October 1993, the Company issued options to
purchase 50,000 shares of common stock to each of Russell T. Stern, Jr., William
Salatich, George Middlemas and Steven Chrust, then all of its outside directors.
The options vested immediately as to 20,000 shares and are exercisable for a
period of five years at an exercise price of $0.875. The options with respect to
the remaining 30,000 shares are
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<PAGE> 107
exercisable at $3.10 and vest with respect to 10,000 shares on each of the first
three anniversaries of the grant and expire on the fifth anniversary of the
vesting date. 30,000 of these options were originally granted to each of Messrs.
Stern, Salatich, Middlemas and Chrust at exercise prices ranging from $6.00 to
$8.00 and such exercise prices were subsequently reduced to $3.10 on July 21,
1994. On December 13, 1994, the exercise prices of such options were further
decreased from $3.10 to $2.25. Messrs. Stern and Salatich subsequently resigned
from the Company's board of directors and pursuant to agreement with the Company
all of their options vested upon such resignation. The Company has relied on
Section 4(2) of the Securities Act in issuing these options.
On June 1, 1994, the Company entered into an agreement with Apex,
Productivity, The Thurston Group, Inc., Brian Boyer and Russell T. Stern, Jr.,
to exchange 548,387 shares of common stock for all 1,700 of the Company's then
currently issued and outstanding shares of preferred stock. The number of shares
of common stock issued was computed by dividing the $1,700,000 face value of the
preferred stock by $3.10, the average of the bid and ask price of the common
stock for the five business days immediately preceding the transaction. This
transaction was effected in reliance on Section 4(2) of the Securities Act and
Rule 506 promulgated thereunder.
On June 28, 1994, the Company issued $4,300,720 principal amount of 15%
convertible notes. These notes had warrants attached, however, the terms of
exercise could not be determined except with reference to an anticipated equity
financing on the part of the Company. The notes were sold by the Company to the
following accredited investors in reliance on Section 4(2) of the Securities Act
and Rule 506 promulgated thereunder: Melco Developments Ltd., Pasquale J.
Beldotti, Brad Peery Capital L.P., Barfield Nominees Limited, Apex,
Productivity, William C. Miller, IV, Prime II Management, L.P., U.S. Signal
Corporation, Ethos Partners L.P. and Global Opportunity Fund I Ltd. In
connection with this transaction, the Company paid a fee of $554,900 to Gerard,
Klauer, Mattison & Co.
Effective July 1, 1994, the Company engaged SGC Advisory Services, Inc.
("SGC") as a financial and business consultant for three years. SGC is an
affiliate of Steven G. Chrust, a director of the Company. Pursuant to the
agreement, the Company will compensate SGC as follows: (1) a monthly fee of
$5,000; (2) options to purchase up to 50,000 shares of the Company's Common
Stock that vest on July 1, 1997, and are exercisable on or before July 1, 1999;
and (3) a fee equal to 4% of the total aggregate consideration received by the
Company or its shareholders in any transaction that the Company completes with a
strategic partner, merger partner or buyer if SGC is the finder of such entity;
or in the case where SGC is not the finder but proves instrumental in completing
the transaction then a fee of 2% will be payable to SGC. In either case, 50% of
the fee will be payable in cash at the time of closing and 50% will be payable
in warrants to purchase securities or instruments similar to those received by
the Company or its shareholders, unless the entire purchase price is paid in
cash. In the latter case, the entire fee will be payable in cash at closing. Any
warrants will have an exercise life of five years from date of issuance or
vesting whichever is later and will be exercisable at the same price as
established by the transaction that generates the warrant fee. At the end of
each month of the term of the agreement, SGC earns a credit against the exercise
price of the options referred to in (2) above equal to 1/36th of the exercise
price. The shares issued upon exercise of the options were priced at the average
of the high bid and low asked price on the closing date of the October 1994
Private Placement and have piggy-back registration rights.
In August 1994, the Company entered into a consulting agreement with
Richard Walko pursuant to which he was granted options to purchase 17,000 shares
of common stock at $3.10 per share. These options are currently exercisable and
expire on December 31, 1996. This transaction was considered a private sale
pursuant to Section 4(2) of the Securities Act.
Pursuant to an agreement dated as of September 9, 1994, as amended on May
12, 1995, the Company issued 62,000 shares of Common Stock to Randall Holcombe
and Karen Grob Holcombe in partial payment of the purchase price for all of the
outstanding shares of Piedmont Teleport, Inc. in a private transaction under
Section 4(2) of the Securities Act.
On October 21, 1994, the Company sold 186,664 shares of Series A Preferred
Stock and warrants to purchase an aggregate of 1,794,486 shares of common stock
to Huff, Apex, Productivity, Ethos Partners L.P.,
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<PAGE> 108
Zelus International Ltd., Global Opportunity Fund I Ltd., William G. Salatich,
Trustee William G. Salatich Consulting and U.S. Signal Corporation in a private
transaction. The Company received aggregate consideration of approximately $16.8
million in connection with this transaction. In connection with this
transaction, which was effectuated pursuant to Section 4(2) of the Securities
Act and Rule 506 thereunder, the Company paid Huff a commitment fee consisting
of warrants to purchase 77,000 shares of common stock at $1.125 per share,
Gerard, Klauer, Mattison and Co. a placement agent fee consisting of warrants to
purchase 350,000 shares of common stock at $3.10 per share and a cash payment of
$825,000 and Marvin Saffian a fee consisting of warrants to purchase 126,007
shares of common stock for $3.10 per share and a cash payment of $125,000.
Pursuant to an agreement dated as of November 28, 1994, the Company issued
10,636 shares of Common Stock to Jeffrey Corl and Leila Davis in partial payment
of the purchase price for all of the outstanding shares of CitiLink Corp. in a
private transaction under Section 4(2) of the Securities Act.
On or about November 30, 1994, Huff exercised warrants to purchase
1,491,222 shares of common stock that it received in connection with the October
1994 Private Placement for an aggregate consideration of $100,767.22. This
transaction was consummated as a private sale pursuant to Section 4(2) of the
Securities Act.
Between August 8 and November 1, 1994, the Company issued options to
purchase 202,000 shares of Common Stock for $3.10 per share to nine employees of
the Company. These were considered private transactions pursuant to Section 4(2)
of the Securities Act.
On March 20, 1995, the Company issued 25,000 shares of Common Stock to
Suite 1025 Limited Partnership ("Suite 1025") pursuant to its exercise of
certain warrants to purchase Common Stock at $.875 per share. On March 10, 1995,
the Company issued 17,500 shares of Common Stock to Suite 1025 pursuant to its
exercise of certain warrants to purchase Common Stock at $.875 per share. On
March 23, 1995, the Company issued 5,000 shares of Common Stock to Suite 1025
pursuant to its exercise of certain warrants to purchase Common Stock at $.875
per share. On April 13, 1995, the Company issued 25,000 shares of Common Stock
to Sabina International S.A. pursuant to its exercise of certain warrants to
purchase Common Stock at $.875 per share. These transactions were completed in
reliance on Section 4(2) of the Securities Act.
In June 1995, the Company completed a private placement of its Series B-1,
Series B-2, and Series B-3 Preferred Stock and warrants to purchase Common Stock
for an aggregate purchase price of $22.75 million. ING purchased an aggregate of
100,000 shares of the Company's Series B-1 Preferred Stock, warrants to purchase
428,571 shares of Common Stock at an exercise price of $0.01 per share and a
warrant to purchase 100,000 shares of Common Stock at an exercise price of $2.50
per share. In June 1995, ING exercised its warrants to purchase 428,571 shares
of Common Stock for an aggregate consideration of $4,286 and the remaining
investors, with the exception of Huff, exercised warrants to purchase 117,854
shares of Common Stock for an aggregate consideration of $1,179 in July 1995.
Huff and certain of its affiliates purchased an aggregate of 100,975 shares of
Series B-2 Preferred Stock, a warrant to purchase 432,749 shares of Common Stock
at an exercise price of $0.01 per share, a warrant to purchase 100,000 shares of
Common Stock at an exercise price of $1.79 and a warrant to purchase 100,000
shares at an exercise price of $2.50 per share. Apex and certain of its
affiliates purchased an aggregate of 21,000 shares of Series B-3 Preferred Stock
and warrants to purchase an aggregate of 90,000 shares of Common Stock at an
exercise price of $.01 per share. The remaining investors in the June 1995
Private Placement purchased an aggregate of 1,525 shares of Series B-2 Preferred
Stock and 4,000 shares of Series B-3 Preferred Stock and warrants to purchase
23,676 shares of Common Stock at an exercise price of $.01 per share. The price
per unit in the private placement was $100 and the Company received aggregate
proceeds of approximately $22.7 million. Pursuant to the Series B Purchase
Agreement, ING purchased 50,000 shares of the Company's Series B-4 Preferred
Stock and exercised a warrant entitling ING to purchase 214,286 shares of Common
Stock at an exercise price of $0.01 per share, which purchases were consummated
in November 1995 at a purchase price of $5.0 million. In connection with the
private placement, the Series A Preferred Stock was exchanged for an identical
number of shares of Series A-1 Preferred Stock and subsequently retired. In
addition, GKM received $1,250,950 warrants to purchase 284,253 shares of Common
Stock at an exercise price of $2.80 per share, and warrants to
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<PAGE> 109
purchase 54 shares of Common Stock at an exercise price of $.01 per share and
Marvin Saffian received warrants to purchase 25,000 shares of Common Stock at
$2.80 per share. These were considered private transactions pursuant to Section
4(2) of the Securities Act.
On July 7, 1995, the Company granted options to purchase 407,850 shares of
Common Stock at an exercise price of $3.40 per share to various employees and
consultants of the Company, which options will vest in various amounts over the
next four years.
On July 19, 1995, the Company issued 54 shares of Common Stock to GKM in
connection with GKM's exercise of certain warrants received by GKM as partial
payment of its placement fee relating to the June 1995 Private Placement. This
transaction was completed in reliance on Section 4(2) of the Securities Act.
On September 22, 1995, the Company granted options to purchase 136,500
shares of Common Stock at an exercise price of $4.00 per share to various
employees and consultants of the Company, which options will vest in various
amounts over the next four years.
On November 14, 1995, the Company issued 12,500 shares of Common Stock to
Walter Lake pursuant to his exercise of certain warrants to purchase Common
Stock at $.875 per share and 676 shares of Common Stock to Brian Boyer pursuant
to his exercise of certain warrants to purchase Common Stock at $.875 per share.
These transactions were completed in reliance on Section 4(2) of the Securities
Act.
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On November 14, 1995, the Company completed a private offering pursuant to
Rule 144A of the Securities Act of 190,000 units (the "Units") consisting of
$190,000,000 principal amount of 13% Senior Discount Notes (the "2005 Notes")
due 2005, and warrants to purchase 2,432,000 shares of Common Stock at an
exercise price of $7.15 per share (the "Warrants"), for which it received
aggregate net proceeds of approximately $96.8 million (after deduction of
underwriting discounts and commissions of $3.3 million and offering expenses of
$900,000). The Units were sold to Smith Barney Inc. and Salomon Brothers Inc
(the "Unit Initial Purchasers"). As part of the plan of distribution, the Unit
Initial Purchasers subsequently sold the Units to the following persons, all of
which were required to qualify as "Qualified Institutional Buyers" (as defined
under Rule 144A):
<TABLE>
<CAPTION>
NUMBER OF
NAME/CLASS OF PURCHASER UNITS PURCHASED
-------------------------------------------------------------- ---------------
<S> <C>
American Express Financial/IDS Financial Services............. 21,000
Lutheran Brotherhood.......................................... 30,000
Manufacturers Life Insurance.................................. 16,000
Invesco Funds Group........................................... 11,000
First Investors Management Co................................. 13,000
T. Rowe Price Associates...................................... 12,000
Nomura Capital Management..................................... 10,000
Northstar Investment Management............................... 12,500
BEA Associates Inc............................................ 13,050
Loews Corp.................................................... 7,200
J&W Seligman & Co............................................. 5,000
Massachusetts Financial Services.............................. 4,000
Fortis Advisers Inc........................................... 5,500
Hampshire Management Company.................................. 3,000
Caywood-Scholl Capital Management............................. 2,750
HighView Fund................................................. 1,000
Brinson Partners Inc.......................................... 2,000
State Street Research & Management............................ 10,000
Aetna Life Insurance & Annuity................................ 4,000
Prospect Management Co........................................ 2,000
Smith Barney Inc.............................................. 5,000
-------
190,000
=======
</TABLE>
The Warrants and the shares of Common Stock underlying the Warrants, as
well as Notes, substantially identical in terms to the 2005 Notes and into which
the 2005 Notes were exchangeable, were registered under the Securities Act
pursuant to Registration Statements declared effective in February 1996.
In December 1995, the Company entered into the GKM Settlement Agreement,
wherein the Company agreed to pay to GKM the GKM Settlement Expenses and issue
the GKM Warrant I, which will allow GKM to purchase 96 shares of the Company's
Common Stock at an exercise price of $0.01 per share at any time before June 28,
1996, and the GKM Warrant II, which will allow GKM to purchase 62,473 shares of
the Company's Common Stock at an exercise price of $2.80 per share at any time
after 5:00 p.m. New York City time on December 28, 1996, until 5:00 p.m. New
York City time on December 28, 2000. The GKM Warrants were earned as a result of
services that GKM performed in connection with the June 1995 private placement.
The Common Stock issuable upon the exercise of the GKM Warrants have certain
registration rights. The GKM Warrant I was exercised.
II-7
<PAGE> 111
On March 21, 1996, the Company completed a private offering pursuant to
Rule 144A of the Securities Act of $120,000,000 in principal amount of 12 3/4%
Senior Discount Notes due 2006 (the "2006 Notes") for which it received net
proceeds of approximately $61.8 million (after deduction of discounts and
commissions of approximately $2.3 million and offering expenses of $400,000).
The 2006 Notes were sold to Smith Barney, Inc. and Bear, Stearns & Co. Inc. (the
"Note Initial Purchasers"). As part of the plan of distribution, the Note
Initial Purchasers subsequently sold the Notes to the following persons, all of
which were required to qualify as "Qualified Institutional Buyers" (as defined
under Rule 144A):
<TABLE>
<CAPTION>
AMOUNT OF
NAME/CLASS OF PURCHASER NOTES PURCHASED
-------------------------------------------------------------- ---------------
<S> <C>
Bank of New York (The)........................................ $ 35,860,000
Bankers Trust Company......................................... 34,170,000
Boston Safe Deposit and Trust Company......................... 1,400,000
Custodial Trust............................................... 1,500,000
Investors Fiduciary Trust Company/SSB......................... 100,000
Northern Trust Company -- Trust............................... 990,000
Smith Barney Inc. ............................................ 5,800,000
SSB -- Custodian.............................................. 40,180,000
------------
Total:.............................................. $ 120,000,000
============
</TABLE>
On June 25, 1996, all outstanding 2006 Notes were exchanged by the Company,
in an exchange offer registered with the SEC, for identical 2006 Notes which,
with certain exceptions, are freely transferable under the Securities Act.
On January 17, 1997, the Company issued 1,000,000 shares of Common Stock to
the stockholders of Cybergate, Inc. in exchange for all of the issued and
outstanding shares of capital stock of Cybergate. This transaction was effected
without registration pursuant to Section 4(2) of the Securities Act.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- ---------------------------------------------------------------------- -------------
<S> <C> <C>
1.1 Form of Underwriting Agreement. ...................................... ++++
3.1 Amended and Restated Certificate of Incorporation of the Company. .... -
3.2 Certificate of Designations of the Company's 9% Series A-1, 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-1 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. ................................................... ++
</TABLE>
II-8
<PAGE> 112
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- ---------------------------------------------------------------------- -------------
<S> <C> <C>
4.7(a) 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 (the
"1995 Indenture"). ................................................... ++
4.7(b) March 11, 1996 Supplement to 1995 Indenture........................... +++++++
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 (the
"1996 Indenture"). ................................................... +++++
5.1 Opinion of Piper & Marbury L.L.P., counsel to the Company. ........... +++++++
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 Company's Employee Stock Purchase Agreement. ......................... +++++++
10.5 Registration Rights Agreement dated July 1, 1992, between American
Lightwave, Inc. and persons named therein. ........................... *
10.6 Supplemental Registration Rights Agreement dated June 26, 1995. ...... ****
10.7 Management Registration Rights Agreement dated June 30, 1995. ........ ****
10.8 Registration Rights Agreement dated June 26, 1995, between the Company
and certain Preferred Stockholders. .................................. **
10.9 Form of Warrant Agreement issued to certain Preferred Stockholders on
June 26, 1995. ....................................................... ****
10.10 Form of $.01 Warrant Agreement. ...................................... ****
10.11 Form of $1.79 Warrant Agreement. ..................................... ****
10.12 Form of $2.25 Warrant Agreement. ..................................... ****
10.13 Stockholders Agreement dated June 26, 1995, between the Company and
certain Preferred Stockholders. ...................................... ****
10.14 Third Amended and Restated Employment Agreement between the Company
and Anthony J. Pompliano. ............................................ ****
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. ................................................. ****
</TABLE>
II-9
<PAGE> 113
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- ---------------------------------------------------------------------- -------------
<S> <C> <C>
10.17 Employment Agreement between the Company and Jack E. Reich. .......... ****
10.18 [intentionally left blank]
10.19 Form of Stock Option Certificates, as amended, issued to executive
officers under employment agreements. ................................ ****
10.20 Agreement, dated March 2, 1994, between the Company and Gerard Klauer
Mattison & Co., as amended. .......................................... *
10.21 Agreement, dated March 20, 1995, between the Company and Gerard Klauer
Mattison & Co., as amended. .......................................... ****
10.22 Agreement, dated October 19, 1994, between the Company and Marvin
Saffian & Company. ................................................... *
10.23 Lease Agreement for the Company's executive offices at 131 National
Business Parkway, Suite 100, Annapolis Junction, Maryland, as
amended. ............................................................. ****
10.24 Loan and Security Agreement, dated October 17, 1994, between AT&T
Credit Corporation and American Communication Services of Louisville,
Inc. ................................................................. *
10.25 Loan and Security Agreement, dated February 28, 1995, between AT&T
Credit Corporation and American Communication Services of Fort Worth,
Inc. ................................................................. ****
10.26 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. ................ ****
10.27 Amendment No. 1 to Parent Support and Pledge Agreement (Louisville)
between the Company and AT&T Credit Corporation. ..................... ****
10.28 Amendment No. 1 to Parent Support and Pledge Agreement (Fort Worth)
between the Company and AT&T Credit Corporation. ..................... ****
10.29 Amendment No. 1 to Loan and Security Agreement between American
Communications Services of Louisville, Inc. and AT&T Credit
Corporation. ......................................................... ****
10.30 Consulting Agreement, dated October 25, 1993, between the Company and
Thurston Partners, Inc.. ............................................. *
10.31 Consulting Agreement, effective July 1, 1994, between the Company and
SGC Advisory Services, Inc. .......................................... *
10.32 Consulting Agreement, dated June 16, 1994, between the Company and
Thurston Partners, Inc. and Global Capital, Inc. ..................... *
10.33 Note Purchase Agreement, dated June 28, 1994. ........................ *
10.34 Investment Agreement dated October 21, 1994, between the Company and
the Purchasers named therein. ........................................ *
10.35 Stock Purchase Agreement, dated October 17, 1994, between the Company
and AT&T Credit Corporation. ......................................... *
10.36 American Communication Services of Louisville, Inc. Common Stock
Purchase Agreement, dated October 17, 1994. .......................... *
10.37 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. ........................... ****
10.38 Stock Purchase Agreement dated December 17, 1996 by and between the
Company and Cybergate, Inc. .......................................... ++++
10.39 Stock Purchase Agreement, dated May 12, 1995, by and among the
Company, Piedmont Teleport, Inc., Randal Holcombe and Karen Holcombe,
as amended. .......................................................... ****
</TABLE>
II-10
<PAGE> 114
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- ---------------------------------------------------------------------- -------------
<S> <C> <C>
10.40 Stock and Warrant Purchase Agreement, dated June 26, 1995, between the
Company and the Purchasers named therein. ............................ **
10.41 Form of Indemnity Agreement between the Company and its Directors, as
amended. ............................................................. ****
10.42 Assignment and Assumption Agreement dated June 21, 1995, between the
Company and Apex Investment Fund II, L.P. ............................ ****
10.43 Registration Agreement dated November 9, 1995, between the Company and
the Initial Purchasers. .............................................. ++
10.44 Loan and Security Agreement, dated September 8, 1995, between AT&T
Credit Corporation and American Communications Services of El Paso,
Inc. ................................................................. ++
10.45 Parent Support and Pledge Agreement (El Paso) dated September 8, 1995,
between the Company and AT&T Credit Corporation. ..................... ++
10.46 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. ................. ++
10.47 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").............................. ++
10.48 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").......... ++
10.49 Amendment to Amended 1994 Stock Option Plan of the Company............ +++++++
10.50 Parent Pledge and Support Agreement dated as of October 17, 1994
between the Company and AT&T Credit Corporation. ..................... *
10.51 American Communication Services of El Paso Inc. Common Stock Purchase
Agreement dated September 8, 1995. ................................... -
10.52 Supplemental 1995 Indenture........................................... ++++
10.53 Supplemental 1996 Indenture........................................... ++++
11.1 Statement re: computation of per share earnings (loss). .............. +
16.1 Letter re: change in certifying accountant. .......................... ***
21.1 Subsidiaries of the Registrant. ...................................... ++++
23.1 Consent of KPMG Peat Marwick LLP. .................................... ++++
23.2 Consent of Piper & Marbury L.L.P. .................................... ++++
24.1 Power of Attorney (included on page II-15). .......................... ++++
</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.
II-11
<PAGE> 115
+ 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.
++++ Filed herewith.
+++++ 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 Current Report on Form
8-K dated December , 1996 and incorporated herein by reference
thereto.
+++++++ To be filed by amendment.
- 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.
ITEM 28. UNDERTAKINGS.
REQUEST FOR ACCELERATION OF EFFECTIVE DATE. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the provisions
set forth in response to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
RULE 430A INFORMATION. For purposes of determining any liability under the
Securities Act, the Registrant will treat the information omitted from the form
of prospectus filed as part of this registration statement in reliance upon Rule
430A and contained in a form of prospectus filed by the registrant under rule
424(b) (1), or (4) or 497(h) under the Securities Act (sec.sec. 230.424(b) (1),
(4) or 230.497(h) as part of this Registration Statement as of the time the
Commission declared it effective.
For purposes of determining any liability under the Securities Act, the
Registrant will treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered in the
registration statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
II-12
<PAGE> 116
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
American Communications Services, Inc. has duly caused this Registration
Statement or Amendment to be signed on its behalf by the undersigned, thereunto
duly authorized, in Annapolis Junction, Maryland, on January 31, 1997.
AMERICAN COMMUNICATIONS SERVICES, INC.
By: /s/ ANTHONY J. POMPLIANO
------------------------------------
Anthony J. Pompliano
Executive Chairman
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Jack E.
Reich and Anthony J. Pompliano his true and lawful attorneys-in-fact and agents,
each acting alone, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any or all
amendments (including post-effective amendments) to the Registration Statement,
and to sign any registration statement for the same offering covered by this
Registration Statement that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933, as amended, and all post-effective
amendments thereto, and to file the same, with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, each acting alone, or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ----------------------------------- -----------------
<S> <C> <C>
/s/ ANTHONY J. POMPLIANO Executive Chairman of the Board of January 31, 1997
- ---------------------------------------- Directors (Principal Executive
Anthony J. Pompliano Officer)
/s/ JACK E. REICH President and Chief Executive January 31, 1997
- ---------------------------------------- Officer -- Communications Services
Jack E. Reich (Principal Financial and Accounting
Officer)
Director , 1997
- ----------------------------------------
George M. Middlemas
Director , 1997
- ----------------------------------------
Edwin M. Banks
/s/ CHRISTOPHER L. RAFFERTY Director January 31, 1997
- ----------------------------------------
Christopher L. Rafferty
/s/ BENJAMIN P. GIESS Director January 31, 1997
- ----------------------------------------
Benjamin P. Giess
/s/ OLIVIER L. TROUVEROY Director January 31, 1997
- ----------------------------------------
Olivier L. Trouveroy
/s/ PETER C. BENTZ Director January 31, 1997
- ----------------------------------------
Peter C. Bentz
</TABLE>
II-13
<PAGE> 117
EXHIBIT INDEX
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- ---------------------------------------------------------------------- -------------
<S> <C> <C>
1.1 Form of Underwriting Agreement. ...................................... ++++
3.1 Amended and Restated Certificate of Incorporation of the Company. .... -
3.2 Certificate of Designations of the Company's 9% Series A-1, 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-1 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 (a) 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 (the
"1995 Indenture"). ................................................... ++
4.7 (b) March 11, 1996 Supplement to 1995 Indenture........................... +++++++
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 (the
"1996 Indenture"). ................................................... +++++
5.1 Opinion of Piper & Marbury L.L.P., counsel to the Company. ........... +++++++
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 Company's Employee Stock Purchase Agreement. ......................... +++++++
</TABLE>
<PAGE> 118
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- ---------------------------------------------------------------------- -------------
<S> <C> <C>
10.5 Registration Rights Agreement dated July 1, 1992, between American
Lightwave, Inc. and persons named therein. ........................... *
10.6 Supplemental Registration Rights Agreement dated June 26, 1995. ...... ****
10.7 Management Registration Rights Agreement dated June 30, 1995. ........ ****
10.8 Registration Rights Agreement dated June 26, 1995, between the Company
and certain Preferred Stockholders. .................................. **
10.9 Form of Warrant Agreement issued to certain Preferred Stockholders on
June 26, 1995. ....................................................... ****
10.10 Form of $.01 Warrant Agreement. ...................................... ****
10.11 Form of $1.79 Warrant Agreement. ..................................... ****
10.12 Form of $2.25 Warrant Agreement. ..................................... ****
10.13 Stockholders Agreement dated June 26, 1995, between the Company and
certain Preferred Stockholders. ...................................... ****
10.14 Third Amended and Restated Employment Agreement between the Company
and Anthony J. Pompliano. ............................................ ****
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 Employment Agreement between the Company and Jack E. Reich. .......... ****
10.18 [intentionally left blank]
10.19 Form of Stock Option Certificates, as amended, issued to executive
officers under employment agreements. ................................ ****
10.20 Agreement, dated March 2, 1994, between the Company and Gerard Klauer
Mattison & Co., as amended. .......................................... *
10.21 Agreement, dated March 20, 1995, between the Company and Gerard Klauer
Mattison & Co., as amended. .......................................... ****
10.22 Agreement, dated October 19, 1994, between the Company and Marvin
Saffian & Company. ................................................... *
10.23 Lease Agreement for the Company's executive offices at 131 National
Business Parkway, Suite 100, Annapolis Junction, Maryland, as
amended. ............................................................. ****
10.24 Loan and Security Agreement, dated October 17, 1994, between AT&T
Credit Corporation and American Communication Services of Louisville,
Inc. ................................................................. *
10.25 Loan and Security Agreement, dated February 28, 1995, between AT&T
Credit Corporation and American Communication Services of Fort Worth,
Inc. ................................................................. ****
10.26 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. ................ ****
10.27 Amendment No. 1 to Parent Support and Pledge Agreement (Louisville)
between the Company and AT&T Credit Corporation. ..................... ****
10.28 Amendment No. 1 to Parent Support and Pledge Agreement (Fort Worth)
between the Company and AT&T Credit Corporation. ..................... ****
10.29 Amendment No. 1 to Loan and Security Agreement between American
Communications Services of Louisville, Inc. and AT&T Credit
Corporation. ......................................................... ****
</TABLE>
<PAGE> 119
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- ---------------------------------------------------------------------- -------------
<S> <C> <C>
10.30 Consulting Agreement, dated October 25, 1993, between the Company and
Thurston Partners, Inc.. ............................................. *
10.31 Consulting Agreement, effective July 1, 1994, between the Company and
SGC Advisory Services, Inc. .......................................... *
10.32 Consulting Agreement, dated June 16, 1994, between the Company and
Thurston Partners, Inc. and Global Capital, Inc. ..................... *
10.33 Note Purchase Agreement, dated June 28, 1994. ........................ *
10.34 Investment Agreement dated October 21, 1994, between the Company and
the Purchasers named therein. ........................................ *
10.35 Stock Purchase Agreement, dated October 17, 1994, between the Company
and AT&T Credit Corporation. ......................................... *
10.36 American Communication Services of Louisville, Inc. Common Stock
Purchase Agreement, dated October 17, 1994. .......................... *
10.37 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. ........................... ****
10.38 Stock Purchase Agreement dated December 17, 1996 by and between the
Company and Cybergate, Inc. .......................................... ++++
10.39 Stock Purchase Agreement, dated May 12, 1995, by and among the
Company, Piedmont Teleport, Inc., Randal Holcombe and Karen Holcombe,
as amended. .......................................................... ****
10.40 Stock and Warrant Purchase Agreement, dated June 26, 1995, between the
Company and the Purchasers named therein. ............................ **
10.41 Form of Indemnity Agreement between the Company and its Directors, as
amended. ............................................................. ****
10.42 Assignment and Assumption Agreement dated June 21, 1995, between the
Company and Apex Investment Fund II, L.P. ............................ ****
10.43 Registration Agreement dated November 9, 1995, between the Company and
the Initial Purchasers. .............................................. ++
10.44 Loan and Security Agreement, dated September 8, 1995, between AT&T
Credit Corporation and American Communications Services of El Paso,
Inc. ................................................................. ++
10.45 Parent Support and Pledge Agreement (El Paso) dated September 8, 1995,
between the Company and AT&T Credit Corporation. ..................... ++
10.46 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. ................. ++
10.47 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").............................. ++
10.48 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").......... ++
10.49 Amendment to Amended 1994 Stock Option Plan of the Company............ +++++++
10.50 Parent Pledge and Support Agreement dated as of October 17, 1994
between the Company and AT&T Credit Corporation. ..................... *
</TABLE>
<PAGE> 120
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- ---------------------------------------------------------------------- -------------
<S> <C> <C>
10.51 American Communication Services of El Paso Inc. Common Stock Purchase
Agreement dated September 8, 1995. ................................... -
10.52 Supplemental 1995 Indenture........................................... ++++
10.53 Supplemental 1996 Indenture........................................... ++++
11.1 Statement re: computation of per share earnings (loss). .............. +
16.1 Letter re: change in certifying accountant. .......................... ***
21.1 Subsidiaries of the Registrant. ...................................... ++++
23.1 Consent of KPMG Peat Marwick LLP. .................................... ++++
23.2 Consent of Piper & Marbury L.L.P. .................................... ++++
24.1 Power of Attorney (included on page II-15). .......................... ++++
</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.
++++ Filed herewith.
+++++ 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 Current Report on Form
8-K dated December , 1996 and incorporated herein by reference
thereto.
+++++++ To be filed by amendment.
- 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> 1
EXHIBIT 1.1
_________ Shares
AMERICAN COMMUNICATIONS SERVICES, INC.
