<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 9, 1997
REGISTRATION NO. 333-20867
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 2
TO
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(1) FEE(2)
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $.01 per share............. $80,500,000 $24,394
==============================================================================================================
</TABLE>
(1) Includes those shares of Common Stock being sold directly to certain
stockholders of the Registrant. See "Sale to Purchaser Stockholders."
(2) Calculated in accordance with Rule 457(o) under the Securities Act of 1933
at the time of the initial filing of the Registration Statement and
Pre-Effective Amendment No. 1 thereto, and all of which was paid previously.
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
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be
used in connection with an underwritten public offering and one to be used in
connection with a direct sale by the Company to certain of its principal
stockholders. The two prospectuses are identical except for the front and back
cover pages. Final forms of each Prospectus will be filed with the Securities
and Exchange Commission under Rule 424(b) under the Securities Act of 1933.
<PAGE> 3
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
APRIL 10, 1997
SHARES
ACSI Logo
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 April 9,
1997 the last reported sales price of the Common Stock on the Nasdaq Stock
Market was $6.125 per share. See "Price Range of Common Stock." Simultaneous
with this offering, the Company is offering directly to the Company's principal
stockholders (the "Purchaser Stockholders") an aggregate of shares of Common
Stock, at a price of $ per share. See "Sale to Purchaser Stockholders."
Consummation of the Company's offering to the Purchaser Stockholders is a
condition precedent to consummation of this offering.
------------------
INVESTMENT IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 9.
------------------
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>
=========================================================================================================
<S> <C> <C> <C>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS COMPANY(1)
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................. $ $ $
- ---------------------------------------------------------------------------------------------------------
Total(2)(3)............................... $ $ $
</TABLE>
================================================================================
(1) Before deducting expenses estimated at $775,000, payable by the Company.
(2) The total Proceeds to Company includes $ of proceeds to the Company from
its sale to the Purchaser Stockholders of shares of its Common Stock.
(3) 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."
------------------
All of 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
being offered by the several Underwriters, will be made at the offices of Alex.
Brown & Sons Incorporated, Baltimore, Maryland on or about ,
1997.
ALEX. BROWN & SONS
INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1997.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
<PAGE> 4
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
APRIL 10, 1997
SHARES
[ACSI LOGO]
COMMON STOCK
------------------
All of the shares of Common Stock offered hereby are being sold
by American Communications Services, Inc. ("ACSI" or the "Company") at a price
of $ per share. The total net proceeds from this offering to the Company
will be $ . The Common Stock is traded on the Nasdaq Stock Market under
the symbol "ACNS." On April 9, 1997 the last reported sales price of the Common
Stock on the Nasdaq Stock Market was $6.125 per share. See "Price Range of
Common Stock."
Simultaneously with this offering the Company is offering to the public an
aggregate of shares of Common Stock at a price of $ per share in an
underwritten public offering. See "Underwriting." Net proceeds from the
underwritten public offering to the Company will be $ , before deducting
expenses estimated at $775,000, payable by the Company. Consummation of the
Company's underwritten public offering is a condition precedent to consummation
of this offering.
------------------
INVESTMENT IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 9.
------------------
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.
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE> 5
[MAP TO BE INSERTED.]
This Prospectus includes trademarks, trade names and service marks of the
Company and other companies.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES AND THE IMPOSITION OF A PENALTY BID, DURING AND AFTER THE OFFERING.
SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ STOCK MARKET IN ACCORDANCE WITH RULE 103 UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING."
<PAGE> 6
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. Subsequent to June 30, 1996, the Company changed
its fiscal year-end from June 30 to December 31. Accordingly, all data for the
fiscal period ended December 31, 1996 is for the six month period ended December
31, 1996.
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 began
offering local switched voice services in three additional markets using its own
switching facilities by March 1997. The Company's local switched services
include local exchange services (dial tone), advanced ISDN and enhanced voice
services. Beginning April 1, 1997, the Company began offering local switched
services on a resale basis in 9 markets, expects this number to increase to 15
by the end of April and plans to expand further the number of markets in which
it is reselling local switched services throughout 1997 and the first quarter of
1998. In late 1996, the Company also deployed ACSINet, a coast-to-coast, leased
broadband data communications network through which the Company offers frame
relay, ATM and Internet access services to both Internet service providers
("ISPs") and local businesses. As of March 31, 1997, the Company had ACSINet
data POPs in 42 markets, including all but one of the markets in which the
Company has operational local networks. Additionally, principally through the
Company's recent acquisition of Cybergate, Inc., a Florida-based ISP, the
Company has begun providing Internet services. The Cybergate acquisition
provides a foundation to support the Company's Internet service offerings to
ISPs in existing ACSI markets and to end users in targeted ACSI markets.
ACSI LOCAL NETWORKS
From January 1, 1996 to December 31, 1996, the Company increased the number
of its operational local networks from nine to 21 and increased its route miles
in service from 136 to 697. As of March 31, 1997, the Company had 28 operational
local networks and had 8 additional local networks under construction. The
Company is actively developing marketing and engineering plans necessary to
achieve its goal (subject to its ability to obtain sufficient additional funds
after this offering) of 50 local networks operating by December 1998. The
following local network information is provided as of March 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 31.4 12-95 Austin, TX.................. 2.2 9-97
Amarillo, TX................ 0.8 1.0 9-96 Baton Rouge, LA............. 1.2 4-97
Baltimore, MD............... 2.8 12.0 10-96 Dallas, TX.................. 1.5 6-97
Birmingham, AL.............. 1.8 3.4 5-96 Knoxville, TN............... 2.3 9-97
Charleston, SC.............. 1.9 1.9 4-96 Rio Rancho, NM.............. 14.2 9-97
Chattanooga, TN............. 1.6 1.6 12-96 Roanoke, VA................. 1.2 9-97
Colorado Springs, CO........ 1.0 1.0 1-97 Savannah, GA................ 6.6 9-97
Columbia, SC................ 2.2 18.5 10-95 Tampa, FL................... 1.6 9-97
Columbus, GA................ 2.2 31.5 9-96
Corpus Christi, TX.......... 2.6 2.6 2-97
El Paso, TX................. 1.2 69.0 11-95
Fort Worth, TX.............. 1.6 99.3 6-95
Greenville, SC.............. 2.0 11.0 5-95
Irving, TX.................. 8.8 23.0 9-96
Jackson, MS................. 2.2 5.4 7-96
Jacksonville, FL............ 1.4 1.4 3-97
Kansas City, MO............. 2.0 2.0 3-97
Las Vegas, NV............... 0.2 16.4 5-96
Lexington, KY............... 3.0 14.5 3-96
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 40.5 12-95
New Orleans, LA............. 3.9 3.9 3-97
Shreveport, LA.............. 1.2 1.2 3-97
Spartanburg, SC............. 4.1 4.3 6-96
Tucson, AZ.................. 6.3 109.0 12-95
Tulsa, OK................... 1.5 2.0 1-97
</TABLE>
3
<PAGE> 7
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> 8
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 February 28, 1997, ACSI had more than 40
rights-of-way agreements with gas and electric utility companies, ILECs
and CATVs, allowing the Company to construct its local networks using
those companies' infrastructure of conduits and utility poles. The
Company historically has leveraged and plans to continue to leverage
relationships with these companies to generate revenues and obtain cost
effective rights-of-way. For the fiscal period ended December 31, 1996,
approximately 40% of the Company's revenues were billed to four of the
largest IXCs for services provided for the benefit of their customers.
The Company has a five year agreement with MCImetro, pursuant to which
MCImetro has agreed to purchase minimum levels of dedicated services from
ACSI and has committed to construct portions of ACSI's fiber optic local
networks in six cities. The Company has also signed agreements with AT&T
and two other IXCs, pursuant to which the Company expects AT&T and such
other IXCs to use the Company as a supplier of dedicated special access
services as well as such other services as may be agreed upon in
particular markets.
RECENT DEVELOPMENTS
Effective March 6, 1997, the Company and MCImetro entered into an agreement
in which MCI names ACSI as its preferred local provider for dedicated and
transport services in 21 ACSI markets for at least a five year period. Pursuant
to this preferred provider agreement, MCI will migrate current dedicated
transport circuits in these markets to ACSI and ACSI will be listed as the first
choice provider in MCI's provisioning system for all new dedicated access
circuits in the designated markets. The preferred provider agreement
contemplates that the parties will execute an agreement giving MCI the option to
purchase loop transport services from ACSI where ACSI has collocations with the
ILEC and MCI has deployed its own local switch. If this loop transport agreement
is not executed prior to April 30, 1997, MCI can terminate ACSI's preferred
provider status and ACSI's right of first refusal under the preferred provider
agreement. The parties also have agreed to use their best efforts to execute an
agreement pursuant to which MCI will resell local switched services in at least
10 of the 21 identified markets on a wholesale basis by July 23, 1997. In
connection with these agreements (collectively, the "MCI Transaction"), ACSI
issued MCI warrants to purchase up to 620,000 shares of ACSI's Common Stock at
$9.86 per share, subject to number and price adjustment in certain
circumstances. ACSI has also agreed to issue warrants to purchase up to an
aggregate of approximately 1.7 million additional shares of ACSI's Common Stock
at fair market value on the date of grant in tranches every six months after
execution of the preferred provider agreement, subject to, and based upon,
certain increases in revenues to ACSI generated under that agreement. Of the
620,000 warrants issued to MCI on March 6, 1997, 360,000 warrants will vest only
when the loop transport agreement is executed or MCI has agreed in writing not
to terminate ACSI's preferred provider status or right of first refusal under
the preferred provider agreement (the "Waiver") and the remaining 260,000
warrants will vest only upon execution of the switched services resale agreement
and the loop transport agreement or when MCI has executed the Waiver. Subject to
certain exceptions, including this offering, MCI has the right to purchase
additional shares of ACSI's Common Stock at a 10% discount to fair market value
so MCI can maintain its equity ownership interest in the Company after giving
effect to warrants issued in connection with the MCI Transaction and shares
issued upon exercise of such warrants. MCI has certain registration rights with
respect to any shares of Common Stock issued to MCI in connection with the MCI
Transaction. If MCI terminates ACSI's status as a preferred provider or ACSI's
right of first refusal under the preferred provider agreement for any reason
(other than ACSI's default under such agreement or a related agreement or a
change in control of ACSI) or MCI fails to deliver to ACSI the Waiver, in each
case, on or before May 12, 1997, the warrants, to the extent issued and not
previously exercised, ACSI's obligation to issue additional warrants, MCI's
right to purchase additional shares of ACSI in
5
<PAGE> 9
order to maintain its equity ownership interest and ACSI's obligation to
register shares of ACSI common stock issuable to MCI in connection with the MCI
Transaction will terminate.
On January 17, 1997, the Company acquired 100% of the outstanding capital
stock of Cybergate, Inc. in exchange for 1,030,000 shares of Common Stock plus
up to an additional 150,000 shares if certain performance goals are achieved
(the "Cybergate Acquisition"). Cybergate, a Florida-based ISP, delivers
high-speed data communications services, including computer network connections
and related infrastructure services, that provide both commercial and
residential customers access to the Internet through their personal computers
and the use of a modem. Cybergate had over 200 commercial dedicated line
accounts and 13,000 consumer accounts at December 31, 1996 compared to 25
commercial accounts and 7,500 consumer accounts at December 31, 1995. Cybergate
had revenues of approximately $4.9 million and EBITDA of approximately $744,000
for the year ended December 31, 1996. The Company believes the Cybergate
Acquisition will help it achieve its goal of becoming a major provider of
high-speed data communications services in the southern United States. The
Cybergate Acquisition provides ACSI with the ability to offer direct Internet
access to end-user commercial 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. Effective February 2, 1997,
the employment of Richard A. Kozak, who was named President and Chief Executive
Officer -- Corporate Services and Acting Chief Financial Officer in the
management reorganization, was terminated. Mr. Kozak and the Company have
settled their dispute relating to Mr. Kozak's termination. See "Certain
Transactions."
Mr. David L. Piazza joined the Company as its Chief Financial Officer on
March 24, 1997. For the last 10 years, Mr. Piazza has been employed by MFS
Communications Company, Inc. ("MFS Communications") in various finance and
senior management positions, most recently as the Senior Vice President and
Chief Financial Officer of MFS Telecom, Inc., a subsidiary of MFS
Communications. Prior to his employment with MFS Communications, Mr. Piazza was
employed by AT&T in its finance and support divisions. Mr. Piazza will report
directly to Mr. Reich. See "Management -- Executive Officers and Directors."
6
<PAGE> 10
THE OFFERING
Common Stock offered by the Company to
the public..............................
Common Stock offered by the Company to
the Purchaser Stockholders.............. ________
Total Common Stock offered by the
Company................................. 8,000,000
Common Stock to be outstanding after the
offering................................ 33,452,823(1)
Use of proceeds......................... To be applied principally toward
the completion of the Company's
50-city local network plan,
operation of its coast-to-coast,
leased broadband data
communications network and
implementation of local switched
voice services, to fund negative
cash flow and to pay approximately
$600,000 of the $8.0 million of
accrued dividends on the Company's
Preferred Stock. See "Use of
Proceeds."
Nasdaq Stock Market Symbol.............. ACNS
- ---------------
(1) Includes 17,377,264 shares issued and issuable upon conversion of 464,164
shares of Preferred Stock. Excludes shares to be issued upon conversion
of 429,566 shares of the Preferred Stock in payment of $7.4 million of
accrued dividends thereon. Excludes 12,881,563 shares issuable upon exercise
of options and warrants outstanding on February 28, 1997, at a weighted
average exercise price of $4.65 per share. Also excludes an increase in the
number of shares issuable upon exercise of certain of the warrants
outstanding on that date (and a corresponding decrease in the weighted
average exercise price set forth above), the extent of both of which will
depend, in large part, on the amount by which the average per share closing
price of the Common Stock for the 20 days prior to the closing of this
offering (the "Average Price") exceeds $ . If the Average Price is
$ (the average per share closing price for the 20 days prior to the
date of this Prospectus), an additional shares would be issuable
upon exercise of outstanding warrants, and the weighted average exercise
price set forth above would be reduced to $ per share. Options to
purchase 166,667 of these shares were canceled subsequent to February 28,
1997. See "Certain Transactions." Also excludes 500,000 shares issuable in
connection with the Company's Employee Stock Purchase Plan and up to
approximately 2.3 million shares issuable upon the exercise of warrants
granted or to be granted in connection with the MCI Transaction, subject to
increase in certain circumstances. See "-- Recent Developments."
RISK FACTORS
Investment in the Common Stock involves a high degree of risk. See "Risk
Factors" beginning on page 9 of this Prospectus.
------------------------
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 464,164 shares of the
Company's Preferred Stock will have been converted into 17,377,264 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> 11
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE, NETWORK AND STATISTICAL DATA)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED FISCAL PERIOD ENDED
FISCAL YEAR ENDED JUNE 30, DECEMBER 31, DECEMBER 31,(1)
------------------------------------- ------------ ------------------------
1995 1996 1995 1996
--------- ------------------------ ------------ ------------------------
ACTUAL PRO FORMA(2) (UNAUDITED) ACTUAL PRO FORMA(2)
-------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................... $ 389 $ 3,415 $ 7,138 $ 989 $ 6,990 $ 9,626
Operating expenses................. 14,797 24,543 29,027 7,966 34,434 37,548
Loss from operations............... (14,408) (21,128) (21,889) (6,977) (27,444) (27,922)
Interest and other income.......... 218 4,410 4,410 777 2,757 2,773
Interest and other expense......... (170) (10,477) (10,824) (2,835) (10,390) (10,619)
Loss before minority interest...... (14,746) (27,195) (28,303) (9,035) (35,077) (35,768)
Minority interest(3)............... 48 413 413 156 160 160
Net loss........................... (14,698) (26,782) (27,890) (8,879) (34,917) (35,608)
Net loss per common share.......... $ (3.30) $ (4.96) $ (4.40) $ (1.82) $ (5.48) $ (4.84)
Weighted average shares
outstanding...................... 4,772 6,185 7,215 5,901 6,734 7,764
OTHER DATA:
EBITDA(4).......................... $ (7,443) $(14,901) $(14,418) $ (4,855) $(21,822) $(21,620)
Depreciation and amortization...... 498 3,078 4,322 763 4,911 5,592
Capital expenditures............... 15,303 60,856 61,667 17,657 64,574 64,832
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(5) AS ADJUSTED(5)(6)
--------- ------------ -----------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 78,618 $ 75,178
Total assets........................................... 230,038 240,578
Long-term liabilities.................................. 216,484 217,583
Redeemable stock, options and warrants................. 2,000 2,000
Stockholders' equity................................... (27,038) (18,283)
</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(7):
Total markets (in operation or under
construction)....................... 17 20 22 30 36
Networks in operation................. 9 10 15 19 21
Networks under construction........... 8 10 7 11 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) Subsequent to June 30, 1996, the Company changed its fiscal year-end from
June 30 to December 31. All data for the fiscal period ended December 31,
1996 is for the six month period ended December 31, 1996.
(2) Pro forma to give effect to the Cybergate Acquisition as if consummated at
the beginning of the earliest period presented.
(3) 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."
(4) EBITDA consists of net income (loss) before net interest, income taxes,
depreciation and amortization, noncash stock compensation and, in fiscal
year ended June 30, 1995, debt conversion expense of $385,000. 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. Noncash compensation expense
associated with employee stock options was $6.4 million and $2.7 million in
fiscal years ended June 30, 1995 and 1996, respectively, and $1.2 million
and $550,000 in the six months ended December 31, 1995 and fiscal period
ended December 31, 1996, respectively. See Note 6 of "Notes to Consolidated
Financial Statements."
(5) Pro forma to give effect to the Cybergate Acquisition as if consummated on
December 31, 1996.
(6) Adjusted to give effect to: (i) sale to the Underwriters of of the
shares of Common Stock offered hereby, sale to the Purchaser Stockholders of
of the shares offered hereby and application of the estimated net
proceeds therefrom and (ii) conversion of the Preferred Stock and payment of
$600,000 of accrued dividends in cash and $7.4 million of accrued dividends
in shares of Common Stock in connection with such conversion.
(7) Network and Selected Statistical Data are derived from ACSI's records.
8
<PAGE> 12
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.
Negative Cash Flow; Anticipated Future Losses; Significant Future Capital
Requirements; Need for Additional Cash. The Company has never been profitable,
has never generated positive cash flow from consolidated operations and, since
its inception has incurred significant net operating losses and negative cash
flow. As of June 30, 1996 and December 31, 1996, the Company had accumulated
deficits of $47.5 million and $82.4 million, respectively. During the fiscal
period ended December 31, 1996, the Company incurred a net operating loss of
$27.4 million and generated negative cash flow from operations of $6.7 million.
The Company expects to continue to incur operating losses and negative cash flow
from operations for at least the next several years in connection with
establishing its local networks and implementing its local switched voice and
high-speed data services. Although the Company had begun to generate revenues
from its operational local networks as of February 28, 1997, it had not yet
generated revenues from any of its other networks. There can be no assurance
that the Company's networks or any of its other services will ever provide a
revenue base adequate to achieve or sustain profitability or to generate
positive cash flow.
The Company's continued development, construction, expansion, operation and
potential acquisition of local networks, as well as the further development of
new services, including local switched voice and high-speed data services, will
require substantial capital expenditures. The Company's ability to fund these
expenditures is dependent upon the Company's ability to raise substantial
financing. As of December 31, 1996, the Company had raised approximately $229.0
million from debt and equity financings, $30.2 million of which had been
advanced under a $31.2 million secured credit facility with AT&T Credit
Corporation, a subsidiary of AT&T Corporation (the "AT&T Credit Facility"),
$96.1 million of which had been raised from the issuance of $190.0 million
principal amount of the Company's 13% Senior Discount Notes due 2005 (the "2005
Notes") and warrants to purchase 2,432,000 shares of Common Stock at $7.15 per
share (the "Warrants") and $61.8 million of which had been raised from the
issuance of $120.0 million principal amount of the Company's 12 3/4% Senior
Discount Notes due 2006 (the "2006 Notes" and, with the 2005 Notes, the
"Notes"). The Company estimates that from January 1, 1997 through December 31,
1997 and December 31, 1998, remaining capital required for implementation of its
integrated networks and its other services and to fund negative cash flow will
be approximately $185 million and $335 million, respectively. At December 31,
1996, the Company had approximately $78.6 million of cash and cash equivalents
available for this purpose. The Company will use approximately $ million of
the estimated net proceeds from this offering principally toward completion of
the Company's 50-city local network plan, operation of its coast-to-coast,
leased broadband data communications network and implementation of its local
switched voice services and to fund negative operating cash flow. However,
unless the Company obtains additional funds after this offering, it will be
unable to reach its goal of local networks in 50 cities. 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.
Management anticipates that the Company's cash resources following this
offering will be insufficient to fund the Company's continuing negative cash
flow and the capital expenditures required to complete the Company's planned
networks. Furthermore, without an infusion of additional cash following this
offering, the Company will exhaust its cash resources during the third quarter
of 1997, even if it halts construction on all additional networks and limits
operations to the networks in service as of the date of this Prospectus. To meet
its additional remaining capital requirements and to successfully implement its
growth strategy, ACSI will be required to sell
9
<PAGE> 13
additional equity securities, increase its existing credit facility, acquire
additional credit facilities or sell additional debt securities, certain of
which would require the consent of the Company's debtholders. Furthermore,
before incurring additional indebtedness, the Company may be required to seek
additional equity financing to maintain balance sheet and liquidity ratios
required under certain of its debt instruments and, as a result of the
registration rights of certain of the Company's security holders, the Company's
ability to raise capital through a public offering of equity securities may be
limited. Accordingly, there can be no assurance that the Company will be able to
obtain the additional financing necessary to satisfy its cash requirements or to
implement its growth strategy successfully, in which event the Company will be
forced to curtail its planned network expansion and may be unable to fund its
ongoing operations. This would have a material adverse effect on its business,
results of operations and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Rapid Expansion of Operations. Subject to the sufficiency of its cash
resources, ACSI plans to continue to expand its business rapidly. The Company's
goal (subject to its ability to obtain sufficient additional funds after this
offering) is to have 50 local networks operating by December 1998. As of March
31, 1997, 28 of the Company's local networks were operational; its switched
voice services were being offered in only five 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. In the past
three months, the Company has effected a management reorganization in connection
with which the Company hired two new members of senior management and saw the
departure of several significant employees. 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 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, however, 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 or that the failure of either of the foregoing to
occur would not have a material adverse effect on the Company's business,
operating results and financial condition.