Common Stock
UNDERWRITING AGREEMENT
________, 1997
Alex. Brown & Sons Incorporated
Donaldson, Lufkin & Jenrette
Securities Corporation
As representatives of the
several underwriters named
in Schedule I hereto
c/o Alex. Brown & Sons Incorporated
135 East Baltimore Street
Baltimore, Maryland 21202
Ladies and Gentlemen:
American Communications Services, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell _________ shares of its common stock,
par value $.01 per share (the "Firm Shares"), to the several underwriters named
in Schedule I hereto (the "Underwriters"). The Company also proposes to issue
and sell to the several Underwriters not more than _______ shares of its common
stock, par value $.01 per share (the "Additional Shares"), if requested by the
Underwriters as provided in Section 2 hereof. The Firm Shares and the
Additional Shares are collectively called the "Shares." The shares of common
stock of the Company to be outstanding after giving effect to the sales
contemplated hereby are hereinafter referred to as the "Common Stock."
1. Registration Statement and Prospectus. The Company has prepared
and filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively called the
"Act"), a registration statement on Form SB-2 (Registration No. 333-_____)
including a prospectus relating to the Shares, which may be amended. The
registration statement as amended at the time when it becomes effective,
including a registration statement (if any) filed pursuant to Rule 462(b) under
the Act increasing the size of the offering registered under the Act and
information (if any)
1
<PAGE> 2
deemed to be part of the registration statement at the time of effectiveness
pursuant to Rule 430A under that Act, is hereinafter referred to as the
"Registration Statement"; and the prospectus in the form first used to confirm
sales of Shares is hereinafter referred as the "Prospectus."
2. AGREEMENTS TO SELL AND PURCHASE. On the basis of the
representations and warranties contained in this Agreement, and subject to its
terms and conditions, the Company agrees to issue and sell, and each
Underwriter agrees, severally and not jointly, to purchase from the Company at
the purchase price per share of $_____ (the "Purchase Price"), the number of
Firm Shares set forth opposite the name of such Underwriter in Schedule I
hereto.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell the Additional Shares and the Underwriters shall have the right to
purchase, severally and not jointly, up to _______ Additional Shares from the
Company at the Purchase Price. Additional Shares may be purchased solely for
the purpose of covering over-allotments made in connection with the offering of
the Firm Shares. The Underwriters may exercise their right to purchase
Additional Shares in whole or in part from time to time by giving written
notice thereof to the Company within 30 days after the date of this Agreement.
You shall give any such notice on behalf of the Underwriters and such notice
shall specify the aggregate number of Additional Shares to be purchased
pursuant to such exercise and the date for payment and delivery thereof. The
date specified in any such notice shall be a business day (i) no earlier than
the Closing Date (as hereinafter defined), (ii) no later than the ten business
days after such notice has been given and (iii) no earlier than two business
days after such notice has been given. If any Additional Shares are to be
purchased, each Underwriter, severally and not jointly, agrees to purchase from
the Company the number of Additional Shares (subject to such adjustments to
eliminate fractional shares as you may determine) which bears the same
proportion to the total number of Additional Shares to be purchased from the
Company as the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I bears to the total number of Firm Shares.
The Company hereby agrees and the Company shall, concurrently with
the execution of this Agreement, deliver an agreement (a "Lock-up Agreement")
executed by (i) each of the directors and executive officers of the Company,
and (ii) each principal stockholder of the Company listed on Annex I hereto,
pursuant to which each such person agrees not to, directly or
2
<PAGE> 3
indirectly, offer, sell, contract to sell, grant any option to purchase, or
otherwise dispose of any Common Stock or any securities convertible into or
exercisable or exchangeable for shares of Common Stock or in any other manner
transfer all or a portion of the economic consequences associated with the
ownership of any such Common Stock, for a period of 180 days after the date of
the Prospectus without the prior written consent of Alex. Brown & Sons
Incorporated ("Alex. Brown"); provided, however, that during such 180-day
period each person delivering an agreement described in this sentence may
surrender shares of Preferred Stock (as defined in Section 6(n) below) owned by
such person to the Company for conversion into shares of Common Stock (in the
manner contemplated by the Prospectus); provided further, that the Lock-up
Agreement executed by each of The Huff Alternative Income Fund, L.P., ING
Equity Partners, L.P., Apex Investment Fund I, L.P., Apex Investment Fund II,
L.P., Argentum Capital Partners, L.P., Environmental Private Equity Fund II,
L.P. and the Productivity Fund II, L.P. (collectively, the "Principal
Investors") shall provide that (i) a Principal Investor may exercise demand
registration rights pursuant to the terms of that certain Registration Rights
Agreement dated as of June 26, 1995 (the "Registration Rights Agreement") by
and among the Company and the entities who are signatories thereto (including
the Principal Investors) at any time so that the Company will be obligated to
file a registration statement pursuant to such demand no earlier than on the
150th day after the date of this Agreement, provided that such Principal
Investor may not offer or sell any shares of the Com- pany's Common Stock
pursuant to any registration statement that is filed pursuant to the exercise
of such demand registration rights until the 181st day after the date of this
Agreement; (ii) if the Company files a "shelf" registration statement pursuant
to Rule 415 under the Act for the benefit of any stockholder of the Company
prior to the 180th day after the date of this Agreement, a Principal Investor
may exercise its piggy-back registration rights pursuant to the terms of the
Registration Rights Agreement at any time so that the Company will be obligated
to appropriately include, by amendment or otherwise, the shares such Principal
Investor wishes to have included in such "shelf" registration statement no
earlier than on the 150th day after the date of this Agreement, provided that
such Principal Investor may not offer or sell any shares of Common Stock
pursuant to such "shelf" registration statement until the 181st day after the
date of this Agreement; and (iii) if the Company is required to file and does
file a registration statement under the Act for the benefit of any stockholder
of the Company with respect to an underwritten offering of shares of Common
Stock prior to the 180th day after the date of this Agreement, a Principal
Investor may exercise its piggy-back registration rights pursuant to the terms
of the Registration Rights Agreement in respect of, and have shares of
3
<PAGE> 4
its Common Stock included on, such registration statement commencing on the
150th day after the date of this Agreement, provided that the inclusion of any
Principal Investor's shares of Common Stock on such registration statement
shall be subject to any ability of the managing underwriter of such
underwritten offering to "cut back" or otherwise restrict the inclusion of any
Principal Investor's shares of Common Stock on such registration statement
shall be subject to the shares of Common Stock that such Principal Investor so
requested be included on such registration statement; and provided further,
that the Lock-up Agreements executed by each of the Principal Investors shall
provide that each of the Principal Investors' obligations thereunder shall be
released to the extent, but only to the extent, that Alex. Brown releases any
other Principal Investor from any obligation under the Lock-up Agreement
executed by such Principal Investor. Notwithstanding the foregoing, during such
180-day lock-up period, the Company may (i) issue and sell the Shares to the
Underwriters in accordance with this Agreement, (ii) issue an aggregate of
17,377,278 shares of Common Stock upon the conversion of the Company's
outstanding shares of its Preferred Stock (as described in the Prospectus),
(iii) issue shares of Common Stock upon the exercise of stock options granted
under the Com- pany's 1994 Stock Option Plan and otherwise in the ordinary
course of business consistent with past practice as compensation for employees
or consultants of the Company, (iv) grant stock options under the Company's
1994 Stock Option Plan and otherwise in the ordinary course of business
consistent with past practice as compensation for employees or consultants of
the Company, (v) issue shares of Common Stock upon the exercise of currently
outstanding warrants and options (in the aggregate amounts set forth in the
Prospectus) and (vi) issue shares of Common Stock or grant options or warrants
exercisable into shares of Common Stock, in connection with strategic
alliances, joint ventures or other business combinations not prohibited by the
terms of the Indentures (as that term is defined in the Prospectus)
(collectively "Permitted Combinations"), provided that no shares shall be
issued as contemplated by this clause (vi) unless such shares are made subject
to the 180-day lock-up provisions described above. The Company shall,
concurrently with the execution of this Agreement, deliver an agreement
executed by each stockholder of the Company listed on Annex II hereto, pursuant
to which each such person agrees not to, directly or indirectly, offer, sell,
contract to sell, grant any option to purchase, or otherwise dispose of any
Common Stock or any securities convertible into or exer- cisable or
exchangeable for shares of Common Stock or in any other manner transfer all or
a portion of the economic consequences associated with the ownership of any
Common Stock, for a period of 90 days after the date of the Prospectus without
the prior written consent of Alex. Brown; provided, however, that
4
<PAGE> 5
during such 90-day period each such person may surrender shares of Preferred
Stock owned by such person to the Company for conversion into shares of Common
Stock (in the manner contemplated by the Prospectus).
3. TERMS OF PUBLIC OFFERING. The Company is advised by you that the
Underwriters propose (i) to make a public offering of their respective portions
of the Shares as soon after the effective date of the Registration Statement as
in your judgment is advisable and (ii) initially to offer the Shares upon the
terms set forth in the Prospectus. The Representatives may from time to time
thereafter change the public offering price and other selling terms. To the
extent, if at all, that any Additional Shares are purchased pursuant to Section
2 hereof, the Underwriters will offer them to the public on the foregoing
terms.
It is understood by all parties that approximately _______ Firm
Shares ("Directed Shares") will initially be reserved by the Underwriters for
offer and sale at the public offering price and upon the terms set forth in the
Prospectus to directors, officers, employees and other persons associated with
the Company (the "Directed Share Purchasers") who have heretofore delivered to
Alex. Brown indications of interest to purchase Directed Shares in form
satisfactory to Alex. Brown, and that any allocation of such Directed Shares
among the Directed Share Purchasers shall be made in accordance with timely
directions received by Alex. Brown from the Company; provided, however, that
under no circumstances will Alex. Brown or any other Underwriter be liable to
the Company or to any of the Directed Share Purchasers for any action taken or
omitted in good faith in connection with transactions effected with the
Directed Share Purchasers. It is further understood that any such Directed
Shares that are not purchased by Directed Share Purchasers will be offered by
the Underwriters for sale to the public upon the terms set forth in the
Prospectus.
It is further understood that you will act as the Representatives for
the Underwriters in the offering and sale of the Shares in accordance with a
[Master Agreement Among Underwriters] entered into by you and the several other
Underwriters.
4. DELIVERY AND PAYMENT. Delivery to the Underwriters of and payment
for the Firm Shares shall be made in accordance with Rule 15c6-1 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), at 10:00
A.M., New York City time, on the third or fourth business day following the
date of the public offering unless otherwise permitted by the Commission
pursuant to Rule 15c6-1 under the Exchange Act (the "Closing Date")
5
<PAGE> 6
at the offices of Piper & Marbury L.L.P., 36 South Charles Street, Baltimore,
Maryland 21201. The Closing Date and the location of delivery of and the form
of payment for the Firm Shares may be varied by agreement between you and the
Company.
Delivery to the Underwriters of and payment for any Additional Shares
to be purchased by the Underwriters shall be made at the offices of Piper &
Marbury L.L.P., 36 South Charles Street, Baltimore, Maryland 21201, at 10:00
A.M., New York City time, on the date specified in the applicable exercise
notice given by you pursuant to Section 2 (an "Option Closing Date"). Any such
Option Closing Date and the location of delivery of and the form of payment for
such Additional Shares may be varied by agreement between you and the Company.
Certificates for the Shares shall be registered in such names and
issued in such denominations as you shall request in writing not later than two
full business days prior to the Closing Date or an Option Closing Date, as the
case may be. Such certificates shall be made available to you for inspection
not later than 9:30 A.M., New York City time, on the business day next
preceding the Closing Date or the applicable Option Closing Date, as the case
may be. Certificates in definitive form evidencing the Shares shall be
delivered to you on the Closing Date or the applicable Option Closing Date, as
the case may be, with any transfer taxes thereon duly paid by the Company, for
the respective accounts of the several Underwriters, against payment of the
Purchase Price therefor by wire or certified or official bank checks payable in
Federal funds to the order of the Company.
5. AGREEMENTS OF THE COMPANY. The Company agrees with
you:
(a) To use its best efforts to cause the Registration Statement to
become effective at the earliest possible time.
(b) To advise you promptly and, if requested by you, to confirm
such advice in writing, (i) when the Registration Statement has become
effective and when any post-effective amendment to it becomes
effective, (ii) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus
or for additional information, (iii) of the issuance by the Commission
of any stop order suspending the effectiveness of the Registration
Statement or of the suspension of qualification of the Shares for
offering or sale in any jurisdiction, or the initiation of any
proceeding for such purposes, and (iv) of the happening of any event
during the period referred to in paragraph (e) below which makes any
statement of a material
6
<PAGE> 7
fact made in the Registration Statement or the Prospectus untrue or
which requires the making of any additions to or changes in the
Registration Statement or the Prospectus in order to make the
statements therein not misleading. If at any time the Commission shall
issue any stop order suspending the effectiveness of the Registration
Statement, the Company will make every reasonable effort to obtain the
withdrawal or lifting of such order at the earliest possible time.
(c) To furnish to you, without charge, four signed copies of the
Registration Statement as first filed with the Commission and of each
amendment to it, including all exhibits, and to furnish to you and
each Underwriter designated by you such number of conformed copies of
the Registration Statement as so filed and of each amendment to it,
without exhibits, as you may reasonably request.
(d) Not to file any amendment or supplement to the Registration
Statement, whether before or after the time when it becomes effective,
or to make any amendment or supplement to the Prospectus of which you
shall not previously have been advised or to which you shall
reasonably object; and to prepare and file with the Commission,
promptly upon your reasonable request, any amendment to the
Registration Statement or supplement to the Prospectus which may be
necessary or advisable in connection with the distribution of the
Shares by you, and to use its best efforts to cause the same to become
promptly effective.
(e) Promptly after the Registration Statement becomes effective,
and from time to time thereafter for such period as in the opinion of
counsel for the Underwriters a prospectus is required by law to be
delivered in connection with sales by an Underwriter or dealer, to
furnish to each Underwriter and dealer as many copies of the
Prospectus (and of any amendment or supplement to the Prospectus) as
such Underwriter or dealer may reasonably request.
(f) If during the period specified in paragraph (e) any event
shall occur as a result of which, in the opinion of counsel for the
Underwriters it becomes necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of
the circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if it is necessary to amend or supplement the
Prospectus to comply with any law, forthwith to prepare and file with
the Commission an appropriate amendment or supplement to the
Prospectus so that the statements in the Prospectus, as so
7
<PAGE> 8
amended or supplemented, will not in the light of the circumstances
when it is so delivered, be misleading, or so that the Prospectus will
comply with law, and to furnish to each Underwriter and to such
dealers as you shall specify, such number of copies thereof as such
Underwriter or dealers may reasonably request.
(g) Prior to any public offering of the Shares, to cooperate with
you and counsel for the Underwriters in connection with the
registration or qualification of the Shares for offer and sale by the
several Underwriters and by dealers under the state securities or Blue
Sky laws of such jurisdictions as you may request, to continue such
qualification in effect so long as required for distribution of the
Shares and to file such consents to service of process or other
documents as may be necessary in order to effect such registration or
qualification; provided, however, that the Company shall not be
required to qualify to do business as a foreign corporation in any
such jurisdiction in connection with such registration or
qualification.
(h) To mail and make generally available to its stockholders as
soon as reasonably practicable an earnings statement covering a period
of at least twelve months after the effective date of the Registration
Statement (but in no event commencing later than 90 days after such
date) which shall satisfy the provisions of Section 11(a) of and Rule
158 under the Act, and to advise you in writing when such statement
has been so made available.
(i) During the period of five years after the date of this
Agreement, (i) to mail as soon as reasonably practicable after the end
of each fiscal year to the record holders of its Common Stock a
financial report of the Company and its subsidiaries on a consolidated
basis (and a similar financial report of all unconsolidated
subsidiaries, if any), all such financial reports to include a
consolidated balance sheet, a consolidated statement of operations, a
consolidated statement of cash flows and a consolidated statement of
stockholders' equity as of the end of and for such fiscal year,
together with comparable information as of the end of and for the
preceding year, certified by independent certified public accountants,
and (ii) to mail and make generally available as soon as practicable
after the end of each quarterly period (except for the last quarterly
period of each fiscal year) to such holders, a consolidated balance
sheet, a consolidated statement of operations and a consolidated
statement of cash flows (and similar financial reports of all
unconsolidated subsidiaries, if any) as of the end of
8
<PAGE> 9
and for such period, and for the period from the beginning of such
year to the close of such quarterly period, together with comparable
information for the corresponding periods of the preceding year.
(j) During the period of five years after the date of this
Agreement, for each quarter for which the Company prepares and
disseminates unaudited financial statements, to have such financial
statements reviewed by the Company's independent accountants in
accordance with a SAS 71.
(k) During the period of five years after the date of this
Agreement, to furnish to you as soon as available a copy of each
report or other publicly available information of the Company mailed
to the holders of Common Stock or filed with the Commission and such
other publicly available information concerning the Company and its
subsidiaries as you may reasonably request.
(l) To pay all costs, expenses, fees and taxes incident to the
performance of its obligations under this Agreement, including those
in connection with (i) the preparation, printing, filing and
distribution under the Act of the Registration Statement (including
financial statements and exhibits), each preliminary prospectus and
all amendments and supplements to any of them prior to or during the
period specified in paragraph (e) of this Section 5, (ii) the printing
and delivery of the Prospectus and all amendments or supplements to it
during the period specified in paragraph (e) of this Section 5, (iii)
the issuance, transfer and delivery of the Shares to the Underwriters,
including, any transfer or taxes payable thereon, (iv) the printing
and delivery of this Agreement, the Preliminary and Supplemental Blue
Sky Memoranda and all other agreements, memoranda, correspondence and
other documents printed and delivered in connection with the offering
of the Shares (including in each case any disbursements of counsel for
the Underwriters relating to such printing and delivery), (v) the
registration or qualification of the Shares for offer and sale under
the securities or Blue Sky laws of the several states (including in
each case the fees and disbursements of counsel for the Underwriters
relating to such registration or qualification and memoranda relating
thereto), (vi) filings and clearance with the National Association of
Securities Dealers, Inc. (the "NASD") in connection with the offering,
(vii) the listing of the Shares on the Nasdaq National Market, (viii)
furnishing such copies of the Registration Statement, the Prospectus
and all amendments and supplements thereto as may be requested for use
in connection with the
9
<PAGE> 10
offering or sale of the Shares by the Underwriters or by dealers to
whom Shares may be sold, and (ix) the cost and charges of any transfer
agent and registrar for the Shares.
(m) To use its best efforts to maintain the inclusion of the
Common Stock in the Nasdaq National Market (or on a national
securities exchange) for a period of five years after the effective
date of the Registration Statement.
(n) To apply the proceeds from the sale of the Shares in the
manner set forth under "Use of Proceeds" in the Prospectus.
(o) To take such steps as shall be necessary to ensure that
neither the Company nor any subsidiary shall become an "investment
company" or a company "controlled" by an "investment company" within
the meaning of such terms under the Investment Company Act of 1940.
(p) To comply with all provisions of all undertakings
contained in the Registration Statement.
(q) Prior to the Closing Date and, if applicable, until the
Option Closing Date, to issue no press release or other communication
or hold any press conference with respect to the offering of the
Shares, or the financial condition, results of operations, operations,
business properties, assets, liabilities, or prospects of the Company,
without your prior consent, which consent shall not be unreasonably
withheld, unless the Company shall conclude upon the advise of counsel
that such press release or other communication should be issued at a
time prior to obtaining such consent.
(r) To use its best efforts to do and perform all things
required or necessary to be done and performed under this Agreement by
the Company prior to the Closing Date or any Option Closing Date, as
the case may be, and to satisfy all conditions precedent to the
delivery of the Shares.
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each Underwriter that:
(a) A registration statement on Form SB-2 (File No.
333-_______) with respect to the Shares has been carefully prepared by
the Company in conformity with the requirements of the Securities Act
of 1933, as amended (the
10
<PAGE> 11
"Act"), and the Rules and Regulations (the "Rules and Regulations") of
the Securities and Exchange Commission (the "Commission") thereunder
and has been filed with the Commission. Copies of such registration
statement, including any amendments thereto, the preliminary
prospectuses (meeting the requirements of the Rules and Regulations)
contained therein and the exhibits, financial statements and
schedules, as finally amended and revised, have heretofore been
delivered by the Company to you.
(b) The Company meets the requirements for the use of a
Registration Statement on Form SB-2 under the Act. The Registration
Statement has become effective; no stop order suspending the
effectiveness of the Registration Statement is in effect, and no
proceedings for such purpose are pending before or threatened by the
Commission.
(c) (i) Each part of the Registration Statement, when such part
became effective, did not contain and each such part, as amended or
supplemented, if applicable, will not contain any untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading,
(ii) the Registration Statement and the Prospectus comply and, as
amended or supplemented, if applicable, will comply in all material
respects with the Act and (iii) the Prospectus does not contain and,
as amended or supplemented, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that
the representations and warranties set forth in this paragraph (b) do
not apply to statements or omissions in the Registration Statement or
the Prospectus based upon information relating to any Underwriter and
the plan of distribution of the Shares by the Underwriters furnished
to the Company in writing on your behalf by Alex. Brown expressly for
use therein.
(d) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or
filed pursuant to Rule 424 under the Act, and each Registration
Statement filed pursuant to Rule 462(b) under the Act, if any,
complied when so filed in all material respects with the Act; and did
not contain an untrue statement of material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading, except that the
11
<PAGE> 12
representations and warranties set forth in this paragraph (c) do not
apply to statements or omissions in the Registration Statement or the
Prospectus based upon information relating to any Underwriter and the
plan of distribution of the Shares by the Underwriters furnished to
the Company in writing on your behalf by Alex. Brown expressly for use
therein.
(e) Each contract, agreement, instrument, lease, license or other
item required to be described in the Registration Statement or the
Prospectus or filed as an exhibit to the Registration Statement has
been so described or filed (or incorporated by reference therein), as
the case may be.
(f) KPMG Peat Marwick LLP, who have certified certain financial
statements of the Company and its consolidated subsidiaries and whose
separate report with respect to the audited consolidated financial
statements and schedules for the fiscal years ended June 30, 1995 and
June 30, 1996 appears in the Prospectus, are independent public
accountants with respect to the Company, as required by and within the
meaning of the Act.
(g) The consolidated financial statements of the Company and its
consolidated subsidiaries included in the Registration Statement or
any preliminary prospectus, or to be included in the Prospectus
present fairly the consolidated financial position, results of
operations and charges in financial position of the Company and its
consolidated subsidiaries and the other information purported to be
shown therein at the respective dates and for the respective periods
to which they apply. The foregoing financial statements and related
schedules and notes have been prepared in accordance with generally
accepted accounting principles as in effect in the United States ("US
GAAP") consistently applied throughout the periods involved, except as
disclosed therein, and are, in all material respects, in accordance
with the books and records of the Company and its consolidated
subsidiaries. The summary and selected financial information included
in the Registration Statement and any preliminary prospectus, and to
be included in the Prospectus (other than information determined based
upon EBITDA (as defined below) and capital expenditure information),
has been fairly extracted from the audited consolidated financial
statements of the Company and its consolidated subsidiaries (in the
case of the financial information at or for the three months ended
September 30, 1995 and September 30, 1996, from the unaudited
condensed consolidated financial statements of the Company and its
consolidated subsidiaries)
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<PAGE> 13
and fairly present, on the basis stated in the Registration Statement,
any preliminary prospectus or the Prospectus, the information included
therein. The pro forma financial statements and other pro forma
financial information included in the Registration Statement and the
Prospectus present fairly the information shown therein, have been
prepared in accordance with the Commission's rules and guidelines with
respect to pro forma financial statements, have been properly compiled
on the pro forma bases described therein, and, in the opinion of the
Company, the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give
effect to the transactions or circumstances referred to therein.
(h) The financial information included in the Registration
Statement, any preliminary prospectus or the Prospectus that is based
upon (i) net income (loss) before net interest, income taxes,
depreciation and amortization ("EBITDA") and (ii) capital expenditures
fairly present, on the basis stated in the Registration Statement, any
preliminary prospectus or the Prospectus, the information included
therein.
(i) Subsequent to the respective dates as of which information is
given in the Registration Statement, except as set forth in the
Registration Statement, there has not been any material adverse change
in the business, properties, operations, condition (financial or
other) or results of operations of the Company and the subsidiaries
(as defined below) taken as a whole, whether or not arising from
transactions in the ordinary course of business, and since the date of
the latest balance sheet of the Company included in the Registration
Statement, and except as contemplated by the Registration Statement or
as may be contemplated by the Prospectus, (i) neither the Company nor
any subsidiary (A) has incurred or undertaken any liabilities or
obligations, direct or contingent, that are, individually or in the
aggregate, material to the Company and the subsidiaries taken as a
whole, or (B) entered into any transaction not in the ordinary course
of business that is material to the Company and the subsidiaries taken
as a whole; (ii) the Company has not declared or paid any dividend on
or made any distribution of or with respect to any shares of its
capital stock or redeemed, purchased or otherwise acquired or agreed
to redeem, purchase or otherwise acquire any shares of its or its
subsidiaries' capital stock; and (iii) there has not been (A) any
change in the capital stock of the Company or any subsidiary or (B)
any issuance of options, warrants, convertible securities or other
rights to purchase capital
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<PAGE> 14
stock of the Company (other than the grant of options pursuant to the
Company's 1994 Stock Option Plan in the ordinary course) or any
subsidiary or otherwise as compensation to employees or consultants of
the Company in the ordinary course of business consistent with past
practice. As used in this Agreement, the term "subsidiary" means any
corporation, partnership, joint venture, association, company,
business trust or other entity in which the Company, directly or
indirectly, (i) beneficially owns or controls a majority of the
outstanding voting securities having by the terms thereof ordinary
voting power to elect a majority of the board of directors (or other
body fulfilling a substantially similar function) of such entity
(irrespective of whether or not at the time any class or classes of
such voting securities shall have or might have voting power by reason
of the happening of any contingency) or (ii) has the authority or
ability to control the policies of such entity (including, but without
limitation thereto, any partnership of which the Company or a
subsidiary is a general partner or owns or has the right to obtain a
majority of limited partnership interests and any joint venture in
which the Company or a subsidiary has liability similar to the
liability of a general partner of a partnership or owns or has the
right to obtain a majority of the joint venture interests).
(j) The Company has all requisite corporate power and authority
to execute, deliver and perform its obligations under this Agreement
and to issue, sell and deliver the Shares in accordance with the terms
and conditions hereof, and has all requisite corporate power and
authority to execute, deliver and perform its obligations under the
Registration Rights Indemnification Agreement (as defined below). This
Agreement and the Registration Rights Indemnification Agreement have
been duly and validly authorized, executed and delivered by the
Company and are legal and binding obligations of the Company,
enforceable against the Company in accordance with their respective
terms, subject to applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and other similar laws
affecting creditors' rights and remedies generally, and subject, as to
enforceability, to general principles of equity, including principles
of commercial reasonableness, good faith and fair dealing (regardless
of whether enforcement is sought in a proceeding at law or in equity),
and except insofar as rights to indemnification and contribution
contained therein may be limited by federal or state securities laws
or related public policy. As used in this Agreement, the terms
"Registration Rights Indemnification Agreement" means that certain
indemnification agreement of even date herewith be-
14
<PAGE> 15
tween the Company, on the one hand, and Alex. Brown and the other
Underwriters, on the other hand, pursuant to which the Company, among
other things, will agree to hold you and the Underwriters harmless
against certain matters in connection with the Registration Rights (as
such term is defined in Section 6(v) hereof).
(k) The Company's execution and delivery of, and its performance
of its obligations under, this Agreement and the consummation of the
transactions contemplated hereby will not (i) conflict with or result
in a breach of any of the terms and provisions of, or constitute a
default under (or an event that with notice or lapse of time, or both,
would constitute a default under) or require approval or consent
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any
subsidiary pursuant to the terms of, any agreement (other than
agreements to which the Company is a party that gives the other party
thereto Registration Rights (as such term is hereinafter defined in
this Agreement) (collectively, the "Registration Rights Agreements")),
contract, indenture, mortgage, lease, license, arrangement or
understanding to which the Company or a subsidiary is a party, or to
which any of its properties is subject, that is material to the
Company and the subsidiaries taken as a whole (hereafter,
collectively, "Material Contracts"), or any governmental franchise,
license, permit or authorization heretofore issued to the Company or
any subsidiary that is material to the Company and the subsidiaries
taken as a whole (hereafter, collectively, "Material Permits"), (ii)
violate or conflict with any provision of the certificate of
incorporation, by-laws or similar governing instruments of the Company
or any subsidiary or (iii) violate or conflict with any judgment,
decree, order, statute, rule or regulation of any court or any public,
governmental or regulatory agency or body having jurisdiction over the
Company or any subsidiary or any of its respective properties or
assets, except for those violations or conflicts, that, individually
or in the aggregate, would not have a material adverse effect on the
business, prospects, financial condition or results of operations of
the Company and the subsidiaries taken as a whole (hereafter, a
"Material Adverse Effect").
(l) No consent, approval, authorization, order, registration,
filing, qualification, license or permit of or with any court or any
public, governmental or regulatory agency or body having jurisdiction
over the Company or any subsidiary or any of its respective properties
or assets is required for the Company's execution and delivery of, and
its
15
<PAGE> 16
performance of its obligations under, this Agreement, and the
consummation of the transactions contemplated thereby, except the
registration of the Shares under the Act and the Exchange Act, the
authorization of the Shares for inclusion on the Nasdaq National
Market and such filings and registrations as may be required under
state securities or "Blue Sky" laws in connection with the purchase
and distribution of the Shares by the Underwriters.
(m) All of the outstanding shares of capital stock of the Company
and all of the outstanding shares of capital stock (or similar
interests) of each of the subsidiaries have been duly and validly
authorized and issued, are fully paid and nonassessable and were not
issued in violation of any preemptive rights. The Company owns
directly or indirectly such percentage of the outstanding capital
stock (or similar interests) of each of its subsidiaries as is set
forth opposite the name of such subsidiary in Schedule II hereto, free
and clear of all claims, liens, security interests, pledges, charges,
encumbrances, stockholders agreements and voting trusts, except as
otherwise described in said Schedule II.
(n) The Shares have been duly authorized and, when issued,
delivered and sold in accordance with the terms of this Agreement,
will be validly issued, fully paid and non-assessable, and will not
have been issued in violation of any preemptive rights, and the
Underwriters will receive valid title to those of the Shares to be
purchased by them from the Company, free and clear of all liens,
security interests, pledges, charges, encumbrances, stockholders'
agreements and voting trusts. The Company has, as of the date hereof,
and will have, as of the Closing Date and the Option Closing Date, if
any, an authorized and outstanding capitalization as set forth under
the caption "Capitalization" in the Registration Statement and as
shall be set forth in the Prospectus, both on a historical basis and
as adjusted to give effect to (i) the offering of the Shares, (ii) the
conversion of the Company's 9% Series A-1 Convertible Preferred Stock,
par value $1.00 per share (the "Series A Preferred Stock"), 9% Series
B-1 Convertible Preferred Stock, par value $1.00 per share (the
"Series B-1 Preferred Stock"), 9% Series B-2 Convertible Preferred
Stock, par value $1.00 per share (the "Series B-2 Preferred Stock"),
9% Series B-3 Convertible Preferred Stock, par value $1.00 per share
(the "Series B-3 Preferred Stock"), and 9% Series B-4 Convertible
Preferred Stock, par value $1.00 per share (the "Series B-4 Preferred
Stock", and collectively with the Series A Preferred Stock, the Series
B-1
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<PAGE> 17
Preferred Stock, the Series B-2 Preferred Stock and the Series B-3
Preferred Stock, the "Preferred Stock"), into an aggregate of
17,377,264 shares of Common Stock, and (iii) the acquisition of
Cybergate, Inc. as described in the Prospectus.
(o) At the Closing, the Company's capital stock will conform to
the descriptions thereof set forth in the Registration Statement and
as shall be set forth in the Prospectus.
(p) There is no commitment, plan or arrangement to issue, and no
outstanding option, warrant or other right calling for the issuance
of, any shares of capital stock (or similar interests) of the Company
or of any subsidiary or any security or other instrument that by its
terms is convertible into or exercisable or exchangeable for capital
stock (or similar interests) of the Company or such subsidiary, except
as described in the Registration Statement and the Prospectus or as
shall be granted as compensation for employees or consultants of the
Company in the ordinary course of business consistent with past
practice.
(q) The Company has no subsidiaries other than those listed in
Schedule II hereto. Each of the Company and the subsidiaries has been
duly organized and is validly existing as a corporation in good
standing under the laws of its jurisdictions of incorporation. Each of
the Company and the subsidiaries is duly qualified and in good
standing as a foreign corporation in each jurisdiction in which the
character or location of its properties (owned, leased or licensed) or
the nature or conduct of its business makes such qualification
necessary, except for those failures to be so qualified or in good
standing that will not in the aggregate have a Material Adverse
Effect.
(r) Each of the Company and the subsidiaries has all requisite
corporate power and authority, and all necessary consents, approvals,
authorizations, orders, registrations, filings, qualifications,
licenses (including, without limitation, all material licenses from
the Federal Communications Commission ("FCC") and state, local or
other governmental or regulatory authorities), and permits of and from
all public, regulatory or governmental agencies and bodies, to own,
lease and operate its properties and conduct its business as now being
conducted and as described in the Registration Statement and as shall
be described in the Prospectus (except for those the absence of which,
individually or in the aggregate, would not have a Material
17
<PAGE> 18
Adverse Effect), and no such consent, approval, authorization, order,
registration, qualification, license or permit contains a materially
burdensome restriction that is not adequately disclosed in the
Registration Statement and the Prospectus. Neither the Company nor any
subsidiary has received any notice of proceedings relating to the
revocation or materially adverse modification of any such consents,
approvals, authorizations, orders, registrations, filings,
qualifications, licenses or permits. To the best of the Company's
knowledge, the descriptions in the Registration Statement and to be in
the Prospectus of federal, state or local statutes, laws, ordinances
and regulations governing the Company's and the subsidiaries'
respective businesses, properties or assets, including any proposed
amendments or additions to any such statutes, laws, ordinances or
regulations, fairly present the information required to be shown
therein.
(s) Except with respect to the Registration Rights Agreements
neither the Company nor any subsidiary, nor to the best knowledge of
the Company, any other party, is in violation or breach of, or in
default under (nor has an event occurred that with notice, lapse of
time or both, would constitute a default under), any of the contracts
listed on Annex III hereto (collectively, the "Listed Contracts"), and
each of the Listed Contracts is in full force and effect, and is the
legal, valid, and binding obligation of the Company or such
subsidiary, as the case may be, and (subject to applicable bankruptcy,
insolvency, and other laws affecting the enforceability of creditors'
rights generally) is enforceable as to the Company or such subsidiary,
as the case may be, in accordance with its terms. Neither the Company
nor any subsidiary is in violation of its certificate of
incorporation, by-laws or similar governing instrument. With the
exception of the Listed Contracts, which may or may not fall within
the definition of Material Contracts, neither the Company nor any
subsidiary is party to any other Material Contract.
(t) Except as described in the Registration Statement and as
shall be described in the Prospectus, there is no litigation,
arbitration, claim, governmental or other proceeding, complaint or
investigation pending or, to the best knowledge of the Company,
threatened with respect to the Company or any subsidiary, or any of
its respective operations, businesses, properties or assets, that,
individually or in the aggregate, might reasonably be expected to have
a Material Adverse Effect. Neither the Company nor any subsidiary is,
or, to the best knowledge of the Company, with
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<PAGE> 19
the giving of notice or lapse of time or both would be, in violation
of or non-compliance with the requirements of any Material Permit or
the provisions of any law, rule, regulation, order, judgment or
decree, including, but without limitation thereto, any applicable
federal, state and local laws and regulations relating to (i) zoning,
land use, protection of the environment, human health and safety or
hazardous or toxic substances, wastes, pollutants or contaminants and
(ii) employee or occupational safety, discrimination in hiring,
promotion or pay of employees, employee hours and wages or employee
benefits, except as described in the Registration Statement and as
shall be described in the Prospectus or for such violations or
failures of compliance that, individually or in the aggregate, would
not have a Material Adverse Effect.
(u) Neither the Company nor any subsidiary owns any real
property. Except as described in the Registration Statement and as
shall be described in the Prospectus, the Company and each subsidiary
have (i) good and marketable title to all personal properties owned by
them, free and clear of all liens, security interests, pledges,
charges, encumbrances, and mortgages, and (ii) valid, subsisting and
enforceable, and enjoy peaceful and undisturbed possession under,
leases or licenses for all real and personal properties leased or
licensed by them, including all rights-of-way, conduit, pole
attachment, service and fiber leases and agreements, in each case,
subject in each case to such exceptions as, individually or in the
aggregate, do not have and are not reasonably likely to have a
Material Adverse Effect. No real or personal property, rights-of-way,
conduits, pole attachments or fiber leased, licensed or used by the
Company or by a subsidiary lies in an area that is, or to the best
knowledge of the Company will be, subject to zoning, use, or building
code restrictions that would prohibit, and no state of facts relating
to the actions or in- action of another person or entity or his, her
or its ownership, leasing, licensing or use of any such real or
personal property, rights-of-way, conduits, pole attachments or fiber
exists that would prevent, the continued effective leasing, licensing
or use of such real or personal property, rights-of-way, conduits,
pole attachments or fiber in the business of the Company or such
subsidiary as presently conducted, subject to in each case such
exceptions as, individually or in the aggregate, do not have and are
not reasonably likely to have a Material Adverse Effect.
(v) The Company, directly or through one or more of
the subsidiaries, owns or possesses all patents, patent
19
<PAGE> 20
rights, licenses, inventions, copyrights, trademarks, know-how
(including trade secrets and other unpatented and/or un- patentable
proprietary or confidential information, systems or procedures),
service marks and trade names (collectively, "Intellectual Property")
necessary to conduct its business as now conducted and proposed to be
conducted as disclosed in the Registration Statement and as shall be
disclosed in the Prospectus, except where the failure to own or
possess such Intellectual Property, individually or in the aggregate,
would not have a Material Adverse Effect. Neither the Company nor any
subsidiary has received notice of infringement of or conflict with the
asserted rights of others with respect to any Intellectual Property.
To the best knowledge of the Company, there is no infringement by
others of any Intellectual Property of the Company or any subsidiary
that has had or may in the future reasonably be expected to have a
Materially Adverse Effect.
(w) Except as set forth in the Registration Rights Schedule (as
defined below) and except as disclosed in the Registration Statement
and the Prospectus, no person or entity has the right, by contract or
otherwise, to require registration under the Act of shares of capital
stock or other securities of the Company solely because of the filing
or effectiveness of the Registration Statement and the consummation of
the transactions contemplated by this Agreement (such rights are
hereinafter referred to as "Registration Rights"). The Company has
previously provided to Alex. Brown and counsel for the Underwriters a
schedule, dated as of _______, 1997 (the "Registration Rights
Schedule"), which Registration Rights Schedule sets forth a correct
and complete list of (i) all security holders of the Company who have
Registration Rights; (ii) the number of shares of Common Stock held by
each such security holder (or shares of Common Stock underlying
securities convertible into or exer- cisable or exchangeable for
Common Stock) with respect to which each such security holder has
Registration Rights, and which of such shares of Common Stock are
subject to under- writers' "cut back" rights pursuant to any contract
or agreement pursuant to which such security holder's Registration
Rights were granted; and (iii) the number of shares of Common Stock
held by such security holder (or shares of Common Stock underlying
securities convertible into or exercis- able or exchangeable for
Common Stock) that, with respect to which each such security holder
has Registration Rights as of the date of the Registration Rights
Schedule, are eligible for sale pursuant to Rule 144 under the Act
based upon the holding period of such shares of Common Stock by such
holder (assuming that no actions have been taken by
20
<PAGE> 21
such holder and that no events have occurred which interrupted such
holding period or commenced a new holding period). On the date of this
Agreement, the Company has delivered to Alex. Brown and counsel for
the Underwriters a letter from Ross & Hardies addressed to the
Underwriters, dated the date of this Agreement (the "Registration
Rights Waiver Letter"), which Registration Rights Waiver Letter sets
forth a correct and complete list of those security holders of the
Company who have and who have not executed waivers of Registration
Rights. Those security holders who have executed waivers of
Registration Rights have legally and effectively waived their
Registration Rights.
(x) Neither the Company nor, to the best knowledge of the
Company, any of its officers, directors or affiliates (as defined in
the Act) has taken or will take, directly or indirectly, prior to the
termination of the offering of the Shares contemplated by this
Agreement, any action designed to stabilize or manipulate the price of
the Common Stock, or that might reasonably be expected to cause or
result in stabilization or manipulation of the price of the Common
Stock.
(y) Neither the Company nor any subsidiary is, or intends to
conduct its business in such a manner that it would become, an
"investment company" or a company "controlled" by an "investment
company" as such terms are defined in the Investment Company Act of
1940, as amended (the "Investment Company Act").
(z) Except as may be set forth in the Prospectus, the Company has
not incurred any liability for a fee, commission, or other
compensation on account of the employment of a broker or finder or
financial advisor or consultant in connection with the transactions
contemplated by this Agreement.
(aa) To the Company's best knowledge, neither the Company nor any
subsidiary, nor any director, officer or employee of the Company or
any subsidiary has, directly or indirectly, used any corporate funds
for unlawful contributions, gifts, entertainment, or other unlawful
expenses relating to political activity; made any unlawful payment to
foreign or domestic government officials or employees or to foreign or
domestic political parties or campaigns from corporate funds; violated
any provision of the Foreign Corrupt Practices Act of 1977, as
amended; or made any bribe, rebate, payoff, influence payment,
kickback, or other unlawful payment.
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<PAGE> 22
(bb) The Company and each of the subsidiaries maintain systems of
internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with US GAAP and to maintain accountability for assets;
(iii) the access to the respective assets of the Company and each
subsidiary, as the case may be, is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to
any differences.
(cc) Other than as disclosed in the Registration Statement and as
shall be disclosed in the Prospectus, no labor dispute with the
employees of the Company or any subsidiary exists or, to the best
knowledge of the Company, is imminent that, individually or in the
aggregate, is or is reasonably likely to have a Material Adverse
Effect, and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its principal suppliers or
contractors that reasonably can be expected to have a Material Adverse
Effect.
(dd) (i) All United States Federal income tax returns of the
Company and each subsidiary required by law to be filed have been
filed and all taxes shown by such returns or which have otherwise been
assessed and are now due and payable have been paid, except
assessments against which appeals have been or will be promptly taken
and (ii) the Company and the subsidiaries have filed all other tax
returns that are required to have been filed by them pursuant to the
applicable laws of all other jurisdictions, except, as to each of the
foregoing clauses (i) and (ii), insofar as the failure to file such
returns, individually or in the aggregate, would not have a Material
Adverse Effect, and the Company and the subsidiaries have paid all
taxes due pursuant to said returns or pursuant to any assessment
received by the Company or any subsidiary, except for such taxes, if
any, as are being contested in good faith and as to which adequate
reserves have been provided in accordance with US GAAP. The charges,
accruals and reserves on the consolidated books of the Company in
respect of any tax liability for any years not finally determined are
adequate to meet any assessments or re-assessments for additional tax
for any years not finally determined, except to the extent of any
inadequacy that would not have a Material Adverse Effect.
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<PAGE> 23
(ee) The Company and each subsidiary is insured by insurers of
recognized financial responsibility against such losses and risks and
in such amounts as are prudent and customary in the businesses in
which the Company and the subsidiaries are engaged. The Company has no
reason to believe that it or any subsidiary will not be able to renew
its existing insurance coverage from similar insurers as may be
necessary to continue its business, except as disclosed in the
Registration Statement and as shall be disclosed in the Prospectus.
(ff) Except as disclosed in the Registration Statement and as
shall be disclosed in the Prospectus, there are no business
relationships or related party transactions of the nature described in
Item 404 of Regulation S-B of the Commission involving the Company or
any other persons referred to in such Item 404, except for such
transactions that would be considered immaterial under such Item 404.
(gg) The Company has filed in a timely manner (or pursuant to an
extension obtained in accordance with applicable law) each document or
report required to be filed by it pursuant to the Exchange Act, and
the rules and regulations thereunder; each such document or report at
the time it was filed conformed in all material respects to the
requirements of the Exchange Act and the rules and regulations there-
under; and none of such documents or reports contained an untrue
statement of any material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading.
(hh) The Company has not distributed and will not distribute any
prospectus or other written offering material in connection with the
offering of the Shares contemplated hereby other than any preliminary
prospectus, the Prospectus or other materials permitted by the Act and
the Regulations to be distributed by the Company.
(ii) The Company has complied with all provisions of Section
517.075, Florida Statutes (Chapter 92-198, Laws of Florida).
7. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act from and
against any and all losses, claims, damages, liabilities and judgments caused
by any untrue statement
23
<PAGE> 24
or alleged untrue statement of a material fact contained in the Registration
Statement or the Prospectus (as amended or supplemented if the Company shall
have furnished any amendments or supplements thereto) or any preliminary
prospectus, or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages,
liabilities or judgments are caused by any such untrue statement or omission or
alleged untrue statement or omission based upon information relating to any
Underwriters furnished in writing to the Company by or on behalf of any
Underwriter or relating to the plan of distribution of the Shares by the
Underwriters through you expressly for use therein; provided, however, that the
foregoing indemnity agreement with respect to any preliminary prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
such losses, claims, damages and liabilities and judgements purchased Shares,
or any person controlling such Underwriter, if a copy of the Prospectus (as
then amended or supplemented if the Company shall have furnished any amendments
or supplements thereto) was not sent or given by or on behalf of such
Underwriter to such person, if required by law so to have been delivered, at or
prior to the written confirmation of the sale of the Shares to such person, and
if the Prospectus (as so amended and supplemented) would have cured the defect
giving rise to such loss, claim, damage, liability or judgment.
(b) In case any action shall be brought against any Underwriter or
any person controlling such Underwriter, based upon any preliminary prospectus,
the Registration Statement or the Prospectus or any amendment or supplement
thereto and with respect to which indemnity may be sought against the Company,
such Underwriter shall promptly notify the Company in writing and the Company
shall assume the defense thereof, including the employment of counsel
reasonably satisfactory to such indemnified party and payment of all fees and
expenses. Any Underwriter or any such controlling person shall have the right
to employ separate counsel in any such action and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
such Underwriter or such controlling person unless (i) the employment of such
counsel shall have been specifically authorized in writing by the Company, (ii)
the Company shall have failed to assume the defense and employ counsel or (iii)
the named parties to any such action (including any im- pleaded parties)
include both such Underwriter or such controlling person and the Company and
such Underwriter or such controlling person shall have been advised by such
counsel that there may be one or more legal defenses available to it which are
different from or additional to those available to the Company
24
<PAGE> 25
(in which case the Company shall not have the right to assume the defense of
such action on behalf of such Underwriter or such controlling person, it being
understood, however, that the Company shall not, in connection with any one
such action or separate but substantially similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances,
be liable for the fees and expenses of more than one separate firm of attorneys
(in addition to any local counsel) for all such Underwriters and controlling
persons, which firm shall be designated in writing by Alex. Brown and that all
such fees and expenses shall be reimbursed as they are incurred). The Company
shall not be liable for any settlement of any such action effected without its
written consent but if settled with the written consent of the Company, the
Company agrees to indemnify and hold harmless any Underwriter and any such
controlling person from and against any loss or liability by reason of such
settlement. Notwithstanding the immediately preceding sentence, if in any case
where the fees and expenses of counsel are at the expense of the indemnifying
party and an indemnified party shall have requested the indemnifying party to
reimburse the indemnified party for such fees and expenses of counsel as
incurred, such indemnifying party agrees that it shall be liable for any
settlement of any action effected without its written consent if (i) such
settlement is entered into more than ten business days after the receipt by
such indemnifying party of the aforesaid request and (ii) such indemnifying
party shall have failed to reimburse the indemnified party in accordance with
such request for reimbursement prior to the date of such settlement. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnity
could have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such proceeding.
(c) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement and any person controlling the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same
extent as the foregoing indemnity from the Company to each Underwriter but only
with reference to information relating to such Underwriter and the plan of
distribution of the Shares by the Underwriters furnished to the Company in
writing by or on behalf of such Underwriter expressly for use in the
Registration Statement, the Prospectus or any preliminary prospectus. The
Company acknowledges that the statements set forth in the last paragraph
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<PAGE> 26
of the cover page of the Prospectus, the legends concerning stabilization and
passive market making on the inside front cover page of the Prospectus and the
statements set forth under the caption "Underwriting" in the Prospectus
constitute the only information furnished in writing by or on behalf of any
Underwriter expressly for use in the Registration Statement, any preliminary
prospectus and the Prospectus. In case any action shall be brought against the
Company, any of its directors, any such officer or any person controlling the
Company based on the Registration Statement, the Prospectus or any preliminary
prospectus and in respect of which indemnity may be sought against any
Underwriter, the Underwriter shall have the rights and duties given to the
Company (except that if the Company shall have assumed the defense thereof,
such Underwriter shall not be required to do so, but may employ separate
counsel therein and participate in the defense thereof but the fees and
expenses of such counsel shall be at the expense of such Underwriter), and the
Company, its directors, any such officers and any person controlling the
Company shall have the rights and duties given to the Underwriter, by Section
7(b) hereof.
(d) If the indemnification provided for in this Section 7 is
unavailable to an indemnified party in respect of any losses, claims, damages,
liabilities or judgments referred to therein, then each indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages, liabilities and judgments (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
Underwriters on the other hand from the offering of the Shares or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
the Underwriters in connection with the statements or omissions which resulted
in such losses, claims, damages, liabilities or judgments, as well as any other
relevant equitable considerations. The relative benefits received by the
Company and the Underwriters shall be deemed to be in the same proportion as
the total net proceeds from the offering (before deducting expenses) received
by the Company, and the total underwriting discounts and commissions received
by the Underwriters, bear to the total price to the public of the Shares, in
each case as set forth in the table on the cover page of the Prospectus. The
relative fault of the Company and the Underwriters shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact relates
to information supplied by the Company or the Underwriters and the
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<PAGE> 27
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party as a result of
the losses, claims, damages, liabilities or judgments referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 7, no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Shares underwritten by it and distributed
to the public were offered to the public exceeds the amount of any damages
which such Underwriter has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 7(d) are several in proportion to the
respective number of Shares purchased by each of the Underwriters hereunder and
not joint.
8. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The
obligations of the Underwriters to purchase the Firm Shares under
this Agreement are subject to the satisfaction of each of the
following conditions:
(a) All the representations and warranties of the Company
contained in this Agreement shall be true and correct on the Closing
Date with the same force and effect as if made on and as of the
Closing Date.
(b) The Registration Statement shall have become effective not
later than 5:00 P.M. (and in the case of a Registration Statement
filed under Rule 462(b) of the Act, not later than 10:00 P.M.), New
York City time, on the date of this Agreement or at such later date
and time as you may approve in writing, and at the Closing Date no
stop order suspending the effectiveness of the Registration Statement
shall have been issued and no proceedings for that purpose
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<PAGE> 28
shall have been commenced or shall be pending before or
contemplated by the Commission.
(c)(i) Since the date of the latest balance sheet included in the
Registration Statement and the Prospectus, there shall not have been
any material adverse change, or any development involving a
prospective material adverse change, in the condition, financial or
otherwise, or in the earnings, affairs or business prospects, whether
or not arising in the ordinary course of business, of the Company,
from that set forth in the Registration Statement and Prospectus, (ii)
since the date of the latest balance sheet included in the
Registration Statement and the Prospectus there shall not have been
any change, or any development involving a prospective material
adverse change, in the capital stock or in the long-term debt of the
Company, (iii) the Company and its subsidiaries shall have no
liability or obligation, direct or contingent, which is material to
the Company and its subsidiaries, taken as a whole, other than those
disclosed in or contemplated by the Registration Statement and the
Prospectus and (iv) on the Closing Date you shall have received a
certificate dated the Closing Date, signed by Jack E. Reich, in his
capacity as the Chief Executive Officer, and by ________________, in
his capacity as Chief Financial Officer of the Company, to the effect
that, as of the Closing Date or the Option Closing Date, as the case
may be, each represents as follows:
A. The Registration Statement has become effective under
the Act and no stop order suspending the effectiveness of the
Registrations Statement has been issued, and no proceedings
for such purpose have been taken or are, to his knowledge,
contemplated by the Commission;
B. The representations and warranties of the
Company contained in Section 6 hereof are true and
correct as of the Closing Date or the Option Closing
Date, as the case may be;
C. All filings required to have been made pur-
suant to Rules 424 or 430A under the Act have been
made;
D. He has carefully examined the Registration
Statement and the Prospectus and, in his opinion, as of
the effective date of the Registration Statement, the
statements contained in the Registration Statement were
true and correct, and such Registration Statement and
28
<PAGE> 29
Prospectus did not omit to state a material fact required to
be stated therein or necessary in order to make the
statements therein not misleading, and since the effective
date of the Registration Statement, no event has occurred
which should have been set forth in a supplement to or an
amendment of the Prospectus which has not been so set forth
in such supplement or amendment; and
E. Since the respective dates as of which information is
given in the Registration Statement and Prospectus, there has
not been any material adverse change or any development
involving a prospective material adverse change in or
affecting the condition, financial or otherwise, of the
Company and its Subsidiaries taken as a whole or the
earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects
of the Company and the Subsidiaries taken as a whole, whether
or not arising in the ordinary course of business.
(d) You shall have received on the Closing Date the written
opinion of Riley M. Murphy, Esq., General Counsel for the Company,
dated the Closing Date, addressed to the Underwriters, and in form and
scope satisfactory to counsel for the Underwriters, to the effect
that:
(i) Each of the Company and the subsidiaries listed in
Schedule II to the Underwriting Agreement has all necessary
consents, approvals, authorizations, orders, registrations,
filings, qualifications, licenses (including, without
limitation, all material licenses from the FCC and state,
local or other governmental or regulatory authorities) and
permits of and from all public, regulatory or governmental
agencies and bodies to own, lease and license its respective
properties and conduct its respective business as now being
conducted, except for those the absence of which,
individually or in the aggregate, would not have a Material
Adverse Effect. Neither the Company nor any such subsidiary
(x) has received any notice of proceedings relating to
revocation or materially adverse modification of any such
consents, approvals, authorizations, orders, registrations,
filings, qualifications, licenses or permits, or (y) is
subject to any pending proceeding, complaint or investigation
before any federal, state or local regulatory authority, nor,
to such counsel's knowledge, has any such proceeding,
complaint or investigation been threatened, with re-
29
<PAGE> 30
spect to the respective telecommunications businesses
of the Company and the subsidiaries.
(ii) There is no commitment, plan or arrangement to
issue, and no outstanding option, warrant or other right
calling for the issuance of, any shares of capital stock (or
similar interests) of the Company or of any subsidiary or any
security or other instrument that by its terms is convertible
into or exercisable or exchangeable for capital stock (or
similar interests) of the Company or any subsidiary, except
as described in the Registration Statement and the Prospectus
or as shall be granted as compensation for employees or
consultants of the Company in the ordinary course of business
consistent with past practice.
(iii) The Company's execution and delivery of, and its
performance of its obligations under, the Underwriting
Agreement and the consummation of the transactions
contemplated thereby do not and, when such performance is
required pursuant to the terms thereof, will not (A) conflict
with or result in a breach of any of the terms and provisions
of, or constitute a default under (or an event that with
notice or lapse of time, or both, would constitute a default
under) or require approval or consent under, or result in the
creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any subsidiary
pursuant to the terms of, any Listed Contract or any permit
referred to in the opinions of local counsel attached hereto,
or (B) to such counsel's knowledge, violate or conflict with
any judgment, decree, order, statute, rule or regulation of
any court or any public, governmental or regulatory agency or
body having jurisdiction over the Company or any subsidiary
or any of its respective properties or assets, except for
those violations or conflicts that, individually or in the
aggregate, would not have a Material Adverse Effect. To such
counsel's knowledge, the permits referred to in the attached
opinions of local counsel are the only Material Permits.
(iv) To such counsel's knowledge, no consent, approval,
authorization, order, registration, filing, qualification,
license or permit of or with any public, governmental or
regulatory agency or body having jurisdiction over the
Company's or any subsidiary's telecommunications business is
required for the Company's execution and delivery of, and its
performance of its
30
<PAGE> 31
obligations under, the Underwriting Agreement, and the
consummation of the transactions contemplated thereby,
including, without limitation, the issuance, sale and
delivery of the Shares.
(v) Insofar as statements in the Prospectus purport to
summarize the nature and status of litigation or the
provisions of statutes, laws, rules, regulations, orders,
judgments or decrees, in either case only those which relate
to the federal, state or local regulation of the respective
telecommunications businesses of the Company and the
subsidiaries, or Permits, such statements fairly summarize
the matters referred to therein in all material respects.
(vi) Except as described in the Prospectus, the Company
and each subsidiary have (i) good and marketable title to all
personal properties owned by them, free and clear of all
liens, security interests, pledges, charges, encumbrances,
and mortgages, and (ii) valid, subsisting and enforceable,
and enjoy peaceful and undisturbed possession under, leases
or licenses for all real and personal properties leased or
licensed by them, including all rights-of-way, conduit, pole
attachment, service and fiber leases and agreements, in each
case, subject in each case to such exceptions as,
individually or in the aggregate, do not have and are not
reasonably likely to have a Material Adverse Effect. No real
or personal property, rights-of-way, conduits, pole
attachments or fiber leased, licensed or used by the Company
or by a subsidiary lies in an area that is, or to the best
knowledge of the Company will be, subject to zoning, use, or
building code restrictions that would prohibit, and no state
of facts relating to the actions or inaction of another
person or entity or his, her or its ownership, leasing,
licensing or use of any such real or personal property,
rights-of-way, conduits, pole attachments or fiber exists
that would prevent, the continued effective leasing,
licensing or use of such real or personal property,
rights-of-way, conduits, pole attachments or fiber in the
business of the Company or such subsidiary as presently
conducted, subject in each case to such exceptions as,
individually or in the aggregate, do not have and are not
reasonably likely to have a Material Adverse Effect. With
respect to the opinion given in the immediately preceding
sentence, such counsel has no reason to believe that the
Company or any subsidiary
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<PAGE> 32
will not be able to conduct its business as the Pro-
spectus indicates is contemplated to be conducted.
(vii) To such counsel's knowledge, neither the Company
nor any subsidiary, nor any other party, is in violation or
breach of, or in default under (nor has an event occurred
that with notice, lapse of time or both, would constitute a
default under), any Material Contract, and each Material
Contract is in full force and effect, and is the legal,
valid, and binding obligation of the Company or such
subsidiary, as the case may be, and (subject to applicable
bankruptcy, insolvency, and other laws affecting the
enforceability of creditors' rights generally) is enforceable
as to the Company or such subsidiary, as the case may be, in
accordance with its terms. Neither the Company nor any
subsidiary is in violation of its certificate of
incorporation, by-laws or similar governing instrument.
In addition, such counsel shall state that she has
participated in conferences with officers and other representatives of
the Company, representatives of the independent certified public
accountants of the Company, representatives of the Underwriters and
counsel for the Underwriters at which the contents of the Registration
Statement, the Prospectus and any amendments thereof or supplements
thereto and related matters were discussed and, although such counsel
has not undertaken to investigate or verify independently and is not
passing upon, and does not assume any responsibility for, the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus or any amendments thereof or
supplements thereto (except as to matters referred to in the last
sentence of clause (ii) above), no facts have come to her attention
which lead her to believe that the Registration Statement, on the
effective date thereof (or any post-effective amendment thereof as of
the date of such amendment), contained an untrue statement of a
material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading or that the Prospectus, on the date thereof or the date of
such opinion, contained an untrue statement of a material fact or
omitted to state any material fact required to be stated therein or
necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading (it being
understood that such counsel need express no view with respect to the
financial statements and related notes, the financial statement
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<PAGE> 33
schedules and the other financial and accounting data in-
cluded therein).
In rendering such opinion, such counsel (i) may limit her
opinions to the laws of the District of Columbia, the corporate laws
of the State of Delaware and the federal laws of the United States of
America, and (ii) may rely (A) as to matters involving the application
of laws other than the laws of the District of Columbia, the corporate
laws of the State of Delaware and the federal laws of the United
States of America, to the extent such counsel deems proper and to the
extent specified in such opinion letter, if at all, upon a written
opinion or opinions (in form and scope reasonably satisfactory to
counsel for the Underwriters) of other counsel reasonably acceptable
to counsel for the Underwriters, familiar with the applicable laws;
and (B) as to matters of fact, to the extent such counsel may deem
proper, on certificates of responsible officers of the Company and
certificates or other written statements of officers of departments of
various jurisdictions having custody of documents respecting the
corporate existence or good standing of the Company and the
subsidiaries. In addition, such counsel may rely as to matters
involving the laws administered by the FCC or involving state
regulatory matters, to the extent such counsel deems proper and to the
extent specified in such opinion letter, if at all, upon a written
opinion of Kelley, Drye & Warren (in substantially the form and scope
set forth in Section 8(g) hereof) or other state and local regulatory
counsel reasonably acceptable to counsel for the Underwriters. The
opinion of such counsel shall specifically state that the opinion of
any such other counsel is in form and scope satisfactory to such
counsel and, in such counsel's opinion, such counsel, you and counsel
for the Underwriters are justified in relying thereon. A copy of the
opinion of any such other counsel shall be delivered to counsel for
the Underwriters.
The opinion of Riley M. Murphy, Esq. described in this
paragraph (d) shall be rendered to you at the request of the Com-
pany and shall so state therein.