10
<PAGE> 14
Substantial Leverage; Future Cash Obligations. Since inception, the
Company's consolidated cash flow from operations has been negative. As a result,
the Company has been required to pay its fixed charges (including interest on
existing indebtedness) and operating expenses with the proceeds from sales of
its debt and equity securities. As a result of the issuance of 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 December 31, 1996, the Company (through five of its
subsidiaries) had approximately $30.2 million in debt outstanding under the AT&T
Credit Facility. 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 December 31, 1996, the Company had approximately
$216.5 million of consolidated outstanding long-term indebtedness. As of
December 31, 1996, the total consolidated liabilities of the Company were
approximately $255.1 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."
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." In addition, the terms of
any debt or equity financings undertaken by the Company to meet its future cash
requirements could restrict the Company's operational flexibility and thereby
adversely affect the Company's business, results of operations and financial
condition.
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 the fiscal period ended December 31, 1996, approximately
60% and 40% of the Company's revenues, respectively, were attributable to access
services provided to four of the largest IXCs, 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. Additionally, in the fiscal period ended December 31, 1996,
approximately 19% of the Company's revenues were generated by ISPs. See
"-- Competition," "Business -- Competition" and "-- Regulation."
11
<PAGE> 15
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 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 material 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
12
<PAGE> 16
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. The Federal
Telecommunications Act imposes a duty upon all ILECs to negotiate in good faith
with potential interconnectors such as the Company 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 Company sought state PSC arbitration
related to agreements for local interconnection and access to unbundled elements
with BellSouth, Southwestern Bell, US West, GTE and Sprint/Central Telephone.
Southwestern Bell, GTE and US West have filed lawsuits in federal and/or state
courts in several states seeking to overturn arbitration awards and prevent
implementation of the ACSI interconnection agreements. If successful, these
lawsuits could delay or interrupt ACSI's interconnection arrangements with the
ILECs in the affected states. Moreover, since ACSI purchases ILEC local services
for resale pursuant to the terms of the interconnection agreements at issue, any
adverse outcome in these lawsuits could impede ACSI's plans to resell ILEC local
services in the affected markets. The Company is unable to predict the likely
outcome of the lawsuits described above, or the probable timeframe for decision.
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 that court decisions or changes in
current or future federal or state legislation or regulations would not
materially adversely affect the Company. See "-- Competition" 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.
13
<PAGE> 17
- 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 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
14
<PAGE> 18
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, 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 December 31, 1996, the Company had posted approximately $6.2
million of performance bonds and letters of credit and expects to post
additional bonds or letters of credit in the future. As of December 31, 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
15
<PAGE> 19
has been stayed by a federal court (American Civil Liberties Union v. Janet
Reno, C.A. No. 96-963 (U.S. Dist. Ct., E.D. 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."
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 in which the Purchaser Stockholders have agreed to purchase an
aggregate of of the shares being offered hereby, 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, payment of $7.4 million of
accrued dividends in connection with the conversion of 429,556 shares of
Preferred Stock and exercise of currently exercisable options and warrants),
including %, % and % of the then outstanding Common Stock which will be
beneficially owned by The Huff Alternative Income Fund, L.P. ("Huff"), ING
Equity Partners, L.P. ("ING") and affiliates of First Analysis Corporation
("FAC"), 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
16
<PAGE> 20
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, is thinly traded and has experienced significant price
volatility. There can be no assurance that, after the completion of this
offering, the Company's Common Stock will be traded more actively or that its
price fluctuations will be less volatile. 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 approximately 33,453,973 shares of
Common Stock, excluding the approximately shares to be issued in
payment of accrued dividends on 429,566 shares of Preferred Stock. The 8,000,000
shares offered hereby (other than the shares sold to the Purchaser Stockholders
in this offering or otherwise acquired by affiliates) and approximately
2,862,918 of the approximately 25,543,973 shares outstanding prior to this
offering (after giving effect to the conversion of the Preferred Stock, but
excluding the approximately shares to be issued in payment of accrued
dividends on 429,566 shares of Preferred Stock ) are freely transferable without
registration
under the Securities Act of 1933, as amended (the "Securities Act"). The
approximately 22,591,055 remaining shares outstanding prior to this offering are
"restricted securities" as that term is defined in Rule 144 of the Securities
Act, approximately 21,439,836 of which are subject to the Lock-Up Agreements
described below. Assuming the recently adopted amendments to Rule 144 became
effective as of the date of this Prospectus (such amendments become effective on
April 29, 1997), approximately 1,202,185 of the restricted shares will be freely
transferable under Rule 144(k) and approximately 20,242,633 of the restricted
shares will be saleable subject to certain volume and manner of sale
restrictions under Rule 144. Of the shares freely transferable under Rule 144(k)
or saleable subject to Rule 144 limitations, approximately 20,404,163 shares are
subject to the Lock-Up Agreements described below. Of the approximately
20,242,633 shares eligible for sale under Rule 144, approximately 273,945 shares
will have become freely transferable under Rule 144(k) on September 1, 1997 and
an additional approximately 21,959 will have become freely transferable under
Rule 144(k) on 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 approximately 45,000 restricted shares will have become
saleable subject to Rule 144 limitations, with an additional approximately
16,042 restricted shares becoming saleable subject to Rule 144 limitations by
January 1, 1998.
The holders of 24,896,764 shares of Common Stock and 521,540 shares of
Common Stock (including, in each case, shares issued or 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 executed or have
agreed to execute an agreement not to sell or otherwise dispose of any of those
shares of Common Stock or shares of Common Stock acquired in this offering or
acquired as a result of the payment of accrued dividends on converted shares of
Preferred Stock for a
17
<PAGE> 21
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 in payment of accrued dividends thereon and (iii)
issuable upon exercise of outstanding options and warrants, including the
additional shares issuable because of certain anti-dilutive provisions of the
Warrants, have either piggyback or demand registration rights relating to those
shares. Holders of approximately 2,998,430 outstanding shares and approximately
22,548,979 shares issuable upon conversion of the Preferred Stock and exercise
of options and warrants have waived or agreed to waive 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). As a
result, the Company's ability to raise additional cash through a public offering
of its equity securities may be limited. There can be no assurance that persons
with piggyback and demand registration rights who have not waived or agreed to
waive those rights (holding up to approximately 1,147,173 shares of outstanding
Common Stock and up to approximately 343,218 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 1,000,000 of
the 1,030,000 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 approximately 13,381,563 shares reserved for issuance upon exercise
of options and warrants outstanding on February 28, 1997 and in connection with
the Company's Employee Stock Purchase Plan, approximately 2,352,640 shares and
approximately 8,594,035 shares have been registered under the Securities Act on
Form S-3 and Form S-8 registration statements, respectively. These numbers
exclude the additional shares issuable upon exercise of the Warrants due to
certain anti-dilution provisions, the extent of which will depend, in large
part, on the amount by which the Average Price exceeds $ . Any additional
shares issuable upon exercise of the Warrants will be registered under the
Securities Act upon issuance. 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), assuming of the shares offered hereby are
sold to the Underwriters and of the shares are sold directly to the
Purchaser Stockholders. The Company intends to use approximately $ mil-
18
<PAGE> 22
lion of the net proceeds toward the completion of its 50-city local network
plan, operation of its coast-to-coast, leased broadband data communications
network and implementation of its local switched voice services and to fund
negative cash flow. The Company has estimated that as of December 31, 1996, the
total remaining capital required for implementing integrated networks and its
other services and to fund negative cash flow through December 31, 1997 and
December 31, 1998 was approximately $185 million and $335 million, respectively.
However, unless the Company obtains additional funds after this offering, it
will be unable to reach its goal of local networks in 50 cities. In addition,
management anticipates that the Company's cash resources following this offering
will be insufficient to fund the Company's continuing negative cash flow and the
capital expenditures required to complete the Company's planned networks and
successfully implement its growth strategy, and, further, that the Company will
exhaust its cash resources during the third quarter of 1997, even if it halts
construction on all additional networks and limits operations to the networks in
service as of the date of this Prospectus. As a result, if the Company is unable
to obtain additional cash through the sale of debt or equity securities or
increases in existing or new credit facilities, the Company will be forced to
curtail its planned network expansion and may be unable to fund its existing
operations.
In addition, the Company will use approximately $600,000 of net proceeds
from this offering to pay a portion of the accrued dividends on its Preferred
Stock, all of which will have been converted into 17,377,264 shares of Common
Stock upon completion of this offering. The remainder of the $8.0 million of
accrued dividends will be paid in approximately shares of Common Stock,
using a $ per share price.
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.
19
<PAGE> 23
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 Period Ended December 31, 1996
First Quarter................................ $13.25 $8.50
Second Quarter............................... 12.38 9.88
Fiscal Year Ending December 31, 1997
First Quarter................................ 11.13 6.50
Second Quarter (through April 9).............
</TABLE>
On April 9, 1997, the last reported sales price for the Company's Common
Stock as reported on The Nasdaq Stock Market was $ . 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
rate of 9% on its issued Preferred Stock. Such accrued dividends, totalling
approximately $8.0 million as of the date of this Prospectus, will be paid
$600,000 in cash and in shares of Common Stock cumulative upon the
consummation of this offering, at which time all of the Preferred Stock will
have been 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."
20
<PAGE> 24
CAPITALIZATION
The following table sets forth the total cash and cash equivalents and
capitalization of the Company (i) as of December 31, 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 of the 8,000,000
shares of Common Stock offered hereby to the Underwriters and the sale of the
remainder of the shares directly to the Purchaser Stockholders and application
of the estimated net proceeds therefrom, the conversion of 464,164 shares of
Preferred Stock into 17,377,264 shares of Common Stock and payment of $560,000
and $6.39 million of accrued dividends in cash and shares of Common
Stock, respectively (the same proportion of accrued dividends payable that will
be paid in cash and shares of Common Stock upon completion of this offering).
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>
DECEMBER 31, 1996
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 78,618 $ 75,178 $
======== ======== =========
Long term debt
12 3/4% Senior Discount Notes due 2006.................. $ 70,825 $ 70,825 $ 70,825
13% Senior Discount Notes due 2005...................... 109,402 109,402 109,402
Notes payable(1)........................................ 29,311 29,717 29,717
Other long-term liabilities............................. -- 693 693
Dividends payable....................................... 6,946 6,946 --
-------- -------- ---------
Total long-term debt............................... 216,484 217,583 210,637
Redeemable stock, options & warrants........................ 2,000 2,000 2,000
Minority interest........................................... -- -- --
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, 6,784,996 shares issued and
outstanding at December 31, 1996; 7,814,996 shares
pro forma; 33,192,260 shares pro forma, as
adjusted(3)(4)....................................... 68 78
Additional paid-in capital.............................. 54,869 63,614
Accumulated deficit..................................... (82,440) (82,440)
-------- -------- ---------
Total stockholders' equity (deficit)............... (27,038) (18,283)
-------- -------- ---------
Total capitalization.......................... $191,446 $201,300
======== ======== =========
</TABLE>
- ---------------
(1) Consists primarily of the AT&T Credit Facility totalling $31.2 million, of
which approximately $30.2 million had been drawn as of December 31, 1996.
(2) As of December 31, 1996, 1,500,000 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.
(3) Excludes 7,457,085 and 4,771,836 shares reserved for issuance upon exercise
of options and warrants, respectively, outstanding at December 31, 1996, at
a weighted average exercise price of $4.37 and 500,000 shares issuable in
connection with the Company's Employee Stock Purchase Plan. Also excludes an
increase in the number of shares issuable upon exercise of the Warrants (and
a corresponding decrease in the weighted average exercise price set forth
above), the extent of both of which will depend, in large part, on the
amount by which the Average Price exceeds $ . If the Average Price is
$ (the per share average closing price for the 20 days prior to the
date of this Prospectus), an additional shares would be issuable
upon exercise of the Warrants, and the weighted average exercise price set
forth above would be reduced to $ per share.
(4) The aggregate proceeds from the exercise of all warrants and options
outstanding at December 31, 1996, would be approximately $53.4 million.
21
<PAGE> 25
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 fiscal year ended June 30, 1996 and for the fiscal period ended December
31, 1996 and an Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
December 31, 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 December 31, 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>
FISCAL YEAR ENDED JUNE 30, 1996 FISCAL PERIOD ENDED DECEMBER 31, 1996(1)
---------------------------------------------- ----------------------------------------------
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 $ 6,990 $ 2,636 $ 9,626
Operating expenses:
Network development and
operations.................. 5,265 1,762 $ -- 7,027 8,703 1,136 $ -- 9,839
Selling, general and
administrative.............. 13,464 1,378 100(2) 14,942 20,270 1,247 50(2) 21,567
Noncash stock and
compensation................ 2,736 -- -- 2,736 550 -- -- 550
Depreciation and
amortization................ 3,078 372 872(3) 4,322 4,911 245 436(3) 5,592
-------- ------- ------- -------- -------- ------- ----- --------
Total operating
expenses................ 24,543 3,512 972 29,027 34,434 2,628 486 37,548
-------- ------- ------- -------- -------- ------- ----- --------
Operating income (loss)......... (21,128) 211 (972) (21,889) (27,444) 8 (486) (27,922)
Non-operating income (expense).. (6,067) (27) (320)(4) (6,414) (7,633) (53) (160)(4) (7,846)
-------- ------- ------- -------- -------- ------- ----- --------
Income (loss) before minority
interest...................... (27,195) 184 (1,292) (28,303) (35,077) (45) (646) (35,768)
Minority interest............... 413 -- -- 413 160 -- -- 160
-------- ------- ------- -------- -------- ------- ----- --------
Net income (loss)............... (26,782) 184 (1,292) (27,890) (34,917) (45) (646) (35,608)
Preferred stock dividends and
accretion..................... (3,871) -- -- (3,871) (2,003) -- -- (2,003)
-------- ------- ------- -------- -------- ------- ----- --------
Net income (loss) to common
stockholders.................. $(30,653) $ 184 $(1,292) $(31,761) $(36,920) $ (45) $(646) $(37,611)
======== ======= ======= ======== ======== ======= ===== ========
Net loss per common
stockholder................... $ (4.96) $ (4.40) $ (5.48) $ (4.84)
======== ======== ========= ========
Weighted average number of
common shares outstanding..... 6,185 1,030(5) 7,215 6,734 1,030(5) 7,764
</TABLE>
- ---------------
(1) Subsequent to June 30, 1996, the Company changed its fiscal year-end from
June 30 to December 31. Accordingly, data for the fiscal period ended
December 31, 1996 is for the six months ended December 31, 1996.
(2) Represents expense related to a consulting agreement entered into by the
Company with a former shareholder of Cybergate.
(3) Reflects amortization of goodwill over a 10 year period and accounting
software over a three year period.
(4) Reflects amortization of consent solicitation fees over the remaining terms
of the Notes.
(5) Excludes adjustment for shares of Common Stock issuable if Cybergate meets
certain performance measures. Inclusion of such shares would be
anti-dilutive.
22
<PAGE> 26
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL DATA -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 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..................... $ 78,618 $ 60 $ (500)(1) $ 75,178
(3,000)(2)
Restricted cash............................... 2,342 -- -- 2,342
Accounts receivable........................... 2,429 127 -- 2,556
Other current assets.......................... 1,203 51 -- 1,254
-------- ------- ------- --------
Total current assets..................... 84,592 238 (3,500) 81,330
Networks, furniture and equipment, net.......... 136,083 2,317 100(3) 138,500
Goodwill........................................ 8,385(1) 8,385
Deferred financing fees......................... 8,380 -- 3,000(2) 11,380
Other assets.................................... 983 -- -- 983
-------- ------- ------- --------
Total assets............................. $230,038 $ 2,555 $ 7,985 $240,578
======== ======= ======= ========
LIABILITIES, REDEEMABLE STOCK, OPTIONS AND
WARRANTS, MINORITY INTEREST AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses......... $ 33,588 $ 348 $ -- $ 33,936
Notes payable -- current portion.............. 872 -- -- 872
Customer deposits and advanced billings....... 0 338 -- 338
Other......................................... 4,132 -- -- 4,132
-------- ------- ------- --------
Total current liabilities................ 38,592 686 -- 39,278
Notes payable................................... 209,538 306 100(3) 209,944
Advances due to affiliates...................... -- 551 -- 551
Dividends payable............................... 6,946 -- -- 6,946
Other........................................... 0 142 -- 142
-------- ------- ------- --------
Total liabilities........................ 255,076 1,685 100 256,861
Redeemable stock, options, and warrants......... 2,000 347 (347)(1) 2,000
Minority interest............................... 0 -- -- 0
Stockholders' equity (deficit).................. (27,038) 523 8,232(1) (18,283)
-------- ------- ------- --------
Total liabilities, redeemable
stock, options and warrants,
minority interest and
stockholders' equity
(deficit)...................... $230,038 $ 2,555 $ 7,985 $240,578
======== ======= ======= ========
</TABLE>
- ---------------
(1) Records the Cybergate Acquisition for a purchase price of $8,755,000
(1,030,000 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 $8.4 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.
23
<PAGE> 27
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of and for the
periods ended June 30, 1995 and 1996 and December 31, 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 and December 31, 1996 have
been audited by KPMG Peat Marwick LLP, independent auditors. Subsequent to June
30, 1996, the Company has changed its fiscal year-end from June 30 to December
31. Accordingly, all data for the fiscal period ended December 31, 1996 is for
the six months ended December 31, 1996. The consolidated financial data of the
Company as of and for the six months ended December 31, 1995 have been derived
from the unaudited Consolidated Financial Statements of the Company 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 fiscal period ended December
31, 1996 are not necessarily indicative of results for a twelve-month fiscal
year.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE SIX MONTHS FISCAL PERIOD
30, ENDED ENDED
---------------------- DECEMBER 31, DECEMBER 31,
1995 1996 1995 1996
--------- --------- ------------ -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................................... $ 389 $ 3,415 $ 989 $ 6,990
Operating expenses............................... 14,797 24,543 7,966 34,434
-------- -------- -------- --------
Income (loss) from operations.................... (14,408) (21,128) (6,977) (27,444)
Interest and other income........................ 218 4,410 777 2,757
Interest and other expense....................... (170) (10,477) (2,835) (10,390)
Debt conversion expense.......................... (385) -- -- --
-------- -------- -------- --------
Net income (loss) before minority interest....... (14,746) (27,195) (9,035) (35,077)
Minority interest(1)............................. 48 413 156 160
-------- -------- -------- --------
Net income (loss)................................ (14,698) (26,782) (8,879) (34,917)
Preferred stock dividends and accretion.......... (1,071) (3,871) (1,854) (2,003)
-------- -------- -------- --------
Net income (loss) to common stockholders......... $ (15,769) $ (30,653) $(10,734) $ (36,920)
======== ======== ======== ========
Net income (loss) per common share............... $ (3.30) $ (4.96) $ (1.82) $ (5.48)
======== ======== ======== ========
Weighted average shares outstanding.............. 4,772 6,185 5,901 6,734
OTHER DATA:
EBITDA(2)........................................ $ (7,443) $ (14,901) $ (4,855) $ (21,822)
Depreciation and amortization.................... 498 3,078 763 4,911
Capital expenditures............................. 15,303 60,856 17,657 64,574
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents........................ $ 20,351 $ 134,116 $ 57,348 $ 78,618
Total assets..................................... 37,627 223,600 147,935 230,038
Long-term liabilities............................ 4,723 189,072 110,176 216,484
Redeemable stock, options and warrants........... 2,931 2,155 2,660 2,000
Stockholders' equity (deficit)................... 22,141 8,982 26,308 (27,038)
</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 and noncash stock compensation and, in fiscal
year ended June 30, 1995, debt conversion expense of $385,000. 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. Noncash compensation expense
associated with employee stock options was $6.4 million and $2.7 million in
fiscal years ended June 30, 1995 and 1996, respectively, and $1.2 million
and $550,000 in the six months ended December 31, 1995 and fiscal period
ended December 31, 1996, respectively. See Note 6 of "Notes to Consolidated
Financial Statements."
24
<PAGE> 28
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 January 1997, the Company
introduced local switched voice services in two of its markets and began
offering local switched voice services in three additional markets by March
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 March 31,
1997, the Company had ACSINet data POPs in 42 markets, including all but one of
the markets in which the Company has operational local networks. Additionally,
principally through the Cybergate Acquisition, the Company has begun providing
Internet services. The Cybergate Acquisition provides a foundation to support
the Company's Internet service offerings to ISPs in existing ACSI markets and to
end users in targeted ACSI markets.
During 1996, the Company increased the number of its operational local
networks from nine to 21 and increased its route miles in service from 136 to
697. As of March 31, 1997, the Company had 28 operational local networks and had
7 additional local networks under construction. The Company is actively
developing marketing and engineering plans necessary to achieve its goal
(subject to its ability to obtain sufficient additional funds after this
offering) of 50 local networks operating by December 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 fiscal period
ended December 31, 1996, 40% of the Company's revenues were generated by four of
the largest IXCs.