(e) You shall have received on the Closing Date the written
opinion of Ross & Hardies, special counsel for the Company, dated the
Closing Date, addressed to the Underwriters, and in form and scope
satisfactory to counsel for the Underwriters, to the effect that:
(i) The authorized capital stock of the Company
as of ________, 1996 consisted of (i) 75,000,000 shares
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<PAGE> 34
of common stock, par value $0.01 per share and (ii) _______
shares of preferred stock, par value $1.00 per share. Of such
shares of preferred stock authorized as of ________, 1996,
186,664 shares were designated as 9% Series A-1 Convertible
Preferred Stock, par value $1.00 per share, 100,000 shares
were designated as 9% Series B-1 Convertible Preferred Stock,
par value $1.00 per share, 102,500 shares were designated as
9% Series B-2 Convertible Preferred Stock, par value $1.00
per share, 25,000 shares were designated as 9% Series B-3
Convertible Preferred Stock, par value $1.00 per share, and
50,000 shares were designated as 9% Series B-4 Convertible
Preferred Stock, par value $1.00 per share. The authorized
capital stock of the Company as of the date of this letter
consist of (i) 75,000,000 shares of common stock, par value
$0.01 per share and (ii) 813,336 shares of preferred stock,
par value $1.00 per share. Of such shares of preferred stock
authorized as of the date of this letter, no shares have been
designated as any specific class or series.
(ii) All of the outstanding shares of capital stock of
the Company have been duly and validly authorized and issued,
are fully paid and nonassessable and were not issued in
violation of any preemptive rights.
(iii) The Company has all requisite corporate power and
authority to execute, deliver and perform its obligations
under the Registration Rights Indemnification Agreement. The
Registration Rights Indemnification Agreement has been duly
and validly authorized, executed and delivered by the
Company. The Registration Rights Indemnification Agreement
constitutes a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms,
subject to applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and other similar laws
affecting creditors' rights and remedies generally, and
subject, as to enforceability, to general principles of
equity, including principles of commercial reasonableness,
good faith and fair dealing (regardless of whether
enforcement is sought in a proceeding at law or in equity),
and except insofar as rights to indemnification contained in
the Registration Rights Indemnification Agreement may be
limited by federal or state securities laws or related public
policy.
34
<PAGE> 35
(iv) Except as set forth in the Registration Rights
Schedule and except as disclosed in the Registration
Statement and the Prospectus, to such counsel's knowledge, no
person or entity has any Registration Rights. To such
counsel's knowledge, the Registration Rights Schedule sets
forth a correct and complete list, as of the date thereof, of
(i) all security holders of the Company who have Registration
Rights; (ii) the number of shares of Common Stock held by
each such security holder (or shares of Common Stock
underlying securities convertible into or exercisable or
exchangeable for Common Stock) with respect to which each
such security holder has Registration Rights, and which of
such shares of Common Stock are subject to under- writers'
"cut back" rights pursuant to any contract or agreement
pursuant to which such security holder's Registration Rights
were granted; and (iii) the number of shares of Common Stock
held by such security holder (or shares of Common Stock
underlying securities convertible into or exercisable or
exchangeable for Common Stock) that, with respect to which
each such security holder has Registration Rights as of the
date of the Registration Rights Schedule, are eligible for
sale pursuant to Rule 144 under the Act based upon the
holding period of such shares of Common Stock by such holder
(assuming that no actions have been taken by such holder and
that no events have occurred which interrupted such holding
period or commenced a new holding period). The Registration
Rights Waiver Letter sets forth a correct and complete list
of those security holders of the Company who have and who
have not executed waivers of Registration Rights. Those
security holders who have executed waivers of Registration
Rights have legally and effectively waived their Registration
Rights.
(v) The statements contained [(i)(A) in the first seven
sentences of the first paragraph and (B) in the fourth
paragraph] under the caption "Risk Factors -- Shares Eligible
for Future Sale" in the Prospectus and [(ii)(A) in the first
seven sentences of the first paragraph and (B) in the fourth
paragraph] under the caption "Shares Eligible for Future
Sale" are true and accurate descriptions of the information
purported to be described therein.
In rendering such opinion, such counsel (i) may limit its
opinions to the laws of the State of New York and the State of
Illinois, and the corporate laws of the State of
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<PAGE> 36
Delaware, and (ii) may rely as to matters involving the application of
laws other than the laws of the State of New York and the State of
Illinois, and the corporate laws of the State of Delaware, to the
extent such counsel deems proper and to the extent specified in such
opinion letter, if at all, upon a written opinion or opinions (in form
and scope reasonably satisfactory to counsel for the Underwriters) of
other counsel reasonably acceptable to counsel for the Underwriters,
familiar with the applicable laws; and (B) as to matters of fact, to
the extent such counsel may deem proper, on certificates of
responsible officers of the Company. The opinion of such counsel shall
specifically state that the opinion of any such other counsel is in
form and scope satisfactory to such counsel and, in such counsel's
opinion, such counsel, you and counsel for the Underwriters are
justified in relying thereon. A copy of the opinion of any such other
counsel shall be delivered to counsel for the Underwriters.
The opinion of Ross & Hardies described in this paragraph (e)
shall be rendered to you at the request of the Company and shall so
state therein.
(f) You shall have received on the Closing Date the written
opinion of Piper & Marbury L.L.P., special counsel for the Company,
dated the Closing Date, addressed to the Underwriters and in form and
scope satisfactory to counsel for the Underwriters, to the effect
that:
(i) Each of the Company and the subsidiaries listed in
Schedule II to the Underwriting Agreement has been duly
organized and is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation
and is duly qualified and in good standing as a foreign
corporation in each jurisdiction in which the character or
location of its properties (owned, leased or licensed) or the
nature or conduct of its business makes such qualification
necessary, except for those failures to be so qualified or in
good standing that will not in the aggregate have a Material
Adverse Effect.
(ii) Each of the Company and the subsidiaries listed on
Schedule II to the Underwriting Agreement has all requisite
corporate power and authority to own, lease and license its
respective properties and conduct its respective business as
now being conducted and as described in the Registration
Statement and the Prospectus, except in those cases where the
failure to
36
<PAGE> 37
have such power or authority would not individually or in the
aggregate have a Material Adverse Effect.
(iii) All of the issued and outstanding capital stock (or
similar interests) of each subsidiary listed on Schedule II
have been duly and validly authorized and issued, are fully
paid and nonassessable and were not issued in violation of
any preemptive rights and are owned by the Company or a
subsidiary, free and clear of all claims, liens, security
interests, pledges, charges, encumbrances, stockholders
agreements and voting trusts, except as otherwise described
in Schedule II to the Underwriting Agreement.
(iv) The Company meets the requirements for the use of a
registration statement on Form SB-2 under the Act. The
Registration Statement and the Prospectus (except for the
financial statements and the notes thereto, the financial
statement schedules and the other financial and accounting
data included therein, as to which no opinion need be
expressed) comply as to form in all material respects with
the requirements of the Act.
(v) The Registration Statement became effective under
the Act on ________, 1997, and to the knowledge of such
counsel, no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for
that purpose are, pending before or contemplated by the
Commission.
(vi) The Shares have been duly authorized and, when
issued, delivered and sold in accordance with the terms of
the Underwriting Agreement, will be validly issued, fully
paid and nonassessable, and will not have been issued in
violation of any preemptive rights.
(vii) The capital stock of the Company conforms in all
material respects to the descriptions thereof contained in
the Registration Statement and the Prospectus.
(viii) The Company's execution and delivery of, and its
performance of its obligations under, the Underwriting
Agreement and the consummation of the transactions
contemplated thereby do not and, when such performance is
required pursuant to the terms thereof, will not violate or
conflict with any provisions of the
37
<PAGE> 38
certificate of incorporation, by-laws or similar
governing instruments of the Company or any subsidiary.
(ix) To such counsel's knowledge, no consent, approval,
authorization, order, registration, filing, qualification,
license or permit of or with any court or any public,
governmental or regulatory agency or body having jurisdiction
over the Company or any subsidiary or any of the Company's or
any subsidiary's properties or assets, other than those
relating to or affecting the telecommunications businesses of
the Company and the subsidiaries (as to which counsel need
not express an opinion) is required for the Company's
execution and delivery of, and its performance of its
obligations under, the Underwriting Agreement, and the
consummation of the transactions contemplated thereby,
including, without limitation, the issuance, sale and
delivery of the Shares, except for (A) such as may be
required under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares
by the Underwriters (as to which such counsel need express no
opinion) and (B) such as have been made or obtained under the
Act, the Exchange Act or the rules of the Nasdaq National
Market or the NASD.
(x) Insofar as statements in the Prospectus purport to
summarize the nature and status of litigation or the
provisions of statutes, laws, rules, regulations, orders,
judgments or decrees (other than federal, state or local
regulation relating to or affecting the respective
telecommunications businesses of the Company and the
subsidiaries as to which counsel need not express an
opinion), or the terms of any Listed Contracts, such
statements are correct in all material respects and are fair
summaries of the matters referred to therein.
(xi) The Shares have been duly authorized for quotation
on the Nasdaq National Market, subject only to official
notice of issuance.
(xii) The Company has all requisite corporate right, power
and authority to execute, deliver and perform its obligations
under the Underwriting Agreement and to issue, sell and
deliver the Shares in accordance with the terms and
conditions thereof. The Underwriting Agreement has been duly
and validly authorized, executed and delivered by the
Company. The Underwriting Agreement constitutes a valid and
binding
38
<PAGE> 39
obligation of the Company, subject to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium
and other similar laws affecting creditors' rights and
remedies generally, and subject, as to enforceability, to
general principles of equity, including principles of
commercial reasonableness, good faith and fair dealing
(regardless of whether enforcement is sought in a proceeding
at law or in equity), and except insofar as rights to
indemnification and contribution contained therein may be
limited by federal or state securities laws or related public
policy.
(xiii) Upon delivery of and payment for the Shares to be
sold by the Company to each Underwriter in accordance with
the Underwriting Agreement, each Underwriter will acquire
good and marketable title to the Shares so sold and delivered
to it, free and clear of all liens, pledges, charges, claims,
security interests, restrictions on transfer, agreements or
other defects of title whatsoever (other than those resulting
from any action taken by such Underwriter).
(xiv) To such counsel's knowledge, there is no litigation,
arbitration or governmental or other action, suit, proceeding
or investigation before any court or before or by any public,
regulatory or governmental agency or body pending or
threatened against, or involving the properties or business
of, the Company or any subsidiary, that, if resolved against
the Company or such subsidiary, individually or, to the
extent involving related claims or issues, in the aggregate,
is of a character required to be disclosed in the
Registration Statement and the Prospectus that has not been
properly disclosed therein; and to such counsel's knowledge,
there is no contract or document concerning the Company or
any subsidiary of a character required to be described in the
Registration Statement and the Prospectus or to be filed as
an exhibit to the Registration Statement, that is not so
described or filed.
(xv) The Company is not and will not become an
"investment company" or a company "controlled" by an
"investment company" as defined in the Investment Company
Act.
39
<PAGE> 40
In addition, you shall have received a statement from such
counsel to the effect of the penultimate paragraph of Section 8(d)
hereof. In rendering such opinion, such counsel (i) may limit its
opinions to the laws of the State of New York, the State of Maryland,
the corporate laws of the State of Delaware and the federal laws of
the United States of America, and (ii) may rely (A) as to matters
involving the application of laws other than the laws of the State of
New York, the State of Maryland, the corporate laws of the State of
Delaware and the federal laws of the United States of America, to the
extent such counsel deems proper and to the extent specified in such
opinion letter, if at all, upon a written opinion or opinions (in form
and scope reasonably satisfactory to counsel for the Underwriters) of
other counsel reasonably acceptable to counsel for the Underwriters,
familiar with the applicable laws; and (B) as to matters of fact, to
the extent such counsel may deem proper, on certificates of
responsible officers of the Company and certificates or other written
statements of officers of departments of various jurisdictions having
custody of documents respecting the corporate existence or good
standing of the Company and the subsidiaries. The opinion of such
counsel shall specifically state that the opinion of any such other
counsel is in form and scope satisfactory to such counsel and, in such
counsel's opinion, such counsel, you and counsel for the Underwriters
are justified in relying thereon. A copy of the opinion of any such
other counsel shall be delivered to counsel for the Underwriters.
The opinion of Piper & Marbury L.L.P. described in this
paragraph (f) shall be rendered to you at the request of the Company and shall
so state therein.
(g) You shall have received on the Closing Date the written
opinion of Kelley, Drye & Warren, special regulatory counsel for the
Company, dated the Closing Date, addressed to the Underwriters, and in
form and scope reasonably satisfactory to counsel for the
Underwriters, to the effect that:
(i) The Company and each subsidiary have all necessary
consents, approvals, authorizations, orders, registrations,
filings, qualifications, licenses and permits of and from the
FCC and other federal regulatory or governmental agencies and
bodies, to conduct their respective telecommunications
businesses as described in the Registration Statement and the
Prospectus.
40
<PAGE> 41
(ii) There is no proceeding, complaint or investigation
pending or, to such counsel's knowledge, threatened before
the FCC or any other federal regulatory or governmental
agency or body with respect to the respective
telecommunications businesses of the Company and the
subsidiaries.
(iii) Insofar as statements in the Prospectus purport to
summarize the provisions of statutes, laws, rules,
regulations, orders, judgments or decrees relating to the
federal regulation of the respective telecommunications
businesses of the Company and the subsidiaries, such
statements are correct in all material respects.
(iv) The Company's execution and delivery of, and its
performance of its obligations under, the Underwriting
Agreement and the consummation of the transactions
contemplated thereby do not and, when such performance is
required pursuant to the terms thereof, will not, to such
counsel's knowledge, violate or conflict with any judgment,
decree, order, statute, rule or regulation of, or license,
permit or authorization granted to the Company or any
subsidiary by, the FCC or any other federal regulatory or
governmental agency or body,relating to the respective
telecommunications businesses of the Company or any
subsidiary.
In rendering such opinion, such counsel (i) may limit its
opinions to the laws of the District of Columbia and the federal laws
of the United States of America and (ii) may rely (A) as to matters
involving the application of laws other than the laws of the District
of Columbia and the federal laws of the United States of America, to
the extent such counsel deems proper and to the extent specified in
such opinion letter, if at all, upon a written opinion or opinions (in
form and scope reasonably satisfactory to counsel for the
Underwriters) of counsel reasonably acceptable to counsel for the
Underwriters, familiar with the applicable laws; and (B) may rely as
to matters of fact, to the extent such counsel may deem proper, on
certificates of responsible officers of the Company and certificates
or other written statements of officers of departments of various
jurisdictions having custody of documents respecting the Company and
the subsidiaries. The opinion of such counsel shall specifically state
that the opinion of any such other counsel is in form and scope
satisfactory to such counsel and, in such counsel's opinion, such
counsel, you and counsel for the Underwriters are justified in relying
41
<PAGE> 42
thereon. A copy of the opinion of any such other counsel
shall be delivered to counsel for the Underwriters.
The opinion of Kelley, Drye and Warren discussed in this
paragraph (g) shall be rendered to you at the request of the Company
and shall so state therein.
(h) You shall have received on the Closing Date the written opinion
of Weil, Gotshal & Manges LLP, counsel for the Underwriters, dated the
Closing Date, and addressed to the Underwriters, to the effect that:
(i) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of
Delaware and has all requisite corporate power and authority
to enter into and perform the Underwriting Agreement.
(ii) The Shares have been duly authorized and, when
issued, delivered and sold in accordance with the terms of
the Underwriting Agreement, will be validly issued, fully
paid and nonassessable, and will not have been issued in
violation of any preemptive rights.
(iii) The Underwriting Agreement has been duly and validly
authorized, executed and delivered by the Company. The
Underwriting Agreement constitutes a valid and binding
obligation of the Company, subject to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium
and other similar laws affecting creditors' rights and
remedies generally, and subject, as to enforceability, to
general principles of equity, including principles of
commercial reasonableness, good faith and fair dealing
(regardless of whether enforcement is sought in a proceeding
at law or in equity), and except insofar as rights to
indemnification and contribution contained therein may be
limited by federal or state securities laws or related public
policy.
(iv) The Registration Statement has become effective
under the Act on ________, 1997, no stop order suspending the
effectiveness of the Registration Statement has been issued
and no proceeding for that purpose are, to the knowledge of
such counsel, pending before or contemplated by the
Commission.
(v) The statements under the captions "Descrip-
tion of Capital Stock" and "Underwriting" in the Regis-
42
<PAGE> 43
tration Statement insofar as such statements constitute a
summary of legal matters, documents or proceedings referred
to therein, fairly present the information called for with
respect to such legal matters, documents and proceedings in
all material respects.
In addition, you shall have received a statement from such
counsel to the effect of the penultimate paragraph of Section 8(d)
hereof.
The Company shall have furnished to counsel for the
Underwriters such documents as such counsel may request for the
purpose of enabling such counsel to pass upon such matters.
(i) At the time this Agreement is executed and at the Closing
Date, you shall have received a letter, from KPMG Peat Marwick LLP,
dated the date of its delivery, addressed to the Underwriters and in
form and substance reasonably satisfactory to you, to the effect that:
(i) they are independent public accountants with respect to the
Company within the meaning of the Act and stating that the answer to
Item 13 of the Registration Statement is correct insofar as it relates
to them; (ii) in their opinion, the consolidated financial statements
of the Company and its subsidiaries included in the Registration
Statement and the Prospectus and covered by their opinion included
therein comply as to form in all material respects with the applicable
accounting requirements of the Act and the applicable published rules
and regulations of the Commission thereunder; (iii) on the basis of
procedures (but not an examination made in accordance with generally
accepted auditing standards) consisting of a reading of the latest
available unaudited interim consolidated financial statements of the
Company and the subsidiaries, a reading of the minutes of meetings and
consents of the stockholders and boards of directors of the Company
and the subsidiaries and the committees of such boards subsequent to
June 30, 1996, inquiries of officers and other employees of the
Company and the subsidiaries who have responsibility for financial and
accounting matters of the Company and the subsidiaries with respect to
transactions and events subsequent to June 30, 1996, reading the
unaudited condensed consolidated financial statements of the Company
and its consolidated subsidiaries at and for the three months ended
September 30, 1996 and 1995, respectively, and other specified
procedures and inquiries to a date not more than five days prior to
the date of such letter, nothing has come to their attention that
would cause them to believe that: (A) the unaudited historical con-
43
<PAGE> 44
densed consolidated financial statements of the Company and its
consolidated subsidiaries included in the Registration Statement and
the Prospectus do not comply as to form in all material respects with
the applicable accounting requirements of the Act or that such
unaudited condensed consolidated financial statements are not
presented in conformity with US GAAP applied on a basis substantially
consistent with that of the audited consolidated financial statements
of the Company and its consolidated subsidiaries included in the
Registration Statement and the Prospectus; (B) with respect to the
period subsequent to September 30, 1996 there were, as of the date of
the most recent available monthly condensed consolidated financial
statements of the Company and its consolidated subsidiaries, if any,
and as of a specified date not more than five days prior to the date
of such letter, any changes in the capital stock or indebtedness of
the Company or any decrease in the net current assets or stockholders'
equity of the Company, in each case as compared with the amounts shown
in the most recent balance sheet included in the Registration
Statement and the Prospectus, except for changes or decreases that the
Registration Statement and the Prospectus disclose have occurred or
may occur; (C) that during the period from September 30, 1996 to the
date of the most recent available monthly condensed consolidated
financial statements of the Company and its consolidated subsidiaries,
if any, and to a specified date not more than five days prior to the
date of such letter, there was any decrease in total revenues or any
increase in total or per share net loss, in each case as compared with
the corresponding period in the prior fiscal year, except for such
decreases or increases, as the case may be, that the Prospectus
discloses have occurred or may occur; or (D) any unaudited pro forma
consolidated condensed financial statements included in the Prospectus
do not comply as to form in all material respects with the applicable
accounting requirements of the Act and the published rules and
regulations thereunder or the pro forma adjustments have not been
properly applied to the historical amounts in the compilation of those
statements; and (iv) stating that they have compared specific dollar
amounts, numbers of shares, percentages of revenues and earnings and
other financial information pertaining to the Company and the
subsidiaries set forth in the Prospectus, which have been specified by
you prior to the date of this Agreement, to the extent that such
dollar amounts, numbers, percentages and information may be derived
from the general accounting and financial records that are subject to
the internal control structure policies and procedures of the
Company's accounting systems or that have been derived directly from
44
<PAGE> 45
such accounting records by analysis or computation, and excluding any
questions requiring an interpretation by legal counsel, with the
results obtained from the application of specified readings,
inquiries, and other appropriate procedures specified by you (which
procedures do not constitute an examination in accordance with
generally accepted auditing standards) set forth in such letter, and
found them to be in agreement.
(j) The NASD, upon review of the terms of the underwriting
arrangements for the public offering of the Shares, shall have raised
no objections thereto.
(k) The Shares shall have been approved for quotation on the
Nasdaq National Market, subject to official notice of issuance.
(l) At the time this Agreement is executed, the Company shall
have furnished to you the agreements specified in Section 2 hereof, in
each case, in form and substance satisfactory to counsel for the
Underwriters and in full force and effect.
(m) The Company shall not have failed at or prior to the Closing
Date to perform or comply with any of the agreements herein contained
and required to be performed or complied with by the Company at or
prior to the Closing Date.
(n) Prior to the Closing Date, the Company shall have furnished
to you such further information, certificates and documents as you or
counsel for the Underwriters may reasonably request.
The several obligations of the Underwriters to purchase any
Additional Shares hereunder are subject to the delivery to you on the
applicable Option Closing Date of such documents as you or counsel for the
Underwriters may reasonably request with respect to the good standing of the
Company, the due authorization and issuance of such Additional Shares and other
matters related to the issuance of such Additional Shares.
9. EFFECTIVE DATE OF AGREEMENT; TERMINATION. This Agree-
ment shall become effective upon the later of (i) execution of
this Agreement and (ii) when notification of the effectiveness of
the Registration Statement has been released by the Commission.
This Agreement may be terminated at any time prior to
the Closing Date by you by written notice to the Company if any
of the following has occurred: (i) since the respective dates as
45
<PAGE> 46
of which information is given in the Registration Statement and the Prospectus,
any material adverse change or development involving a prospective material
adverse change in the condition, financial or otherwise, of the Company and its
subsidiaries, taken as a whole, or the earnings, affairs, or business prospects
of the Company or any of its subsidiaries, taken as whole, whether or not
arising in the ordinary course of business, which would, in your judgment, make
it impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus, (ii) any outbreak or escalation of hostilities
or other national or international calamity or crisis or change in economic
conditions or in the financial markets of the United States or elsewhere that,
in your reasonable judgment, is material and adverse and would, in your
reasonable judgment, make it impracticable to market the Shares on the terms
and in the manner contemplated in the Prospectus, (iii) the suspension or
material limitation of trading in securities on the New York Stock Exchange,
the American Stock Exchange or the Nasdaq National Market or limitation on
prices for securities on any such exchange or Nasdaq National Market, (iv) the
enactment, publication, decree or other promulgation of any federal or state
statute, regulation, rule or order of any court or other governmental authority
which in your opinion materially and adversely affects, or will materially and
adversely affect, the business or operations of the Company or any subsidiary,
(v) the declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in your
opinion has a material adverse effect on the financial markets in the United
States.
If on the Closing Date or on an Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase the
Firm Shares or Additional Shares, as the case may be, which it or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters, as the case may be, agreed but failed or refused
to purchase is not more than one-tenth of the total number of Shares to be
purchased on such date by all Underwriters, each non-defaulting Underwriter
shall be obligated severally, in the proportion which the number of Firm Shares
set forth opposite its name in Schedule I hereto bears to the total number of
Firm Shares which all the non-defaulting Underwriters, as the case may be, have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters, as the case may be, agreed but failed or refused
to purchase on such date; provided that in no
46
<PAGE> 47
event shall the number of Firm Shares or Additional Shares, as the case may be,
which any Underwriter has agreed to purchase pursuant to Section 2 hereof be
increased pursuant to this Section 9 by an amount in excess of one-ninth of
such number of Firm Shares or Additional Shares, as the case may be, without
the written consent of such Underwriter. If on the Closing Date or on an Option
Closing Date, as the case may be, any Underwriter or Underwriters shall fail or
refuse to purchase Firm Shares, or Additional Shares, as the case may be, and
the aggregate number of Firm Shares or Additional Shares, as the case may be,
with respect to which such default occurs is more than one-tenth of the
aggregate number of Shares to be purchased on such date by all Underwriters and
arrangements satisfactory to you and the Company for purchase of such Shares
are not made within 48 hours after such default, this Agreement will terminate
without liability on the part of any non-defaulting Underwriter and the
Company. In any such case which does not result in termination of this
Agreement, either you or the Company shall have the right to postpone the
Closing Date or the applicable Option Closing Date, as the case may be, but in
no event for longer than seven days, in order that the required changes, if
any, in the Registration Statement and Prospectus or any other documents or
arrangements may be effected. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any default of
any such Underwriter under this Agreement.
10. MISCELLANEOUS. Notices given pursuant to any provision of this
Agreement shall be addressed as follows: (a) if to the Company, to
American Communications Services, Inc., 131 National Business Parkway, Suite
100, Annapolis Junction, Maryland 20701, Attention: Riley M. Murphy, Esq. (Fax
No.: 301-617-4277), and (b) if to any Underwriter or to you, to you c/o Alex.
Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland
21202, Attention: Syndicate Department (Fax No.: (410) 895-4481), or in any
case to such other address or facsimile number as the person to be notified may
have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company, its officers and directors and
of the several Underwriters set forth in or made pursuant to this Agreement
shall remain operative and in full force and effect, and will survive delivery
of and payment for the Shares, regardless of (i) any investigation, or
statement as to the results thereof, made by or on behalf of any Underwriter or
by or on behalf of the Company, the officers or directors of the Company or any
controlling person of the
47
<PAGE> 48
Company, (ii) acceptance of the Shares and payment for them hereunder and (iii)
termination of this Agreement.
If this Agreement shall be terminated by the Underwriters because of
any failure or refusal on the part of the Company to comply with the terms or
to fulfill any of the conditions of this Agreement, the Company agrees to
reimburse the several Underwriters for all out-of-pocket expenses (including
the fees and disbursements of counsel for the Underwriters) reasonably incurred
by them.
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the
Underwriters, any controlling persons referred to herein and their respective
successors and assigns, all as and to the extent provided in this Agreement,
and no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include a purchaser of
any of the Shares from any of the several Underwriters merely because of such
purchase.
For the purposes of this Agreement, "business day" means any day on
which the New York Stock Exchange is open for trading.
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
This Agreement may be signed in various counterparts, which together
shall constitute one and the same instrument.
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
AMERICAN COMMUNICATIONS SERVICES, INC.
By:
---------------------------------------
Name:
Title:
48
<PAGE> 49
Accepted as of the date first above written.
ALEX. BROWN & SONS INCORPORATED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By: ALEX. BROWN & SONS
INCORPORATED
By:
---------------------------------------
Name: Scott Wieler
Title: Managing Director
49
<PAGE> 50
SCHEDULE I
<TABLE>
<CAPTION>
Number of
Firm Shares
Name of Underwriter to be Purchased
- ------------------- ---------------
<S> <C>
Alex. Brown & Sons Incorporated.............................................
Donaldson, Lufkin & Jenrette
Securities Corporation....................................................
---------
TOTAL =========
</TABLE>
<PAGE> 51
SCHEDULE II
SUBSIDIARIES *
<TABLE>
<CAPTION>
Jurisdiction of Percentage
Name Incorporation of Equity
- ---- ------------- ---------
<S> <C> <C>
American Communication Services Delaware **
of Columbia, Inc.
American Communication Services Delaware **
of Fort Worth, Inc.
American Communication Services Delaware **
of Greenville, Inc.
American Communication Services Delaware 100
of Little Rock, Inc.
American Communication Services Delaware **
of Louisville, Inc.
American Communication Services Delaware 100
of Albuquerque, Inc.
American Communication Services Delaware 100
of Charleston, Inc.
American Communication Services Delaware 100
of Chattanooga, Inc.
American Communication Services Delaware **
of El Paso, Inc.
American Communication Services Delaware 100
of Lexington, Inc.
American Communication Services Delaware 100
of Pima County, Inc.
American Communication Services Delaware 100
of Birmingham, Inc.
</TABLE>
- -------------
* All subsidiaries are subject to restrictions and other
provisions of the Indentures.
** AT&T Credit owns 7.25% of outstanding stock of subsidiary, has a
security interest in the rest, which ASCI has pledged to AT&T Credit.
<PAGE> 52
<TABLE>
<CAPTION>
Jurisdiction of Percentage
Name Incorporation of Equity
- ---- ------------- ---------
<S> <C> <C>
American Communication Services Delaware 100
of Mobile, Inc.
ACSI Advanced Technologies, Inc. Maryland 100
American Communication Services Maryland 100
of Irving, Inc.
American Communication Services Maryland 100
of Montgomery, Inc.
American Communication Services Maryland 100
of Amarillo, Inc.
American Communication Services Maryland 100
of Baton Rouge, Inc.
American Communication Services Maryland 100
of Jackson, Inc.
American Communication Services Maryland 100
of Spartanburg, Inc.
American Communication Services Maryland 100
of Columbus, Inc.
American Communication Services Maryland 100
of Las Vegas, Inc.
American Communication Services Maryland 100
of Maryland, Inc.
[Piper & Marbury to update]
</TABLE>
<PAGE> 53
ANNEX I
STOCKHOLDERS SUBJECT TO 180-DAY LOCK-UP PERIOD
Anthony J. Pompliano
Jack Reich
Richard A. Kozak
George M. Tronsrue, III
Riley M. Murphy
Douglas R. Hudson
Robert H. Ottman
George M. Middlemas
Edwin M. Banks
Christopher L. Rafferty
Benjamin P. Giess
Olivier L. Trouveroy
Peter C. Bentz
The Huff Alternative Income Fund, L.P.
ING Equity Partners, L.P.
Apex Investment Fund I, L.P.
Apex Investment Fund II, L.P.
Argentum Capital Partners, L.P.
[Blazerhold & Co.]
Environmental Private Equity Fund II, L.P.
The Productivity Fund II, L.P.
<PAGE> 54
ANNEX II
STOCKHOLDERS SUBJECT TO 90-DAY LOCK-UP PERIOD
Brad Peery Capital, L.P.
Brad Peery Capital International
Prime II Management, L.P.
U.S. Signal Corporation
<PAGE> 55
ANNEX III
LISTED CONTRACTS
1. 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;
2. Indenture, dated March 26, 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;
3. Loan and Security Agreement, dated October 17, 1994, between
AT&T Credit Corporation and American Communication Services
of Louisville, Inc.;
4. Loan and Security Agreement, dated February 28, 1995,
between AT&T Credit Corporation and American Communication
Services of Fort Worth, Inc.;
5. 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.;
6. Loan and Security Agreement, dated September 8, 1995,
between AT&T Credit Corporation and American Communications
Services of El Paso, Inc.;
7. Parent Support and Pledge Agreement (Louisville) dated
October 17, 1994, between the Company and AT&T Credit
Corporation;
8. Parent Support and Pledge Agreement (El Paso) dated
September 8, 1995, between the Company and AT&T Credit
Corporation;
9. Amendment No. 1 to Parent Support and Pledge Agreement
(Louisville) between the Company and AT&T Credit
Corporation;
10. Amendment No. 1 to Parent Support and Pledge Agreement (Fort
Worth) between the Company and AT&T Credit Corporation;
11. Amendment No. 1 to Loan and Security Agreement between
American Communications Services of Louisville, Inc. and
AT&T Credit Corporation;
12. Stock Purchase Agreement, dated October 17, 1994, between
the Company and AT&T Credit Corporation;
<PAGE> 56
13. Stock Purchase Agreement, dated October 17, 1994, between
the American Communications Services of Louisville, Inc. and
AT&T Credit Corporation;
14. AT&T Credit Facility Master Agreement;
15. AT&T Credit Facility Addendums for Louisville, Fort Worth,
Greenville, Columbia and El Paso subsidiaries;
16. Master IRU Agreement, dated June 23, 1995, by and between
MCImetro Access Transmission Services, Inc. and the Company;
17. Agreement, dated as of June 15, 1996, by and between AT&T
Communications, Inc. and the Company;
18. Access Service Agreement, dated June 15, 1996, by and
between LCI International Telecom Corp. and the Company, and
Addendum, dated February 22, 1996;
19. General Agreement between Lucent Technologies, Inc. and the
Company, and Addendum Number One to the General Agreement
between Lucent Technologies, Inc. and the Company, executed
June 25, 1996.
[additional contracts to be listed]
<PAGE> 1
================================================================================
STOCK PURCHASE AGREEMENT
BY AND AMONG
AMERICAN COMMUNICATIONS SERVICES, INC.
AND
HAROLD L. VAN ARNEM AND THOMAS R. BENHAM
AND
CYBERGATE, INC.
DATED
DECEMBER 13, 1996
================================================================================
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
ARTICLE I TERMS OF PURCHASE AND SALE............................... 1
1.1 Purchase and Sale of the Shares.......................... 1
1.2 Time and Place of Closing................................ 2
1.3 Payment of Purchase Price................................ 2
1.4 Adjustment Shares........................................ 3
ARTICLE II REPRESENTATIONS AND WARRANTIES OF
SHAREHOLDERS AND CYBERGATE................................ 4
2.1 Organization and Qualification............................ 4
2.2 Capitalization............................................ 5
2.3 Title to Shares........................................... 7
2.4 Authority................................................. 7
2.5 Consents and Approvals.................................... 8
2.6 Absence of Conflicts...................................... 8
2.7 Subsidiaries; Acquisitions; Dispositions.................. 9
2.8 Financial Statements; Accounts Receivable; Liabilities.... 11
2.9 Absence of Undisclosed Liabilities........................ 12
2.10 Absence of Certain Changes or Events...................... 12
2.11 Real and Personal Property; Inventories................... 14
2.12 Intellectual Property..................................... 15
2.13 Insurance................................................. 16
2.14 Contracts and Commitments................................. 17
2.15 Litigation and Administrative Proceedings................. 18
2.16 Tax Matters............................................... 19
2.16.1 All Returns Filed................................. 19
2.16.2 All Taxes Paid.................................... 19
2.16.3 Examinations, Etc................................. 20
2.16.4 Section 341(f).................................... 20
2.16.5 Withholding....................................... 20
2.16.6 Foreign Person, Etc............................... 21
2.16.7 Parachute Payments................................ 21
2.16.8 Accounting; Tax Attributes........................ 21
2.16.9 Prior Consolidated Groups......................... 22
2.17 Compliance with Laws...................................... 22
2.18 Environmental Compliance.................................. 22
2.19 Employee Benefits......................................... 24
2.20 Licenses and Permits...................................... 26
2.21 Relations with Suppliers and Customers.................... 26
2.22 Interest in Competitors, Suppliers, Customers, Etc........ 27
2.23 Employment Matters........................................ 27
2.24 Discrimination; Occupational Safety; Labor................ 27
2.25 Related Transactions...................................... 28
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
2.26 Brokers and Finders....................................... 29
2.27 Questionable Payments..................................... 29
2.28 Books and Records......................................... 30
2.29 Bank Accounts; Safe Deposit Boxes......................... 30
2.30 Full Disclosure........................................... 30
2.31 Effect of Certificates.................................... 30
2.32 Acquisition for Investment................................ 31
2.33 Export Law Compliance..................................... 32
ARTICLE III REPRESENTATIONS AND WARRANTIES OF ACSI.................... 32
3.1 Organization and Qualification............................ 32
3.2 Authority................................................. 32
3.3 Consents and Approvals.................................... 33
3.4 Absence of Conflicts...................................... 33
3.5 Litigation and Administrative Proceedings................. 33
3.6 No Material Misstatements................................. 34
3.7 Brokers and Finders....................................... 34
ARTICLE IV COVENANTS OF SHAREHOLDERS AND CYBERGATE................... 34
4.1 Conduct of Business....................................... 34
4.2 Negative Covenants........................................ 35
4.3 Access.................................................... 36
4.4 Reasonable Efforts........................................ 38
4.5 Consents and Approvals.................................... 38
4.6 Disposition of ACSI Common Stock.......................... 38
4.7 Further Assurances........................................ 39
4.8 Exclusivity............................................... 39
ARTICLE V COVENANTS OF ACSI......................................... 41
5.1 Reasonable Efforts........................................ 41
5.2 Consents and Approvals.................................... 41
5.3 Retention of Records...................................... 42
5.4 Release of Libra and Gemini............................... 42
5.5 Post-Closing Operating and Accounting Procedures.......... 43
5.6 Further Assurances........................................ 43
ARTICLE VI MUTUAL COVENANTS.......................................... 43
6.1 Confidentiality........................................... 43
6.2 Tax Reporting............................................. 44
6.3 Cooperation............................................... 44
ARTICLE VII SURVIVAL; INDEMNIFICATION................................. 44
7.1 Survival.................................................. 44
7.2 Indemnification........................................... 44
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
7.3 Indemnification Procedure.................................. 48
7.4 Treatment as Adjustment of Purchase Price.................. 50
ARTICLE VIII CLOSING DELIVERIES AND REQUIREMENTS........................ 51
8.1 Conditions Precedent to ACSI's Obligation to Close......... 51
8.2 Conditions Precedent to Shareholders' Obligation to Close.. 54
8.3 Closing Deliveries of CyberGate and the Shareholders....... 56
8.4 Closing Deliveries of ACSI................................. 57
ARTICLE IX TERMINATION................................................ 58
ARTICLE X MISCELLANEOUS.............................................. 59
10.1 Amendment and Modification................................. 59
10.2 Waiver of Compliance....................................... 59
10.3 Expenses................................................... 59
10.4 Notices.................................................... 59
10.5 Assignment................................................. 61
10.6 Publicity.................................................. 62
10.7 Headings................................................... 62
10.8 Severability............................................... 63
10.9 Governing Law.............................................. 63
10.10 Counterparts............................................... 63
10.11 Third Parties.............................................. 63
10.12 Entire Agreement........................................... 63
</TABLE>
iii
<PAGE> 5
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT (the "Agreement"), dated as of December 13, 1996,
by and among American Communications Services, Inc., a Delaware corporation
("ACSI"), CyberGate, Inc., a Florida corporation ("CyberGate"), Harold L. Van
Arnem, a resident of the State of Florida ("Van Arnem"), and Thomas R. Benham,
a resident of the State of Florida ("Benham") (Van Arnem and Benham being the
shareholders of CyberGate, individually a "Shareholder" and collectively, the
"Shareholders").
W I T N E S S E T H:
WHEREAS, the Shareholders own of record and beneficially all 1,000 issued
and outstanding shares of common stock, par value $0.01 per share, of CyberGate
(the "CyberGate Common Stock");
WHEREAS, ACSI desires to purchase from the Shareholders, and the
Shareholders desire to sell to ACSI, all 1,000 shares of the CyberGate Common
Stock (the "Shares").
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants,
agreements, representations and warranties contained herein and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
TERMS OF PURCHASE AND SALE
1.1 Purchase and Sale of the Shares. Subject to the terms and conditions
contained in this Agreement, at the Closing Date (as hereinafter defined), the
Shareholders shall sell, assign, transfer and deliver the Shares to ACSI, and
ACSI shall purchase the
<PAGE> 6
Shares from the Shareholders, for an aggregate purchase price consisting of the
items and amounts set forth in Section 1.3 hereof (the "Purchase Price")
payable pursuant to the terms provided in Section 1.3 hereof.
1.2 Time and Place of Closing. Subject to the terms and conditions
contained in this Agreement, the purchase and sale of the Shares (the
"Closing") will take place at the offices of CyberGate, 1301 Newport Center
Drive, Deerfield Beach, Florida, on December ___, 1996, or such other date as
the parties hereto may agree (the "Closing Date").
1.3 Payment of Purchase Price. Upon satisfaction of all the terms and
conditions set forth in Article VIII hereof, ACSI shall deliver the Purchase
Price consisting of 1,150,000 shares of ACSI's Common Stock, $0.01 par value
per share (the "ACSI Common Stock"), to be paid as follows: (a) at the Closing,
the Shareholders shall receive an aggregate of 750,000 shares of ACSI Common
Stock to be allocated between the Shareholders as set forth in Schedule 1.3
hereof, (b) at the Closing, 250,000 shares of ACSI Common Stock (the
"Indemnification Shares") shall be delivered to the escrow agent (the "Escrow
Agent") selected by mutual agreement of the parties hereto prior to the Closing
in accordance with Article VIII hereof, to be held in escrow pursuant to the
terms and conditions of the Indemnification Escrow Agreement attached hereto as
Exhibit A with such change as may be required by the Escrow Agent and not
objected to by the Shareholders or ACSI (the "Indemnification Escrow
Agreement"), and (c) 150,000 shares of ACSI Common Stock (the "Adjustment
Shares") will be retained by ACSI to be paid to the Shareholders, if at all, in
accordance with the provisions of Section 1.4 hereof.
2
<PAGE> 7
1.4 Adjustment Shares. On the dates listed below, the Shareholders shall
be entitled to receive such aggregate number of shares of the Adjustment
Shares, to be allocated between the Shareholders as set forth in Schedule 1.4
hereto, if any, as is determined by the following formulas:
(a) on March 1, 1998, such number of Adjustment Shares as is equal
to the number derived by the following formula:
50,000 x [(CyberGate's actual EBITDA (as defined by
generally accepted accounting principles) for the year
ended December 31, 1997 ("Calendar 1997") divided by
2,225,916]
provided, however, that in no event shall more than 50,000
Adjustment Shares be earned by the Shareholders on such date
and, provided further, however, that no Adjustment Shares shall
be earned on such date if the quotient of CyberGate's actual
EBITDA for Calendar 1997 divided by 2,473,240 is less than .70.
(b) on March 1, 1999, such number of Adjustment Shares as is equal
to the number derived by the following formula:
50,000 x [(CyberGate's actual EBITDA for the year ended
December 31, 1998 ("Calendar 1998") divided by 4,280,528]
provided, however, that in no event shall more than 50,000
Adjustment Shares be earned by the Shareholders on such date
and, provided further, however, that no Adjustment Shares
shall be earned on such date if the quotient of CyberGate's
actual EBITDA for Calendar 1998 divided by 4,756,120 is less
than .70.
(c) on March 1, 2000, such number of Adjustment Shares as is equal
to the number derived by the following formula:
50,000 x [(CyberGate's actual EBITDA for the fiscal year
ended December 31, 1999 ("Calendar 1999") divided by
7,452,612]
provided, however, that in no event shall more than 50,000
Adjustment Shares be earned by the Shareholders on such date
and, provided further, however, that no Adjustment Shares shall
be earned on such date if the quotient of CyberGate's actual
EBITDA for Calendar 1999 divided by 8,280,680 is less than .70.
3
<PAGE> 8
Notwithstanding the foregoing, if ACSI has not invested the minimum capital set
forth opposite each of Calendar 1997, Calendar 1998, and Calendar 1999 below,
the Shareholders shall receive 50,000 Adjustment Shares, to be allocated
between the Shareholders as set forth in Schedule 1.4 hereto, on February 15 of
each calendar year subsequent to the calendar year in which such failure
occurred until such time as the Shareholders shall have received all 150,000
Adjustment Shares.
<TABLE>
<CAPTION>
Minimum Capital
Investment
---------------
<S> <C>
Calendar 1997 $4,500,000
Calendar 1998 $5,400,000
Calendar 1999 $5,400,000
</TABLE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS AND
CYBERGATE
The Shareholders, severally with respect to their individual
representations and warranties, and CyberGate and the Shareholders, jointly and
severally with respect to CyberGate's representations and warranties, represent
and warrant to ACSI as follows:
2.1 Organization and Qualification.
(a) CyberGate is a corporation duly organized, validly existing and
in good standing under the laws of the State of Florida and has the corporate
power and authority to enter into this Agreement, to consummate the
transactions contemplated hereby, to own and lease the properties and other
assets it presently owns or leases and to carry on its business as presently
conducted.
4
<PAGE> 9
(b) The copy of the Articles of Incorporation, and all amendments
thereto, of CyberGate, as certified by the Secretary of State of the State of
Florida, and of the By-Laws, as amended to date, of CyberGate, as certified by
its Secretary, heretofore delivered to ACSI are true, complete and correct
copies of the Articles of Incorporation and By-Laws of CyberGate, as amended
and presently in effect. All minutes for proceedings of CyberGate's
shareholders and directors are contained in the minute books of CyberGate and
have been furnished to ACSI for examination. There are no matters, events,
actions or proceedings taken or omitted to be taken by the directors or
shareholders not included in the minute books, where taking or omission to take
such action would have a material, adverse effect on CyberGate, the rights of
CyberGate to enter into the transactions contemplated by this Agreement or the
realization by ACSI of the benefits to be received by it hereunder. No minutes
have been included in such minute books since such examination by ACSI which
have not heretofore been furnished to ACSI, and no corporate action has been
taken since such examination which would be required to be reflected in the
minute book.
(c) Except where such failure to be licensed or qualified would not
have a material adverse impact on CyberGate's business or assets, CyberGate is
duly licensed or qualified to do business as a foreign corporation, and is in
good standing, in every domestic and foreign jurisdiction in which CyberGate is
required to be so licensed or qualified.
2.2 Capitalization. The entire authorized capital stock of CyberGate and
the number of shares thereof which are issued and outstanding are as follows:
5
<PAGE> 10
<TABLE>
<CAPTION>
===============================================================================
NUMBER OF NUMBER ISSUED
AUTHORIZED SHARES CLASS AND OUTSTANDING
- -------------------------------------------------------------------------------
<S> <C> <C>
1,000 Common Stock, $0.01 par value 1,000
- -------------------------------------------------------------------------------
1,000 Cumulative Preferred Stock, 1,000
$1.00 par value
===============================================================================
</TABLE>
All of the issued and outstanding shares of CyberGate's capital stock are owned
of record and beneficially by the Shareholders in the respective amounts set
forth in Schedule 2.2 hereto. Except for the matters set forth on Schedule 2.2
hereto, each of which will be removed prior to the Closing, the CyberGate
Common Stock is subject to no restrictions on transferability other than
restrictions imposed by the Securities Act of 1933, as amended (the "1933
Act"), and applicable state securities laws. All of the outstanding shares of
capital stock of CyberGate are duly authorized and validly issued and
outstanding, fully paid and non-assessable, and were not issued in violation of
any preemptive rights. There are no shares of CyberGate capital stock reserved
for issuance. Except as set forth in Schedule 2.2 hereto, there are no
outstanding subscriptions, options, rights, warrants, convertible securities or
other agreements or commitments to issue, or contracts or any other agreements
obligating CyberGate to issue, any shares of its capital stock, or securities
convertible into such capital stock. Except for this Agreement and as set forth
on Schedule 2.2 hereto, neither of the Shareholders is a party to any contract
or agreement which would require either of them to transfer title to any of the
shares of CyberGate Common Stock currently owned by either of them. Except as
set forth on Schedule 2.2 hereto, there are no agreements or understandings
with respect to the voting, holding or selling of any shares of
6
<PAGE> 11
capital stock of CyberGate, or any contractual obligations of CyberGate with
respect to CyberGate's capital stock. No person has any right to require
CyberGate to register any of its securities under the 1933 Act.
2.3 Title to Shares. Except for the matters set forth on Schedule 2.3
hereto, each of which will be removed prior to the Closing, the Shareholders
own and have good and marketable title to the CyberGate Common Stock, free and
clear of any lien, pledge, claim, encumbrance, restriction or right of any
third party of any kind. Except for the matters set forth on Schedule 2.3
hereto, each of which will be removed prior to the Closing, the Shareholders
have complete and unrestricted authority to sell the Shares and there are no
trust agreements, shareholders' agreements, redemption agreements, buy-sell
agreements, restrictive stock transfer agreements, voting trusts, proxies or
similar agreements pertaining to the Shares which would preclude or require the
consent of any person other than the Shareholders to the sale of the Shares
contemplated by this Agreement or would give any person any right or interest
in the Shares after the consummation of the transactions contemplated herein.
At the Closing, the Shareholders will convey to ACSI good and marketable title
to the Shares, free and clear of any lien, pledge, claim, encumbrance,
restriction or right of any third party of any kind. Except as set forth in
Schedule 2.3 hereto, the Shares represent the only interest of the Shareholders
in CyberGate.
2.4 Authority. Each of the Shareholders and CyberGate has full power,
capacity and authority (corporate or otherwise) to execute and deliver this
Agreement and the other agreements contemplated hereby and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the other agreements
7
<PAGE> 12
contemplated hereby, and the consummation of the transactions contemplated
hereby and thereby, have been duly and validly authorized by each of the
Shareholders and CyberGate, and no other proceedings (corporate or otherwise)
on the part of any of the Shareholders or CyberGate are necessary to authorize
this Agreement or the other agreements contemplated hereby or to consummate the
transactions contemplated hereby and thereby. This Agreement and the other
agreements contemplated hereby have been duly and validly executed and
delivered by each of the Shareholders and CyberGate, and constitute the legal,
valid and binding agreements of the Shareholders and CyberGate.
2.5 Consents and Approvals. Except as disclosed on Schedule 2.5 hereto,
there is no authorization, consent, order or approval of, or notice to or
filing with, any individual or entity required to be obtained or given in order
for the Shareholders and CyberGate to consummate the transactions contemplated
hereby and fully perform their respective obligations hereunder, excluding,
however, any authorization, consent, order, approval, notice or filing which if
not obtained or given would not have a material adverse effect on the business
or assets of CyberGate and any authorization, consent, order, approval, notice
or filing which ACSI is required to obtain or give.
2.6 Absence of Conflicts. The execution, delivery and performance by the
Shareholders and CyberGate of this Agreement and the other agreements
contemplated hereby and the consummation by the Shareholders and CyberGate of
the transactions contemplated hereby and thereby will not, with or without the
giving of notice or lapse of time, or both, (i) violate any provision of law,
statute, rule or regulation to which the Shareholders, CyberGate or the
Subsidiaries (as hereinafter defined) are subject, (ii) violate
8
<PAGE> 13
any order, judgment or decree applicable to the Shareholders, CyberGate or the
Subsidiaries, (iii) conflict with or result in a breach or default, or result
in any event which would materially interfere with the Shareholders' or
CyberGate's ability to consummate the transactions contemplated hereby and
thereby, under any term or condition of the Articles of Incorporation or
By-Laws of CyberGate, or any bond, debenture, note, indenture, mortgage, deed
of trust, loan or credit agreement, contract, lease, judgment, decree, order,
award or any other material agreement or instrument to which any of the
Shareholders, CyberGate or the Subsidiaries is a party or by which any of them
or their assets is bound, or (iv) cause, or give any person grounds to cause,
the maturity of any debt, liability or obligation of CyberGate or the
Subsidiaries to be accelerated, or the amount thereof to be increased.
2.7 Subsidiaries; Acquisitions; Dispositions.
(a) CyberGate does not directly or indirectly control, and has never
owned or controlled, any corporation except as set forth on Schedule 2.7(a)
(collectively, the "Subsidiaries").
(b) Each of the Subsidiaries is duly organized, validly existing and
in good standing under the laws of their respective states of incorporation as
set forth on Schedule 2.7(b). The Subsidiaries have all necessary corporate
powers to own their properties and to operate their businesses as now owned and
operated. Complete copies of the Articles of Incorporation, By-laws, minutes
and stock transfer records of each such Subsidiary have been delivered to ACSI.
(c) The authorized capital stock of each of the Subsidiaries is
disclosed on Schedule 2.7(c). All shares of capital stock of each of the
Subsidiaries have been validly
9
<PAGE> 14
issued, fully paid, are nonassessable and were issued in compliance with
applicable federal and state securities laws, and, except as disclosed in
Schedule 2.7(c), are wholly-owned by CyberGate free and clear of any
pre-emptive rights, claims, security interests, encumbrances or restrictions of
any kind. There are no outstanding subscriptions, options, rights, warrants,
convertible securities or other agreements or commitments obligating any
Subsidiary to issue or to transfer from treasury any additional shares of
capital stock or any securities convertible into or which grant the holder the
right to acquire any capital stock of any Subsidiary.
(d) Schedule 2.7(d) lists the name of each business whose capital
stock or assets were acquired by CyberGate since its formation. CyberGate has
delivered to ACSI complete copies of all agreements which effect those
acquisitions or were executed in connection therewith.
(e) Schedule 2.7(e) lists each partnership, limited partnership,
limited liability company, joint venture or other business entity in which
CyberGate has an investment and describes the nature and extent of that
investment.
(f) Schedule 2.7(f) lists each Subsidiary, partnership, joint venture
or other business disposed of by CyberGate since its formation.
(g) Each of the Subsidiaries is duly licensed or qualified to do
business as a foreign corporation, and is in good standing, in every domestic
and foreign jurisdiction in which such Subsidiary is required to be so licensed
or qualified, except where the failure to be so licensed or qualified would not
have a material adverse effect on such Subsidiary, its business or assets.
10
<PAGE> 15
2.8 Financial Statements; Accounts Receivable; Liabilities. The
Shareholders have previously delivered to ACSI true and correct copies of the
audited consolidated balance sheets, including the accountants' reports thereon
and all notes thereto, of CyberGate as of December 31, 1995, and the related
audited consolidated statements of operations, including the accountants'
reports thereon and all notes thereto, of CyberGate for the year ended December
31, 1995, reported on and certified by Coopers & Lybrand L.L.P., as independent
accountants, and the unaudited consolidated balance sheet of CyberGate as of
September 30, 1996, and the related unaudited consolidated statements of
income, for the nine months ended September 30, 1996, which unaudited financial
statements are attached hereto as Schedule 2.8(a) (collectively, the "Financial
Statements"). Except as disclosed on Schedule 2.8(b) hereto, the Financial
Statements (i) have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis, are correct and complete
and are in accordance with the books and records of CyberGate, (ii) present
fairly the financial position and condition of CyberGate and the related
results of operations as at the dates and for the periods then ended (subject,
in the case of the unaudited statements, to customary year-end adjustments,
which adjustments shall not be material) and (iii) contain no material
misstatements or omissions which under generally accepted accounting principals
would be required to be disclosed for financial statement purposes.
Subject to applicable allowances for bad debts shown on CyberGate's
balance sheet at September 30, 1996 included in the Financial Statements, as
such allowances are adjusted from the date thereof in the ordinary course of
business, all accounts and notes receivable reflected on the balance sheet are,
and all accounts and notes receivable subsequently
11
<PAGE> 16
accruing to the Closing Date will be, (a) representative of a billed receivable
for goods or services actually supplied or provided to CyberGate's customers,
(b) subject to no known defenses, set-offs or counterclaims, and (c) except as
set forth on Schedule 2.8(c) hereto, current and collectible.
2.9 Absence of Undisclosed Liabilities. Except as and to the extent
accrued or reserved for in the Financial Statements or as disclosed in
Schedules 2.9 or 2.12 hereto, CyberGate does not have any liabilities or
obligations, whether accrued, absolute or contingent, determined or
undetermined, known or unknown or whether due or to become due (including,
without limitation, obligations as a guarantor), which are not reflected in the
Financial Statements other than those incurred in the ordinary course of
business consistent with past practice since September 30, 1996.
2.10 Absence of Certain Changes or Events. Except as set forth in Schedules
2.10 and 2.12, since September 30, 1996 there has not been (a) any material
damage, destruction or casualty loss to the assets of CyberGate (which, for
purposes of this Section 2.10 shall be deemed to include the Subsidiaries)
which has not been repaired, replaced or corrected (whether covered by
insurance or not); (b) any material adverse change in the business, assets,
properties, operations, prospects or financial condition of CyberGate, or any
fact or condition which could cause such a change; (c) any entry into any
transaction, commitment or agreement (including, without limitation, any
borrowing) material to CyberGate, or outside the ordinary course of business;
(d) any redemption, repurchase or other acquisition for value by CyberGate of
its capital stock or any declaration, setting aside or payment of any dividend
or other distribution in cash, stock or property with respect to CyberGate's
12
<PAGE> 17
capital stock; (e) any increase in the rate or terms of compensation payable or
to become payable by CyberGate to its directors, officers or employees, or any
increase in the rate or change in the terms of any employment agreement or
compensatory arrangement, or any bonus, pension, insurance or other employee
benefit plan, or any payment or benefit made to or for any such director,
officer or employee; (f) any sale, transfer or other disposition of any
material asset of CyberGate to any party, including the Shareholders, except
for payment of third-party obligations incurred in the ordinary course of
business in accordance with CyberGate's regular payment practices; (g) any
termination or waiver of any rights of material value to the business of
CyberGate; (h) any failure by CyberGate to pay its accounts payable or other
obligations in the ordinary course of business consistent with past practices;
(i) any capital expenditure for additions to property or equipment by CyberGate
in excess of $25,000; (j) any split, combination, exchange or reclassification
of shares of capital stock of CyberGate; (k) any issuance or any agreement
executed with respect to the future issuance of capital stock of CyberGate or
of securities convertible into or rights to acquire any such capital stock; (l)
any change in any method of accounting or accounting practice, principle or
procedure; (m) any action or inaction which might cause CyberGate to incur any
material tax liability not in the ordinary course of business; (n) any pledge
of any of the assets or properties of CyberGate or any action or inaction which
would subject any such asset or property to any lien, security interest,
mortgage, pledge, claim, charge or other encumbrance; (o) the incurrence of any
material liability or obligation by CyberGate, except for liabilities incurred
in the ordinary course of business consistent with past practices; (p) any
actual, or to the Shareholders' or CyberGate's knowledge threatened,
termination or
13
<PAGE> 18
cancellation of, or modification or change in, any business relationship with
any customer of CyberGate or other agreement or arrangement involving or
related to CyberGate where such event or events, taken together, would have a
material, adverse effect on the business or assets of CyberGate; (q) any
cancellation of a material debt due to or a claim of CyberGate, other than by
payment or other satisfaction; (r) any failure of CyberGate to perform, or any
default by CyberGate under, any agreement, obligation or covenant to which
CyberGate is or was bound where such event or events, taken together, would
have a material, adverse effect on the business or assets of CyberGate; or (s)
any agreement whether in writing or otherwise, to take any action described in
this Section 2.10.
2.11 Real and Personal Property; Inventories. Schedule 2.11(a) hereto
correctly identifies each lease or rental of real property currently held or
paid by CyberGate and the Subsidiaries. Schedule 2.11(b) hereto correctly
identifies each parcel of real property, and each interest (other than such
leases or rentals) in real property, currently used by CyberGate and the
Subsidiaries in the conduct of their operations. Except as disclosed in
Schedule 2.11(c), each of the properties listed in Schedule 2.11(b) is held
free and clear of any mortgage, pledge, lien or other encumbrance. Except as
set forth in Schedule 2.11(d) hereto, (a) any structures described in Schedules
2.11(a) and 2.11(b), and CyberGate's or the Subsidiaries' use thereof, conform
in all material respects with all applicable ordinances, requirements,
regulations, zoning laws and restrictive covenants, and do not encroach on
property of others, and are not encroached upon by structures of others; and
(b) no claims, charges or notice of violations have been filed, served, made,
or to the best of the Shareholders' or CyberGate's knowledge threatened, orally
or in writing, against or relating
14
<PAGE> 19
to any such property or any of the operations conducted at any such property
(currently or in the past) as a result of (i) any violation or alleged
violation of any applicable ordinances, requirements, regulations, zoning laws
or restrictive covenants, or (ii) as a result of any encroachment on the
property of others. Schedule 2.11(e) hereto describes all material tangible and
intangible personal property and assets currently held by CyberGate and the
Subsidiaries. CyberGate and the Subsidiaries have good and marketable title to,
and are in possession of or have control over, all such tangible and intangible
personal property, none of which is held under or subject to any mortgage,
pledge, lien, lease, encumbrance, conditional sales contract or other security
arrangement, except to the extent described in Schedules 2.11(f) and 2.12
hereto. The real property and tangible and intangible personal property listed
on Schedules 2.11(a), 2.11(b) and 2.11(e) are all of the assets necessary for
CyberGate and the Subsidiaries to conduct their businesses as currently
conducted and each such item of real and tangible personal property is in good
condition and/or working order, reasonable wear and tear excepted.
2.12 Intellectual Property. Except as set forth on Schedule 2.12 hereto,
CyberGate and the Subsidiaries own or have a license or otherwise have the
right to use, in all jurisdictions in which they carry on business, all patents
(including all applications, renewals, reissues, extensions, divisions,
continuations and extensions thereof), trademarks (including both registered
and unregistered trademarks and applications therefor), service marks, trade
names, copyrights (including all registrations, renewals, modifications and
extensions thereof), know-how and trade secrets (including inventions,
computerized data and information, computer codes and programs, other software,
business records, files and data,
15
<PAGE> 20
discoveries, formulae, production outlines, product designs, technical
information, processes and techniques, testing and quality control processes
and techniques, drawings, designs and customer lists), used in the conduct of
their businesses as currently conducted (collectively, the "Intellectual
Property") without violating or conflicting with the rights of others in any
material manner. Schedule 2.12 hereto lists all patents, all registered and
material unregistered trademarks, service marks and trade names and all
registered copyrights, and all applications for any of the foregoing, that are
owned by CyberGate or any of the Subsidiaries. Except as set forth on Schedule
2.12 hereto, none of the Intellectual Property is subject to any encumbrance.
Except as disclosed on Schedule 2.12 hereto, neither CyberGate nor any of the
Subsidiaries are obligated to pay any material amount, whether as a royalty,
license fee or other payment, to any person in order to use any of the
Intellectual Property. Except as set forth on Schedule 2.12 hereto, there has
not been any material infringement or alleged infringement by CyberGate or any
of the Subsidiaries of the Intellectual Property rights of any person or any
infringement by any person of any of the Intellectual Property rights of
CyberGate or any of the Subsidiaries. Schedule 2.12 correctly states the
current status of CyberGate's pending applications before the United States
Patent and Trademark Office with respect to the names "CyberGate," "ValueWeb,"
"NetHelper" and "TargetNet."
2.13 Insurance. CyberGate keeps its businesses, operations and properties
and those of the Subsidiaries insured against loss or damage, with responsible
insurers, pursuant to the policies listed in Schedule 2.13. Schedule 2.13 is a
descriptive list of all insurance policies held by CyberGate concerning its
business, operations and properties and those of
16
<PAGE> 21
the Subsidiaries. These policies are in the respective amounts set forth in
Schedule 2.13. Except as disclosed on Schedule 2.13, all insurance policies of
CyberGate and the Subsidiaries provide claims made coverage. True, complete and
correct copies of each insurance policy listed on Schedule 2.13 have been
previously provided to ACSI. Each of the insurance policies referred to in
Schedule 2.13 is in full force and effect and the premiums with respect thereto
are fully paid through the dates indicated thereon. No insurer has denied
coverage or reserved rights for any claim made by CyberGate or any of the
Subsidiaries or any other individual or entity under any insurance policies
applicable to CyberGate or any of the Subsidiaries.