Beginning in the fiscal quarter ended December 31, 1996, the Company began
providing and plans to continue to provide, local switched voice services, such
as local dial tone, termination of local calling, Centrex services, PBX
trunking, switched access and enhanced voice services, initially to existing and
new corporate customers in buildings already connected to the Company's local
networks. Revenues from the Company's local switched voice services will be
generated from fixed and usage-based charges billed directly to the end user at
rates below those charged by ILECs for
25
<PAGE> 29
similar services. The Company began generating revenues from its local switched
voice services during the first quarter of 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 March 31, 1997, the Company had long-term operating leases
for nine Lucent 5ESS switches. The use of operating leases, rather than the
acquisition of such equipment reduces the Company's capital requirements but
negatively impacts its EBITDA.
ACSI is operating its coast-to-coast, leased broadband data communications
network via high bandwidth (DS-3) longhaul circuits pursuant to multi-year
operating leases with various IXCs. Network connectivity within each node will
be via OC-3 bandwidth, enabling the transparent migration of longhaul circuits
to OC-3 capacity as needed. Ultimately, the platform technology is capable of
upgrading the backbone to OC-12 without further modification.
Initially, the Company expects to experience negative cash flow from
operations in each of its operating local networks. The Company estimates that
because of the reduced operating costs associated with its smaller local
networks and its single point of service sales force, it can achieve operating
cash flow breakeven (i.e., positive EBITDA before overhead allocations) on
dedicated access services provided on its local networks within ten to 15 months
from the start of those services. Thereafter, the Company anticipates that its
profit margins will increase as each local network is expanded to connect
additional customers directly to its network backbone and as off-net customers
migrate to on-net status (thus allowing the Company to retain the portion of
customer charges previously paid out to the ILEC for resale of ILEC facilities).
The Company will also experience initial negative cash flow from operations as
its data, local switched voice and Internet services are introduced and until
networks providing those services reach operating cash flow breakeven.
26
<PAGE> 30
Capital Expenditures; Operating Cash Flow
The costs associated with the initial construction and operation of local
networks may vary greatly, primarily due to market variations in geographic and
demographic characteristics and the types of construction technologies which can
be used to deploy the network. Management estimates that construction of the
initial one-to-three mile local network backbone and installation of related
network transmission equipment for dedicated services for each market will cost
generally between $3.5 million and $6.0 million, depending on the size of the
market served. Including planned expansion routes, total capital expenditures
per network are estimated to average $6.0 million. In addition to capital
expenditure requirements, the Company incurs sales and marketing (including
sales commissions) and operating expenses and other expenses such as property
taxes and, in certain markets, franchise fees. Prior to the completion of local
network construction, certain of these expenses, to the extent they are related
to pre-service construction, are capitalized. These capitalized expenses,
estimated by management to be between approximately $500,000 and $1.0 million
per local network, are amortized over the anticipated life of the network. These
costs vary depending on the size of the market, the length of time required to
build out the network and the rate of growth of the customer base.
The Company has never been profitable, has never generated positive cash
flow from consolidated operations and, since its inception has incurred
significant net operating losses and negative cash flow. The Company's continued
development, construction, expansion, operation and potential acquisition of
local networks, as well as the further development of new services, including
local switched voice and high-speed data services, will require substantial
capital expenditures and the Company expects to continue to incur operating
losses and negative cash flows from operations for at least the next several
years. The Company estimates that through December 31, 1997 and December 31,
1998, remaining capital required for implementation of its integrated networks
and its other services and to fund negative cash flow will be approximately $185
million and $335 million, respectively. At December 31, 1996, the Company had
approximately $78.6 million of cash and cash equivalents available for this
purpose. Management anticipates that the Company's cash resources following this
offering will be insufficient to fund the Company's continuing negative cash
flow and the capital expenditures required to complete the Company's planned
networks. Furthermore, without an infusion of additional cash following this
offering, the Company will exhaust its cash resources during the third quarter
of 1997, even if it halts construction on all additional networks and limits
operations to the networks in service as of the date of this Prospectus. See
"-- Liquidity and Capital Resources."
RESULTS OF OPERATIONS
FISCAL PERIOD ENDED DECEMBER 31, 1996 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1995
Revenues
During the fiscal period ended December 31, 1996, the Company recorded
revenues of $7.0 million as compared to revenues of $988,877 during the six
months ended December 31, 1995. Four of the largest IXCs accounted for
approximately $2.8 million, or 40%, of revenues for the fiscal period ended
December 31, 1996.
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>
December 31, 1995 9 136 5,957 100 82,055 111
December 31, 1996 21 697 48,792 595 384,134 322
</TABLE>
Total Operating Expenses
Network development and operating expenses for the fiscal period ended
December 31, 1996 increased to $8.7 million from $2.9 million in the six months
ended December 31, 1995, reflecting
27
<PAGE> 31
significant increases in personnel, network development and non-payroll
operating expenses. Related personnel costs increased to $3.9 million in the
fiscal period ended December 31, 1996, from approximately $1.5 million in the
six months ended December 31, 1995. Other operating expenses related to the
development of prospective new markets, which include expenses such as contract
labor and legal expenses and certain franchise fees, travel expenses, rent,
utilities, charges and taxes increased to $4.8 million in the fiscal period
ended December 31, 1996 from approximately $1.4 million in the six months ended
December 31, 1995.
In the fiscal period ended December 31, 1996, selling, general and
administrative expenses increased to $20.3 million from $3.1 million in the six
months ended December 31, 1995. Related personnel costs increased to $6.6
million in the fiscal period ended December 31, 1996 from $1.5 million in the
six months ended December 31, 1995, and corresponding operating costs increased
to $13.7 million in the fiscal period ended December 31, 1996 from $1.6 million
in the six months ended December 31, 1995. This increase reflected costs
associated with the Company's efforts in the rapid expansion of its services
offered, network deployment and geographic coverage as well as significantly
increasing its national and local city sales, marketing and administrative
staffs and increased legal and other consulting expenses associated with its
programs for obtaining regulatory approvals and certifications and providing
quality network services.
Depreciation and amortization expenses increased to $4.9 million in the
fiscal period ended December 31, 1996 from $762,657 in the six months ended
December 31, 1995. The Company increased its capital assets to $144.4 million as
of December 31, 1996, from the $32.6 million in capital assets as of December
31, 1995. Non-cash stock compensation expense decreased to $549,545 for the
fiscal period ended December 31, 1996 from $1.2 million for the six months ended
December 31, 1995. This expense reflects the Company's accrual of non-cash costs
for options granted to key executives, employees and others arising from the
difference between the exercise price and the valuation prices used by the
Company to record such costs and from the vesting of those options. Certain of
these options had put rights and other factors that required variable plan
accounting in both 1996 and 1995 but, on or about June 30, 1995, the Company
renegotiated contracts with certain of its officers, establishing a limit of
$2.5 million on the Company's "put right" obligations with respect to those
contracts. Between July 1, 1995 and June 30, 1996, the limit was further reduced
to $2.0 million.
During the fiscal period ended December 31, 1996, the Company incurred a
net operating loss of $27.4 million and generated negative cash flow from
operations of $6.7 million, compared to a net operating loss of $7.0 million and
negative cash flow from operations of $4.8 million in the six months ended
December 31, 1995.
Interest and Other Expenses
Interest and other income increased to $2.8 million for the fiscal period
ended December 31, 1996 from $777,504 in the six months ended December 31, 1995.
Interest and other expense increased to $10.4 million in the fiscal period ended
December 31, 1996 from $2.8 million in the six months ended December 31, 1995.
The increase in interest and other income reflects the significant increase in
available funds from the Company's sale of its 9% Series B Preferred Stock in
June and November 1995, the 2005 Notes in November 1995 and the 2006 Notes in
March 1996. The increase in interest and other expenses reflected the accrual of
interest related to the 2005 Notes and 2006 Notes and the Company's increased
borrowings under the AT&T Credit Facility. Payments of principal and interest on
the AT&T Credit Facility will begin in calendar 1997, payments of interest on
the 2005 Notes will not begin until November 2000 and payments of interest on
the 2006 Notes will not begin until October 2001.
AT&T Credit Corporation's minority interest in certain of the Company's
operating subsidiaries, reduced operating losses by approximately $160,370 for
the fiscal period ended December 31, 1996, and by $155,861 for the six month
period ended December 31, 1995.
28
<PAGE> 32
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995
Revenues
During the fiscal year ended June 30, 1996 ("fiscal 1996"), the Company
recorded revenues of $3.4 million as compared to revenues of $388,887 during the
fiscal year ended June 30, 1995 ("fiscal 1995"). Four of the largest IXCs
accounted for approximately $2.1 million, or 60%, of revenues for fiscal 1996 as
compared to fiscal 1995 when three of the largest IXCs accounts for
approximately $331,000, or 85% of revenues for fiscal 1995, reflecting the
Company's increased sales to end users during fiscal 1996.
Total Operating Expenses
Network development and operations expenses for fiscal 1996 increased to
$5.3 million from $3.3 million in fiscal 1995, reflecting significant increases
in personnel, network development and non-payroll operating expenses. These
increased costs were associated with developing and establishing centralized
engineering, circuit provisioning and network management functions, constructing
and initially operating the Company's competitive access networks and performing
market feasibility, engineering, rights-of-way and regulatory evaluations in
additional target cities. Related personnel costs increased to $4.5 million in
fiscal 1996 from approximately $1.3 million in fiscal 1995. Other operating
expenses related to the development of prospective new markets, which include
expenses such as contract labor and legal expenses and certain franchise fees,
travel expenses, rent, utilities, charges and taxes, decreased to $800,212 in
fiscal 1996 from approximately $1.9 million in fiscal 1995.
In fiscal 1996, selling, general and administrative expenses increased to
$13.5 million from $4.6 million in fiscal 1995. Related personnel costs
increased to $3.2 million in fiscal 1996 from $2.0 million in fiscal 1995, and
corresponding operating costs increased to $10.2 million in fiscal 1996 from
$2.2 million in fiscal 1995. This increase reflected costs associated with the
Company's efforts in expanding its national and local city sales, marketing and
administrative staffs, as well as increased legal and other consulting expenses
associated with its aggressive programs for obtaining regulatory approvals and
certifications and providing quality network services.
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
29
<PAGE> 33
2005 Notes do not begin until November 2000 and payments of interest of the 2006
Notes do not begin until October 2001.
Debt conversion expense in fiscal 1995 totaled $385,000, reflecting
expenses incurred in connection with the conversion of certain of the Company's
debt to equity in September 1994. AT&T Credit Corporation's minority interest in
the Company's operating subsidiaries for which it provided funding, reduced
operating losses by approximately $412,606 for fiscal 1996, and by $48,055 for
fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has funded the construction of its local networks and
its operations with external financing. Prior to November 1995, the primary
sources of funds used to finance the building of existing networks and the
completion of new targeted networks were two Preferred Stock private offerings
completed in October 1994 and June 1995, through which the Company raised an
aggregate of approximately $39.6 million before related expenses, and the AT&T
Credit Facility, through which the Company has financing commitments for $31.2
million. On November 14, 1995, the Company completed a private offering of the
2005 Notes and the Warrants from which the Company received approximately $96.1
million in net proceeds. The 2005 Notes will accrete to an aggregate principal
amount of $190.0 million by November 1, 2000, after which cash interest will
accrue and be payable on a semi-annual basis. The Company also received net
proceeds of approximately $4.7 million from the private sale of an additional
50,000 shares of its Preferred Stock to a principal stockholder and the exercise
by that stockholder of warrants to purchase 214,286 shares of Common Stock
acquired in the Company's June 1995 Preferred Stock private placement. On March
21, 1996, the Company completed a private offering of the 2006 Notes from which
the Company received net proceeds of approximately $61.8 million. The 2006 Notes
will accrete to an aggregate principal amount of $120.0 million by April 1,
2001, after which cash interest will accrue and be payable on a semi-annual
basis.
The Company's continued development, construction, expansion, operation and
potential acquisition of local networks, as well as the further development of
new services, including local switched voice and high-speed data services, will
require substantial capital expenditures and the Company expects to continue to
incur operating losses and negative cash flows from operations for at least the
next several years. The Company estimates that through December 31, 1997 and
December 31, 1998, remaining capital required for implementation of its
integrated networks and its other services and to fund negative cash flow will
be approximately $185 million and $335 million, respectively. At December 31,
1996, the Company had approximately $78.6 million of cash and cash equivalents
available for this purpose. The Company's expectations of required future
capital expenditures are based on the Company's current estimates and the
current state and federal regulatory environment. There can be no assurance that
actual expenditures will not be significantly higher or lower. In addition,
there can be no assurance that the Company will be able to meet its strategic
objectives or that such funds, if available, will be available on a timely basis
or on terms that are acceptable to the Company. In addition, the Company
continues to consider potential acquisitions or other strategic arrangements
that may fit the Company's strategic plan. Although the Company has had
discussions concerning such potential acquisitions or arrangements, with the
exception of the MCI Transaction, to date no agreements have been reached with
regard to any particular acquisition. Any such acquisitions or strategic
arrangements that the Company might consider are likely to require additional
equity or debt financing, which the Company will seek to obtain as required.
Management anticipates that the Company's cash resources following this
offering will be insufficient to fund the Company's continuing negative cash
flow and the capital expenditures required to complete the Company's planned
networks although approximately $ million of the net proceeds from this
offering will be used for these purposes. Furthermore, without an infusion of
additional cash following this offering, the Company will exhaust its cash
resources during the third quarter of 1997, even if it halts construction on all
additional networks and limits
30
<PAGE> 34
operations to the networks in service as of the date of this Prospectus. To meet
its additional remaining capital requirements and to successfully implement its
growth strategy, ACSI will be required to sell additional equity securities,
increase its existing credit facility, acquire additional credit facilities or
sell additional debt securities, certain of which would require the consent of
the Company's debtholders. Furthermore, before incurring additional
indebtedness, the Company may be required to seek additional equity financing to
maintain balance sheet and liquidity ratios required under certain of its debt
instruments and, as a result of the registration rights of certain of the
Company's security holders, the Company's ability to raise capital through a
public offering of equity securities may be limited. Accordingly, there can be
no assurance that the Company will be able to obtain the additional financing
necessary to satisfy its cash requirements or to successfully implement its
growth strategy, in which event the Company will be forced to curtail its
planned network expansion and may be unable to fund its ongoing operations.
Preferred Stock. In October 1994, the Company completed the private
placement of 186,664 shares of its 9% Series A Convertible Preferred Stock, par
value $1.00 per share (which was later exchanged for Series A-1 Preferred Stock
that will convert into 7,466,560 shares of Common Stock simultaneous with the
completion of 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 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 $4.7 million. The
Series B Preferred Stock will convert into an aggregate of 9,910,704 shares of
Common Stock simultaneous with the completion of 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 17,377,264 shares of Common Stock upon completion of this
offering, at which time the Company will pay accrued dividends on the Preferred
Stock of approximately $8.0 million, $ million of which will be paid in cash
and the remainder of which will be paid in shares of Common Stock.
AT&T Credit Facility. In October 1994, the Company entered into the AT&T
Credit Facility pursuant to which AT&T Credit Corporation has agreed to provide
up to $31.2 million in financing for the development and construction of fiber
optic local networks by five of the Company's subsidiaries. In connection with
each loan made under the AT&T Credit Facility, AT&T Credit Corporation purchased
7.25% of the capital stock of the funded subsidiary, and ACSI pledged the other
shares and the assets of the subsidiary to AT&T Credit Corporation as security
for the loan. During fiscal 1995, the Company's subsidiaries in Louisville, Fort
Worth, Greenville and Columbia entered into loan agreements under the AT&T
Credit Facility providing for AT&T Credit Corporation funding of up to $19.8
million in the aggregate, and, in September 1995, the Company's subsidiary in El
Paso entered into a loan agreement under the AT&T Credit Facility providing for
up to $5.5 million of AT&T Credit Corporation funding. As of December 31, 1996,
an aggregate of $30.2 million had been borrowed under these agreements.
Principal amounts payable on the AT&T Credit Facility during 1997 are
approximately $872,000.
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EFFECTS OF NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to Be Disposed Of, which requires the Company to review for the
impairment of long-lived assets and certain identifiable intangibles to be held
and used by the Company whenever events or changes in circumstances indicate
that the carrying amount of any asset may not be recoverable. Adoption of SFAS
No. 121 did not have a material impact on the Company's Consolidated Financial
Statements in the fiscal period ended December 31, 1996.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which establishes a fair value-based method for financial
accounting and reporting stock-based employee compensation plans. However, the
new standard allows compensation to continue to be measured by using the
intrinsic value-based method accounting prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, but requires
expanded disclosures. SFAS No. 123 is effective for fiscal years that begin
after December 15, 1995. The Company has elected to continue to apply the
intrinsic value-based method of accounting for stock options.
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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 represent one of the fastest growing segments of the
telecommunications services market due, in part, to the continuing proliferation
of computers and the increasing need to interconnect these computers via local
and wide area networks, the dramatic growth of the Internet and the emergence of
multimedia applications. Together, these applications have spawned numerous
network technologies and communications protocols to support legacy, current and
emerging needs. The domestic network infrastructure currently supporting both
voice and data transport requirements, which focuses on IP switching and framed
relay services, is being strained by the increasing demand for high bandwidth
transport at both the local and national levels. The Company believes that the
increasing volume and complexity of high-speed applications will further strain
the domestic network infrastructure and create an opportunity for ACSI to
provide a single high-quality ATM-based network capable of consistently
supporting diverse data communications needs.
- Internet Access Services. Businesses are increasingly using the Internet
to transmit e-mail, engage in commercial transactions (e.g., electronic
commerce) and develop internal communications networks, or "intranets."
Increasing business utilization of the Internet has added to the demand
for higher-speed access (i.e., services connecting users to the
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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 substantial demand for an
integrated package of communications services from mid-size commercial
and government customers. ACSI has extended its service offerings to
include dedicated access, switched voice, data and Internet services. The
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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 fiscal period ended December 31, 1996,
approximately 40% of the Company's revenues were billed to four of the
largest IXCs for services provided for the benefit of their customers.
The Company has a five-year agreement with MCImetro, pursuant to which
MCImetro has agreed to purchase minimum levels of dedicated services from
ACSI and has committed to construct portions of ACSI's fiber optic local
networks in six cities. In addition to the MCI Transaction, the Company
has also signed agreements with AT&T and two other IXCs, pursuant to
which the Company expects AT&T and such other IXCs to use the Company as
a supplier of dedicated special access services as well as such other
services as may be agreed upon in particular markets.
SALES AND MARKETING
The Company generated substantially all of its revenues in the fiscal
period ended December 31, 1996 from sales to IXCs and ISPs. As ACSI develops its
ACSI-branded product offerings and expands its sales force, the Company will
market its voice and high-speed data services through three channels: (i) direct
sales to end users, (ii) sales to IXCs and ISPs and (iii) sales of private-label
services through alternative distribution channels.
Direct Sales. The Company intends to focus its local sales force on the
commercial end users in each of the markets it serves. Generally, three or four
local sales representatives will provide a single point-of-service for the
customer base in each market and will be supported by voice, data and Internet
product specialists in order to respond effectively to unique and complex
customer needs. In addition, national account representatives will be
responsible for coordinating marketing efforts to Fortune 500 companies located
in the Company's markets. The Company believes that this local,
customer-oriented, single point-of-service sales structure facilitates greater
customer care in both the sales and customer service processes and helps the
Company differentiate itself as a customer-focused telecommunications services
provider. The Company expects the percentage of revenues generated through the
direct sales channel to increase as it hires additional local sales
representatives and focuses on sales directly to end users. The Company expects
to increase its direct sales force from 52 to 149 in the first half of 1997.
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Carrier Sales. The Company sells dedicated services to IXCs and ISPs
(together, "carriers") who utilize the Company's products and services to
provide local access for their own products. The Company has a five-year
agreement with MCImetro, under which MCImetro has agreed to purchase minimum
levels of dedicated services from ACSI. In addition to the MCI Transaction, ACSI
is also a party to agreements with AT&T and two other IXCs to use the Company as
a supplier of dedicated access services in certain markets. See "Prospectus
Summary -- Recent Developments." The Company intends to support and expand its
relationships with carriers through additional agreements to offer dedicated and
switched services on its integrated network. At December 31, 1996, 10 sales
professionals targeted IXC and ISP customers. For the fiscal period ended
December 31, 1996, approximately 40% of the Company's revenues were billed to
four of the largest IXCs for services provided for the benefit of their
customers, and approximately 19% of the Company's revenues were billed to ISPs.
Alternative Distribution. The Company plans to expand distribution of its
services by contracting with IXCs, utilities, CATVs, out-of-region RBOCs, ILECs
and cellular and other wireless communication providers to resell the Company's
products and services under their own private labels. The Company is presently
recruiting a dedicated sales force to serve in support of sales through
alternative channels.
The Company is developing a core competency in marketing its integrated
voice and data network by focusing on branding its services and using its sales
force to sell ACSI's branded services continuously through its three sales
channels. The Company also plans to market its services by uniquely packaging
them in ways that meet its customers' various needs. Also, ACSI intends to
deliver additional services to its end-user customers throughout 1997.
ACSI SERVICES
The Company currently provides, or is actively implementing plans to
provide, a wide range of local telecommunications services including dedicated
and private line, high-speed data services, including IP switching and managed
services, local switched voice services and Internet services. The Company's
SONET-based fiber optic local networks are designed to support this wide range
of enhanced communications services, provide increased network reliability and
reduce costs for its customers.
Dedicated Services. During 1996, dedicated and private line services for
IXCs and other carriers generated a substantial portion of the Company's
revenues, with the remaining revenues generated from business and government end
users. The Company's dedicated services provide high capacity non-switched
interconnections: (i) between POPs of the same IXC; (ii) between POPs of
different IXCs; (iii) between large business and government end users and their
selected IXCs; (iv) between an IXC POP and a ILEC central office or between two
ILEC central offices; and (v) between different locations of business or
government end users.