2.14 Contracts and Commitments.
2.14.1 Schedule 2.14.1 hereto lists each contract, commitment or
agreement, whether oral or written, which can or may provide for the payment by
or to CyberGate or any of the Subsidiaries of an amount in excess of $25,000
per annum, as well as any contract, commitment or agreement entered into by
CyberGate outside the ordinary course of business (collectively, the
"Contracts"). True and correct copies of all written contracts, and written
descriptions of all oral contracts, listed on the Schedules hereto have been
delivered to ACSI. All such Contracts are valid and binding obligations of
CyberGate or the Subsidiaries, enforceable in accordance with their respective
terms to the extent permitted by applicable law, and are in full force and
effect; and CyberGate and the Subsidiaries are in compliance therewith. None of
the Contracts relating to payments to CyberGate or the Subsidiaries for the
provision of services to its customers fail to provide to CyberGate or the
Subsidiaries consideration constituting a profit upon commercially
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reasonable terms and conditions, and none have, or may have, to the
Shareholders' and CyberGate's knowledge, a material adverse effect on
CyberGate's assets, properties, businesses, financial condition or prospects.
No allegation or notice of default has been received by CyberGate, any of the
Subsidiaries or any of the Shareholders with respect to the Contracts, and to
the Shareholders' and CyberGate's knowledge, no other party to any of the
Contracts is in default or breach thereof in any material respect.
2.14.2 Neither CyberGate nor any of the Subsidiaries has given any
power of attorney (whether revocable or irrevocable) to any individual or
entity.
2.14.3 Neither CyberGate nor the Subsidiaries is in default and
there is no basis for any valid claim of default, in any respect under any of
the Contracts.
2.14.4 Schedule 2.14.4 hereto sets forth a list of all current
warranties with respect to any products or services currently sold,
distributed, offered, or licensed by CyberGate and the Subsidiaries. Except as
set forth in Schedule 2.14.4, and other than those which are or may be provided
by applicable law, there are no express or implied warranties outstanding with
respect to any products or services created, sold, distributed, offered or
licensed by CyberGate and the Subsidiaries.
2.15 Litigation and Administrative Proceedings. Except as set
forth in Schedule 2.15 hereto and except for governmental or regulatory
proceedings generally applicable to those in the same business as CyberGate,
there is no claim, action, suit, proceeding or investigation in any court or
before any governmental or regulatory authority pending or, to the best of the
Shareholders' and CyberGate's knowledge, threatened against or affecting
CyberGate or any of the Subsidiaries or any of their respective assets or
properties or which
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seeks to enjoin or obtain damages in respect of the transactions contemplated
hereby. There is no basis, or reason to know of any basis, for any such claim,
action, suit, proceeding or investigation. No claim, action, suit, proceeding
or investigation set forth in Schedule 2.15 could, if adversely decided, have a
material adverse effect on the business, properties, condition (financial or
otherwise) or prospects of CyberGate and the Subsidiaries.
2.16 Tax Matters.
2.16.1 All Returns Filed. Except as set forth in
Schedule 2.16.1, all federal, state, local and foreign income, franchise,
sales, use, excise, real and personal property, employment (including FICA and
other payroll) and other tax returns, reports and declarations of every kind
and nature (collectively, "Returns") required to be filed by or on behalf of
CyberGate and the Subsidiaries on or before the Closing Date have been or will
be filed and such Returns are not materially inaccurate and disclose all taxes
(and other charges) expected to be due for the periods covered thereby. No
extension of time in which to file any such Returns is currently in effect and
there are no outstanding agreements or waivers extending the statutory period
of limitation applicable to any such Returns.
2.16.2 All Taxes Paid. Except as on Schedule 2.16.2, all
taxes (and other charges) shown on such Returns or otherwise required to be
paid, and any deficiency assessments, penalties, interest and other charges
with respect thereto, have been paid or reserved or accrued for in the
Financial Statements, and there is otherwise no current liability for any
unpaid taxes (or other charges) due which has not been paid or reserved or
accrued for in connection with such Returns or otherwise. There are no tax
liens (other than for
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taxes not yet due) on any of the assets or properties of CyberGate and, no
basis exists for the imposition of any such liens.
2.16.3 Examinations, Etc. Except as disclosed on
Schedule 2.16.3 hereto, none of the Returns of CyberGate for tax years that
remain open under any applicable statute of limitations have been examined by
the IRS or other pertinent tax authorities and no deficiencies have been
asserted or assessments made as a result of any such examinations (including
all penalties and interest). No issues have been raised by (or are currently
pending before) the IRS or any other taxing authority in connection with any of
the Returns which could reasonably be expected to have a material adverse
effect on the financial condition of CyberGate and the Subsidiaries, taken as a
whole, if decided adversely to CyberGate, nor are there any such issues which
have not been so raised but, if so raised by the IRS or any other taxing
authority in connection with any of the Returns could, in the aggregate,
reasonably be expected to have a material adverse effect on the financial
condition of CyberGate other than those disclosed on Schedule 2.16.3 hereto.
2.16.4 Section 341(f). CyberGate has not filed a consent
to the application of Section 341(f) of the Internal Revenue Code of 1986, as
amended (the "Code").
2.16.5 Withholding. Except as disclosed on Schedule
2.16.5 hereto, CyberGate has withheld from its employees and others (and timely
remitted to the appropriate taxing authorities) proper and accurate amounts for
all periods in compliance with all tax withholding provisions of applicable
federal, state, foreign, local and other laws
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(including, without limitation, income, withholding, social security,
employment and other payroll taxes).
2.16.6 Foreign Person, Etc. No Shareholder is a
"foreign person" as defined in Section 1445(f)(3) of the Code. Neither CyberGate
nor any of the Subsidiaries has a permanent establishment in any foreign
country, as defined in the applicable tax treaty, if any, between the United
States and such foreign country. Neither CyberGate nor any of the Subsidiaries
is, and never has been, a United States real property holding corporation within
the meaning Section 897(c)(1)(A)(ii) of the Code and ACSI is not required to
withhold tax on the purchase of the Shares by reason of Section 1445 of the
Code. Neither CyberGate nor any of the Subsidiaries has participated in an
international boycott within the meaning of Section 999 of the Code. Neither
CyberGate nor any of the Subsidiaries has any foreign assets.
2.16.7 Parachute Payments. CyberGate has not made, has
not become obligated to make nor will, as a result of any event connected with
the acquisition of the Shares by ACSI or any other transaction contemplated
herein, make or become obligated to make any "excess parachute payment" as
defined in Section 280G of the Code.
2.16.8 Accounting; Tax Attributes. None of the assets or
properties of CyberGate (a) is tax-exempt use property within the meaning of
Section 168(h) of the Code, (b) directly or indirectly secures any debt, the
interest on which is tax-exempt under Section 103(a) of the Code, or (c) is
required to be treated as property owned by another under Section 168(f) of the
Code. Except as disclosed on Schedule 2.16.8 hereto, CyberGate has not agreed
to make, nor is it required to make, any adjustment under Section 481(a) of the
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Code. The basis of CyberGate in its assets is as set forth in its financial
and tax records. Except as set forth on Schedule 2.16.8 hereto, CyberGate is
not a party to or bound by any tax indemnity, tax sharing or tax allocation
agreement.
2.16.9 Prior Consolidated Groups. Except as disclosed on
Schedule 2.16.9 hereto, CyberGate is not, and has never been, an includible
corporation in an affiliated group of corporations within the meaning of
Section 1504 of the Code.
2.17 Compliance with Laws. Except for such violations as would not
individually or in the aggregate have a material, adverse effect on the
business or assets of CyberGate, neither CyberGate nor any of the Subsidiaries
has in the past been, nor is presently, in violation of, in respect of its
operations, real property, machinery, equipment, all other property,
practices and all other aspects of its businesses, any applicable law (whether
statutory or otherwise), rule, regulation, order, ordinance, judgment or decree
of any governmental authority (federal, state, local or otherwise)
(collectively, "Laws"). Except as disclosed in Schedule 2.17 hereto, CyberGate
has not received any notification of any asserted present or past failure of
CyberGate to comply with any of such Laws.
2.18 Environmental Compliance. Except as set forth on Schedule 2.18
hereto, no pollutants or other toxic, infectious or hazardous substances,
material or wastes (collectively, the "Substances"), including any solid,
liquid, gaseous or thermal irritant or contaminant, such as smoke, vapor, soot,
fumes, acids, alkalis, chemicals or wastes (including material to be recycled,
reconditioned or reclaimed), petroleum, petroleum derivatives and petroleum
products, asbestos and asbestos-containing material, radon gas, methane gas,
polychlorinated biphenyls ("PCBs") (including PCBs in the form of electrical
transformers, fluorescent light
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fixtures with ballasts, cooling oils or any other device or form) and any other
substance, material or waste, which Substances may be regulated or prohibited
by, or may support a cause of action, claim or proceeding under, any federal,
state or local environmental statute or ordinance or regulations promulgated
thereunder (including the Comprehensive Environmental Response, Compensation
and Liability Act, the Superfund Amendments and Reauthorization Act, the
Resource Conservation and Recovery Act, the Toxic Substances Control Act, the
Hazardous Material Transportation Act, the Clean Air Act, the Federal Water
Pollution Control Act, the Safe Drinking Water Act, the Occupational Safety and
Health Act, the Emergency Planning and Community Right-to-Know Act, and the
Federal Insecticide, Fungicide and Rodenticide Act), law, ordinance,
regulation, rule, requirement, published policy, or right or remedy existing
under common law or in equity (collectively, "Environmental Laws") have been,
or, prior to the Closing, shall have been, used, installed, located, spilled,
discharged, dispersed, released, stored, treated, generated, transported to or
from, disposed of or allowed to escape on any real property in which CyberGate
or the Subsidiaries has or has had an interest, including the soil and the
surface and subsurface waters of such locations in such a manner so as to
violate any of the Environmental Laws, or to give rise to liability or
potential liability under the Environmental Laws or to create a cause of action
under the Environmental Laws. No investigation, administrative order,
governmental notice of noncompliance or violation, remediation action, plan,
consent, order or agreement, civil or criminal litigation or settlement with
respect to Substances or underground storage tanks is or at the Closing Date
shall be proposed, threatened or in existence with respect to any real property
in which CyberGate or the Subsidiaries has or has
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had an interest. There are not currently and there have never been any above-
ground storage tanks or underground storage tanks located on any real property
in which CyberGate or the Subsidiaries has or has had an interest.
All real property in which CyberGate or the Subsidiaries has or has
had an interest, the operations of CyberGate and the Subsidiaries and, to
CyberGate's and the Shareholders' knowledge, all past operations on all such
real property have at all times been, and at the Closing Date shall be, in
compliance with all applicable Environmental Laws in all material respects. No
notice shall have been served on or delivered to CyberGate or the Subsidiaries
or shall exist with respect to any real property in which CyberGate or the
Subsidiaries has or has had an interest from any entity, governmental or
regulatory authority or individual claiming any violation of the Environmental
Laws, demanding payment or contribution for environmental damage or injury to
natural resources or requiring any environmental cleanup or assessment
activities, nor is such notice threatened.
2.19 Employee Benefits. Attached hereto as Schedule 2.19 is a written list
of all employee benefit plans relating to employee benefits with respect to
which CyberGate or the Subsidiaries has incurred or may incur any future or
contingent obligations, including without limitation all plans, agreements or
arrangements relating to stock purchase, stock ownership, stock options, stock
appreciation rights, bonuses, severance arrangements, health and welfare
benefits, vacation, sick leave, disability, insurance benefits and all other
employee benefits or fringe benefits, whether or not such plans constitute
"employee benefit plans" within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") (collectively
referred to as the "Plans"). Neither CyberGate nor any of
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the Subsidiaries has ever sponsored or contributed to, nor do any of them now
sponsor or contribute to, (a) any plans, agreements or arrangements relating to
deferred compensation, pensions, profit sharing, retirement income or other
similar benefits, including without limitation any "employee pension benefit
plans" within the meaning of Section 3(1) of ERISA, or (b) any "multiemployer
plans" within the meaning of Sections 3(37) or 4001(a)(3) of ERISA. Neither
CyberGate nor any of the Subsidiaries or Shareholders is now affiliated with,
nor has any of them ever been affiliated with, any entity such that CyberGate
or any of the Subsidiaries now has, or might have in the future, any
multiemployer plan withdrawal liability under Subtitle E of Part IV of ERISA.
CyberGate has made available to ACSI true and correct copies of each Plan,
along with any related amendments, trust agreements and summary plan
descriptions and the most recently dated Form 5500 annual reports and financial
statements, if any.
Each Plan is in full force and effect and has been administered and
operated in all respects in accordance with its terms and applicable law.
Neither CyberGate nor any of the Subsidiaries has engaged in, or assumed
any liability or responsibility for, any transaction in connection with which
any of them, directly or indirectly, would be subject to either a civil penalty
assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975
of the Code.
Full payment has been made of all amounts which CyberGate or the
Subsidiaries were required under the terms of any of the Plans to have paid as
contributions to such Plans on or prior to the Closing Date.
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Other than for claims in the ordinary course of business for benefits
under the Plans, there are no actions, suits, claims or proceedings, pending or
threatened, nor does there exist any basis therefor, which may result in any
liability on the part of CyberGate or any Subsidiary with respect to any Plan
or related trust.
Except for continuation coverage under Sections 601 et seq. of ERISA, no
former employee of CyberGate or the Subsidiaries, or any affiliate thereof, nor
any dependent of any such former employee, is entitled to any medical or dental
benefits under any Plan.
CyberGate and the Subsidiaries have no remaining liability under any
terminated employee benefit plan previously sponsored by any of them, and the
termination of any and all such plans has been effected in compliance with the
requirements of the Code and ERISA.
2.20 Licenses and Permits. CyberGate and the Subsidiaries have all
governmental licenses and permits and other governmental authorizations and
approvals currently required for the conduct of their businesses as presently
conducted ("Permits"). Schedule 2.20 hereto includes a list of all Permits.
2.21 Relations with Suppliers and Customers. Neither CyberGate nor the
Subsidiaries are required to provide any bonding or other financial security
arrangements in connection with any transaction with any customer or supplier.
To the best knowledge of CyberGate and the Shareholders, no supplier of
CyberGate or the Subsidiaries will cease to do business with CyberGate or the
Subsidiaries after the consummation of the transactions contemplated hereby,
and no customer has notified CyberGate or the Subsidiaries that it will cease
to do business with CyberGate or the Subsidiaries after the consummation of the
transactions contemplated hereby, to the extent that the failure to continue
such business
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would have a material, adverse effect on CyberGate's or the Subsidiaries'
business or assets when taken as a whole.
2.22 Interest in Competitors, Suppliers, Customers, Etc. Except as
disclosed in Schedule 2.22 hereto, neither of the Shareholders nor any officer
or director of CyberGate nor any affiliate of any such Shareholder, officer or
director has any ownership interest (other than the ownership, as a passive
investment, of less than 2% of the equity securities or other ownership
interests of any entity) in any competitor, supplier or customer of CyberGate
or any individual piece of property with a value of at least $7,500 used in the
operation of the business of CyberGate.
2.23 Employment Matters. Schedule 2.23 hereto is a list of all written
employment contracts and all written pension, bonus, profit sharing, stock
option, life, health, retirement, welfare, or other agreements or arrangements
providing for employee remuneration or benefits to which CyberGate or the
Subsidiaries are a party or by which they are bound, and all these contracts
and arrangements are in full force and effect. There have been no claims of
defaults and there are no facts or conditions which if continued, or with the
giving of notice, will result in a default under these contracts or
arrangements.
2.24 Discrimination; Occupational Safety; Labor. No person or party
(including, but not limited to, governmental or regulatory authorities of any
kind) has any claim presently pending, or, to the best knowledge of CyberGate
and the Shareholders, a reasonable basis for any action or proceeding, against
CyberGate or the Subsidiaries arising out of any statute, ordinance or
regulation relating to discrimination in employment or employment practices or
occupational safety and health standards (including, but without
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limiting the foregoing, The Fair Labor Standards Act, as amended; Title VII of
the Civil Rights Act of 1964, as amended; 42 U.S.C. 1981 or the Age
Discrimination in Employment Act of 1967, as amended), which, if upheld, would
have an adverse effect on the assets, properties, business or condition,
financial or otherwise, of CyberGate and the Subsidiaries. There is no pending,
or to the best knowledge of the Shareholders and CyberGate threatened, federal
or state equal employment opportunity enforcement action or similar proceeding
or labor dispute, strike, or work stoppage affecting CyberGate's or the
Subsidiaries' businesses. Neither CyberGate nor the Subsidiaries have any
collective bargaining or similar agreements, nor do they have any obligation to
bargain with any labor organization as the representative of CyberGate's or the
Subsidiaries' employees, and there is neither pending, nor to the best
knowledge of the Shareholders and CyberGate, threatened, any labor dispute,
strike or work stoppage which affects or which may affect the business of
CyberGate or the Subsidiaries or which may interfere with the continued
operation of CyberGate or the Subsidiaries. No present or former employee of
CyberGate or the Subsidiaries has any claim against CyberGate for (a) overtime
pay, other than overtime pay for the current payroll period, (b) wages or
salary (excluding bonuses and amounts accruing under pension and profit sharing
plans) for any period other than the current payroll period, (c) vacation, time
off or pay in lieu of vacation or time off, other than that earned in respect
of the current fiscal year or carried over from prior years, or (d) any
violation of any statute, ordinance or regulation relating to minimum wages or
maximum hours of work.
2.25 Related Transactions. Except as set forth on Schedule 2.25, neither
CyberGate nor any of the Subsidiaries has made or entered into any loan,
contract, lease or
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commitment, whether oral or written, with any of the Shareholders or any
officer, director, employee, shareholder or partner of any of CyberGate, the
Subsidiaries or the Shareholders or with any affiliate or associate of any of
the foregoing, under which CyberGate or the Subsidiaries have continuing
obligations and except for normal compensation arrangements with CyberGate's
officers and employees, all of which are reasonable in amount and terminable by
CyberGate on 30 days' notice.
2.26 Brokers and Finders. Neither the Shareholders nor CyberGate (nor any
of their respective officers, directors, employees, affiliates, associates, or
family members) has employed any broker, finder or investment banker, or
incurred any liability for any brokerage fees, commissions or finders' fees in
connection with this Agreement or the transactions contemplated hereby.
2.27 Questionable Payments. None of CyberGate, the Subsidiaries or the
Shareholders, or any director, officer, agent, employee or other person
associated with or acting on behalf of CyberGate or the Subsidiaries has
directly or indirectly: (a) used any corporate funds for unlawful
contributions, gifts, entertainment or other unlawful expenses relating to
political activity; (b) made any unlawful payment to government officials or
employees or to political parties or campaigns from corporate funds; (c)
violated any provision of the Foreign Corrupt Practices Act of 1977, as
amended; (d) established or maintained any unlawful or unrecorded fund of
corporate monies or other assets; (e) made any false or fictitious entry on the
books or records of CyberGate or the Subsidiaries; (f) made any unlawful bribe,
rebate, payoff, influence payment, kickback or other unlawful payment; or (g)
made any unlawful bribe or other unlawful payment of a similar or
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comparable nature to any person or entity, private or public, regardless of
form, to obtain favorable treatment in securing business or to obtain special
concessions or treatment. Neither CyberGate nor the Subsidiaries has any
foreign assets or foreign operations.
2.28 Books and Records. The books and records of CyberGate have been
maintained in accordance with generally accepted accounting principles, and
accurately reflect in all material respects the business, assets, properties,
rights, obligations, liabilities and operations of CyberGate and the
Subsidiaries.
2.29 Bank Accounts; Safe Deposit Boxes. Schedule 2.29 hereto sets forth
the names and locations of all banks in which CyberGate or the Subsidiaries has
an account or safe deposit box and the names of all persons authorized to draw
thereon or to have access thereto.
2.30 Full Disclosure. The Shareholders and CyberGate have disclosed in
writing in, or pursuant to, this Agreement all material facts relating to the
business, operations, assets or condition (financial or otherwise) of CyberGate
and the Subsidiaries. No representation or warranty to ACSI contained in this
Agreement, and no statement contained in the disclosure, the Schedules to this
Agreement, any certificate, list or other writing furnished to ACSI pursuant to
the provisions hereof, contains any untrue statement of a material fact or
omits to state a material fact necessary in order to make the statements herein
or therein not misleading.
2.31 Effect of Certificates. All certificates of the Shareholders and/ or
CyberGate or CyberGate's officers delivered hereunder shall be deemed to be
additional representations and warranties of the Shareholders and CyberGate,
respectively.
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2.32 Acquisition for Investment. The Shareholders represent and warrant
that they have received and carefully reviewed ACSI's Form 10-KSB, as amended,
for the fiscal year ended June 30, 1996 (the "Annual Report"), ACSI's Proxy
Statement prepared for its annual meeting on November 15, 1996 (the "Proxy
Statement"), ACSI's quarterly report on Form 10-QSB for the quarter ended
September 30, 1996 (the "Quarterly Report"), and ACSI's Form 8-K dated December
10, 1996 (the "Form 8-K"; the Quarterly Report, the Annual Report, the Proxy
Statement, the Quarterly Report and the Form 8-K being hereinafter collectively
referred to as the "Reports"). The Shareholders further represent and warrant
that they have been advised that the ACSI Common Stock has not been registered
under the 1933 Act or applicable state securities laws and that such securities
are being offered and sold pursuant to exemptions from such laws and that
ACSI's reliance upon such exemptions is predicated in part on the Shareholders'
representations as contained herein. The Shareholders represent that they
understand that the shares of ACSI Common Stock to be received by them
hereunder will be "Restricted Securities" within the meaning of Rule 144
promulgated pursuant to the 1933 Act and that the certificates representing
such shares of ACSI Common Stock will bear restrictive legends to that effect.
The Shareholders represent and warrant that they are acquiring the ACSI Common
Stock for their own accounts and for investment and without the present
intention of reselling or redistributing the same (except in accordance with
clauses (A) or (B) below and Section 4.6 hereof). The Shareholders further
represent and agree that if, contrary to the foregoing intentions, either of
them should later desire to dispose of or transfer any of the ACSI Common Stock
in any manner, they shall not do so without first obtaining (A), at the request
of ACSI, an opinion of counsel
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satisfactory to ACSI that such proposed disposition or transfer lawfully may be
made without the registration of such ACSI Common Stock pursuant to the 1933
Act and applicable state securities laws, or (B) such registration. The
Shareholders represent and warrant that they are accredited investors within
the meaning of Rule 501 under the 1933 Act and that they can bear the economic
risk of a complete loss of their investment in ACSI Common Stock.
2.33 Export Law Compliance. Except as described in Schedule 2.33 hereto,
neither CyberGate nor any predecessor, division or Subsidiary currently
exports, or has in the past exported, any products or provided any services,
directly or indirectly to any foreign individual or entity.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ACSI
As of the Closing Date, ACSI represents and warrants to the Shareholders as
follows:
3.1 Organization and Qualification. ACSI is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has the corporate power and authority to enter into this Agreement and to
consummate the transactions contemplated hereby.
3.2 Authority. ACSI has full power, capacity and authority (corporate or
otherwise) to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly authorized by ACSI, and no other corporate proceedings on the part of
ACSI are necessary to authorize this Agreement or to consummate the
transactions contemplated hereby. This Agreement has
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been duly and validly executed and delivered by ACSI, and constitutes a legal,
valid and binding agreement of ACSI.
3.3 Consents and Approvals. There is no authorization, consent, order or
approval of, or notice to or filing with, any individual or entity required to
be obtained or given in order for ACSI to consummate the transactions
contemplated hereby and fully perform its obligations hereunder, excluding,
however, any authorization, consent, order, approval or filing which shall have
been obtained or made by ACSI prior to the Closing or which the Shareholders
and/or CyberGate are required to obtain or give.
3.4 Absence of Conflicts. The execution, delivery and performance by ACSI
of this Agreement and the consummation by ACSI of the transactions contemplated
hereby will not, with or without the giving of notice or the lapse of time, or
both, (i) violate any provision of law, statute, rule or regulation to which
ACSI is subject, (ii) violate any order, judgment or decree applicable to ACSI
or (iii) conflict with, or result in a material breach or default under, any
term or condition of the Amended and Restated Certificate of Incorporation or
By-Laws of ACSI or any material agreement or other material instrument to which
ACSI is a party or by which ACSI is bound.
3.5 Litigation and Administrative Proceedings. There is no claim, action,
suit, proceeding or investigation in any court or before any governmental or
regulatory authority pending or, to the best knowledge of ACSI, threatened
against or affecting ACSI which seeks to enjoin or obtain damages in respect of
the transactions contemplated hereby. To the best knowledge of ACSI, there is
no basis for any such claim, action, suit, proceeding or investigation.
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3.6 No Material Misstatements. ACSI has previously delivered the Reports
to the Shareholders. The Reports do not contain an untrue statement of a
material fact and do not omit to state any fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not materially misleading. Since the
respective dates of the Reports, there have been no changes, except as
contemplated therein, which would render the statements therein materially
untrue or cause the statements therein, in light of the circumstances under
which they were made, to be materially misleading.
3.7 Brokers and Finders. Except as declared in Schedule 3.7 hereto,
neither ACSI nor its officers, directors, employees, affiliates or associates
has employed any broker, finder or investment banker, or incurred any liability
for any brokerage fees, commissions or finders' fees in connection with this
Agreement or the transactions contemplated by this Agreement.
ARTICLE IV
COVENANTS OF SHAREHOLDERS AND CYBERGATE
The Shareholders and CyberGate covenant to ACSI, jointly and severally, as
follows:
4.1 Conduct of Business. Subsequent to the date hereof and prior to the
Closing Date, CyberGate and the Subsidiaries shall conduct their respective
businesses only in the ordinary course of business, except as otherwise
permitted by this Agreement or consented to by ACSI in writing. Without
limiting the generality of the foregoing covenant, each of CyberGate and the
Subsidiaries shall (a) maintain its Articles of Incorporation and By-laws in
their respective forms as they exist on the date of this Agreement, (b) at all
times keep full
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and complete books and records both consistently and in accordance with GAAP;
(c) maintain in full force and effect the insurance policies heretofore
maintained by CyberGate or the Subsidiaries (or policies providing
substantially the same coverage); (d) preserve its property in good condition;
(e) preserve its business organization intact and preserve for ACSI the
goodwill of customers, suppliers and others having business relationships with
CyberGate or the Subsidiaries; (f) conduct its business in substantial
compliance with all laws, regulations and ordinances applicable to its
business; (g) promptly advise ACSI in writing of any material adverse change in
its business or assets; and (h) furnish ACSI all interim financial statements
of CyberGate or the Subsidiaries as soon as they become available.
4.2 Negative Covenants. Subsequent to the date hereof and prior to the
Closing Date, none of CyberGate or any of the Subsidiaries will, except as
otherwise permitted by this Agreement or consented to by ACSI in writing, (a)
incur any trade accounts payable except in the ordinary course of business or
make any commitment to purchase quantities of any item in excess of quantities
normally purchased in the ordinary course of business; (b) increase its
indebtedness for borrowed money by more than $25,000 in the aggregate; (c)
except for encumbrances disclosed on Schedules 2.11(c) and 2.11(f), subject any
of its assets to encumbrances; (d) guarantee the obligations of any other
person; (e) merge or consolidate with, purchase substantially all of the assets
of, or otherwise acquire, any business or any proprietorship, firm,
association, corporation or other business organization or corporation; (f)
increase or decrease the rate of compensation of or pay any unusual
compensation to any officer or employee, or enter into any agreement to
increase or decrease the rate of
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compensation of or to pay any unusual compensation to any officer or employee;
(g) enter into any collective bargaining agreement, or create or modify any
pension or profit sharing plan, bonus, deferred compensation, death benefit, or
retirement plan, or any other employee benefit plan, or increase the level of
benefits under any such plan, or increase or decrease any severance or
termination pay benefit or any other fringe benefit; (h) make any
representation to anyone indicating any intention of ACSI to retain, institute,
or provide any employee benefit plans, or represent in any manner that any
officer or employee of CyberGate or any Subsidiaries will be employed by ACSI
after the Closing, provided, however, that CyberGate and ACSI shall jointly
meet with the employees of CyberGate and the Subsidiaries as soon as
practicable following execution of this Agreement to explain employment and
benefits to be offered by ACSI upon Closing; (i) issue any shares of its
capital stock, any security convertible into or exchangeable for such stock, or
any warrant, option or other right to purchase or acquire such security; (j)
declare or pay any dividend or make any distribution with respect to, or
purchase or redeem, shares of its capital stock; (k) sell or dispose of any of
its material assets other than in the ordinary course of business consistent
with past practices; (l) make any capital expenditures in excess of an
aggregate of $25,000.00 in the aggregate; (m) enter into any contract or
commitment of a type required to be disclosed on any Schedule to this
Agreement, other than contracts entered into in the ordinary course of business
consistent with past practices; or (n) enter into any contract or agreement,
oral or written, to do any of the foregoing.
4.3 Access. Between the date hereof and the Closing Date, each of
CyberGate and the Subsidiaries shall give to ACSI and its designees full
access, during normal business
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hours and upon reasonable notice, in such a manner as not to disrupt normal
business activities, to their respective premises, properties, material
contracts and books of accounts and records reasonably relevant to an
evaluation of their respective assets, liabilities and businesses. CyberGate
and the Subsidiaries will also cause their respective officers to furnish any
and all material financial, technical and operating data and other material
information pertaining to CyberGate's and the Subsidiaries' respective assets,
liabilities and businesses as is reasonably available and as ACSI shall from
time to time reasonably request for such purpose. ACSI will hold, and will
cause all of its directors, officers, employees and representatives to hold, in
complete confidence, all information so obtained and will use such information
only for the purpose of (a) evaluating the accuracy of the representations made
by CyberGate and the Shareholders herein, (b) determining whether the
conditions to Closing set forth in Article VIII have been satisfied, (c)
obtaining any approval or consent necessary for ACSI to consummate the
transactions contemplated hereby and (d) making any public or other
announcement which ACSI deems necessary or appropriate pursuant to the
provisions of the 1933 Act, the Securities Exchange Act of 1934, as amended
(the "1934 Act"), and the rules and regulations promulgated thereunder. If the
transactions contemplated herein are not consummated as contemplated herein,
ACSI will return all information and data to CyberGate and will not disclose
any such data or information to any other person, except as otherwise required
by law, including, but not limited to, the 1933 Act, the 1934 Act, and the
rules and regulations promulgated thereunder, or judicial or administrative
proceedings. Such obligation of confidentiality shall not extend to any
information which is shown to have been previously known to ACSI by any means
other than disclosure pursuant hereto, or
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generally known to others engaged in the same trade or business as ACSI, or
that is part of public knowledge, and shall not extend beyond the Closing Date.
4.4 Reasonable Efforts. Subject to the terms and conditions of this
Agreement, the Shareholders and CyberGate will use all reasonable efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, all
things, including, but not limited to, the matters set forth in Article VIII
hereof, necessary to consummate and make effective the transactions
contemplated by this Agreement consistent with the terms of this Agreement,
insofar as such matters are within the control of any of them.
4.5 Consents and Approvals. The Shareholders and CyberGate agree to use
all reasonable efforts to make all registrations, filings and applications, and
give all notices and obtain all governmental and other consents, approvals,
orders, qualifications and waivers necessary for the consummation of the
transactions contemplated by, or the performance by the Shareholders and
CyberGate of their obligations under, this Agreement, or which may become
reasonably necessary or desirable in connection with any of the foregoing, in
each case upon terms and conditions reasonably satisfactory to ACSI and its
counsel.
4.6 Disposition of ACSI Common Stock. Notwithstanding anything in this
Agreement, or in any other agreement delivered pursuant hereto, including, but
not limited to, the Registration Rights Agreement (as hereinafter defined), the
Shareholders agree that with the exception of (i) gratuitous transfers of
shares of ACSI Common Stock to an entity of which a Shareholder controls a
majority of the voting or other decision-making power thereof or the ability to
control the disposition of the assets held thereunder, (ii) the transfer of up
to 18,000 shares of ACSI Common Stock to Thomas R. Benham, Jr., and (iii) the
transfer of
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up to 15,000 shares of ACSI Common Stock to individuals who are currently
employees of CyberGate or the Subsidiaries and up to 10,000 shares to employees
of entities controlled by Van Arnem (with such transfer in each case being
conditioned upon the transferee of such shares agreeing to be bound by the
provisions of this Section 4.6); they shall not make any sale or other transfer
of shares of ACSI Common Stock prior to the later of (a) 210 days from the
effective date of a registration statement relating to ACSI's next underwritten
public equity offering (the "Lock-up Date"), or (b) the effective date of a
registration statement filed for their benefit pursuant to the terms of the
Registration Rights Agreement (the "Effective Date") and that from the later of
the Lock-up Date and the Effective Date, and for a period of eighteen (18)
months thereafter, Benham shall sell or otherwise transfer for value no more
than 27,777 shares of ACSI Common Stock per month and Van Arnem shall sell or
otherwise transfer for value no more than 27,778 shares of ACSI Common Stock
per month (which amounts may be cumulated from month to month if less than the
maximum number of shares of ACSI Common Stock are sold during any month).
4.7 Further Assurances. After the Closing, Shareholders shall from time to
time, at the reasonable request of ACSI and at the cost and expense of ACSI,
execute and deliver such other documents and take such other actions as shall
be reasonably necessary or appropriate to consummate fully the transactions
contemplated hereby.
4.8 Exclusivity.
(a) For the period from the date hereof until December 31, 1996 (the
"Exclusivity Period"), neither CyberGate nor the Shareholders shall, nor shall
CyberGate or the Shareholders authorize or permit any of their respective
affiliates to, nor shall CyberGat
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or the Shareholders authorize or permit any officer, director or employee of
CyberGate or the Shareholders, or any investment banker, attorney or other
adviser or representative of, CyberGate, any of its affiliates or the
Shareholders to, (A) solicit or initiate, or encourage the submission of, or
respond to inquiries or proposals regarding, any takeover proposal (as defined
below) with respect to CyberGate or any issuance of equity or debt securities
by CyberGate ("proposed securities issuance"), (B) enter into any agreement,
arrangement or understanding with respect to any takeover proposal or proposed
securities issuance, or (C) participate in any discussions or negotiations
regarding, or furnish to any person any information with respect to, or take
any other action to facilitate any inquiries or the making of any proposal that
constitutes, or may reasonably be expected to lead to, any takeover proposal or
proposed securities issuance, other than a transaction with ACSI; provided that
upon expiration of the Exclusivity Period (or any subsequent 7-day period
contemplated by this proviso) the Exclusivity Period shall be extended for an
additional 7 days unless either party has provided prior written notice to the
other party that it does not desire to so extend the Exclusivity Period.
(b) CyberGate or the Shareholders, as the case may be, will
immediately notify ACSI of the occurrence of any takeover proposal or any
proposed securities issuance.
(c) For purposes of this Agreement, "takeover proposal" means (A)
any inquiry, proposal or offer from any person relating to any direct or
indirect acquisition or purchase of a substantial amount of assets of CyberGate
or the Subsidiaries or of any voting securities of, or equity interest in,
CyberGate or the Subsidiaries (including, without limitation, from the
Shareholders) or which would require approval under any federal, state
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or local law, rule, regulation, judgment, injunction or other governmental rule
governing or relating to the current or contemplated business operations of
CyberGate or the Subsidiaries, or any merger, consolidation, business
combination, sale of a material portion of the assets, recapitalization,
liquidation, dissolution or similar transaction involving CyberGate or the
Subsidiaries or any other transaction, the consummation of which would
reasonably be expected to impede, interfere with, prevent or materially delay
the transactions contemplated hereby or which would reasonably be expected to
dilute materially the benefits to ACSI of the transactions contemplated hereby
and (B) any inquiry, proposal or offer from any person relating to any direct
or indirect acquisition or purchase, by operation of law or otherwise of any
beneficial interest in equity securities of CyberGate or the Subsidiaries (or
interest therein) beneficially owned by the Shareholders or any of their
associates or affiliates.
ARTICLE V
COVENANTS OF ACSI
ACSI covenants to the Shareholders as follows:
5.1 Reasonable Efforts. Subject to the terms and conditions of this
Agreement, ACSI will use all reasonable efforts to take, or cause to be taken,
all actions, and to do, or cause to be done, all things necessary, including,
but not limited to, the matters set forth in Article VIII hereof, to consummate
and make effective the transactions contemplated by this Agreement, insofar as
such matters are within its control.
5.2 Consents and Approvals. ACSI agrees to use all reasonable efforts to
make all registrations, filings and applications, and give all notices and
obtain all governmental and other consents, approvals, orders, qualifications
and waivers necessary for the consummation
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of the transactions contemplated by, or the performance by ACSI of its
obligations under, this Agreement, or which may become reasonably necessary or
desirable in connection with any of the foregoing, in each case upon terms and
conditions reasonably satisfactory to the Shareholders and their counsel.
5.3 Retention of Records. After the Closing, ACSI will retain all of
CyberGate's books and records in its possession in accordance with ACSI's
policies for retention of its own books and records, and upon reasonable notice
and during ACSI's regular business hours and at reasonable intervals, will
provide the Shareholders, and their respective agents and representatives
designated in writing, access to CyberGate's books and records, concerning
periods prior to the Closing Date and the transactions contemplated hereby or
the disclosures, representations, warranties or covenants contained herein, in
ACSI's possession.
5.4 Release of Libra and Gemini. After the Closing, ACSI shall use its
reasonable efforts to obtain the release of Libra Global Services, Inc. ("LGS")
and Gemini Group Inc. ("Gemini") or any of its subsidiaries from any agreement
to which LGS or Gemini is a party and pursuant to which LGS or Gemini acts as a
guarantor or co-obligor if the benefits of such agreement following the Closing
run exclusively to CyberGate. The parties hereto specifically agree that ACSI
shall not be obligated to (i) pay any amount of money in order to obtain the
release or (ii) assume any obligation which is prohibited by any other
agreement to which ACSI is a party, in order to obtain such release. In the
event ACSI is unable to obtain the release of Gemini or Libra from any
agreement referred to in the first sentence of this Section 5.4, ACSI shall
indemnify Libra and Gemini for any payment actually made and all reasonable
expenses incurred by either of them pursuant to such agreement.
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5.5 Post-Closing Operating and Accounting Procedures. After the Closing,
ACSI shall use all reasonable efforts to maximize CyberGate's EBITDA. ACSI
shall fairly and accurately attribute to CyberGate only those expenses that,
according to GAAP, are related directly to CyberGate's activities and shall
credit CyberGate with all revenue, according to GAAP, for which CyberGate was
responsible.
5.6 Further Assurances. After the Closing, ACSI shall from time to time,
at the reasonable request of the Shareholders and at the cost and expense of
the Shareholders, execute and deliver such other documents and take such other
actions as shall be reasonably necessary or appropriate to consummate fully the
transactions contemplated hereby.
ARTICLE VI
MUTUAL COVENANTS
Each of the parties hereto covenants as follows:
6.1 Confidentiality. Except as otherwise required by law or judicial or
administrative proceedings, including proceedings between the parties with
respect to the transactions contemplated hereby, and then only to the extent
specifically required by such proceedings, and except for the purposes
enumerated in Section 4.3 hereof, each of the parties agrees not to (i)
disclose any information heretofore or hereafter obtained from the other party
with respect to the financial condition, results of operations or methods of
operation of CyberGate or ACSI (collectively, the "Confidential Information"),
to any individual or entity (other than its directors, officers, employees,
agents and representatives with a need to know such Confidential Information in
order to consummate the transactions contemplated hereby) or (ii) use any
Confidential Information for any purpose other than,
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with respect to ACSI's use of Confidential Information concerning CyberGate and
the Subsidiaries only, operating the acquired businesses after the Closing
Date.
6.2 Tax Reporting. The parties agree for tax purposes to report the
transactions contemplated by this Agreement, and to treat any subsequent
related transactions or items, in a manner consistent in all respects with the
terms and provisions of this Agreement.
6.3 Cooperation. The parties agree to cooperate for all other reasonable
purposes after the Closing, including with respect to any audit by any taxing
authority of any of the income tax or other tax returns of CyberGate.
ARTICLE VII
SURVIVAL; INDEMNIFICATION
7.1 Survival. All representations and warranties contained herein, or
made in writing by any party in connection herewith, shall survive the Closing
until January 31, 1998, subject to the other pertinent clauses of this
Agreement, including Section 7.2(d), and the Indemnification Escrow Agreement.
All covenants contained herein and all other obligations of the parties hereto
to be performed after the Closing shall survive until performed fully.
7.2 Indemnification.
(a) The Shareholders, severally with respect to their individual
representations, warranties, breaches and covenants, and CyberGate and the
Shareholders, jointly and severally with respect to CyberGate's
representations, warranties, breaches and covenants, agree to indemnify and
hold ACSI and its affiliates and the respective officers, directors, employees,
agents and representatives of each of the foregoing harmless from and
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against any and all costs, expenses, losses, claims, damages, penalties, fines,
liabilities and obligations whenever arising or incurred (including, without
limitation, amounts paid in settlement, costs of investigation and attorneys'
fees and expenses) (individually, a "Loss", and collectively, "Losses") arising
out of or relating to (i) any breach of any representation or warranty of
CyberGate or the Shareholders contained herein or any related Schedule, or set
forth in any closing certificate or other document delivered in connection with
the transactions contemplated by this Agreement; and (ii) any breach of any
covenant or obligation of CyberGate or the Shareholders contained in this
Agreement or in any other closing document. No due diligence or other
investigation of CyberGate, its properties, business or operations performed by
or on behalf of ACSI shall have the effect of limiting the Shareholders'
indemnification obligations as set forth herein.
(b) Without limitation as to the indemnification set forth in
subsection (a) hereof, but subject to the Basket (as hereinafter defined), each
of the Shareholders agrees, jointly and severally, to indemnify and hold ACSI
and its affiliates and the respective officers, directors, employees, agents
and representatives of each of the foregoing, harmless from and against (i) any
federal, state, local and foreign income, franchise, sales, use, excise, real
and personal property, employment (including but not limited to FICA and other
payroll) or any other tax liabilities or other charges of every kind and nature
(including, without limitation, any penalties and/or interest) of or incurred
by CyberGate or the Subsidiaries for any taxable year or other period the
Return for which was filed or due on or before the Closing Date which have not
been previously paid or accrued for in the Financial Statements; (ii) the
Shareholders' pro-rata share of any federal, state, local and foreign
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income, employment or other tax liabilities or charges incurred by CyberGate or
the Subsidiaries for any taxable year or other period beginning before and
ending after the Closing Date, to the extent in excess of the liability for
taxes (excluding any liability for deferred taxes established to reflect timing
differences between book and tax income) set forth or included in its most
recent balance sheet contained in the Financial Statements or as disclosed on
Schedule 2.16.2, and (iii) all federal, state, local and foreign income,
employment or other tax liabilities or charges of any corporation other than
CyberGate which was at any time prior to the Closing Date a member of an
"affiliated group" of corporations that included CyberGate. For purposes of
this Subsection 7.2(b), in the case of any taxable period beginning before and
ending after the Closing Date, for purposes of determining the amount of the
Shareholders' liability for taxes attributable to the portion of the taxable
period ending on or before the Closing Date: (A) in the case of sales, use,
payroll or excise taxes or taxes based upon or related to income, such portion
of the taxable period shall be deemed to be a separate taxable year and the
Shareholders' liability shall be determined by taking into account all items of
income, gain, loss, deduction or credit on a basis consistent with that
employed in preparing the federal income tax return of CyberGate for the
taxable year ending on the Closing Date and the relevant state or local tax
return for prior years, and (B) in the case of other taxes, the Shareholders'
liability shall equal a pro-rata portion of the liability for taxes for the
entire taxable period based on the ratio of the number of days from the
beginning of such taxable period through the Closing Date to the total number
of days included in such taxable period.
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(c) ACSI agrees to indemnify and hold the Shareholders harmless from
and against any Losses arising out of or relating to (i) any breach of any
representation or warranty of ACSI contained herein or in any related Schedule,
or set forth in any closing certificate or other document delivered in
connection with the transactions contemplated by this Agreement; and (ii) any
breach of any covenant or obligation of ACSI contained in this Agreement or in
any other closing document.
(d) Except as otherwise specifically set forth herein, the indemnity
provided in this Agreement shall not apply until, and to the extent, the
cumulative amount of all Losses and tax liabilities incurred by the party
seeking indemnification shall exceed $100,000 in the aggregate (the "Basket").
Notwithstanding the foregoing, (i) the Basket shall not apply to (A) the
indemnities provided in this Agreement for breach of any non-competition or
confidentiality obligation contained herein or in any other closing document,
(B) any failure of title to the Shares, (C) a breach of the representations and
warranties in Sections 2.2 and 2.3, or (D) any fraud, willful misconduct, gross
negligence or criminal action on the part of the parties hereto; and (ii) nor
shall the Basket apply to a breach of the representations and warranties
contained in Sections 2.9 and 2.16 with respect to which the indemnity provided
in this Agreement shall not apply until, and to the extent, the cumulative
amount of all Losses and tax liabilities incurred by the party seeking
indemnification pursuant to such sections shall exceed $37,500 in the
aggregate. The indemnity obligations of the Shareholders set forth above shall
be limited to the value of the Indemnification Shares held in escrow at the
time a claim for indemnification is made hereunder and ACSI shall have the
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right of set off, if any, for any claim for indemnification against the
Indemnification Shares pursuant to the terms of the Indemnification Escrow
Agreement.
7.3 Indemnification Procedure.
(a) An indemnified party (the "Indemnified Party") under this Article
VII shall give prompt written notice to each potentially liable person or
entity (the "Responsible Party") (when and to the extent that the Indemnified
Party has actual knowledge thereof) of an Indemnification Event (as defined
hereinafter); provided however, that the failure to so notify the Responsible
Party shall not relieve the Responsible Party of any indemnification obligation
hereunder unless such failure substantially prejudices the Responsible Party.
An "Indemnification Event" shall be any condition, event or occurrence, or the
commencement of any action, suit or proceeding, for which indemnification may
be sought hereunder, and, except as otherwise provided in subsection (b)
hereof, the Responsible Party, through counsel reasonably satisfactory to the
Indemnified Party, shall assume the defense thereof or other indemnification
obligation with respect thereto; provided, however, that any Indemnified Party
shall be entitled to participate in any such action, suit or proceeding with
counsel of its own choice but at its own expense; and provided further, that
any Indemnified Party shall be entitled to participate in any such action, suit
or proceeding with counsel of its own choice at the expense of the Responsible
Party if, in the good faith judgment of the Indemnified Party's counsel,
representation by the Responsible Party's counsel may present a conflict of
interests. In any event, if the Responsible Party fails to assume the defense
within a reasonable time, the Indemnified Party may assume such defense or
other indemnification obligation and the reasonable fees and expenses of its
attorneys will be covered by the
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indemnity provided for in this Article VII. No action, suit or proceeding for
which indemnification may be sought shall be compromised or settled in any
manner which might adversely affect the interests of either the Indemnified
Party or the Responsible Party without the prior written consent of such party
(which shall not be unreasonably withheld). Notwithstanding anything in this
Section 7.3 to the contrary, the Responsible Party shall not, without the
written consent of the Indemnified Party, settle or compromise any action, suit
or proceeding or consent to the entry of any judgment which does not include as
an unconditional term thereof the delivery by the claimant or plaintiff to the
Indemnified Party of a written release from all liability in respect of such
action, suit or proceeding. The Responsible Party shall pay all expenses,
including attorneys' fees, that may be incurred by any Indemnified Party in
enforcing the indemnity provided for in this Article VII.
(b) In the case of any proposed or actual assessment of tax liabilities
for which ACSI is entitled to indemnification from the Shareholders as provided
in Subsection 7.2(b), ACSI shall give written notice to the Shareholders as
provided in Subsection 7.3(a) hereof and shall contest such proposed or actual
assessment through the administrative review or appeal procedures available
under the relevant tax laws and regulations, provided, however, that the
Shareholders may, at their option, undertake such contest if the result of any
such contest would be to trigger the Shareholders' indemnification obligations
hereunder. ACSI and the Shareholders shall keep each other fully informed as to
the progress of such contest. If at any point prior to the termination of the
administrative review process, the Shareholders notify ACSI in writing that
they are willing to accept a settlement proposed by the relevant taxing
authority with respect to such proposed or actual
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assessment of tax liabilities, ACSI will settle the proposed or actual tax
assessment, and ACSI shall immediately be entitled to indemnification
hereunder. If the Shareholders never elect to request ACSI to settle and such
administrative review process is unsuccessful at eliminating the proposed tax,
ACSI shall be entitled to pay the tax (and any penalties and interest) and be
entitled to indemnification; provided, that if within ten (10) days of receipt
from ACSI of notice that it is paying the tax, the Shareholders notify ACSI of
their desire to contest the proposed or assessed tax deficiency in the courts,
the Shareholders shall be entitled to do so provided that (a) if the proposed
or actual tax deficiency is contested in tax court, the Shareholders shall pay
from their own sources any amount of taxes, penalties and interest determined
to be due that are in excess of that previously proposed by ACSI to be paid,
and (b) if the proposed or actual tax deficiency is contested by suit for
refund in any other court, ACSI shall be entitled to indemnification hereunder
and if the outcome of the contest determines that the tax paid should be
refunded, such refund shall be returned to ACSI or to the Shareholders if and
to the extent ACSI has previously been indemnified for such payment. Any
post-administrative review contest shall be conducted at the sole cost and
expense of the Shareholders.
7.4 Treatment as Adjustment of Purchase Price. Any indemnity payment
received by a party hereunder shall be treated as an adjustment of the Purchase
Price. However, in the event that the Internal Revenue Service or any other
taxing authority determines that such indemnity payment constitutes taxable
gain or income to the indemnified party, the indemnifying party shall increase
the amount otherwise required to be paid so that the
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indemnified party, receives, on an after-tax basis, an amount equal to the
amount it would have received had the indemnity not resulted in taxable gain or
income.
ARTICLE VIII
CLOSING DELIVERIES AND REQUIREMENTS
The following deliveries and conditions shall be made or satisfied at the
Closing unless waived in writing or subject to a post-Closing agreement:
8.1 Conditions Precedent to ACSI's Obligation to Close. ACSI's
obligations to consummate the transactions hereunder are subject to the
satisfaction, on or prior to the Closing Date, of the following conditions,
compliance with which or the occurrence of which may be waived in writing, in
whole or in part, by ACSI prior to the Closing.
(a) At the Closing Date, the Shareholders shall have obtained clear
and unencumbered title to the Shares and shall transfer the same to ACSI.
(b) As of the Closing Date (i) all of the representations and
warranties made by CyberGate and the Shareholders herein and in any Schedule or
Exhibit hereto shall, in all material respects, be true and correct, (ii) all
of the obligations of CyberGate and the Shareholders to be performed on or
before the Closing Date shall have been performed, (iii) none of the events
specified in Section 2.10 shall have occurred, and (iv) ACSI shall have
received a certificate from each of the Shareholders and CyberGate, dated as of
the Closing Date, to the effect of the matters listed in subsections (i), (ii)
and (iii) of this subsection (a).
(c) CyberGate or the Shareholders, as the case may be, shall have
executed and delivered to ACSI each of the agreements, certificates and other
documents to be delivered to ACSI pursuant to Section 8.3 hereof.
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(d) All registrations, filings, applications, notices, transfers,
consents, approvals, orders, qualifications, waivers and other actions listed
on Schedule 2.5 hereto or otherwise required of any persons or governmental
authorities or private agencies in connection with the consummation of the
transactions contemplated by and the performance by CyberGate and the
Shareholders of their respective obligations under this Agreement shall have
been made or obtained and all applicable waiting periods shall have expired or
been terminated.
(e) As of the Closing Date, CyberGate shall have had an average of
at least $450,000 in total monthly revenues for each of the last two calendar
months immediately preceding such Closing Date and the President of CyberGate
shall have delivered a certificate to that effect to ACSI.
(f) As of the Closing Date, CyberGate shall have provided ACSI with
evidence, reasonably satisfactory to ACSI and its counsel, that the contracts
listed on Schedule 8.1(e) shall remain in full force and effect following the
consummation of the transactions contemplated hereby.
(g) As of the Closing Date, CyberGate shall have retired (i) all
shares of its capital stock, other than the Shares, (ii) cancelled without
payment any accrued, accumulated or declared and unpaid dividends associated
with any share of capital stock, and (iii) cancelled any option relating to the
purchase or sale of any shares of CyberGate's capital stock, whether issued by
CyberGate or either of the Shareholders, all upon such terms and conditions as
are acceptable to ACSI in the exercise of its sole discretion.
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(h) On or prior to the Closing Date CyberGate shall have acquired
the twenty percent (20%) of FloridaNet, Inc. not already owned by it from
Thomas Benham, Jr. on such terms and conditions as are acceptable to ACSI in
the exercise of its sole discretion.
(i) Effective simultaneous with the Closing, each of CyberGate's
directors and officers shall resign.
(j) ACSI shall have obtained any required consents of the holders of
its 13% Senior Discount Notes due 2005 issued pursuant to that certain
Indenture, dated November 14, 1995, by and between ACSI and Chemical Bank, as
Trustee, as previously supplemented, and the holders of its 12-3/4% Senior
Discount Notes due 2006 issued pursuant to that certain Indenture, dated March
4, 1996, by and between ACSI and Chemical Bank, as Trustee, and such Indentures
shall have been supplemented as necessary.
(k) Pacific Atlantic Lease Management Corporation shall have
executed and delivered to CyberGate a non-exclusive assignment of CyberGate's
current accounting software (the "Software Assignment") which Software
Assignment shall provide for the payment of $100,000 over a three year period
at 8.25% per annum by CyberGate and be on such other terms and conditions as
are reasonably acceptable to ACSI.
(l) Acquisition Management Corporation ("AMC") and CyberGate shall
have entered into a Facilities Management Agreement (the "FMA") for
approximately 6,854 square feet of office space located at 1301 West Newport
Center Drive, Deerfield Beach, Florida, with an option, exercisable after 90
days upon 90 days' prior written notice, to acquire the remainder of the space
in the building, which Sublease shall provide for the payment of $12.00 per
square foot, plus pass-throughs, for a term of three years, shall
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provide CyberGate with indemnification from AMC should the FMA prove invalid or
unenforceable and shall be on such other terms and conditions as are reasonably
acceptable to ACSI.
(m) No action, suit or proceeding shall have been instituted by any
person or entity, or threatened by any governmental agency or body, before a
court or governmental body, to restrain or prevent the consummation of the
transactions contemplated by, or the performance by CyberGate, the Shareholders
or ACSI of their respective obligations under this Agreement or which seeks
other relief with respect to any of such transactions or which could reasonably
be expected to have a materially adverse effect on the business, results of
operations, assets, financial condition or prospects of CyberGate. At the
Closing Date, there shall be no injunction, restraining order or decree of any
nature of any court or governmental agency or body in effect which restrains or
prohibits the consummation of the transactions contemplated by this Agreement
or the Indemnification Escrow Agreement.
8.2 Conditions Precedent to Shareholders' Obligation to Close. The
Shareholders' obligations to consummate the transactions hereunder are subject
to the satisfaction, on or prior to the Closing Date, of the following
conditions, compliance with which or the occurrence of which may be waived in
writing, in whole or in part, by the Shareholders prior to the Closing.
(a) At the Closing Date, the Shareholders shall have obtained clear
and unencumbered title to the Shares.
(b) As of the Closing Date (i) all of the representations and
warranties made by ACSI herein and in any Schedule or Exhibit hereto shall, in
all material respects, be
54
<PAGE> 59
true and correct, (ii) all of the obligations of ACSI to be performed on or
before the Closing Date shall have been performed and (iii) the Shareholders
shall have received a certificate from ACSI, dated as of the Closing Date, as
to the effect of the matters listed in subsections (i) and (ii) of this
subsection (a).
(c) ACSI shall have executed and delivered to the Shareholders each
of the agreements, certificates and other documents to be delivered to the
Shareholders pursuant to Section 8.4 hereof.
(d) ACSI shall have obtained any required consents of the holders of
its 13% Senior Discount Notes due 2005 issued pursuant to that certain
Indenture, dated November 14, 1995, by and between ACSI and Chemical Bank, as
Trustee, as previously supplemented, and the holders of its 12-3/4% Senior
Discount Notes due 2006 issued pursuant to that certain Indenture, dated March
4, 1996, by and between ACSI and Chemical Bank, as Trustee, and such Indentures
shall have been supplemented as necessary.
(e) No action, suit or proceeding shall have been instituted by any
person or entity, or threatened by any governmental agency or body, before a
court or governmental body, to restrain or prevent the consummation of the
transactions contemplated by, or the performance by CyberGate, the Shareholders
or ACSI of their obligations under, this Agreement. At the Closing Date, there
shall be no injunction, restraining order or decree of any nature of any court
or governmental agency or body in effect which restrains or prohibits the
consummation of the transactions contemplated by this Agreement or the
Indemnification Escrow Agreement.
55
<PAGE> 60
8.3 Closing Deliveries of CyberGate and the Shareholders. At the
Closing, CyberGate or the Shareholders, as the case may be, shall deliver, or
cause to be delivered, the following documents:
(a) The Shareholders shall deliver to ACSI certificates representing
the Shares, with any required stock transfer stamps affixed, duly endorsed for
transfer or with stock powers duly executed in blank attached, in good form for
delivery. The Shareholders shall also duly execute and deliver to the Escrow
Agent, to be held in accordance with the Indemnification Escrow Agreement,
stock powers in blank, in good form for delivery, covering the Indemnification
Shares, including signature guarantees.
(b) The Shareholders and CyberGate shall deliver to ACSI evidence
reasonably satisfactory to ACSI and its counsel of all consents and approvals
required in connection with the performance by the Shareholders or CyberGate of
their respective obligations under this Agreement and the consummation by the
Shareholders and CyberGate of the transactions contemplated hereby.
(c) CyberGate and the Shareholders, after having agreed with ACSI on
a mutually acceptable Escrow Agent, shall execute and deliver the
Indemnification Escrow Agreement, with such changes therein as may be required
to by the Escrow Agent and not objected to by ACSI or the Shareholders, to ACSI
and the Escrow Agent. (d) CyberGate and the Shareholders shall deliver to ACSI
the written opinion, dated the Closing Date, of Gunster, Yoakley, Valdes-Fauli
& Stewart, P.A., counsel to CyberGate and the Shareholders in form and
substance satisfactory to ACSI and its counsel.
56
<PAGE> 61
(e) The Shareholders shall have caused to be delivered to ACSI all of
CyberGate's books and records, including, without limitation. the stock
transfer and minute books and financial records.
(f) The Shareholders shall execute and deliver to ACSI the
Registration Rights Agreement attached hereto as Exhibit B (the "Registration
Rights Agreement").
(g) The Shareholders shall execute and deliver to ACSI the Employment
Agreement and Consulting Agreement attached hereto as Exhibits C and D,
respectively.
(h) Van Arnem shall cause the Software Assignment to be executed and
delivered to ACSI.
(i) Van Arnem shall cause the FMA to be executed and delivered to
ACSI.
(j) The Shareholders shall deliver to ACSI CyberGate's Articles of
Incorporation, as amended to the Closing Date, certified by the Secretary of
State of the State of Florida, CyberGate's By-laws, as amended to the Closing
Date, certified by CyberGate's secretary, resolutions of the Board of Directors
of CyberGate authorizing the execution and delivery of this Agreement and each
of the other agreements, instruments, certificates and other documents to be
delivered by CyberGate pursuant hereto, certified by CyberGate's secretary, and
good standing certificate from the State of Florida.
8.4 Closing Deliveries of ACSI. At the Closing, ACSI shall deliver, or
cause to be delivered, the following documents.
(a) ACSI shall deliver (i) 750,000 shares of ACSI Common Stock to the
Shareholders, as set forth in Section 1.3 hereof, and (ii) the 250,000 shares
of ACSI
57
<PAGE> 62
Common Stock representing the Indemnification Shares to the Escrow Agent to be
held pursuant to the Indemnification Escrow Agreement.
(b) ACSI shall deliver to the Shareholders resolutions of the Board
of Directors of ACSI authorizing the execution and delivery of this Agreement
and each of the other agreements, instruments, certificates and other documents
to be delivered by ACSI pursuant hereto, certified by ACSI's secretary.
(c) ACSI shall deliver to the Shareholders the written opinion,
dated the Closing Date, of Ross & Hardies, counsel to ACSI in form and
substance satisfactory to the Shareholders and their counsel.
(d) ACSI, after having agreed with the Shareholders and CyberGate on
a mutually acceptable Escrow Agent, shall execute and deliver the
Indemnification Escrow Agreement, with such changes therein as may be required
by the Escrow Agent and not objected to by ACSI or the Shareholders, to the
Shareholders and the Escrow Agent.
(e) ACSI shall execute and deliver to the Shareholders the
Registration Rights Agreement.
(f) ACSI shall execute and deliver to the Shareholders the Employment
Agreement and Consulting Agreement attached hereto as Exhibits C and D,
respectively.
ARTICLE IX
TERMINATION
9.1 This Agreement may be terminated at any time prior to the Closing as
follows: (a) by mutual consent of ACSI, CyberGate and the Shareholders, or (b)
by any party hereto if the Closing has not occurred on or before December 31,
1996; provided, that no party
58
<PAGE> 63
shall be entitled to terminate pursuant to this Section 9.1(b) if its or his
own acts or failures to act has delayed the Closing beyond December 31, 1996.