- Special access services. Special access services provide a link
between an end-user location and the POP of its IXC, or links
between IXC POPs, thus bypassing the facilities of the ILEC. These
services, which may be ordered by either the long distance customer
or directly by its IXC, typically provide the customer better
reliability, shorter installation intervals, and lower costs than
similar services offered by the ILEC. Customer charges are based on
the number of channel 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 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
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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 March 31, 1997 the Company offered
local switched voice services using its own facilities in Columbus, Georgia;
Montgomery, Alabama; Birmingham, Alabama; Ft. Worth, Texas; and Louisville,
Kentucky. On April 1, 1997, the Company began providing local switched services
on a resale basis in 9 markets, expects that this number will increase to 15 by
the end of April and plans to expand further the number of markets in which it
is reselling local switched services throughout 1997 and the first quarter of
1998.
The Company's local switched voice services include telephone exchange
service, including optional enhanced services such as call waiting, caller ID
and three-way conference calling; switching traffic between ACSI's switch and a
business customer's PBX and routing local, intraLATA and interLATA phone calls
according to the customers' specific requirements; providing local dial tone
services with functionality such as free internal communications, call
forwarding, call transfer, conference call and speed dialing; ISDN data
services; and origination and termination of long distance traffic between a
customer premise and interexchange carrier via shared trunks utilizing the
Company's local switch.
During the first quarter of 1977, the Company began generating revenues
from its enhanced voice services that are currently being offered to small and
mid-sized business and government end users in a limited number of its local
network markets. 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 speed
performance. As users' requirements expand into multimedia applications,
which require higher bandwidth, frame relay offers a natural migration
path to ATM.
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- 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
permit and franchise requirements. The market or end-user survey, also
done by independent telecommunications consultants, identifies the
significant commercial and government end users in the target service
areas. Individual telephone and/or face-to-face interviews are then
conducted with potential end users, focusing on those anticipated to have
the largest business volume. The interviews determine the end user's
receptiveness to using a competitor to the ILEC, the telecommunications
requirements of such end user, current pricing by the ILEC and other
relevant information. This "bottom up" sizing of the target service areas
provides an estimate of the prospective business by building and by
customer.
- Rights-of-Way. As part of its due diligence on a market during its site
selection process, the Company seeks municipal authorizations (such as
franchises, licenses, or permits) to construct and operate its network
within the public rights-of-way. The duration of this approval process
can vary from less than three months to several years, depending on the
specific legal, administrative, and political factors existing in that
market. The initial term of these municipal approvals, once granted, may
range from as few as five years to as many as 25 years, and such
approvals typically may be renewed for additional terms. See "Risk
Factors --
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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 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.
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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 March 31, 1997, the Company had installed central office switching
facilities in Columbus, Georgia; Montgomery, Alabama; Birmingham, Alabama; Ft.
Worth, Texas; and Louisville, Kentucky. The Company expects to have switches in
23 more markets installed by December 1999, with switches in 11 of those market
expected to be installed by December 1997. Toward this end, the Company had
long-term lease commitments for nine initial switches as of March 31, 1997.
In December 1996, the Company deployed ACSINet, a coast-to-coast, leased
broadband data communications backbone network via leased inter-city fiber
connections on which customers' high-speed data and multimedia traffic may be
transported at a high-quality level on a cost-effective basis. ACSI believes its
ATM-based high bandwidth network will be capable of simultaneously supporting IP
switching, frame relay and multimedia applications. This technology will allow
network customers to migrate transparently from lower speed services to high
bandwidth services, as their data communications requirements expand.
COMPETITION
Dedicated Services. The Company operates in a highly competitive
environment and has no significant market share in any market in which it
operates. The Company provides dedicated services to large business and
government end users. In each of the metropolitan areas to be served by the
Company's networks, the Company's dedicated services will compete principally
with the dedicated services offered by the ILEC. The ILECs, as the historical
monopoly providers of local access and other services, have long-standing
relationships with their customers and have financial and technical resources
substantially greater than those of the Company. The ILECs also offer certain
services that the Company cannot currently provide without first obtaining
requisite regulatory approvals. 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 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).
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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 significant
savings over traditional private lines. Other frame relay service providers
include WorldCom, Inc. and Intermedia Communications. A number of companies,
primarily CLECs, have announced plans to offer frame relay service. ATM
offerings are only beginning to emerge. ATM service is currently being offered
by most of the original RBOCs, WorldCom, Inc., AT&T, MCI, Sprint and WilTel,
Inc. A number of other data communications
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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.
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 telecom-
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munications 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-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 "Interconnec-
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tion 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 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
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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.
- 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
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remain subject to FCC complaint procedures. The FCC's interexchange
de-tariffing order was stayed by the U.S. Court of Appeals for D.C.
on February 13, 1997.
Pursuant to these FCC requirements, the Company has filed and
maintains tariffs for its interstate services with the FCC. All of
the interstate retail "basic" services (as defined by the FCC)
provided by the Company are described therein. "Enhanced" services
(as defined by the FCC) need not be tariffed. The Company believes
that its enhanced voice and Internet services are "enhanced"
services which need not be tariffed.
- ILEC Price Cap Regulation. In 1991, the FCC replaced traditional
rate of return regulation for large ILECs with price cap regulation.
Under price caps, ILECs can only raise prices for certain services,
including interconnection services provided to CLECs, by a small
percentage each year. In addition, there are constraints on the
pricing of ILEC services that are competitive with those of CLECs.
On September 14, 1995, the FCC proposed a three-stage plan that
would substantially reduce ILEC price cap regulation as local
markets become increasingly competitive and ultimately would result
in granting ILECs nondominant status. The FCC proposed immediate
elimination of the lower service band index limit on price
reductions within service categories, modification of tariff filing
requirements and revision of the structure of price cap baskets. The
FCC also sought comment on whether ILECs should be permitted to
expand use of volume and term discount plans. Adoption of the FCC's
proposal to reduce significantly its regulation of ILEC pricing
would significantly enhance the ability of ILECs to compete against
the Company and could have a material adverse effect on the Company.
The FCC released an order on December 24, 1996 which adopted certain
of these proposals, including the elimination of the lower service
band index limits on price reductions within the access service
category. The FCC's December 1996 order also eased the requirements
necessary for the introduction of new services.
- Access Charges. The FCC has granted ILECs significant flexibility
in pricing their interstate special and switched access services on
a specific central office by central office basis. Under this
pricing scheme, ILECs may establish pricing zones based on access
traffic density and charge different prices for each zone. The
Company anticipates that this pricing flexibility will result in
ILECs lowering their prices in high traffic density areas, the
probable area of competition with the Company. The Company also
anticipates that the FCC will grant ILECs increasing pricing
flexibility as the number of interconnections and competitors
increases. In a concurrent proceeding on transport rate structure
and pricing, the FCC enacted interim pricing rules that restructure
ILEC switched transport rates in order to facilitate competition for
switched access.
On February 15, 1996, the FCC partially waived its access charge rules for
Ameritech Corporation (one of the seven RBOCs), thereby giving Ameritech certain
access charge pricing flexibility which will likely make it more difficult for
CLECs to compete against Ameritech in the affected areas. The FCC had previously
approved alternative access charge billing plans proposed by NYNEX. The Company
does not currently provide service in the Ameritech or NYNEX operating regions.
However, on December 24, 1996, in its Notice of Proposed Rulemaking, Third
Report and Order, and Notice of Inquiry ("NPRM"), the FCC proposed and sought
comment on far-reaching reforms to its access charge rules, including granting
all ILECs additional access charge pricing flexibility. These proposals could,
if implemented, make it more difficult for the Company to compete for access
traffic.
In the NPRM, the FCC proposed a set of reforms to its existing access
charge rules which are intended to (i) take account of the local competition and
RBOC reentry provisions of the Federal Telecommunications Act, state PSC actions
to open local networks for competition and implicit universal service subsidies;
(ii) establish fair rules of competition; (iii) address perceived inequities and
inefficiencies in the current ILEC access charge structure and (iv) generally
lower access charge levels. The FCC proposed making significant changes to the
current rules which govern the
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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.
Some states in which the Company operates are considering legislation which
could impede efforts by new entrants in the local services market to compete
effectively with ILECs. The Arkansas legislature, for example, recently enacted
legislation which curtails the ability of the state PSC to make available
additional network elements to CLECs or authorize CLECs to receive universal
service funding. On March 25, 1997, the Company filed a petition for Declaratory
Ruling with the FCC asking it to preempt portions of the Arkansas statute.
As of March 31, 1997 the Company had obtained intrastate authority for the
provision of dedicated services in Alabama, Arizona, Arkansas, Colorado,
Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, Missouri, Nevada,
New Mexico, Oklahoma, South Carolina, Tennessee, Texas and Virginia. As of that
date, the Company also had an application pending before the District of
Columbia PSC 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 March 31, 1997,
the Company had applied for authorization to provide local switched voice
services in New Mexico and the District of Columbia and had been granted such
authority in Alabama, Arizona, Arkansas, Colorado, Florida, Georgia, Kentucky,
Louisiana, Maryland, Mississippi, Missouri, Nevada, Oklahoma, South Carolina,
Tennessee, Texas and Virginia. There can be no assurances that the Company will
receive the authorizations it is currently seeking, or will seek, from these
PSCs. 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
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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 Federal Telecommunications Act imposes a duty
upon all ILECs to negotiate in good faith with potential interconnectors to
provide interconnection to the ILEC network, exchange local traffic, make
unbundled basic local network elements available, and permit resale of most
local services. In the event that negotiations do not succeed, the Company has a
right to seek state PSC arbitration of any unresolved issues. The state PSC must
conclude the arbitration within nine months of the date upon which the ILEC
received the Company's initial request for interconnection. Although the Company
found it necessary to seek state PSC arbitration of some material issues, the
Company negotiated partial agreements for local interconnection and access to
unbundled elements with BellSouth in South Carolina, Georgia, Florida, Kentucky,
North Carolina, Tennessee, Alabama, Mississippi and Florida; and with
Southwestern Bell in Arkansas and Texas. All issues with BellSouth were later
settled and final interconnection agreements were executed. Unsuccessful
interconnection negotiations also 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 arbitrations with US West and GTE have been concluded, and
arbitrated agreements have been filed in each of the affected states.
Southwestern Bell has filed lawsuits in both federal and state courts in Texas
seeking to overturn the Texas PUC arbitration award and prevent implementation
of the anticipated ACSI interconnection agreement. The state action has been
removed to federal court. GTE and US West have filed similar lawsuits in federal
courts in Kentucky and Arizona, respectively, seeking to reverse the state
commission arbitration awards in those states, and prevent implementation of the
arbitrated interconnection agreements there. Similar court challenges to the
state commission arbitration decisions involving US West in New Mexico and GTE
in Texas also are expected. If successful, these lawsuits could delay or
interrupt ACSI's interconnection arrangements with the ILECs in the affected
states. Moreover, since ACSI purchases ILEC local services for resale pursuant
to the terms of the interconnection agreements at issue, any adverse outcome in
these lawsuits could impede ACSI's plans to resell ILEC local services in the
affected markets. The Company is unable to predict the likely outcome of the
lawsuits described above, or the probable timeframe for decision. The
arbitration proceeding with Sprint/Central Telephone in Nevada was settled, and
an interconnection agreement has been submitted for PSC approval. 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.
The Company has experienced some difficulty in obtaining timely ILEC
implementation of local interconnection agreements. Delays encountered in
unbundled loop installation have caused the Company to file complaints against
BellSouth with the FCC and Georgia PSC.
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.
48
<PAGE> 52
Termination of the existing franchise or license agreements prior to their
expiration dates could have a materially adverse effect on the Company.
EMPLOYEES
As of December 31, 1996, the Company employed a total of 322 individuals
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.
ACSI's former Chief Financial Officer, Harry J. D'Andrea, has initiated
litigation against the Company in the Circuit Court of Maryland for Anne Arundel
County. The lawsuit alleges four different counts: breach of contract; breach of
the covenant of good faith and fair dealing; negligent misrepresentation; and
specific performance. D'Andrea seeks damages in excess of $5,000,000, and the
right to exercise options to purchase 100,000 shares of ACSI common stock at
$4.25 per share. The Company received a copy of the Complaint on April 8, 1997.
The Company believes it has meritorious defenses to this complaint and intends
to defend this lawsuit vigorously.
Additionally, the Company and its subsidiaries are currently parties to
routine litigation incidental to their business, none of which, individually or
in the aggregate, are expected to have a material adverse effect on the Company.
The Company and its subsidiaries are parties to various court appeals and
regulatory arbitration proceedings relating to certain of the Company's
interconnection agreements and continue to participate in regulatory proceedings
before the FCC and state regulatory agencies concerning the authorization of
services and the adoption of new regulations. See "-- Regulation."
PROPERTIES
The Company leases a 23,925 square foot office space in Annapolis Junction,
Maryland for its corporate headquarters and network management center for
$28,647 per month as of December 31, 1996, subject to periodic increases in
specified amounts. The lease expires in 2002, but may be renewed for two
additional five-year terms. The Company leases a 1,358 square foot field office
in Lombard, Illinois which houses its local network development and real estate
development operations. This lease expires on January 31, 1999.
As of December 31, 1996, the Company's various operating subsidiaries have
leased facilities for their offices and network nodes. The aggregate monthly
rent on these properties is approximately $285,000. The various leases expire on
dates ranging from February 28, 1998, to April 1, 2007. Most have renewal
options. A subsidiary of the Company leases shared office space in Greenville,
SC. Additional office space and equipment rooms will be leased as additional
networks are constructed and the Company's operations are expanded.
The Company believes that its insurance coverage on these properties is
adequate and in compliance with the related leases.
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<PAGE> 53
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.......................... 58 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
David L. Piazza............................... 42 Chief Financial Officer
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 Communications 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
50
<PAGE> 54
Central Region for Teleport Communications Group and the Vice President of
Emerging Markets, responsible for start-up and profit and loss management of
joint ventures with major cable television providers in eight major markets.
From 1987 until 1992, he was a member of the initial management team at MFS,
where he held senior positions in planning and market development, served as
Vice President of Sales and the Vice President/General Manager for the initial
start-up of MFS' New York operations, and served as the Executive Vice President
for MFS-Intelenet. Prior to joining MFS, he was a Director of Operations for MCI
Telecommunications International. Mr. Tronsrue has a B.S. degree in Applied
Sciences and Engineering from the United States Military Academy at West Point.
Riley M. Murphy, Executive Vice President -- Legal and Regulatory Affairs
and Secretary, had twelve years of experience in the private practice of
telecommunications regulatory law for inter-exchange, cellular, paging and other
competitive telecommunication services prior to joining the Company. Since
February 1995, she has served as an officer and director of The Association for
Local Telecommunications Services. Ms. Murphy joined ACSI on a full-time basis
in April 1994 and was senior counsel to Locke Purnell Rain Harrell, a
Dallas-based law firm through December 1994. From 1987 to 1992, Ms. Murphy was a
partner of Wirpel and Murphy, a telecommunications law firm she co-founded, and
from 1992 to 1993 she was a sole practitioner. She holds a B.A. degree from the
University of Colorado and a J.D. from the Catholic University of America and is
admitted to practice law in the District of Columbia and Louisiana.
David L. Piazza, Chief Financial Officer, joined the Company on March 24,
1997. For ten years prior to joining the Company, Mr. Piazza was employed by MFS
Communications in a variety of finance and senior management positions, most
recently as the Senior Vice President and Chief Financial Officer of MFS
Telecom, Inc., a subsidiary of MFS Communications. Prior to his employment with
MFS Communications, Mr. Piazza was employed by AT&T for four years in its
finance and support divisions. Mr. Piazza received his B.S. degree in
Accountancy from the University of Illinois and holds a CPA.
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.
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<PAGE> 55
Mr. Rafferty also serves as a director of Del Monte Foods Company. Mr. Rafferty
received his undergraduate degree from Stanford University and his law degree
from Georgetown University.
Benjamin P. Giess, Director, was elected a director of the Company in June
1995. Since 1992, Mr. Giess has been employed by ING and its predecessors and
affiliates and currently serves as a Vice President responsible for originating,
structuring and managing equity and debt investments. From 1991 to 1992, Mr.
Giess worked in the Corporate Finance Group of ING Capital. From 1990 to 1991,
Mr. Giess was employed by the Corporate Finance Group of General Electric
Capital Corporation where he worked in the media and entertainment group. Prior
to attending business school, from 1986 to 1988, Mr. Giess was the Credit
Department Manager of the Boston Branch of ABN Amro North America, Inc. From
1984 to 1986, Mr. Giess was employed at the Shawmut Bank of Boston. Mr. Giess
also serves as a director of Matthews 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. Mr. D'Andrea has since filed a complaint against the Company in connection
with his resignation. See "Business -- Legal Proceedings." Effective February 2,
1997, Mr. Kozak's employment was terminated, with each of Mr. Kozak and the
Company claiming the termination was the result of the other party's breach of
his employment agreement. The parties have settled their dispute relating to the
cause of Mr. Kozak's termination. 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 stage 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,
52
<PAGE> 56
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.
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.
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.
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
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<PAGE> 57
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.
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<PAGE> 58
EXECUTIVE COMPENSATION
The following table provides a summary of compensation for the fiscal
period ended December 31, 1996 and for each of the three fiscal years ended June
30, 1996, 1995 and 1994, with respect to the Company's Chief Executive Officer,
and the other five 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
AWARDS
ANNUAL COMPENSATION ------------
----------------------------------------- NUMBER OF
OTHER SECURITIES
NAME AND PRINCIPAL POSITION ON DECEMBER 31, ANNUAL UNDERLYING ALL OTHER
1996 YEAR SALARY BONUS COMPENSATION(1) OPTIONS(2) COMPENSATION
- -------------------------------------------- ---- -------- -------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Pompliano........................ 1996* $124,167 $ 75,000(3) $ -- -- $ 2,574(4)
Executive Chairman of the Board of 1996 239,583 175,000(3) -- -- 6,187(4)
Directors 1995 219,500 175,000(3) -- 500,000 6,977(4)
1994 110,000 -- 25,000(5) 1,349,899 61,507(6)
Jack E. Reich(7)............................ 1996* 20,883 -- -- 1,200,000
President and Chief Executive
Officer -- Communications Services
George M. Tronsrue.......................... 1996* 100,000 -- -- -- 2,400(4)
President and Chief Operating 1996 191,128 54,116(8) -- 50,000 4,800(4)
Officer -- Strategy and Technology 1995 150,000 135,417(8) 68,800(9) 350,001(10) --
Development 1994 53,827 50,000 -- --
Riley M. Murphy............................. 1996* 91,250 -- -- -- --
Executive Vice President -- Legal 1996 162,499 81,500(11) 37,004(9) 50,000 3,536(4)
and Regulatory Affairs, General 1995 150,000 81,500(12) -- 250,001(10) 9,783(4)
Counsel and Secretary 1994 37,500 -- 48,620(13) --
Robert H. Ottman(14)........................ 1996* 90,667 -- -- -- --
Executive Vice President/Network 1996 170,000 50,000(3) 100,000(9) -- --
Services and Technical Support 1995 28,333 -- -- 250,000 --
Richard A. Kozak(15)........................ 1996* 129,167 137,500(3) -- 83,334(16) 2,700(4)
President and Chief Executive 1996 232,885 200,000(3) -- -- 5,400(4)
Officer -- Corporate Services and 1995 184,378 175,000(3) -- 399,999(16) 3,750(4)
Acting Chief Financial Officer 1994 87,500 -- 39,728(5) 899,932 --
</TABLE>
- ---------------
* Subsequent to June 30, 1996, the Company changed its fiscal year-end to
December 31. Information is for the six months ended December 31, 1996.
(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 Fiscal Year Ended June 30,
1996 and Fiscal Period Ended December 31, 1996" and "December 31, 1996
Option Values."
(3) Represents cash bonuses received for attainment of certain performance
goals.
(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) Mr. Reich commenced employment with the Company in December 1996.
(8) Represents an installment of a $244,500 bonus, $54,116 of which is due on
February 24, 1997.
(9) 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 to
Annapolis Junction, Maryland.
(10) 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.
(11) Represents an installment of a $244,500 cash bonus, $81,500 of which was
paid in January 1997.
(12) This payment represents the first installment of a $244,500 cash bonus.
(13) Consists of $43,620 received for performing legal services for the Company
as outside counsel and a $5,000 for location expenses.
(14) Mr. Ottman commenced employment with the Company in May 1995 and his
employment was terminated in February 1997.
(15) 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 was terminated.
(16) In connection with the settlement of the dispute relating to the
termination of Mr. Kozak's employment, all of the options granted in fiscal
period ended December 31, 1996 and options to purchase 83,333 shares
granted in fiscal year ended June 30, 1995 were canceled. See
"-- Employment Agreements."
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<PAGE> 59
OPTION GRANTS IN FISCAL YEAR ENDED JUNE 30, 1996 AND FISCAL PERIOD ENDED
DECEMBER 31, 1996
The following table contains information concerning the grant of stock
options to the Named Officers during the fiscal year ended June 30, 1996 and the
fiscal period ended December 31, 1996.
INDIVIDUAL GRANTS (1)
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS MARKET PRICE
UNDERLYING GRANTED TO EXERCISE OR OF UNDERLYING
OPTIONS EMPLOYEES BASE PRICE SECURITIES ON EXPIRATION
NAME GRANTED IN PERIOD (PER/SHARE) DATE OF GRANT DATE
- ---------------------------- ---------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Anthony J. Pompliano........ -- -- -- -- --
Jack E. Reich............... 200,000 13.95% $ 9.375 $11.625 12/1/02
200,000 13.95 9.375 11.625 12/1/03
200,000 13.95 9.375 11.625 12/1/04
200,000 13.95 9.375 11.625 12/1/05
400,000 27.9 9.375 11.625 12/31/07
George M. Tronsrue, III..... 25,000(2) 2.2 3.40 3.875 2/22/03
25,000(3) 2.2 3.40 3.875 2/22/04
Riley M. Murphy............. 25,000(2) 2.2 3.40 3.875 3/30/03
25,000(3) 2.2 3.40 3.875 3/30/04
Robert H. Ottman............ -- -- -- -- --
Richard A. Kozak............ 83,334 5.8 15.00 11.75 11/15/04(4)
</TABLE>
- ---------------
(1) Mr. Tronsrue and Ms. Murphy were granted options in fiscal year ended June
30, 1996, and Messrs. Reich and Kozak were granted options in the fiscal
period ended December 31, 1996.