ARTICLE X
MISCELLANEOUS
10.1 Amendment and Modification. Subject to applicable law, this Agreement
may only be amended, modified and supplemented by written agreement of all of
the parties hereto at any time on or after the Closing Date.
10.2 Waiver of Compliance. Any failure of the Shareholders or CyberGate,
on the one hand, or ACSI, on the other, to comply with any obligation herein
may be expressly waived hereunder, but such waiver shall not operate as a
waiver of, or estoppel with respect to, any subsequent or other failure. Any
waiver must be in writing and duly executed by the appropriate parties.
10.3 Expenses. Except as otherwise set forth herein, the parties hereto
agree that all fees and expenses incurred by the Shareholders, on the one hand,
and ACSI on the other, in connection with this Agreement shall be borne by the
Shareholders and by ACSI, respectively, including, without limitation, all fees
of counsel and accountants.
10.4 Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when delivered by hand or by facsimile transmission (confirmed
by mail) or five days after mailed, certified or registered mail with postage
prepaid:
59
<PAGE> 64
(a) If to the Shareholders, to:
Thomas R. Benham
1561 Northwest 13th Avenue
Boca Raton, Florida 33486
with a copy to:
Marshall R. Burack
Akerman, Senterfitt & Edison, P.A.
1 Southeast 3rd Avenue
28th Floor
Miami, Florida 33131-1704
Harold L. Van Arnem
733 North Ocean Blvd.
DelRay Beach, Florida 33483
with a copy to:
Drew M. Levitt
1301 West Newport Center Drive
Deerfield Beach, Florida 33442
or to such other person or address as the Shareholders shall furnish to ACSI in
writing by notice given in the manner set forth in (a) above.
60
<PAGE> 65
(b) If to CyberGate, to:
CyberGate, Inc.
1301 West Newport Center Drive
Deerfield Beach, Florida 33442
or to such other person or address as CyberGate shall furnish to ACSI in
writing by notice given in the manner set forth in (a) above.
(c) If to ACSI, to:
American Communications Services, Inc.
131 National Business Parkway
Suite 100
Annapolis Junction, Maryland 20201
Attention: Riley M. Murphy, Esq.
Executive Vice President - Legal and Regulatory
Affairs, General Counsel and Secretary
Facsimile: (301) 617-4277
with a copy to:
Ross & Hardies
65 East 55th Street
Park Avenue Tower
New York, New York 10022-3219
Attention: Kevin T. Collins, Esq.
Facsimile: (212) 421-5682
or to such other person or address as ACSI shall furnish to the Shareholders in
writing by notice given in the manner set forth above.
10.5 Assignment. This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests or obligations
61
<PAGE> 66
hereunder shall be assigned by any of the parties hereto without the prior
written consent of the other parties, provided, however, that the Shareholders
shall be permitted to make gratuitous transfers of the Adjustment Shares only
if (a) either, (i) the Shareholders deliver to ACSI of an opinion of counsel
satisfactory to ACSI that such transfer may lawfully be made without the
registration of such Adjustment Shares pursuant to the 1933 Act, or (ii) the
Adjustment Shares are registered under the 1933 Act, and (b) such transfers are
made in accordance with Section 4.6 hereof.
10.6 Publicity. Neither the Shareholders or CyberGate nor ACSI shall make
or issue, or cause to be made or issued, any announcement or written statement
concerning this Agreement or the transactions contemplated hereby for
dissemination to the general public, other than ACSI announcing the execution
of the Agreement or the completion of the transactions contemplated hereby as
and at the times and in such detail as may be required or may be desirable
under the federal securities laws, without the prior written consent of the
other parties. This provision shall not apply, however, to any announcement or
written statement required to be made by law or the regulations of any federal
or state governmental agency or any stock exchange, except that the party
required to make such announcement shall, whenever practicable, consult with
the other party concerning the timing and content of such announcement before
such announcement is made.
10.7 Headings. The Article and Section headings contained in this
Agreement are inserted for convenience only and shall not affect in any way the
meaning or interpretation of this Agreement.
62
<PAGE> 67
10.8 Severability. If any provision of this Agreement shall be determined
to be contrary to law and unenforceable by any court of law, the remaining
provisions shall be severable and enforceable in accordance with their terms.
10.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida, without regard to its
conflicts of law doctrine. The parties hereto expressly submit themselves to
the non-exclusive jurisdictions of the State and Federal Courts of Florida for
the resolution of any disputes which may arise under or with respect to
compliance with this Agreement.
10.10 Counterparts. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10.11 Third Parties. Except as specifically set forth or referred to
herein, nothing herein shall be construed to confer upon or give to any party
other than the parties hereto and their successors or permitted assigns, any
rights or remedies under or by reason of this Agreement.
10.12 Entire Agreement. This Agreement, including the Exhibits and
Schedules hereto, and the other documents and certificates delivered pursuant
to the terms hereof, sets forth the entire agreement and understanding of the
parties hereto in respect of the subject matter contained herein, and
supersedes all prior agreements, covenants, representations or warranties,
whether oral or written, by any party hereto.
63
<PAGE> 68
Signature page to:
STOCK PURCHASE AGREEMENT By and Among
AMERICAN COMMUNICATIONS SERVICES, INC.
and HAROLD L. VAN ARNEM and
THOMAS R. BENHAM and CYBERGATE, INC.
IN WITNESS WHEREOF, the parties hereto have caused this Stock Purchase
Agreement to be duly executed, all as of the day and year first above written.
AMERICAN COMMUNICATIONS SERVICES, INC.
By:
-----------------------------------
Title:
CYBERGATE, INC.
By:
-----------------------------------
Title:
-----------------------------------
Thomas R. Benham
-----------------------------------
Harold L. Van Arnem
64
<PAGE> 1
EXHIBIT 4.7
EXECUTION COPY
============================================================
AMERICAN COMMUNICATIONS SERVICES, INC.
$190,000,000
13% SENIOR DISCOUNT NOTES DUE 2005
-----------------------------
SUPPLEMENTAL INDENTURE
Dated as of January 13, 1997
to
INDENTURE
Dated as of November 14, 1995, as amended
-----------------------------
THE CHASE MANHATTAN BANK,
Trustee
============================================================
<PAGE> 2
THIS SUPPLEMENTAL INDENTURE (the "Supplemental Indenture"),
dated as of January 13, 1997, by and between AMERICAN COMMUNICATIONS SERVICES,
INC., a Delaware corporation (the "Company"), having its principal office at
131 National Business Parkway, Suite 100, Annapolis Junction, Maryland 20701,
and THE CHASE MANHATTAN BANK (formerly known as Chemical Bank), as trustee (the
"Trustee") under the Indenture (as defined below), having its Corporate Trust
Office at 450 West 33rd Street, New York, New York 10001-2697. Capitalized
terms used but not defined herein shall have the meanings assigned to such
terms in the Indenture.
WHEREAS, the Company and the Trustee previously duly executed,
and the Company duly delivered to the Trustee, an Indenture dated as of
November 14, 1995, as amended by the Supplemental Indenture dated as of March
11, 1996 (the "Indenture"), relating to $190,000,000 aggregate principal amount
at maturity of the Company's 13% Senior Discount Notes due November 1, 2005
(the "Notes");
WHEREAS, pursuant to Section 9.02 of the Indenture, the
Company and the Trustee have obtained the consent of the Holders of not less
than a majority in principal amount of the outstanding Notes to the amendments
made hereby;
WHEREAS, the Board of Directors of the Company has authorized
the execution of this Supplemental Indenture and its delivery to the Trustee;
WHEREAS, the Company has delivered an Officers' Certificate
and Opinion of Counsel to the Trustee pursuant to Section 9.07 of the
Indenture; and
WHEREAS, all other actions necessary to make this Supplemental
Indenture a legal, valid and binding obligation of the parties hereto in
accordance with its terms and the terms of the Indenture have been performed;
NOW, THEREFORE, in consideration of the promises contained
herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Company and the Trustee hereby
<PAGE> 3
2
mutually covenant and agree for the equal and proportionate benefit of all
Holders of the Notes as follows:
ARTICLE I
AMENDMENTS
Upon execution of this Supplemental Indenture, the terms of
the Notes and the Indenture shall be amended as follows:
SECTION 1.1. (a) Section 1.01 of the Indenture shall
be amended by striking the word "and" at the end of clause (viii) in the
definition of "Permitted Investments", by renumbering the final clause (ix) of
such definition as clause (x) and by inserting a new clause (ix) on the
immediately preceding line as follows:
"(ix) Investments by the Company or a Restricted Subsidiary in
or in respect of a Person to the extent the consideration for such
Investment consists of shares of Qualified Stock of the Company; and"
(b) Section 1.01 of the Indenture shall further be
amended by renumbering clauses (xiv) and (xv) of the definition of "Permitted
Liens" as clauses (xv) and (xvi), respectively, and by inserting the following
new clause (xiv) on the line immediately preceding new clause (xv):
"(xiv) Liens on Property or assets of a Person existing prior
to the time such Person is acquired by the Company as a result of (a)
an Investment described in clause (ix) of the definition of "Permitted
Investments" herein or (b) an Investment described in clause (vii) of
Section 4.13(b) hereof; provided that such Liens were in existence
prior to the contemplation of such Investment and do not secure any
Property or assets of the Company or any of its Subsidiaries other
than the Property or assets subject to the Liens prior to such
Investment;"
(c) Section 1.01 of the Indenture shall further be
amended by striking the following definitions in their entirety: "Joint
Venture", "Lit Cities Amount", "New Financing Amount" and "Qualified Joint
Venture".
SECTION 1.2. Section 4.09(b) of the Indenture shall be
amended by renumbering clauses (xi) and (xii) as clauses (xii) and (xiii),
respectively, and by inserting the following new clause (xi) on the line
immediately preceding new clause (xii):
<PAGE> 4
3
"(xi) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness of any Person which incurrence resulted
directly from an Investment described in clause (ix) of the definition
of "Permitted Investments" in Section 1.01 hereof; provided that, (x)
immediately after giving effect to such Investment on a pro forma
basis (and treating any Indebtedness which becomes, or is anticipated
to become, an obligation of the Company or any Restricted Subsidiary
as a result of such Investment as having been incurred by the Company
or such Restricted Subsidiary at the time of such Investment), the
Company would (A) be permitted to incur $1.00 of additional
Indebtedness under Section 4.09(a) hereof or (B) have a Debt to EBITDA
Ratio which is equal to or not worse than the Debt to EBITDA Ratio of
the Company immediately prior to such Investment or (y) such
incurrence is otherwise permitted; provided further that Indebtedness
incurred by the Company and its Restricted Subsidiaries under this
clause (xi) as a result of any such Investment does not exceed 50
percent of the Fair Market Value of the Qualified Stock used as
consideration in such Investment; provided further that the aggregate
principal amount of Indebtedness incurred under this clause (xi) does
not exceed $50,000,000;"
SECTION 1.3. Section 4.13(b) of the Indenture shall be
amended by striking existing clauses (vii) and (viii) in their entirety and by
inserting new clauses (vii) and (viii) as follows:
"(vii) making Investments in joint ventures or other risk
sharing arrangements (which may include partnerships, limited
liability companies, corporations or other arrangements) (each a
"Joint Venture Entity") the purpose of which is to engage in the same
or complementary lines of business as the Company or a Restricted
Subsidiary or in businesses consistent with the fundamental nature of
the operating business of the Company or a Restricted Subsidiary in an
aggregate amount not to exceed $20,000,000; provided the management
and operations of any such Joint Venture Entity are controlled by the
Company pursuant to (i) the charter documents of such Joint Venture
Entity, or (ii) an agreement between or among the holders of the
Voting Stock of such Joint Venture Entity, or (iii) a management
agreement of a minimum duration of three or more years between the
Company and such Joint Venture Entity;"
"(viii) permitting a Restricted Subsidiary which became a
Restricted Subsidiary as a result of an
<PAGE> 5
4
Investment by the Company or a Restricted Subsidiary described in
clause (vii) of this Section 4.13(b) to declare or pay any dividend or
distribution on any Capital Stock of such Subsidiary to all holders of
Capital Stock of such Subsidiary on a pro rata basis; and"
SECTION 1.4. (a) Section 4.15 of the Indenture shall
be amended by striking the language of clause (f) thereof up to subclause (B)
thereof and by inserting the following in its place:
"(f) Capital Stock of a Person which became or will become a
Restricted Subsidiary as a result of an Investment by the Company or a
Restricted Subsidiary described in clause (vii) of Section 4.13(b)
hereof, provided that"
(b) Section 4.15(f) of the Indenture shall further be
amended by re-lettering subclauses (B), (C) and (D) thereof as subclauses (A),
(B) and (C), respectively, by inserting the word "and" before new subclause (C)
and by striking the language beginning "and (E)" through the semi-colon at the
end of subclause (E).
SECTION 1.5. Section 4.17 of the Indenture shall be amended
by striking the period at the end of the first sentence of clause (b) thereof
and by inserting in its place the following:
"; provided, however, that the foregoing restriction shall not
apply to a Person which becomes a Restricted Subsidiary as a result of
(a) an Investment described in clause (ix) of the definition of
"Permitted Investments" in Section 1.01 hereof or (b) an Investment
described in clause (vii) of Section 4.13(b) hereof."
ARTICLE II
MISCELLANEOUS
SECTION 2.1. For all purposes of this Supplemental Indenture,
except as otherwise herein expressly provided or unless the context otherwise
requires: (A) the terms and expressions used herein shall have the same
meanings as corresponding terms and expressions used in the Indenture and (B)
the words "herein," "hereof" and "hereby" and other words of similar import
used in this Supplemental Indenture refer to this Supplemental Indenture as a
whole and not any particular Article, Section or other subdivision.
<PAGE> 6
5
SECTION 2.2. Upon execution of this Supplemental Indenture,
the Indenture shall be modified in accordance herewith, but except as expressly
amended hereby, the Indenture is in all respects ratified and confirmed and all
the terms, conditions and provisions thereof shall remain in full force and
effect.
SECTION 2.3. Upon execution, this Supplemental Indenture
shall form a part of the Indenture and the Supplemental Indenture and the
Indenture shall be read, taken and construed as one and the same instrument for
all purposes, and every holder of Notes heretofore or hereafter authenticated
and delivered under the Indenture shall be bound hereby.
SECTION 2.4. This Supplemental Indenture shall become
effective as of the date first above written.
SECTION 2.5. The Trustee accepts the amendment to the
Indenture effected by this Supplemental Indenture and agrees to execute the
trust created by the Indenture, as hereby amended, but only upon the terms and
conditions set forth in the Indenture, as hereby amended, including the terms
and provisions defining and limiting the liabilities and responsibilities of
the Trustee, which terms and provisions shall in like manner define and limit
the Trustee's liabilities in the performance of the trust created by the
Indenture, as hereby amended. Without limiting the generality of the
foregoing, the Trustee has no responsibility for the correctness of the
recitals of fact herein contained which shall be taken as the statements of the
Company and makes no representations as to the validity or sufficiency of this
Supplemental Indenture, except as to the due and valid execution hereof by the
Trustee, and shall incur no liability or responsibility in respect of the
validity thereof. The Trustee's execution of this Supplemental Indenture
should not be construed to be an approval or disapproval of the advisability of
the amendments to the Indenture provided herein.
<PAGE> 7
6
SECTION 2.6. THIS SUPPLEMENTAL INDENTURE SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY IN SAID STATE.
SECTION 2.7. This Supplemental Indenture may be executed in
any number of counterparts, each of which when so executed shall be deemed to
be an original, and all of such counterparts shall together constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Supplemental Indenture to be duly executed, and their respective corporate
seals to be hereunto affixed and duly attested, all as of the day and year
first above written.
AMERICAN COMMUNICATIONS SERVICES, INC.
By
--------------------------
Name:
Title:
[Corporate Seal]
Attest:
- -------------------------
THE CHASE MANHATTAN BANK
(formerly known as Chemical Bank),
as Trustee
By
--------------------------
Name:
Title:
[Corporate Seal]
Attest:
- -------------------------
<PAGE> 8
STATE OF )
) SS.:
COUNTY OF )
On the ___ day of ________, 1997, before me personally came
________________________, to me known, who, being by me duly sworn, did depose
and say that he is _________________ of American Communications Services, Inc.,
one of the corporations described in and which executed the foregoing
instrument; that he knows the seal of said corporation; that the seal affixed
to said instrument is such corporate seal; that it was so affixed by authority
of the Board of Directors of said corporation, and that he signed his name
thereto by like authority.
------------------------------
Notary Public
State of
My commission expires / /
[Seal]
<PAGE> 9
STATE OF )
) SS.:
COUNTY OF )
On the ___ day of ________, 1997, before me personally came
________________________, to me known, who, being by me duly sworn, did depose
and say that he is _________________ of The Chase Manhattan Bank, one of the
corporations described in and which executed the foregoing instrument; that he
knows the seal of said corporation; that the seal affixed to said instrument is
such corporate seal; that it was so affixed by authority of the Board of
Directors of said corporation, and that he signed his name thereto by like
authority.
------------------------------
Notary Public
State of
My commission expires / /
[Seal]
<PAGE> 1
EXHIBIT 4.11
EXECUTION COPY
============================================================
AMERICAN COMMUNICATIONS SERVICES, INC.
$120,000,000
12 3/4% SENIOR DISCOUNT NOTES DUE 2006
-----------------------------
SUPPLEMENTAL INDENTURE
Dated as of January 13, 1997
to
INDENTURE
Dated as of March 26, 1996
-----------------------------
THE CHASE MANHATTAN BANK,
Trustee
============================================================
<PAGE> 2
THIS SUPPLEMENTAL INDENTURE (the "Supplemental Indenture"),
dated as of January 13, 1997, by and between AMERICAN COMMUNICATIONS SERVICES,
INC., a Delaware corporation (the "Company"), having its principal office at
131 National Business Parkway, Suite 100, Annapolis Junction, Maryland 20701,
and THE CHASE MANHATTAN BANK (formerly known as Chemical Bank), as trustee (the
"Trustee") under the Indenture (as defined below), having its Corporate Trust
Office at 450 West 33rd Street, New York, New York 10001-2697. Capitalized
terms used but not defined herein shall have the meanings assigned to such
terms in the Indenture.
WHEREAS, the Company and the Trustee previously duly executed,
and the Company duly delivered to the Trustee, an Indenture dated as of March
26, 1996 (the "Indenture"), relating to $120,000,000 aggregate principal amount
at maturity of the Company's 12 3/4% Senior Discount Notes Due 2006 (the
"Notes");
WHEREAS, pursuant to Section 9.02 of the Indenture, the
Company and the Trustee have obtained the consent of the Holders of not less
than a majority in principal amount of the outstanding Notes to the amendments
made hereby;
WHEREAS, the Board of Directors of the Company has authorized
the execution of this Supplemental Indenture and its delivery to the Trustee;
WHEREAS, the Company has delivered an Officers' Certificate
and Opinion of Counsel to the Trustee pursuant to Section 9.07 of the
Indenture; and
WHEREAS, all other actions necessary to make this Supplemental
Indenture a legal, valid and binding obligation of the parties hereto in
accordance with its terms and the terms of the Indenture have been performed;
NOW, THEREFORE, in consideration of the promises contained
herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Company and the Trustee hereby
<PAGE> 3
2
mutually covenant and agree for the equal and proportionate benefit of all
Holders of the Notes as follows:
ARTICLE I
AMENDMENTS
Upon execution of this Supplemental Indenture, the terms of
the Notes and the Indenture shall be amended as follows:
SECTION 1.1. (a) Section 1.01 of the Indenture shall
be amended by striking the word "and" at the end of clause (viii) in the
definition of "Permitted Investments", by renumbering the final clause (ix) of
such definition as clause (x) and by inserting a new clause (ix) on the
immediately preceding line as follows:
"(ix) Investments by the Company or a Restricted Subsidiary in
or in respect of a Person to the extent the consideration for such
Investment consists of shares of Qualified Stock of the Company; and"
(b) Section 1.01 of the Indenture shall further be
amended by renumbering clauses (xiv) and (xv) of the definition of "Permitted
Liens" as clauses (xv) and (xvi), respectively, and by inserting the following
new clause (xiv) on the line immediately preceding new clause (xv):
"(xiv) Liens on Property or assets of a Person existing prior
to the time such Person is acquired by the Company as a result of (a)
an Investment described in clause (ix) of the definition of "Permitted
Investments" herein or (b) an Investment described in clause (vii) of
Section 4.13(b) hereof; provided that such Liens were in existence
prior to the contemplation of such Investment and do not secure any
Property or assets of the Company or any of its Subsidiaries other
than the Property or assets subject to the Liens prior to such
Investment;"
(c) Section 1.01 of the Indenture shall further be
amended by striking the following definitions in their entirety: "Joint
Venture", "Lit Cities Amount", "New Financing Amount" and "Qualified Joint
Venture".
SECTION 1.2. Section 4.09(b) of the Indenture shall be
amended by renumbering clauses (xi) and (xii) as clauses (xii) and (xiii),
respectively, and by inserting the following new clause (xi) on the line
immediately preceding new clause (xii):
<PAGE> 4
3
"(xi) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness of any Person which incurrence resulted
directly from an Investment described in clause (ix) of the definition
of "Permitted Investments" in Section 1.01 hereof; provided that, (x)
immediately after giving effect to such Investment on a pro forma
basis (and treating any Indebtedness which becomes, or is anticipated
to become, an obligation of the Company or any Restricted Subsidiary
as a result of such Investment as having been incurred by the Company
or such Restricted Subsidiary at the time of such Investment), the
Company would (A) be permitted to incur $1.00 of additional
Indebtedness under Section 4.09(a) hereof or (B) have a Debt to EBITDA
Ratio which is equal to or not worse than the Debt to EBITDA Ratio of
the Company immediately prior to such Investment or (y) such
incurrence is otherwise permitted; provided further that Indebtedness
incurred by the Company and its Restricted Subsidiaries under this
clause (xi) as a result of any such Investment does not exceed 50
percent of the Fair Market Value of the Qualified Stock used as
consideration in such Investment; provided further that the aggregate
principal amount of Indebtedness incurred under this clause (xi) does
not exceed $50,000,000;"
SECTION 1.3. Section 4.13(b) of the Indenture shall be
amended by striking existing clauses (vii) and (viii) in their entirety and by
inserting new clauses (vii) and (viii) as follows:
"(vii) making Investments in an aggregate amount not to exceed
$20,000,000 in joint ventures or other risk sharing arrangements
(which may include partnerships, limited liability companies,
corporations or other arrangements) (each a "Joint Venture Entity")
the purpose of which is to engage in the same or complementary lines
of business as the Company or a Restricted Subsidiary or in businesses
consistent with the fundamental nature of the operating business of
the Company or a Restricted Subsidiary; provided the management and
operations of any such Joint Venture Entity are controlled by the
Company pursuant to (i) the charter documents of such Joint Venture
Entity, or (ii) an agreement between or among the holders of the
Voting Stock of such Joint Venture Entity, or (iii) a management
agreement of a minimum duration of three or more years between the
Company and such Joint Venture Entity;"
"(viii) permitting a Restricted Subsidiary which became a
Restricted Subsidiary as a result of an
<PAGE> 5
4
Investment by the Company or a Restricted Subsidiary described in
clause (vii) of this Section 4.13(b) to declare or pay any dividend or
distribution on any Capital Stock of such Subsidiary to all holders of
Capital Stock of such Subsidiary on a pro rata basis; and"
SECTION 1.4. (a) Section 4.15 of the Indenture shall
be amended by striking the language of clause (f) thereof up to subclause (B)
thereof and by inserting the following in its place:
"(f) Capital Stock of a Person which became or will become a
Restricted Subsidiary as a result of an Investment by the Company or a
Restricted Subsidiary described in clause (vii) of Section 4.13(b)
hereof, provided that"
(b) Section 4.15(f) of the Indenture shall further be
amended by re-lettering subclauses (B), (C) and (D) thereof as subclauses (A),
(B) and (C), respectively, by inserting the word "and" before new subclause (C)
and by striking the language beginning "and (E)" through the semi-colon at the
end of subclause (E).
SECTION 1.5. Section 4.17 of the Indenture shall be amended
by striking the period at the end of the first sentence of clause (b) thereof
and by inserting in its place the following:
"; provided, however, that the foregoing restriction shall not
apply to a Person which becomes a Restricted Subsidiary as a result of
(a) an Investment described in clause (ix) of the definition of
"Permitted Investments" in Section 1.01 hereof or (b) an Investment
described in clause (vii) of Section 4.13(b) hereof."
ARTICLE II
MISCELLANEOUS
SECTION 2.1. For all purposes of this Supplemental Indenture,
except as otherwise herein expressly provided or unless the context otherwise
requires: (A) the terms and expressions used herein shall have the same
meanings as corresponding terms and expressions used in the Indenture and (B)
the words "herein," "hereof" and "hereby" and other words of similar import
used in this Supplemental Indenture refer to this Supplemental Indenture as a
whole and not any particular Article, Section or other subdivision.
<PAGE> 6
5
SECTION 2.2. Upon execution of this Supplemental Indenture,
the Indenture shall be modified in accordance herewith, but except as expressly
amended hereby, the Indenture is in all respects ratified and confirmed and all
the terms, conditions and provisions thereof shall remain in full force and
effect.
SECTION 2.3. Upon execution, this Supplemental Indenture
shall form a part of the Indenture and the Supplemental Indenture and the
Indenture shall be read, taken and construed as one and the same instrument for
all purposes, and every holder of Notes heretofore or hereafter authenticated
and delivered under the Indenture shall be bound hereby.
SECTION 2.4. This Supplemental Indenture shall become
effective as of the date first above written.
SECTION 2.5. The Trustee accepts the amendment to the
Indenture effected by this Supplemental Indenture and agrees to execute the
trust created by the Indenture, as hereby amended, but only upon the terms and
conditions set forth in the Indenture, as hereby amended, including the terms
and provisions defining and limiting the liabilities and responsibilities of
the Trustee, which terms and provisions shall in like manner define and limit
the Trustee's liabilities in the performance of the trust created by the
Indenture, as hereby amended. Without limiting the generality of the
foregoing, the Trustee has no responsibility for the correctness of the
recitals of fact herein contained which shall be taken as the statements of the
Company and makes no representations as to the validity or sufficiency of this
Supplemental Indenture, except as to the due and valid execution hereof by the
Trustee, and shall incur no liability or responsibility in respect of the
validity thereof. The Trustee's execution of this Supplemental Indenture
should not be construed to be an approval or disapproval of the advisability of
the amendments to the Indenture provided herein.
<PAGE> 7
6
SECTION 2.6. THIS SUPPLEMENTAL INDENTURE SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY IN SAID STATE.
SECTION 2.7. This Supplemental Indenture may be executed in
any number of counterparts, each of which when so executed shall be deemed to
be an original, and all of such counterparts shall together constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Supplemental Indenture to be duly executed, and their respective corporate
seals to be hereunto affixed and duly attested, all as of the day and year
first above written.
AMERICAN COMMUNICATIONS
SERVICES, INC.
By
------------------------------
Name:
Title:
[Corporate Seal]
Attest:
- --------------------------
THE CHASE MANHATTAN BANK
(formerly known as Chemical Bank),
as Trustee
By
------------------------------
Name:
Title:
[Corporate Seal]
Attest:
- --------------------------
<PAGE> 8
STATE OF )
) SS.:
COUNTY OF )
On the ___ day of ________, 1997, before me personally came
________________________, to me known, who, being by me duly sworn, did depose
and say that he is _________________ of American Communications Services, Inc.,
one of the corporations described in and which executed the foregoing
instrument; that he knows the seal of said corporation; that the seal affixed
to said instrument is such corporate seal; that it was so affixed by authority
of the Board of Directors of said corporation, and that he signed his name
thereto by like authority.
-------------------------------
Notary Public
State of
My commission expires / /
[Seal]
<PAGE> 9
STATE OF )
) SS.:
COUNTY OF )
On the ___ day of ________, 1997, before me personally came
________________________, to me known, who, being by me duly sworn, did depose
and say that he is _________________ of The Chase Manhattan Bank, one of the
corporations described in and which executed the foregoing instrument; that he
knows the seal of said corporation; that the seal affixed to said instrument is
such corporate seal; that it was so affixed by authority of the Board of
Directors of said corporation, and that he signed his name thereto by like
authority.
-------------------------------
Notary Public
State of
My commission expires / /
[Seal]
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
JURISDICTION OF
NAME INCORPORATION
- --------------------------------- ----------------
<S> <C>
American Communication Services Delaware
of Columbia, Inc.
American Communication Services Delaware
of Fort Worth, Inc.
American Communication Services Delaware
of Greenville, Inc.
American Communication Services Delaware
of Little Rock, Inc.
American Communication Services Delaware
of Louisville, Inc.
American Communication Services Delaware
of Albuquerque, Inc.
American Communication Services Delaware
of Charleston, Inc.
American Communication Services Delaware
of Chattanooga, Inc.
American Communication Services Delaware
of El Paso, Inc.
American Communication Services Delaware
of Lexington, Inc.
American Communication Services Delaware
of Pima County, Inc.
American Communication Services Delaware
of Birmingham, Inc.
American Communication Services Delaware
of Mobile, Inc.
ACSI Advanced Data Services, Inc. Maryland
American Communication Services Maryland
of Irving, Inc.
American Communication Services Maryland
of Montgomery, Inc.
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
JURISDICTION OF
NAME INCORPORATION
- --------------------------------- ----------------
<S> <C>
American Communication Services Maryland
of Amarillo, Inc.
American Communication Services Maryland
of Baton Rouge, Inc.
American Communication Services Maryland
of Jackson, Inc.
American Communication Services Maryland
of Spartanburg, Inc.
American Communication Services Maryland
of Columbus, Inc.
American Communication Services Maryland
of Las Vegas, Inc.
American Communication Services Maryland
of Maryland, Inc.
American Communication Services Maryland
of Corpus Christi, Inc.
American Communication Services Maryland
of Colorado Springs, Inc.
American Communication Services Maryland
of Kansas City, Inc.
American Communication Services Maryland
of Chattanooga, Inc.
American Communication Services Maryland
of Austin, Inc.
American Communication Services Maryland
of Dallas, Inc.
American Communication Services Maryland
of Jacksonville, Inc.
American Communication Services Maryland
of Knoxville, Inc.
American Communication Services Maryland
of New Orleans, Inc.
American Communication Services Maryland
of Rio Rancho, Inc.
American Communication Services Maryland
of Roanoke, Inc.
American Communication Services Maryland
of Savannah, Inc.
American Communication Services Maryland
of Shreveport, Inc.
American Communication Services Maryland
of Tampa, Inc.
American Communication Services Maryland
of Tulsa, Inc.
</TABLE>
<PAGE> 1
EXHIBIT 23.1
ACCOUNTANTS' CONSENT
The Stockholders and Board of Directors
American Communications Services, Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the headings "Selected Consolidated Financial Data" and "Experts"
in the Prospectus.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Washington, D.C.
January 31, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF PIPER & MARBURY L.L.P.
The Stockholders and Board of Directors
American Communications Services, Inc.:
We consent to the reference to our firm under the heading "Legal Matters"
in the Prospectus.
/s/ PIPER & MARBURY L.L.P.
Piper & Marbury L.L.P.
January 30, 1997