(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, 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.
(3) 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.
(4) These options were canceled in connection with the settlement of the dispute
relating to the termination of Mr. Kozak's employment. See "-- Employment
Agreements."
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<PAGE> 60
DECEMBER 31, 1996 OPTION VALUES
The following table sets forth the value of unexercised options held by the
Named Officers as of December 31, 1996. None of the Named Officers exercised
options during the fiscal year ended June 30, 1996 or the fiscal period ended
December 31, 1996.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS AT DECEMBER 31,
OPTIONS AT DECEMBER 31, 1996 1996(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Anthony J. Pompliano............... 1,599,899 250,000 $15,455,253 $ 1,987,500
Jack E. Reich...................... -- 1,200,000 -- 1,650,000
George M. Tronsrue, III............ 250,000 150,000 2,125,000 1,217,500
Riley M. Murphy.................... 137,501 162,501 1,168,759 1,323,759
Robert H. Ottman................... 100,000 150,000(2) 775,000 1,162,500
Richard A. Kozak................... 1,133,265 250,000(3) 10,824,326 970,825
</TABLE>
- ---------------
(1) Represents the difference between the per share exercise price of the
unexercised options and $10.75, the last sale price on December 31, 1996, as
reported by the Nasdaq Stock Market.
(2) The vesting of options to purchase 75,000 of these shares was accelerated in
connection with the termination of Mr. Ottman's employment in February 1997.
(3) Of these, options to purchase 166,667 shares were canceled and the vesting
of options to purchase an additional 83,333 shares was accelerated in
connection with the settlement of the dispute relating to the termination of
Mr. Kozak's employment. See "-- Employment Agreements."
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 the fiscal year ended June 30, 1996 and the fiscal period
ended December 31, 1996, the Company paid an aggregate of approximately $31,000
in such counsel fees. Directors who also serve as executive officers receive
cash compensation for acting in their capacity as executive officers. See
"-- Summary Compensation Table." 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 year ended December 31, 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 $200,000 for each of
the 1997 and 1998 fiscal years 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. 1,662,399 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
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$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 400,000 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 300,002 shares of Common Stock
at prices ranging from $2.25 per share to $3.40 per share. 137,501 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 is party to an employment agreement with
Robert Ottman, which was terminated in February 1997. In connection with Mr.
Ottman's termination, the Company accelerated the vesting of options to purchase
75,000 shares of Common Stock having an exercise price of $3.00 per share and
paid Mr. Ottman a lump sum of approximately $44,000. Mr. Ottman's employment
agreement contains a two year non-compete/non-solicit provision.
Richard A. Kozak. The Company was party to an employment agreement with
Richard A. Kozak, which was terminated effective February 2, 1997. Each of the
parties initially claimed the termination was the result of a breach of the
employment agreement by the other party. In settlement of their dispute and
related litigation concerning Mr. Kozak's termination, the parties agreed, among
other things, that Mr. Kozak will (i) receive $300,000 in cash, payable by the
Company in three equal installments on April 1, July 1 and October 1, 1997, (ii)
forfeit 166,667 of his unvested options, and (iii) execute a 180-day Lock-Up
Agreement with the Underwriters for all but 150,000 of the shares underlying his
vested options and 80,000 other shares he holds. Also, Mr. Kozak's rights to
have his shares of Common Stock registered under the Securities Act will
terminate upon completion of this offering. The Company has agreed to accelerate
the vesting of Mr. Kozak's remaining 83,333 options which had not vested at the
time of his termination. Mr. Kozak also agreed to waive any rights that he may
have under the Registration Rights Agreement with respect to this offering and,
upon consummation of this offering, he will waive all rights under the
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<PAGE> 62
Registration Rights Agreement, provided that this offering is consummated by
June 30, 1997. If this offering has not been consummated by June 30, 1997, then
the Registration Rights Agreement shall only terminate as to Mr. Kozak if the
Stockholders Agreement has been amended to permit Mr. Kozak to transfer, in
addition to the 230,000 shares referred to above, the greater of (a) 75,000
shares of Common Stock in every three month period or (b) the amount that Mr.
Kozak would be permitted to sell under Rule 144(e) if he were an affiliate of
the Company. Mr. Kozak has also agreed to certain non-compete, non-solicitation
and confidentiality provisions expiring on December 31, 1997. Under his
employment agreement, Mr. Kozak had been granted stock options to purchase an
aggregate of 1,383,265 shares of the Company's Common Stock at exercise prices
ranging from $0.875 per share to $15.00 per share, of which options to purchase
1,133,265 shares had vested as of his termination. In January 1997, Mr. Kozak
exercised options to purchase 100,000 of these shares.
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. Mr. Pompliano has waived his right to demand an underwritten
registration of at least 300,000 shares of Common Stock beginning 120 days after
this offering. Mr. Kozak has agreed that his rights under this agreement will
terminate upon completion of this offering. 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 December 31, 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 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.
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<PAGE> 63
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 and the fiscal period ended December 31, 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 595,309 shares of Common Stock, at an average exercise price of
$5.41 per share, during the fiscal year ended June 30, 1996 and the fiscal
period ended December 31, 1996.
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
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
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<PAGE> 64
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
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
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<PAGE> 65
Preferred Stock. 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. 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"). 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.
The Company was party to an employment agreement with Richard A. Kozak,
which was terminated effective February 2, 1997. Each of the parties initially
claimed the termination was the result of a breach of the employment agreement
by the other party. In settlement of their dispute and related litigation
concerning Mr. Kozak's termination, the parties agreed, among other things, that
Mr. Kozak will (i) receive $300,000 in cash, payable by the Company in three
equal installments on April 1, July 1 and October 1, 1997, (ii) forfeit 166,667
of his unvested options, and (iii) execute a 180-day Lock-Up Agreement with the
Underwriters for all but 150,000 of the shares underlying his vested options and
80,000 other shares he holds. Also, Mr. Kozak's rights to have his shares of
Common Stock registered under the Securities Act will terminate upon completion
of this offering. The Company has agreed to accelerate the vesting of Mr.
Kozak's remaining 83,333 options which had not vested at the time of his
termination. Mr. Kozak also agreed to waive any rights that he may have under
the Registration Rights Agreement with respect to this offering and, upon
consummation of this offering, he will waive all rights under the Registration
Rights Agreement, provided that this offering is consummated by June 30, 1997.
If this offering has not been consummated by June 30, 1997, then the
Registration Rights Agreement shall only terminate as to Mr. Kozak if the
Stockholders Agreement has been amended to permit Mr. Kozak to transfer, in
addition to the 230,000 shares referred to above, the greater of (a) 75,000
shares of Common Stock in every three month period or (b) the amount that Mr.
Kozak would be permitted to sell under Rule 144(e) if he were an affiliate of
the Company. Mr. Kozak has also agreed to certain non-compete, non-solicitation
and confidentiality provisions expiring on December 31, 1997. Under his
employment agreement, Mr. Kozak had been granted stock options to purchase an
aggregate of 1,383,265 shares of the Company's Common Stock at exercise prices
ranging from $0.875 per share to $15.00 per share, of which options to purchase
1,133,265 shares had vested as of his termination. In January 1997, Mr. Kozak
exercised options to purchase 100,000 of these shares.
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PRINCIPAL STOCKHOLDERS
The following table sets forth as of February 28, 1997, 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)........................................ 1,662,499 6.1% 4.7%
Jack E. Reich.................................................. -- -- --
George M. Tronsrue, III(5)..................................... 300,000 1.2 *
Riley M. Murphy(6)............................................. 137,500 * *
George M. Middlemas(7)......................................... 1,433,679 5.3 4.1
Christopher Rafferty(8)........................................ 8,000 * *
Edwin M. Banks(8).............................................. -- -- --
Peter C. Bentz(8).............................................. -- -- --
Olivier L. Trouveroy(9)........................................ -- -- --
Benjamin P. Giess(9)........................................... -- -- --
Richard A. Kozak(10)........................................... 1,113,465 4.3 3.8
Robert H. Ottman(11)........................................... 175,000 * *
The Huff Alternative Income Fund, L.P.(12)(13)................. 11,246,782 30.7 25.2
ING Equity Partners, L.P. I(13)(14)............................ 6,100,000 19.3 15.4
First Analysis Corporation(13)(15)............................. 2,840,185 10.0 7.8
All executive officers and directors as a group (10 persons)... 3,541,678 12.2 9.6
</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 183,754 remaining shares of Series A-1
Preferred Stock into 7,350,160 shares of Common Stock and conversion of
277,500 shares of Series B Preferred Stock into 9,910,704 shares of Common
Stock. See "Description of Capital 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 February 28, 1997 (assuming conversion of
preferred stock into common stock) by (ii) the sum of (A) the number of
shares of Common Stock outstanding as of February 28, 1997 plus (B) the
number of shares of Common Stock into which all the shares of Preferred
Stock outstanding as of February 28, 1997, 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 February 28,
1997 or will become exercisable within 60 days after February 28, 1997
("currently exercisable").
(4) Includes currently exercisable options to purchase 1,662,399 shares.
(5) Includes currently exercisable options to purchase 300,000 shares.
(6) Includes currently exercisable options to purchase 137,500 shares.
(7) 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 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
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<PAGE> 67
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.
(8) 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.
(9) 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.
(10) Includes currently exercisable options to purchase 1,033,265 shares. In
connection with the settlement of the dispute concerning termination of Mr.
Kozak's employment, the Company accelerated the vesting of an additional
83,333 shares subsequent to February 28, 1997. Mr. Kozak's employment was
terminated effective February 2, 1997. See "Certain Transactions."
(11) Includes currently exercisable options to purchase 175,000 shares. Mr.
Ottman's employment with the Company was terminated in February 1997.
(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) Assuming the Purchaser Stockholders purchase an aggregate of
shares of Common Stock in this offering, the number of shares beneficially
owned and the percentage of the shares outstanding after the offering would
increase to shares and % for Huff, shares and % for ING and
shares and % for FAC, excluding , and
shares to be issued to Huff, ING and affiliates of FAC, respectively, in
payment of accrued dividends on 238,889, 150,000 and 40,677 of the shares
of Preferred Stock to be converted into Common Stock in connection with
this offering by Huff, ING and affiliates of FAC, respectively.
(14) 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.
(15) 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"). 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. The address for First Analysis Corporation is 233 South
Wacker Drive, Suite 9600, Chicago, 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 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 December 31,
1996, outstanding borrowings under the AT&T Credit Facility totalled
approximately $30.2 million, including accrued interest of approximately $2.6
million. Interest rates applicable to the loans ranged from 11.93% to 14.47% as
of February 28, 1997.
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 had contributed
approximately $18.9 million in capital to its subsidiaries through December 31,
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 Indenture Act of 1939 as in effect on the date of that
Indenture. The terms of the Indentures are
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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,
2001 at 106 3/8%, 104 1/4% and 102 1/8% of the principal amount for the twelve
months following
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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
February 28, 1997, there were 8,191,959 shares of Common Stock issued and
outstanding and held of record by approximately 271 persons, including 116,400
shares issued in February 1997 in connection with conversion of 2,910 shares of
Preferred Stock. The Company has designated 186,664 shares (of which 183,754
remain outstanding) 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 461,254 issued and outstanding shares of Preferred Stock
will be converted into 17,260,864 shares of Common Stock and will again become
authorized but unissued shares of Preferred Stock. Approximately $7.4 million of
accrued dividends on 429,556 of the 461,254 shares of Preferred Stock to be
converted in connection with this offering will be paid in shares of
Common Stock. The remaining $600,000 of accrued dividends will be paid in cash.
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,
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any other series or class of preferred stock entitled to a share of the
remaining assets of the Company pro rata based on the number of shares of Common
Stock held by each (assuming full conversion of all such Preferred Stock or such
other series or class of preferred stock). The holders of the Company's Common
Stock do not have pre-emptive rights or cumulative voting rights with respect to
the election of directors.
ANTI-TAKEOVER STATUTE
Section 203 of the DGCL prohibits certain transactions between a Delaware
corporation and an interested stockholder, which is defined therein as a person
who, together with any affiliates and/or associates of such person, beneficially
owns, directly or indirectly, 15% or more of the outstanding voting shares of a
Delaware corporation. This provision prohibits certain business combinations
(defined broadly to include mergers, consolidations, sales or other dispositions
of assets having an aggregate value in excess of 10% of the consolidated assets
of the corporation, and certain transactions that would increase the interested
stockholder's proportionate share ownership in the corporation) between an
interested stockholder and a corporation for a period of three years 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
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action by or in the right of the corporation) by reason of the fact that he is
or was a director, officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation or enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.
Section 145 also empowers a corporation to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that such person acted in any of the
capacities set forth above, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted under similar standards, except
that no indemnification may be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the corporation
unless, and only to the extent that, the Delaware Court of Chancery or the court
in which such action was brought shall determine that despite the adjudication
of liability such person is fairly and reasonably entitled to indemnity for such
expenses which the Delaware Court of Chancery or such other court shall deem
proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to above or in the defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith; that indemnification provided for by Section 145 shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled;
and that the corporation is empowered to purchase and maintain insurance on
behalf of any person who is a or was a director, officer, employee or agent of
the corporation against any liability asserted against him in any such capacity,
or arising out of his status as such, whether or not the corporation would have
the power to indemnify him against such liabilities under Section 145.
There has not been in the past and there is not presently pending any
litigation or proceeding involving a director, officer, employee or agent of the
Company which could give rise to an indemnification obligation on the part of
the Company. In addition, except as described herein, the Board of Directors is
not aware of any threatened litigation or proceeding which may result in a claim
for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a 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
approximately 33,453,973 shares of Common Stock, excluding the approximately
shares to be issued in payment of accrued dividends on 429,566 shares
of Preferred Stock. The 8,000,000 shares offered hereby (other than the shares
sold to the Purchaser Stockholders in this offering or otherwise acquired by
affiliates) and approximately 2,862,918 of the approximately 25,543,973 shares
outstanding prior to this offering (after giving effect to the conversion of the
Preferred Stock, but excluding the approximately shares to be issued
in payment of accrued dividends on 429,566 shares of Preferred Stock) are freely
transferable without registration under the Securities Act of 1933, as amended
(the "Securities Act"). The approximately 22,591,055 remaining shares
outstanding prior to this offering are "restricted securities" as that term is
defined in Rule 144 of the Securities Act, approximately 21,439,836 of which are
subject to the Lock-Up Agreements described below. Assuming the recently adopted
amendments to Rule 144 became effective as of the date of this Prospectus (such
amendments become effective on April 29, 1997), approximately 1,202,185 of the
restricted shares will be freely transferable under Rule 144(k) and
approximately 20,242,633 of the restricted shares will be saleable subject to
certain volume and manner of sale restrictions under Rule 144. Of the shares
freely transferable under Rule 144(k) or saleable subject to Rule 144
limitations, approximately 20,404,163 shares are subject to the Lock-Up
Agreements described below. Of the approximately 20,242,633 shares eligible for
sale under Rule 144, approximately 273,945 shares will have become freely
transferable under Rule 144(k) on September 1, 1997 and an additional
approximately 21,959 will have become freely transferable under Rule 144(k) on
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 approximately 45,000 restricted shares will have become saleable
subject to Rule 144 limitations, with an additional approximately 16,042
restricted shares becoming saleable subject to Rule 144 limitations by January
1, 1998.
The holders of 24,896,764 shares of Common Stock and 521,540 shares of
Common Stock (including, in each case, shares issued or 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 executed or have
agreed to execute an agreement not to sell or otherwise dispose of any of those
shares of Common Stock or shares of Common Stock acquired in this offering or
acquired as a result of the payment of accrued dividends on converted shares of
Preferred 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 in payment of accrued dividends thereon and (iii)
issuable upon exercise of outstanding options and warrants, including the
additional shares issuable because of certain anti-dilutive provisions of the
Warrants, have either piggyback or demand registration rights relating to those
shares. Holders of approximately 2,998,430 outstanding shares and approximately
22,548,979 shares issuable upon conversion of the Preferred Stock and exercise
of options and warrants have waived or agreed to waive 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). As a
result, the Company's ability to raise additional cash through a public offering
of its equity securities may be limited. There can be no assurance that persons
with piggyback and demand registration rights who have not waived or agreed to
waive those rights (holding up to approximately 1,147,173 shares of outstanding
Common Stock and up to approximately 343,218 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
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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 1,000,000 of the 1,030,000 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 approximately 13,381,563 shares reserved for issuance upon exercise
of options and warrants outstanding on February 28, 1997 and in connection with
the Company's Employee Stock Purchase Plan, approximately 2,352,640 shares and
approximately 8,594,035 shares have been registered under the Securities Act on
Form S-3 and Form S-8 registration statements, respectively. These numbers
exclude the additional shares issuable upon exercise of the Warrants due to
certain anti-dilution provisions, the extent of which will depend, in large
part, on the amount by which the Average Price exceeds $ . Any
additional shares issuable upon exercise of the Warrants will be registered
under the Securities Act upon issuance. 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.
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 it will be in effect beginning April 29,
1997, 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 one year (currently, 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 one-year (currently, 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 two (currently, 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.
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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, including consummation
of the sale by the Company to the Purchaser Stockholders of an aggregate of
of the shares offered hereby and the issuance of shares of Common
Stock as payment for $ million of accrued dividends on the Preferred Stock. In
addition, the Underwriters are obligated to purchase 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 22,871,967 and
521,540 shares of Common Stock (including, in each case, shares issued or
issuable upon conversion of the Preferred Stock and exercise of options and
warrants which are or will have become vested during the
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applicable lock-up period) have agreed not to offer, sell or otherwise dispose
of any of such Common Stock or any of the shares acquired in this
offering or shares acquired as payment of accrued dividends on
shares of Preferred Stock, for a period of 180 and 90 days, respectively, after
the date of this Prospectus without the prior written consent of the
Representatives of the Underwriters. See "Shares Eligible for Future Sale."
It is contemplated that First Analysis Securities Corporation, a
wholly-owned subsidiary of First Analysis Corporation (a principal stockholder
of the Company) will be one of the Underwriters. Additionally, two other
affiliates of First Analysis Corporation have agreed in principle to purchase
directly from the Company an aggregate of of these shares offered hereby at
a per share price of $ , the price being paid by the Underwriters for the
shares purchased by them under the Underwriting Agreement. See "Sale to
Purchaser Stockholders." The provisions of Rule 2720 of the National Association
of Securities Dealers, Inc. (the "NASD") Conduct Rules apply to this offering.
Under Rule 2720, when a NASD member such as First Analysis Securities
Corporation distributes an affiliated company's equity securities, one of the
following two criteria must be met: (1) the price of such equity security can be
no higher than that recommended by a "qualified independent underwriter" or (2)
the offering must be for a class of equity security for which a "bona fide
independent market" exists. Because (i) the shares of Common Stock are quoted on
the Nasdaq Stock Market, (ii) the aggregate trading volume for the 12 months
immediately preceding the filing of the registration statement of which this
Prospectus forms a part was at least 100,000 shares, (iii) the Company had
outstanding for the 12-month period immediately preceding the filing of such
registration statement a minimum of 250,000 publicly-held shares and (iv) there
are, and for the 30-days immediately preceding the filing of such registration
statement there were, at least three "bona fide independent market makers" for
the Common Stock, a "bona fide independent market" for the Common Stock exists.
Accordingly, the public offering price of the Common Stock offered hereby will
not be passed upon by a "qualified independent underwriter." Pursuant to Rule
2720, NASD members may not execute transactions in the shares of Common Stock
offered hereby in discretionary accounts without the prior approval of the
customer.
During and after the offering, the Underwriters may purchase and sell
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with the offering. The Underwriters also may impose a
penalty bid, where selling concessions allowed to syndicate members or other
broker-dealers in respect of the Common Stock sold in the offering for their
account may be reclaimed by the syndicate if such securities are repurchased by
the syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of Common Stock which
may be higher than the price that might otherwise prevail in the open market.
These transactions may be effected on the Nasdaq National Market or otherwise
and these activities, if commenced, may be discontinued at any time.
As permitted by Rule 103 under the Exchange Act, Underwriters or
prospective Underwriters that are market makers ("passive market makers") in the
Common Stock may make bids for or purchases of Common Stock in the Nasdaq Stock
Market until such time, if any, when a stabilizing bid for such securities has
been made. Rule 103 generally provides that (a) a passive market maker's net
daily purchases of the Common Stock may not exceed 30% of its average daily
trading volume in such securities for the two full consecutive calendar months
(or any 60 consecutive days ending within the 10 days) immediately preceding the
filing date of the registration statement of which this Prospectus forms a part,
(b) a passive market maker may not effect transactions or display bids for the
Common Stock at a price that exceeds the highest independent bid for the Common
Stock by persons who are not passive market makers and (c) bids made by passive
market makers must be identified as such.
In the past, Donaldson, Lufkin & Jenrette Securities Corporation has
performed certain investment banking and other financial advisory services for
the Company, including in connection
73
<PAGE> 77
with the solicitation of consents from the Company's noteholders for the
Cybergate Acquisition, for which they have received customary compensation.
SALE TO PURCHASER STOCKHOLDERS
Subject to terms and conditions comparable to those in the Underwriting
Agreement, the Company has offered to sell an aggregate of of the shares
offered hereby directly to the following Purchaser Stockholders:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- -------------------------------------------------------------------------------- ---------
<S> <C>
---------
Total...........................................................................
=========
</TABLE>
The agreement pursuant to which the shares to be sold to the Purchaser
Stockholders provides that the obligations of the Purchaser Stockholders are
subject to certain conditions precedent, including completion of the sale of
shares of Common Stock pursuant to the Underwriting Agreement, and that the
Purchaser Stockholders will purchase of the shares of Common Stock
offered hereby if any of such shares are purchased. Each of the Purchaser
Stockholders who purchases Common Stock will be doing so in the ordinary course
of its business, and none has any arrangement or understanding to participate in
a distribution of the Shares purchased pursuant to the Purchase Agreement. Each
of the Purchaser Stockholders has agreed not to sell, transfer or otherwise
dispose of any of the shares acquired in this offering for a period of 180 days
following completion of this offering.
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 June 30, 1995
and 1996 and December 31, 1996 and for the fiscal years ended June 30, 1995 and
1996 and for the fiscal period ended December 31, 1996, have been included
herein and in the registration statement 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
74
<PAGE> 78
with their reports on the Company's financial statements. During the fiscal
years ended June 30, 1993, and June 30, 1994, and the subsequent interim periods
immediately preceding the change in accountants, there were no reportable events
(as that term is used in Regulation S-K, Item 304(a)(1)(v)(A) through (D) of the
Exchange Act), except that at the March 30, 1994, meeting of the Audit Committee
at which representatives of Coopers & Lybrand were present, Coopers & Lybrand
communicated to the Audit Committee that through approximately August 1993,
documentation of equity or other non-cash transactions and controls over cash
were less than adequate. This matter was then discussed. The Company has
authorized Coopers & Lybrand to respond fully to the inquiries of KPMG Peat
Marwick concerning such reportable events.
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.
75
<PAGE> 79
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> 80
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> 81
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.
SONET (SYNCHRONOUS OPTICAL NETWORK) -- A self-healing fiber optic ring that
constitutes a local network.
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
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<PAGE> 82
call. The switch opens or closes circuits or selects the paths or circuits to be
used for transmission of information. Switching is a process of interconnecting
circuits to form a transmission path between users. Switches allow local
telecommunications service providers to connect calls directly to their
destination, while providing advanced features and recording connection
information for future billing.
SWITCHED ACCESS SERVICES -- The origination or termination of long distance
traffic between a customer premise and an IXC POP via shared local trunks using
a local switch.
SWITCHED TRANSPORT SERVICES -- Transportation of switched traffic along
dedicated lines between the LEC central offices and IXC POPs.
SWITCHED TRAFFIC -- Telecommunications traffic along a switched network.
VGE (Voice Grade Equivalent Circuits) -- A measure of service equivalent to
one telephone line (64 kilobits of bandwidth) actually billed to a customer.
79
<PAGE> 83
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets as of June 30, 1995 and 1996 and December 31, 1996........ F-3
Consolidated Statements of Operations for the Years Ended June 30, 1995 and 1996 and
for the Six Months Ended December 31, 1996.......................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended June 30,
1995 and 1996 and for the Six Months Ended December 31, 1996........................ F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1995 and 1996 and
for the Six Months Ended December 31, 1996.......................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 84
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
American Communications Services, Inc.:
We have audited the accompanying consolidated balance sheets of American
Communications Services, Inc. and subsidiaries as of June 30, 1995 and 1996 and
December 31, 1996, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the years ended June 30, 1995
and 1996 and the six months ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American
Communications Services, Inc. and subsidiaries as of June 30, 1995 and 1996 and
December 31, 1996, and the results of their operations and their cash flows for
the years ended June 30, 1995 and 1996 and for the six months ended December 31,
1996 in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Washington, D.C.
February 14, 1997
F-2
<PAGE> 85
AMERICAN COMMUNICATIONS SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
1995 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (note 1).................................... $ 20,350,791 $134,115,981 $ 78,618,544
Restricted cash (note 1).............................................. 752,000 2,342,152 2,342,152
Trade accounts receivable, net of allowance for doubtful accounts of
$8,600, $189,500, and $432,400 at June 30, 1995, June 30, 1996 and
December 31, 1996, respectively..................................... 350,436 735,260 2,429,077
Other current assets.................................................. 92,325 1,003,465 1,202,711
------------ ------------ ------------
Total current assets.................................................... 21,545,552 138,196,858 84,592,484
Networks, equipment and furniture, gross (note 2)....................... 15,897,562 80,147,964 144,403,123
Less: accumulated depreciation and amortization....................... (330,272) (3,408,698) (8,320,372)
------------ ------------ ------------
15,567,290 76,739,266 136,082,751
Deferred financing fees, net of accumulated amortization of $64,458,
$732,775 and $1,070,670, at June 30, 1995, June 30, 1996 and December
31, 1996, respectively................................................ 292,113 8,334,183 8,380,283
Other assets............................................................ 222,010 329,584 982,649
------------ ------------ ------------
Total assets............................................................ $ 37,626,965 $223,599,891 $230,038,167
============ ============ ============
LIABILITIES, REDEEMABLE STOCK, OPTIONS AND WARRANTS, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable -- current portion (note 4)............................. $ 146,083 $ 252,809 $ 872,031
Accounts payable...................................................... 3,843,167 21,317,346 33,587,407
Accrued financing fees................................................ 1,542,255 -- --
Accrued employee costs................................................ 836,509 774,262 2,057,187
Other accrued liabilities............................................. 1,269,484 886,692 2,074,945
------------ ------------ ------------
Total current liabilities............................................... 7,637,498 23,231,109 38,591,570
Long term liabilities:
Notes payable, less current portion (notes 4 and 6)................... 3,652,085 184,129,361 209,538,226
Dividends payable (note 3)............................................ 1,070,985 4,942,313 6,945,943
------------ ------------ ------------
Total liabilities....................................................... 12,360,568 212,302,783 255,075,739
------------ ------------ ------------
Redeemable stock, options and warrants (notes 6, 9 and 11).............. 2,930,778 2,155,025 2,000,000
------------ ------------ ------------
Minority interest (note 4).............................................. 194,402 160,270 --
------------ ------------ ------------
Stockholders' equity (deficit) (notes 3, 4, 5 and 6):
Preferred stock, $1.00 par value, 186,664 shares designated as 9%
Series A-1 Convertible Preferred Stock authorized, issued and
outstanding at June 30, 1995, June 30, 1996 and December 31, 1996,
respectively, convertible into 7,466,560 shares of common stock
(notes 3 and 4)..................................................... 186,664 186,664 186,664
Preferred stock, $1.00 par value, 277,500 shares authorized and
designated as 9% Series B Convertible Preferred Stock; 227,500,
277,500 and 277,500 shares issued and outstanding at June 30, 1995,
June 30, 1996 and December 31, 1996, respectively, convertible into
9,910,704 shares of common stock (notes 3 and 5).................... 227,500 277,500 277,500
Common stock, $.01 par value, 75,000,000 shares authorized, 5,744,782,
6,645,691 and 6,784,996 shares issued and outstanding at
June 30, 1995, June 30, 1996 and December 31, 1996, respectively
(note 5)............................................................ 56,827 65,837 67,850
Additional paid-in capital............................................ 42,411,448 55,975,078 54,870,194
Accumulated deficit................................................... (20,741,222) (47,523,266) (82,439,780)
------------ ------------ ------------
Total stockholders' equity (deficit).................................... 22,141,217 8,981,813 (27,037,572)
------------ ------------ ------------
Commitments and contingencies (notes 1, 4, 6, 7, 8, and 9)
Total liabilities, redeemable stock, options and warrants, minority
interest and stockholders' equity (deficit)........................... $ 37,626,965 $223,599,891 $230,038,167
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 86
AMERICAN COMMUNICATIONS SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX
----------------------------- MONTHS ENDED
JUNE 30, JUNE 30, DECEMBER 31,
1995 1996 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenues (note 1)................................ $ 388,887 $ 3,415,137 $ 6,990,452
------------- ------------- -------------
Operating expenses:
Network development and operations............. 3,282,183 5,264,570 8,703,057
Selling, general and administrative............ 4,597,615 13,463,775 20,269,991
Noncash stock compensation (note 6)............ 6,419,412 2,735,845 549,645
Depreciation and amortization.................. 497,811 3,078,426 4,911,674
------------- ------------- -------------
Total operating expenses......................... 14,797,021 24,542,616 34,434,367
Non-operating income (expenses):
Interest and other income...................... 217,525 4,409,733 2,757,461
Interest and other expense (note 4)............ (170,095) (10,476,904) (10,390,330)
Debt conversion expense (note 4)............... (385,000) -- --
------------- ------------- -------------
Loss before minority interest.................... (14,745,704) (27,194,650) (35,076,784)
Minority interest................................ 48,055 412,606 160,270
------------- ------------- -------------
Net loss......................................... (14,697,649) (26,782,044) (34,916,514)
Preferred stock dividends and accretion (note
3)............................................. (1,070,985) (3,871,328) (2,003,630)
------------- ------------- -------------
Net loss to common stockholders.................. $ (15,768,634) $ (30,653,372) $ (36,920,144)
============= ============= =============
Net loss per common share........................ $ (3.30) $ (4.96) $ (5.48)
============= ============= =============
Average number of common shares outstanding...... 4,771,689 6,185,459 6,733,759
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 87
AMERICAN COMMUNICATIONS SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996 AND THE SIX MONTHS ENDED DECEMBER 31,
1996
<TABLE>
<CAPTION>
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 9)............. -- -- -- -- -- --
Warrant and stock option exercises and stock grant (note
6)...................................................... -- -- -- -- -- --
Establish limitation on common stock put right obligation
(note 6)................................................ -- -- -- -- -- --
Series A Preferred Stock dividends accrued
(note 3)................................................ -- -- -- -- -- --
Net loss.................................................. -- -- -- -- -- --
------ ----------- ------- -------- ------- --------
Balances at June 30, 1995................................... -- $ -- 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 (notes 4 and 6)........... -- -- -- -- -- --
Warrants and stock options exercised (note 6)............. -- -- -- -- -- --
Series A and B Preferred Stock dividends accrued (note
3)...................................................... -- -- -- -- -- --
Cancellation of and adjustments to put right obligations
(note 6)................................................ -- -- -- -- -- --
Stock compensation expense................................ -- -- -- -- -- --
Net loss.................................................. -- -- -- -- -- --
------ ----------- ------- -------- ------- --------
Balances at June 30, 1996................................... -- $ -- 186,664 $186,664 277,500 $277,500
Warrants and stock options exercised (note 6)............. -- -- -- -- -- --
Series A and B Preferred Stock dividends accrued (note
3)...................................................... -- -- -- -- -- --
Accretion of consulting agreement credit to exercise price
of warrants (note 9).................................... -- -- -- -- --
Cancellation of and adjustments to put right obligations
(note 6)................................................ -- -- -- -- -- --
Stock compensation expense................................ -- -- -- -- -- --
Net loss.................................................. -- -- -- -- -- --
------ ----------- ------- -------- ------- --------
Balances at December 31, 1996............................... -- $ -- 186,664 $186,664 277,500 $277,500
====== =========== ======= ======== ======= ========
<CAPTION>
NOTES
RECEIVABLE
COMMON STOCK ADDITIONAL ON SALE OF
------------------- PAID-IN COMMON ACCUMULATED
SHARES AMOUNT CAPITAL STOCK DEFICIT
--------- ------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1994................................... 2,755,005 $ -- $ 1,080,566 $ (2,750) $ (6,043,573)
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 -- --
Series B Preferred private placement, net of related costs
(note 3)................................................ -- -- 20,434,000 -- --
Issuance of put right obligations (notes 6
and 9).................................................. -- -- (53,303) -- --
Cancellation of put right obligation (note 9)............. -- -- 487,500 -- --
Warrant and stock option exercises and stock grant (note
6)...................................................... 2,379,390 23,794 349,030 -- --
Establish limitation on common stock put right obligation
(note 6)................................................ -- -- 4,510,962 -- --
Series A Preferred Stock dividends accrued
(note 3)................................................ -- -- (1,070,985) -- --
Net loss.................................................. -- -- -- -- (14,697,649)
--------- ------- ----------- -------- ------------
Balances at June 30, 1995................................... 5,744,782 $56,827 $42,411,448 $ -- $(20,741,222)
Issuance of Series B-4 Preferred Stock
(note 3)................................................ -- -- 4,950,000 -- --
Issuance of detachable warrants (notes 4 and 6)........... -- -- 8,684,000 -- --
Warrants and stock options exercised (note 6)............. 900,909 9,010 289,360 -- --
Series A and B Preferred Stock dividends accrued (note
3)...................................................... -- -- (3,871,328) -- --
Cancellation of and adjustments to put right obligations
(note 6)................................................ -- -- 775,753 -- --
Stock compensation expense................................ -- -- 2,735,845 -- --
Net loss.................................................. -- -- -- -- (26,782,044)
--------- ------- ----------- -------- ------------
Balances at June 30, 1996................................... 6,645,691 $65,837 $55,975,078 $ -- $(47,523,266)
Warrants and stock options exercised (note 6)............. 139,305 1,393 175,945 -- --
Series A and B Preferred Stock dividends accrued (note
3)...................................................... -- -- (2,003,630) -- --
Accretion of consulting agreement credit to exercise price
of warrants (note 9).................................... -- -- 18,750
Cancellation of and adjustments to put right obligations
(note 6)................................................ -- 620 154,405 -- --
Stock compensation expense................................ -- -- 549,646 -- --
Net loss.................................................. -- -- -- -- (34,916,514)
--------- ------- ----------- -------- ------------
Balances at December 31, 1996............................... 6,784,996 $67,850 $54,870,194 $ -- $(82,439,780)
========= ======= =========== ======== =============
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
Balances at June 30, 1994................................... $ (3,265,757)
Preferred Stock exchange (note 12)........................ --
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)................................................ 15,196,125
Series B Preferred private placement, net of related costs
(note 3)................................................ 20,661,500
Issuance of put right obligations (notes 6
and 9).................................................. (53,303)
Cancellation of put right obligation (note 9)............. 487,500
Warrant and stock option exercises and stock grant (note
6)...................................................... 372,824
Establish limitation on common stock put right obligation
(note 6)................................................ 4,510,962
Series A Preferred Stock dividends accrued
(note 3)................................................ (1,070,985)
Net loss.................................................. (14,697,649)
------------
Balances at June 30, 1995................................... $ 22,141,217
Issuance of Series B-4 Preferred Stock
(note 3)................................................ 5,000,000
Issuance of detachable warrants (notes 4 and 6)........... 8,684,000
Warrants and stock options exercised (note 6)............. 298,370
Series A and B Preferred Stock dividends accrued (note
3)...................................................... (3,871,328)
Cancellation of and adjustments to put right obligations
(note 6)................................................ 775,753
Stock compensation expense................................ 2,735,845
Net loss.................................................. (26,782,044)
------------
Balances at June 30, 1996................................... $ 8,981,813
Warrants and stock options exercised (note 6)............. 177,338
Series A and B Preferred Stock dividends accrued (note
3)...................................................... (2,003,630)
Accretion of consulting agreement credit to exercise price
of warrants (note 9).................................... 18,750
Cancellation of and adjustments to put right obligations
(note 6)................................................ 155,025
Stock compensation expense................................ 549,646
Net loss.................................................. (34,916,514)
------------
Balances at December 31, 1996............................... $(27,037,572)
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 88
AMERICAN COMMUNICATIONS SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE YEARS ENDED MONTHS
----------------------------- ENDED
JUNE 30, JUNE 30, DECEMBER 31,
1995 1996 1996
------------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................................. $ (14,697,649) $ (26,782,044) $(34,916,514)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization...................................... 497,811 3,078,426 4,911,674
Interest deferral and accretion.................................... -- 10,447,687 10,041,189
Amortization of deferred financing fees............................ 323,900 668,317 334,671
Provision for doubtful accounts.................................... 8,570 180,940 242,915
Loss from impairment of assets..................................... -- -- 318,737
Loss attributed to minority interest............................... (48,055) (412,606) (160,270)
Noncash compensation, consultants and other expenses............... 6,419,412 2,735,845 549,645
Accretion of consulting agreement credit to exercise price of
warrants......................................................... -- -- 18,750
Noncash debt conversion expense.................................... 385,000 -- --
Changes in operating assets and liabilities:
Trade accounts receivable........................................ (359,007) (565,764) (1,936,732)
Restricted cash related to operating activities.................. 200,000 -- --
Other current assets............................................. (92,325) (911,140) (199,246)
Other assets..................................................... (26,545) (107,574) (653,065)
Accounts payable................................................. 3,170,885 17,474,179 12,270,061
Accrued financing fees........................................... 1,542,255 (1,542,255) --
Accrued employee costs........................................... 719,333 (62,247) 1,282,925
Other accrued liabilities........................................ 1,055,673 (382,792) 1,188,253
------------- ------------- -----------
Net cash (used in) provided by operating activities.................... (900,742) 3,818,972 (6,707,007)
------------- ------------- -----------
Cash flows from investing activities:
Purchase of net assets of Piedmont Teleport, Inc. ................... (19,135) -- --
Purchase of equipment and furniture.................................. (306,454) (2,966,987) (1,827,119)
Restricted cash related to network activities........................ (752,000) (1,590,152) --
Network development costs............................................ (14,996,303) (57,889,227) (62,746,777)
------------- ------------- -----------
Net cash used in investing activities.................................. (16,073,892) (62,446,366) (64,573,896)
------------- ------------- -----------
Cash flows from financing activities:
Issuance of notes payable............................................ 3,510,349 166,888,210 16,329,923
Payment of deferred financing fees................................... (310,175) (8,710,387) (380,771)
Warrant and stock option exercises................................... 372,824 298,370 177,338
Issuances of Series A Preferred Stock, net of offering costs and
conversion of bridge financing..................................... 10,962,046 -- --
Issuances of Series B Preferred Stock, net of offering costs......... 20,661,500 5,000,000 --
Issuance of warrants with 2005 Notes................................. -- 8,684,000 --
Issuance of notes payable -- stockholders............................ 250,000 -- --
Proceeds from sale of minority interest in subsidiaries.............. 242,457 378,474 --
Payment of equipment financing....................................... -- -- (343,024)
Payments of notes payable -- stockholders............................ (481,692) (146,083) --
Payments of bridge notes............................................. (1,000,000) -- --
Payments of secured note............................................. (75,000) -- --
Payments of secured convertible notes................................ (77,281) -- --
------------- ------------- -----------
Net cash provided by financing activities.............................. 34,055,028 172,392,584 15,783,466
------------- ------------- -----------
Net (decrease) increase in cash and cash equivalents................... 17,080,394 113,765,190 (55,497,437)
Cash and cash equivalents, beginning of year........................... $ 3,270,397 $ 20,350,791 $134,115,981
------------- ------------- -----------
Cash and cash equivalents, end of year................................. $ 20,350,791 $ 134,115,981 $78,618,544
============= ============= ===========
Supplemental disclosure of cash flow information -- interest paid on
all debt obligations................................................. $ 219,554 $ 29,217 $ 14,470
============= ============= ===========
Supplemental disclosure of noncash investing and financing activities:
Equipment financing.................................................... $ -- $ 343,024 --
============= ============= ===========
Dividends declared in connection with Series A Preferred Stock......... $ 1,070,985 $ 3,871,328 $ 2,003,630
============= ============= ===========
Bridge financing, secured convertible notes, and notes payable --
stockholders converted to equity in connection with private
placements........................................................... $ 4,080,079 $ -- $ --
============= ============= ===========
Cancellation of and adjustments to put right obligations............... $ (487,500) $ (775,753) $ (155,025)
============= ============= ===========
Write off of note receivable from sale of common stock................. $ 2,750 $ -- $ --
============= ============= ===========
Preferred stock exchange............................................... $ 1,700,000 $ -- $ --
============= ============= ===========
Purchase of Piedmont Teleport, Inc. for common stock and related put
right obligation..................................................... $ 192,303 $ -- $ --
============= ============= ===========
Negotiation of right-of-way agreement for option discount.............. $ 201,000 $ -- $ --
============= ============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 89
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996
(1) BASIS OF PRESENTATION AND RELATED MATTERS
FISCAL YEAR
Effective December 31, 1996, the Company changed its fiscal year from a
twelve-month period ending June 30 to a twelve-month period ending December 31.
The consolidated statements of operations, stockholders' equity (deficit) and
cash flows are presented for the twelve month period ended June 30, 1995, the
twelve month period ended June 30, 1996 and the six month period ended December
31, 1996.
The Unaudited Condensed Consolidated Statement of Operations information for the
six months ended December 31, 1995 is as follows:
<TABLE>
<S> <C>
Revenues...................................................... $ 988,877
Operating expenses............................................ 7,966,463
Non-operating expenses........................................ 2,057,410
------------
Loss before minority interest................................. (9,034,996)
Minority interest............................................. 155,861
------------
Net loss...................................................... (8,879,135)
Preferred stock dividends and accretion....................... (1,854,495)
------------
Net loss to common stockholders............................... (10,733,630)
------------
Net loss per common share..................................... (1.82)
Average number of common shares outstanding................... 5,900,606
============
</TABLE>
ORGANIZATION
The consolidated financial statements include the accounts of American
Communications Services, Inc. and its majority-owned subsidiaries (ACSI or the
Company). As discussed in note 4 to the consolidated financial statements, all
of the Company's subsidiaries are wholly owned with the exception of the
Louisville, Fort Worth, El Paso, Greenville, and Columbia subsidiaries, in which
the Company has a 92.75% controlling ownership interest. All material
intercompany accounts and transactions have been eliminated in consolidation.
BUSINESS AND OPERATING ENVIRONMENT
ACSI constructs and operates digital fiber optic networks and offers local
telecommunications services to long distance companies and business and
government end users in selected target markets, principally in the southern
United States. The Company provides nonswitched dedicated services, including
special access, switched transport and private line services. In addition to
these dedicated services, the Company is developing and has begun offering high
speed data services to business, government and other communications carriers,
including Internet service providers. The Company has also begun offering, on a
limited basis, enhanced voice messaging services and plans to begin offering
local switched voice services in the future. The Company is a competitive local
exchange carrier and is referred to as a competitive access provider with
respect to provision of dedicated services.
To date, the Company has funded the construction of its networks and its
operations with external financing. Prior to November 1995, the primary sources
of funds were two Preferred Stock private offerings completed in October 1994
and June 1995 (see note 3), and a credit facility from AT&T
F-7
<PAGE> 90
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) BASIS OF PRESENTATION AND RELATED MATTERS -- (CONTINUED)
Credit Corporation (see note 4). During the fiscal year ended June 30, 1996, the
Company raised additional funds through an additional sale of Preferred Stock
(see note 3), two private offerings of Senior Notes, one of which included
detachable warrants and further borrowings under the AT&T Credit Corporation
Credit Facility (see note 4).
The Company has never been profitable, has never generated positive cash flow
from consolidated operations and, since its inception has incurred significant
net operating losses and negative cash flow. In accordance with the terms of its
debt facilities the Company has also deferred payment of most of its interest
charges. The Company's continued development, construction, expansion, operation
and potential acquisition of local networks, as well as the further development
of new services, including local switched voices and high-speed data services,
will require substantial capital expenditures. The Company's ability to fund
these expenditures is dependent upon the Company's raising substantial
financing. To meet its remaining capital requirements and to fund operations and
cash flow deficiencies, ACSI will be required to sell additional equity
securities, increase its existing credit facility, acquire additional credit
facilities or sell additional debt securities, certain of which would require
the consent of the Company's debtholders. Before incurring additional
indebtedness, the Company may be required to seek additional equity financing to
maintain balance sheet and liquidity ratios under certain of its debt
instruments. There can be no assurance that the Company will be able to obtain
the additional financing necessary to satisfy its cash requirements or to
successfully implement its growth strategy. Failure to raise sufficient capital
could compel the Company to delay or abandon some or all of its plans or
expenditures, which could have a material adverse effect on its business,
results of operations and financial condition.
CASH EQUIVALENTS AND RESTRICTED CASH
Pursuant to SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", the Company's short and long-term debt securities and marketable
equity securities are accounted for at market value. The fair market value of
short- and long-term investments is determined based on quoted market prices for
those investments. The Company's marketable securities have been classified as
available for sale and are recorded at current market value with an offsetting
adjustment to stockholders' equity (deficit).
The Company's investments consist of commercial paper, U.S. Government
Securities and money market instruments, all with original maturities of 90 days
or less. The fair market value of such securities approximates amortized cost.
At June 30, 1995 and 1996 and December 31, 1996, cash equivalents consists of
government securities and overnight investments.
The Company has provided performance bonds and letters of credit in various
cities in connection with its operations, resulting in a restriction of cash
amounting to $752,000, $2,342,000 and $2,342,000 at June 30, 1995, June 30, 1996
and December 31, 1996, respectively. The face amount of all bonds and letters of
credits was approximately $6,200,000 as of December 31, 1996.
NETWORKS, EQUIPMENT AND FURNITURE
Networks, equipment and furniture are stated at cost less accumulated
depreciation and amortization. Costs capitalized during the network development
stage include expenses associated with network engineering, design and
construction, negotiation of rights-of-way, obtaining legal and regulatory
authorizations and the amount of interest costs associated with the network
development.
F-8
<PAGE> 91
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) BASIS OF PRESENTATION AND RELATED MATTERS -- (CONTINUED)
Provision for depreciation of networks, equipment and furniture is computed
using the straight-line method over the estimated useful lives of the assets
beginning in the month a network is substantially complete and available for use
and equipment and furniture are acquired.
The estimated useful lives of the Company's principal classes of assets are
as follows:
<TABLE>
<S> <C>
Networks:
Fiber optic cables and installation costs................... 20 years
Telecommunications equipment................................ 3-7 years
Interconnection and collocation costs....................... 3-10 years
Leasehold improvements........................................ Life of lease
Furniture and fixtures........................................ 5 years
Capitalized network development costs......................... 3-20 years
</TABLE>
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" on
January 1, 1996. This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.
DEFERRED FINANCING FEES
Deferred financing fees include commitment fees and other costs related to
certain debt financing transactions and are being amortized using the effective
interest method over the initial term of the related debt.
REVENUE RECOGNITION
Revenue is recognized as services are provided. Billings to customers for
services in advance of providing such services are deferred and recognized as
revenue when earned. The Company also enters into managed services agreements
with certain customers. Under such agreements the Company provides use of
Company owned equipment, collocation and network access services. Revenue is
recognized on a monthly basis as these services are provided to the customer.
EARNINGS (LOSS) PER COMMON SHARE
The computation of earnings (loss) per common share is based upon the weighted
average number of common shares outstanding. The effect of including common
stock options and warrants as common stock equivalents would be anti-dilutive
and is excluded from the calculation of loss per common share.
F-9
<PAGE> 92
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) BASIS OF PRESENTATION AND RELATED MATTERS -- (CONTINUED)
INCOME TAXES
Deferred income taxes are recognized for temporary differences between financial
statement and income tax bases of assets and liabilities and loss carryforwards
and tax credit carryforwards for which income tax benefits are expected to be
realized in future years. A valuation allowance is established to reduce
deferred tax assets if it is more likely than not that all, or some portion, of
such deferred tax assets will not be realized. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date.
RECLASSIFICATIONS
Certain reclassifications have been made to the June 30, 1995 and 1996
consolidated financial statements to conform to the December 31, 1996
presentation. Such reclassifications had no effect on net loss or total
stockholders' equity (deficit).
STOCK OPTION PLAN
Prior to July 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees", and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
July 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock Based
Compensation", which permits entities to recognize as expense over the vesting
period the fair value of all stock based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosure for employee stock option grants as if the
fair-value based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results may differ from those estimates.
CONCENTRATION OF CREDIT RISK
The Company receives a significant portion of its revenues from a small number
of major customers, particularly the long distance telecommunications companies
that service the Company's markets. For the years ended June 30, 1995 and June
30, 1996 and the six months ended December 31, 1996 approximately 85%, 60% and
40% of the Company's revenues were attributable to services provided to three,
four and four of the largest long distance telecommunications companies,
respectively. The loss of any one of these customers could have an adverse
material impact on the Company's revenues.
The Company provides managed services to certain Internet service providers.
Such companies operate in a highly competitive and uncertain environment.
Approximately 19% of the Company's
F-10
<PAGE> 93
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) BASIS OF PRESENTATION AND RELATED MATTERS -- (CONTINUED)
revenues for the six months ended December 31, 1996 were attributed to these
companies. At December 31, 1996, the Company had trade accounts receivable of
$923,000 from Internet service providers. The Company also has approximately
$4.5 million in equipment dedicated to providing service to these companies. The
Company believes that, if necessary, this equipment could be redeployed
throughout the Company's data network.
(2) NETWORKS, EQUIPMENT AND FURNITURE
Networks, equipment and furniture consists of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
1995 1996 1996
----------- ----------- ------------
<S> <C> <C> <C>
Networks and telecommunications
equipment............................... $15,570,450 $76,853,865 $139,129,495
Furniture and fixtures.................... 188,534 1,982,910 3,334,147
Computer software......................... 56,485 948,848 1,558,384
Leasehold improvements.................... 82,093 362,341 381,097
----------- ----------- ------------
15,897,562 80,147,964 144,403,123
Less -- accumulated depreciation and
amortization............................ 330,272 3,408,698 8,320,372
----------- ----------- ------------
Total, net of accumulated depreciation and
amortization............................ $15,567,290 $76,739,266 $136,082,751
============ ============ =============
</TABLE>
For the years ended June 30, 1995 and 1996, the Company capitalized interest of
approximately $536,000 and $3,051,000, respectively. For the six months ended
December 31, 1996, the Company capitalized interest of approximately $2,268,000.
(3) PRIVATE PLACEMENTS
In October 1994, the Company completed a private placement of its 9% Series A
Convertible Preferred Stock, $1.00 par value (the "Series A Preferred Stock").
There were 138,889 shares issued for cash at $90 per share resulting in proceeds
of $10,962,046, net of placement agent commissions and related placement fees
and costs.
In addition, bridge financing was converted and several other obligations were
retired with proceeds of the offering. See note 4 to the consolidated financial
statements. Further, as discussed in note 6 to the consolidated financial
statements, certain parties obtained warrants to purchase shares of the
Company's common stock. In June 1995, the Series A Preferred Stock was exchanged
for an identical number of 9% Series A-1 Convertible Preferred Stock, $1.00 par
value. (the "Series A-1 Preferred Stock").
In June 1995, the Company completed a private placement of its 9% Series B-1
Convertible Preferred Stock (the "Series B-1 Preferred"), 9% Series B-2
Convertible Preferred Stock (the "Series B-2 Preferred") and 9% Series B-3
Convertible Preferred Stock (the "Series B-3 Preferred"), each having a par
value of $1.00 per share. There were 227,500 shares issued for cash at $100 per
share with proceeds of $20,661,500, net of placement agent commissions and
related placement fees and costs. In November 1995, 50,000 shares of 9% Series
B-4 Convertible Preferred Stock (the "Series B-4 Preferred") were issued for
cash of $100 per share resulting in proceeds of $5,000,000. The Series B-1
Preferred, the Series B-2 Preferred, the Series B-3 Preferred and the Series B-4
Preferred
F-11
<PAGE> 94
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) PRIVATE PLACEMENTS -- (CONTINUED)
are hereafter collectively referred to as the "Series B Preferred Stock." The
Series A-1 Preferred Stock and the Series B Preferred Stock are hereafter
collectively referred to as the "Preferred Stock." Further, as discussed in note
6 to the consolidated financial statements, certain parties obtained warrants to
purchase shares of the Company's common stock.
The Company's Preferred Stock and common stock vote as a single class (except
with respect to the election of directors and certain other transactions and
matters) with the common stock entitled to one vote per share and the Preferred
Stock entitled to one vote for each share of common stock into which it is
convertible. At December 31, 1996, the outstanding Series A-1 Preferred Stock
was convertible into 7,466,560 shares of common stock and the outstanding Series
B Preferred Stock was convertible into 9,910,704 shares of common stock.
Pursuant to the Company's certificate of incorporation, the board of directors
is currently comprised of seven directors. The holders of common stock are
entitled to elect four directors and the holders of the Preferred Stock are
entitled to elect three directors. In addition, certain transactions and matters
require the consent of the holders of at least 75% of the shares of Preferred
Stock voting as a separate class.
Certain holders of the Company's Preferred Stock and common stock have entered
into a Voting Rights Agreement pursuant to which such stockholders have agreed
to vote their shares of Preferred Stock and common stock for the election of
directors designated by the majority Preferred stockholders.
In connection with its Series A-1 and Series B Preferred Stock, the Company has
recorded approximately $1,071,000, $4,942,000 and $6,946,000 as of June 30,
1995, June 30, 1996 and December 31, 1996, respectively, as a reduction in
additional paid-in capital, for the payment of anticipated dividends. The
Company's certificate of incorporation requires the Company to accrue dividends,
on a quarterly basis, at an annual rate of 9% of the face value of the Series
A-1 and B Preferred Stock.
Although the Board of Directors of the Company has not taken any formal action
as of December 31, 1996, as a condition of the aforementioned provisions of the
certificate of incorporation, the dividends have been deemed declared and
properly reflected in the accompanying consolidated financial statements.
Pursuant to the Company's certificate of incorporation, dividends accrued shall
be paid cumulatively, beginning January 1, 1998, or earlier upon conversion.
Upon a voluntary conversion on or before December 31, 1997, the Company shall,
in lieu of accrued and unpaid dividends, issue promissory notes to the holders
of the Preferred Stock. The Company expects to issue promissory notes to the
holders on January 1, 1998 for dividends accrued, if conversion has not
occurred, subject to restrictions included in the Senior Discount Note
Indentures. Conversion may occur at any time at the holder's option or
automatically, upon a certain qualifying issuance of common stock. As of
December 31, 1996, no conversions had occurred.
F-12
<PAGE> 95
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
1995 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
Notes payable-stockholders at 10-15%,
maturing September 15, 1995............ $ 146,083 -- --
AT&T Credit Corporation equipment and
working capital financing facility..... 3,652,085 $ 14,971,122 $ 30,183,264
2006 Senior Discount notes, interest at
12 3/4%, maturing April 1, 2006........ -- 66,635,887 70,824,922
2005 Senior Discount notes, interest at
13% maturing November 1, 2005.......... -- 102,432,137 109,402,071
Secured equipment note payable, interest
of 9.98%, payable in 36 equal monthly
installments of $2,766, including
interest commencing March 1, 1996...... -- 343,024 --
------------ ------------ ------------
Total long-term debt..................... 3,798,168 184,382,170 210,410,257
Less current portion..................... 146,083 252,809 872,031
------------ ------------ ------------
$3,652,085 $184,129,361 $209,538,226
=========== ============= =============
</TABLE>
Principal payments for each of the years from 1997 to 2001 and thereafter, are
due as follows at December 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
-------------------------------------------------------------
<S> <C>
1997.................................................... $ 872,031
1998.................................................... 1,190,150
1999.................................................... 2,124,721
2000.................................................... 3,250,483
2001.................................................... 4,618,260
Thereafter.............................................. 198,354,612
-------------
$ 210,410,257
=============
</TABLE>
NOTES PAYABLE -- STOCKHOLDERS
At June 30, 1995, the Company had a total of $146,083 in notes payable to
stockholders which matured and were repaid on September 14, 1995.
AT&T CREDIT CORPORATION EQUIPMENT AND WORKING CAPITAL FINANCING FACILITY
In October 1994, the Company entered into the AT&T Credit Facility pursuant to
which AT&T Credit Corporation has agreed to provide financing for the
development and construction of fiber optic networks by certain of the Company's
subsidiaries. In accordance with the terms of the facility, the Company is
obligated to use at least 10% of the borrowed funds for purchases of equipment
manufactured by AT&T or its affiliates. Pursuant to the AT&T Credit Facility,
during fiscal 1995 the Company's subsidiaries in Louisville, Fort Worth,
Greenville and Columbia entered into loan agreements with AT&T Credit
Corporation providing for up to $19.8 million in loans collateralized by the
assets of such subsidiaries. As of June 30, 1995, an aggregate of approximately
$3.7 million had been borrowed under these agreements. Subsequent to June 30,
1995, the Company's
F-13
<PAGE> 96
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) DEBT -- (CONTINUED)
subsidiary in E1 Paso entered into a separate loan agreement with AT&T Credit
Corporation pursuant to the AT&T Credit Facility providing for up to an
aggregate of approximately $5.5 million in loans collateralized by its assets.
During the fiscal year ended June 30, 1996, the existing loan agreements were
amended to increase the aggregate credit available under such agreements to
$31.2 million. As of June 30, 1996 and December 31, 1996, outstanding borrowings
under the AT&T Credit Facility totaled approximately $15 million and $30
million, respectively, including accrued interest of approximately $1.4 million
and $2.7 million, respectively. Interest rates currently applicable to the loans
range from 11.93% to 14.47%.
The loans under the AT&T Credit Facility are collateralized by all of the assets
of the respective borrowing subsidiary, including its installed fiber optic
system and other equipment. The principal is payable in 28 consecutive quarterly
installments, beginning with the ninth quarter after the date of the loan. The
principal may be prepaid in certain circumstances, and must be prepaid along
with a premium in other circumstances. Interest is due quarterly. At the
borrowing subsidiary's option, the interest rate may be fixed or variable. The
borrowing subsidiary has a one-time option to convert all variable rate loans to
fixed rate loans. Upon certain events of default, additional interest ranging
from 2% to 4% will become payable. Interest may generally be deferred so long as
it would not cause the outstanding principal balance to exceed the commitment
amounts for Capital Loans and for Equipment Loans (as defined in the loan
documents). To date, the Company has elected to defer all interest due under the
loans. In addition, the AT&T Credit Facility includes covenants, some of which
impose certain restrictions on the Company and its restricted subsidiaries
including restrictions on the declaration or payment of dividends, the conduct
of certain activities, certain capital expenditures, the creation of additional
liens or indebtedness, the disposition of assets, transactions with affiliates
and extraordinary corporate transactions. The AT&T Credit Facility imposes
restrictions on the ability of those subsidiaries of ACSI that incur
indebtedness thereunder to transfer funds to ACSI in the form of dividends or
other distributions. The AT&T Credit Facility also imposes restrictions on the
ability of such subsidiaries to raise capital by incurring additional
indebtedness. These restrictions could limit ACSI's ability to meet its
obligations with respect to the 2005 and 2006 Senior Discount Notes.
Pursuant to the AT&T Credit Facility, AT&T Credit Corporation purchased 7.25% of
the outstanding capital stock of each of the Company's operating subsidiaries
for which it provided financing. The Company was required to pledge its interest
in these subsidiaries to AT&T Credit Corporation as a condition to each loan.
Under certain circumstances, this pledge agreement also restricts the Company's
ability to pay dividends on its capital stock.
2005 SENIOR DISCOUNT NOTES AND 2006 SENIOR DISCOUNT NOTES
On November 14, 1995, the Company completed an offering of 190,000 Units (the
"Units") consisting of $190,000,000 principal amount of 13% Senior Discount
Notes due 2005 (the "2005 Notes") and warrants to purchase 2,432,000 shares of
the Company's common stock at a price of $7.15 per share (the "Warrants"). The
2005 Notes will accrete at a rate of 13% compounded semi-annually to an
aggregate principal amount of $190,000,000 by November 1, 2000. Thereafter,
interest on the 2005 Notes will accrue at the annual rate of 13% and will be
payable in cash semi-annually. The Company received net proceeds of
approximately $96,105,000 from the sale of the Units. The value ascribed to the
Warrants was $8,684,000.
On March 21, 1996, the Company completed an offering of $120,000,000 of 12 3/4%
Senior Discount Notes due 2006 (the "2006 Notes") resulting in net proceeds of
approximately $61,800,000. The
F-14
<PAGE> 97
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) DEBT -- (CONTINUED)
2006 Notes will accrete at a rate of 12 3/4% compounded semi-annually, to an
aggregate principal amount of $120,000,000 by April 1, 2001. Thereafter,
interest on the 2006 Notes will accrue at the annual rate of 12 3/4% and will be
payable in cash semi-annually on April 1 and October 1, commencing on October 1,
2001. The 2006 Notes will mature on April 1, 2006.
The 2005 Notes and 2006 Notes (collectively the "Notes") are general,
unsubordinated and unsecured obligations of the Company. The Company's
subsidiaries have no obligation to pay amounts due on the Notes and do not
guarantee the notes. Therefore, the Notes are effectively subordinated to all
liabilities of ACSI's subsidiaries, including trade payables. Any rights of the
Company and its creditors, including the holders of the Notes, to participate in
the assets of any of the Company's subsidiaries upon any liquidation or
reorganization of any such subsidiaries will be subject to the prior claims of
that subsidiary's creditors.
The Notes are subject to certain covenants which, among other things, restrict
the ability of ACSI and certain of its subsidiaries to incur additional
indebtedness, pay dividends or make distributions.
DEBT CONVERSION
On June 28, 1994, the Company issued a total of $4,300,720 principal of its 15
percent convertible bridge notes due December 31, 1994, including $1,300,720
issued to then existing stockholders. During 1995, the holders of $3,300,720 of
these convertible bridge notes converted the notes plus accrued interest thereon
of $35,754 into 37,073 shares of Series A Preferred Stock. The remaining
$1,000,000 principal amount was retired by cash payment from the proceeds of the
Series A Preferred Stock private offering (see note 3). The Company recorded
noncash debt conversion expense of $231,000 associated with the related
unamortized financing fees.
At June 30, 1994, the Company had outstanding loans from affiliates with an
aggregate principal balance of $606,640, which were notes secured by certain
assets of the Company. These loans bore interest at 15% per annum and had a
scheduled maturity date of December 31, 1994.
In October 1994, the holders of $529,359 principal amount of these notes, plus
accrued interest thereon of $29,368, converted the notes into 7,924 shares of
Series A Preferred Stock. The remaining principal on the secured convertible
notes of $77,281 was retired by a cash payment from the proceeds of the Series A
Preferred Stock private placement offering (see note 3). The Company recorded
noncash debt conversion expense of $154,000 equal to the premium to induce
conversion.
In August 1994, the Company borrowed $250,000, at a rate of 15% per annum from
an affiliate that was payable on demand. In October 1994, this note was
converted into 2,778 shares of Series A Preferred Stock.
(5) STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
In fiscal 1995, the Company established a par value of $.01 for its issued and
outstanding common stock.
F-15
<PAGE> 98
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) STOCKHOLDERS' EQUITY -- (CONTINUED)
PREFERRED STOCK
Pursuant to the Series B Preferred Stock offerings, as described in note 3, four
classes of Series B Preferred Stock have been designated and issued. The
composition of the Series B Preferred Stock at December 31, 1996 is as follows:
<TABLE>
<S> <C>
Preferred Stock, $1.00 par value, 100,000 shares designated as 9%
Series B-1 Convertible Preferred Stock authorized, issued and
outstanding.................................................... $100,000
Preferred Stock, $1.00 par value, 102,500 shares designated as 9%
Series B-2 Convertible Preferred Stock authorized, issued and
outstanding.................................................... 102,500
Preferred Stock, $1.00 par value, 25,000 shares designated as 9%
Series B-3 Convertible Preferred Stock authorized, issued and
outstanding.................................................... 25,000
Preferred Stock, $1.00 par value, 50,000 shares designated as 9%
Series B-4 Convertible Preferred Stock authorized, issued and
outstanding.................................................... 50,000
--------
Total............................................................ $277,500
=========
</TABLE>
(6) STOCK OPTIONS AND STOCK PURCHASE WARRANTS
The Company has a stock option plan which provides for the granting of options
to officers, employees, directors and consultants of the Company to purchase
shares of its common stock within prescribed periods.
In 1994, the Company entered into employment agreements with five executive
officers. Pursuant to the agreements, as amended, such officers have been
granted options to purchase an aggregate of 4,149,834 shares of common stock of
the Company at exercise prices ranging from $.875 to $3.40 per share. The
options vest at various dates as specified in the employment agreements with
4,069,834 of the options vesting on specific dates ranging from November 1, 1993
to November 4, 2001, and 80,000 of such options which vested upon the occurrence
of certain specified performance milestones. When the employment of these
individuals with the Company terminates, these individuals have the right to
sell certain of their shares to the Company (the put right) for a price equal to
fair market value. On June 26, 1995, the employment agreements were amended to
limit the purchase price paid by the Company pursuant to the put right to a
maximum of $2,500,000, which amount is subject to further reductions based on
the employees' sales of stock. During the year ended June 30, 1996, the limit
was further reduced to $2,000,000.
The Company has also issued 500,000 options to a supplier to purchase stock at
90% of the fair value at the date of exercise. Such options give the supplier
the right to sell the stock acquired back to the Company at fair value under
certain circumstances. None of the options have been exercised to date and they
expire in December, 1997.
The Company applies APB Opinion 25 and related Interpretations in accounting for
its plans. Accordingly, compensation cost has been recognized for its stock
option plans based on the intrinsic value of the option at the date of grant.
The compensation cost that has been charged against income was approximately
$6.4 million, $2.7 million and $550,000 for the years ended June 30, 1995 and
June 30, 1996 and for the six months ended December 31, 1996, respectively. Had
compensation cost for the Company's plan been determined based on the fair value
at the grant dates consistent with the method of FASB Statement 123 for all
options granted after June 30, 1995, and the intrinsic
F-16
<PAGE> 99
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) STOCK OPTIONS AND STOCK PURCHASE WARRANTS -- (CONTINUED)
value for all options granted prior to July 1, 1995, the Company's net loss and
loss per share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1996 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C> <C>
Net loss..................................... As reported: $ (26,782,044) $ (34,916,514)
Pro forma: (27,533,636) (36,828,677)
Loss per common share........................ As reported: (4.96) (5.48)
Pro forma: (5.08) (5.77)
</TABLE>
Pro forma net loss reflects compensation cost under SFAS No. 123 only for
options granted for the year ended June 30, 1996 and for the six months ended
December 31, 1996. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro forma net loss
amounts presented above because compensation cost is reflected over the vesting
period and compensation cost under SFAS No. 123 for options granted prior to
July 1, 1995 is not considered.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in the year ended June 30, 1996 and the six months
ended December 31, 1996, respectively: dividend yield of 0% for both periods;
expected volatility of 50% and 50%, risk-free interest rates of 5.97% and 6.4%
and expected lives of 4.74 and 4.37 years.
A summary of the status of the Company's stock options as of June 30, 1995, June
30, 1996 and December 31, 1996 and changes during the period ending on those
dates is presented below:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
-------------------------------------------------------- --------------------------
JUNE 30, 1995 JUNE 30, 1996 DECEMBER 31, 1996
-------------------------- -------------------------- --------------------------
SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
------ ---------------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year........................ 859 $ 2.22 5,042 $ 1.72 6,095 $ 2.21
Granted....................... 4,283 1.64 1,228 4.30 1,433 9.45
Exercised..................... -- -- (105) 2.46 (48) 2.02
Forfeited..................... (100) 2.51 (70) 3.57 (23) 3.54
------ ------ ------
Outstanding at end of year.... 5,042 1.72 6,095 2.21 7,457 3.60
Options exercisable at
year-end.................... 2,387 3,461 4,140
Weighted-average fair value of
options granted during the
year........................ $ 1.16 $ 3.35 $ 5.95
</TABLE>
The following table summarizes information about fixed stock options at December
31,1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------- -------------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
RANGE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISABLE
EXERCISE PRICE AT 12/31/96 CONTRACTUAL LIFE PRICE AT 12/31/96 PRICE
------------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.875 to 2.25..... 4,038,777 2.2 years $ 1.46 3,596,275 $ 1.35
2.80 to 4.78....... 1,672,974 3.4 3.31 496,058 3.21
6.00 to 9.375...... 1,662,000 4.7 8.53 47,500 6.00
15.00.............. 83,334 4.9 15.00 -- --
----------- ---------------- ------- ----------- ------
$0.875 to 15.00.... 7,457,085 3.1 3.60 4,139,833 1.64
</TABLE>
F-17
<PAGE> 100
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) STOCK OPTIONS AND STOCK PURCHASE WARRANTS -- (CONTINUED)
During fiscal years ended June 30, 1995 and 1996, in connection with the Series
A-1 and Series B Preferred Stock private placements and related bridge note
conversions, warrants for 4,367,078 shares of common stock were issued at prices
ranging from $.01 to $3.10. In fiscal 1996, as part of the issuance of the 2005
Notes, detachable warrants to purchase 2,432,000 shares of the Company's common
stock at a price of $7.15 per share were issued. These warrants include certain
anti-dilution provisions.
At December 31, 1996, unexercised warrants outstanding are as follows:
<TABLE>
<CAPTION>
NUMBER PRICE PER SHARE
--------- ----------------
<S> <C> <C>
Series A and Series B Preferred Stock
placements..................................... 1,474,836 $0.01-3.10
2005 Senior Discount Notes offering.............. 2,432,000 7.15
Other............................................ 865,000 0.01-9.68
--------- ----------------
Total............................................ 4,771,836 $0.01-9.68
========= =============
</TABLE>
The gross proceeds that would be received by the Company on the exercise of all
outstanding options and warrants is approximately $53,400,000.
(7) COMMITMENTS AND CONTINGENCIES
CERTAIN AGREEMENTS
The Company has signed nonexclusive license agreements with various utility and
inter-exchange carrier companies, including an affiliate of one of the country's
three largest long distance carriers, to install and maintain fiber cable
systems for the Company's use for periods up to 15 years or more, upon
exercising of extensions available to the parties. Under these agreements, the
Company has use of these rights-of-way for its telecommunications systems, and
may be entitled to certain payments for providing telecommunications service,
subject to its satisfactory performance of certain agreed upon requirements.
RETIREMENT PLAN
On February 1, 1996, the Company began sponsoring the American Communications
Services, Inc. 401(k) Plan (the "Plan"), a defined contribution plan. All
individuals employed on February 1, 1996 were eligible to participate.
Participation to all other employees is available after three months of
full-time equivalent service. The Company contributions under the Plan are
discretionary and may be as much as 6% of an employee's gross compensation
subject to certain limits. Total expense under the Plan amounted to
approximately $30,000 and $95,000 for the year ended June 30, 1996 and for the
six months ended December 31, 1996, respectively.
LEGAL PROCEEDINGS
On July 24, 1996, the Company was named as a codefendant in a lawsuit arising
from a personal injury sustained during the construction of one of its networks.
At the time of the incident giving rise to the lawsuit, the plaintiff was an
employee of a subcontractor hired by the Company's general contractor for the
construction project. The lawsuit seeks recovery from the Company and the
general contractor of at least $25 million plus punitive damages. The Company,
the general contractor, and the Company's insurance carrier have begun
investigations into the facts surrounding the incident and intend to defend
against this suit vigorously.
F-18
<PAGE> 101
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
In addition, the Company is a party to certain litigation and regulatory
proceedings arising in the ordinary course of business. In the opinion of
management, based upon the advice of counsel, the ultimate disposition of these
matters will not have a material adverse effect on the Company's consolidated
financial position.
(8) LEASES
The Company is obligated under various noncancelable operating leases for office
and node space as well as office furniture. The minimum future lease obligations
under these noncancelable operating leases as of December 31, 1996 are
approximately as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
-------------------------------------------------------------- -----------
<S> <C>
1997.......................................................... $ 3,980,000
1998.......................................................... 4,320,000
1999.......................................................... 4,560,000
2000.......................................................... 4,051,000
2001.......................................................... 3,078,000
Thereafter.................................................... 13,640,000
-----------
$33,629,000
===========
</TABLE>
Rent expense for the years ended June 30, 1995 and June 30, 1996 and for the six
months ended December 31, 1996 was approximately $200,000, $1,166,000 and
$1,700,000, respectively.
(9) RELATED-PARTY TRANSACTIONS
In October 1993, the Company executed a financial consulting and advisory
agreement with a related party for a period of six months. In consideration, the
related party received warrants to purchase 300,000 shares of ACSI common stock
exercisable at $.875 per share if a future equity financing was successfully
completed. The related party had the right to resell the shares to ACSI for
$2.50 per share two years from the date of the agreement. At June 30, 1994, the
Company provided an accrual of $487,500 for this redemption privilege at the
redemption price net of the exercise price. In June 1995, the Company's
obligations to repurchase the shares were assumed by a stockholder of the
Company. Accordingly, as of June 30, 1995, the $487,500 share value has been
transferred from redeemable stock, options, and warrants to additional
paid-in-capital.
On June 16, 1994, the Company entered into a financial consulting agreement for
capital raising activities with an entity controlled by significant stockholders
of the Company. Under this agreement, the Company paid $153,750 for consulting
services rendered through the date of the agreement relating to placement of the
Convertible Bridge Notes. Additionally, the Company agreed to pay a $7,500
monthly consulting fee for a two year period beginning on the closing date of
the first private placement. During the six months ended December 31, 1996 and
the years ended June 30, 1996 and 1995, the Company paid $22,500, $90,000 and
$67,500 under this arrangement, respectively.
Effective July 1, 1994, the Company engaged SGC Advisory Services, Inc. ("SGC")
as a financial and business consultant for three years. SGC is an affiliate of a
former director of the Company. Pursuant to the agreement, the Company will
compensate SGC as follows: (1) a monthly fee of $5,000; and (2) options to
purchase up to 50,000 shares of the Company's Common Stock which vest on July 1,
F-19
<PAGE> 102
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) RELATED-PARTY TRANSACTIONS -- (CONTINUED)
1997, and are exercisable on or before July 1, 1999. At the end of each month of
the term of the agreement, SGC earns a credit against the exercise price of
those options equal to 1/36th of the exercise price. The shares issued upon
exercise of the options will be priced at $2.25 per share and the shares issued
will have piggy back registration rights.
(10) INCOME TAXES
Temporary differences and carryforwards that give rise to deferred tax assets
and liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
1995 1996 1996
----------- ---------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Capitalized start-up and other costs.............. $ 4,163,941 $3,733,898 $ 3,972,981
Stock options -- noncash compensation............. 2,768,488 3,848,128 4,085,146
Net operating loss carryforwards.................. 1,149,755 12,181,162 31,310,726
Other accrued liabilities......................... 454,391 496,634 964,786
----------- ---------- ------------
Total gross deferred assets......................... 8,536,575 20,259,822 40,333,639
Less: valuation allowance......................... 8,291,380 18,304,754 31,990,518
----------- ---------- ------------
Net deferred tax assets............................. 245,195 1,955,068 8,343,121
Deferred tax liabilities -- fixed assets
depreciation and amortization..................... 245,195 1,955,068 8,343,121
----------- ---------- ------------
Net deferred tax assets (liabilities)............... -- -- --
============ ========== ============
</TABLE>
The valuation allowance for deferred tax assets as of July 1, 1994 was
$2,375,327. The net change in the total valuation allowance for the years ended
June 30, 1995 and June 30, 1996 and for the six months ended December 31, 1996
was an increase of $5,916,053, $10,013,374 and $13,685,764, respectively. The
valuation allowances at June 30, 1996 and December 31, 1996 are a result of the
uncertainty regarding the ultimate realization of the tax benefits related to
the deferred tax assets. The utilization of the tax benefits associated with net
operating losses of approximately $80,000,000 at December 31, 1996 is dependent
upon the Company's ability to generate future taxable income. The net operating
loss carryforward period expires commencing in 2008 through the year 2012.
Further, as a result of certain financing and capital transactions, an annual
limitation on the future utilization of the net operating loss carryforward may
have occurred.
No income tax provision has been provided for the years ended June 30, 1995 and
June 30, 1996 and the six months ended December 31, 1996 as the aforementioned
deferred tax assets have provided no tax benefit.
(11) ACQUISITION
On September 12, 1994 the Company executed a Stock Purchase Agreement with
Piedmont Teleport, Inc. under which the Company acquired certain assets,
liabilities, and certain right-of-way agreements for $20,000 in cash and the
issuance of 62,000 shares of the Company's common stock. The Company accounted
for the acquisition as a purchase and, accordingly, the purchase price was
allocated to the assets acquired and liabilities assumed based upon their
estimated fair values at September 12, 1994. The seller had the right to put
these shares back to the Company on November 1, 1996 for a price of $2.50 per
share. Accordingly, this obligation was recorded as redeemable stock until
November 1996 at which time it was reclassed to additional paid in capital.
F-20
<PAGE> 103
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following notes summarize the major methods and assumptions used in
estimating the fair value of financial instruments:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value due to the relatively short period
to maturity of these instruments.
LETTERS OF CREDIT
The fair value of the Letters of credit is based on fees currently charged for
similar agreements.
SHORT-TERM AND LONG-TERM DEBT
The fair value of the Company's long-term debt is estimated based on the quoted
market prices for the same or similar issues if available or based on the
present value of expected cash flows at rates currently available to the Company
for borrowings with similar terms.
The carrying amounts and fair values of the Company's financial instruments at
December 31, 1996 were:
<TABLE>
<CAPTION>
1996
--------------------------
CARRYING FAIR
VALUE VALUE
----------- -----------
<S> <C> <C>
Cash and cash equivalents (including restricted
cash) 80,960,696 80,960,696
Letters of credit............................... -- 25,000
Long-term debt.................................. 210,410,259 208,583,264
</TABLE>
(13) SUBSEQUENT EVENT
On January 17, 1997, the Company acquired 100% of the outstanding capital stock
of Cybergate, Inc. in exchange for 1,030,000 shares of common stock plus up to
an additional 150,000 shares if certain performance goals are achieved.
Cybergate, a Florida based Internet services provider, delivers high-speed data
communications services. The acquisition will be recorded using the purchase
method of accounting.
F-21
<PAGE> 104
======================================================
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....................... 18
Price Range of Common Stock........... 20
Dividend Policy....................... 20
Capitalization........................ 21
Unaudited Pro Forma Condensed
Consolidated Financial Data......... 22
Selected Consolidated Financial
Data................................ 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 25
Business.............................. 33
Management............................ 50
Certain Transactions.................. 61
Principal Stockholders................ 63
Description of Certain Indebtedness... 65
Description of Capital Stock.......... 67
Shares Eligible for Future Sale....... 70
Underwriting.......................... 72
Sale to Purchaser Stockholders........ 74
Legal Matters......................... 74
Experts............................... 74
Change in Independent Public
Accountants......................... 74
Additional Information................ 75
Glossary.............................. 76
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
SHARES
ACSI LOGO
COMMON STOCK
-------------------
PROSPECTUS
-------------------
ALEX. BROWN & SONS
INCORPORATED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
, 1997
======================================================
<PAGE> 105
======================================================
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....................... 18
Price Range of Common Stock........... 20
Dividend Policy....................... 20
Capitalization........................ 21
Unaudited Pro Forma Condensed
Consolidated Financial Data......... 22
Selected Consolidated Financial
Data................................ 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 25
Business.............................. 33
Management............................ 50
Certain Transactions.................. 61
Principal Stockholders................ 63
Description of Certain Indebtedness... 65
Description of Capital Stock.......... 67
Shares Eligible for Future Sale....... 70
Underwriting.......................... 72
Sale to Purchaser Stockholders........ 74
Legal Matters......................... 74
Experts............................... 74
Change in Independent Public
Accountants......................... 74
Additional Information................ 75
Glossary.............................. 76
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
SHARES
ACSI LOGO
COMMON STOCK
-------------------
PROSPECTUS
-------------------
, 1997
======================================================
<PAGE> 106
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
II-1
<PAGE> 107
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.............................................. $ 24,394
NASD Filing Fee................................................... 8,550
Nasdaq Listing Fee................................................ 15,000
Accounting Fees and Expenses...................................... 100,000
Legal Fees and Expenses........................................... 200,000
Blue Sky Fees and Expenses........................................ 5,000
Printing Fees..................................................... 395,000
Miscellaneous..................................................... 27,056
--------
Total............................................................. $775,000
========
</TABLE>
- ---------------
* To be completed by amendment.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
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 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
II-2
<PAGE> 108
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 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
II-3
<PAGE> 109
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., 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.
II-4
<PAGE> 110
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 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.
II-5
<PAGE> 111
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 $96.1 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.
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<PAGE> 112
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 1,030,000 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.
On March 6, 1997, the Company issued MCI Telecommunications Corporation
warrants to purchase 620,000 shares of Common Stock at a price of $9.86 per
share in connection with the execution of a preferred provider agreement, which
warrants vest upon certain criteria having been met. 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
- ----------- ---------------------------------------------------------------------- -------------
<C> <S> <C>
1.1 Revised Form of Underwriting Agreement. .............................. ++++++++
1.2 Form of Underwriters' Indemnification Agreement. ..................... ++++++++
1.3 Form of Purchase Agreement between the Company and the Purchaser
Stockholders.......................................................... ++++++++
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. ............................................................... ****
</TABLE>
II-7
<PAGE> 113
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- ---------------------------------------------------------------------- -------------
<C> <S> <C>
4.3 Specimen Certificate of the Company's 9% Series B-1 Preferred
Stock. ............................................................... ****
4.4 Specimen Certificate of the Company's 9% Series B-2 Preferred
Stock. ............................................................... ****
4.5 Specimen Certificate of the Company's 9% Series B-3 Preferred
Stock. ............................................................... ****
4.6 Certificate of the Company's 9% Series B-4 Preferred Stock dated
November 14, 1995. ................................................... ++
4.7 Indenture dated November 14, 1995, between the Company and Chemical
Bank, as trustee, relating to $190,000,000 in principal amount of 13%
Senior Discount Notes due 2005, including the form of global note (the
"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"). ................................................... +++++
4.12 Warrant Agreement dated March 6, 1997 by and between the Company and
MCImetro. ............................................................
---
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 Plan. .............................. --
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. ...................................... ****
</TABLE>
II-8
<PAGE> 114
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- ---------------------------------------------------------------------- -------------
<C> <S> <C>
10.14(a) Third Amended and Restated Employment Agreement between the Company
and Anthony J. Pompliano. ............................................ ****
10.14(b) First Amendment to 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 Employment Agreement between the Company and David L. Piazza..........
---
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. ........................................ *
</TABLE>
II-9
<PAGE> 115
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- ---------------------------------------------------------------------- -------------
<C> <S> <C>
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. ..................... *
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...................................... ++++
</TABLE>
II-10
<PAGE> 116
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- ---------------------------------------------------------------------- -------------
<C> <S> <C>
24.1 Power of Attorney .................................................... ++++
</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 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 on January 31, 1997 with this Registration Statement on Form
SB-2 (File No. 333-20867).
+++++ 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 January 17, 1997 and incorporated herein by reference
thereto.
+++++++ Filed on March 12, 1997 with Pre-Effective Amendment No. 1 to the
Company's Registration Statement on Form SB-2 (File No. 333-20867).
++++++++ Filed herewith.
- 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.
-- Previously filed as an exhibit to the Company's Definitive Proxy
Statement filed on October 14, 1996 and incorporated herein by
reference thereto.
--- Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB filed on March 28, 1997 and incorporated herein by reference
thereto.
II-11
<PAGE> 117
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> 118
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 April 9, 1997.
AMERICAN COMMUNICATIONS SERVICES, INC.
By: /s/ ANTHONY J. POMPLIANO
-----------------------------------
Anthony J. Pompliano
Executive Chairman
POWER OF ATTORNEY
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
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 Chairman of the Board of Directors April 9, 1997
- ---------------------------------------- (Principal Executive Officer)
Anthony J. Pompliano
/s/ DAVID L. PIAZZA Chief Financial Officer (Principal April 9, 1997
- ---------------------------------------- Financial and Accounting Officer)
David L. Piazza
Director
- ----------------------------------------
George M. Middlemas
Director
- ----------------------------------------
Edwin M. Banks
/s/ CHRISTOPHER L. RAFFERTY* Director April 9, 1997
- ----------------------------------------
Christopher L. Rafferty
/s/ BENJAMIN P. GIESS* Director April 9, 1997
- ----------------------------------------
Benjamin P. Giess
/s/ OLIVIER L. TROUVEROY* Director April 9, 1997
- ----------------------------------------
Olivier L. Trouveroy
/s/ PETER C. BENTZ* Director April 9, 1997
- ----------------------------------------
Peter C. Bentz
*By: /s/ JACK E. REICH
- ----------------------------------------
Jack E. Reich, Attorney-in-Fact
</TABLE>
II-13
<PAGE> 119
EXHIBIT INDEX
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- ---------------------------------------------------------------------- -------------
<C> <S> <C>
1.1 Revised Form of Underwriting Agreement. .............................. ++++++++
1.2 Form of Underwriters' Indemnification Agreement. ..................... ++++++++
1.3 Form of Purchase Agreement between the Company and the Purchaser
Stockholders.......................................................... ++++++++
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 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"). ................................................... ++
4.8 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"). ................................................... +++++
4.12 MCI Preferred Provider Agreement dated March 6, 1997 by and between
the Company and MCImetro. ............................................ ---
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. ...............................
</TABLE>
<PAGE> 120
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- ---------------------------------------------------------------------- -------------
<C> <S> <C>
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 Plan. .............................. --
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(a) Third Amended and Restated Employment Agreement between the Company
and Anthony J. Pompliano. ............................................ ****
10.14(b) First Amendment to 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 Employment Agreement between the Company and David L. Piazza.......... ---
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. ................
</TABLE>
<PAGE> 121
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- ---------------------------------------------------------------------- -------------
<C> <S> <C>
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. .......................................................... ****
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").............................. ++
</TABLE>
<PAGE> 122
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- ---------------------------------------------------------------------- -------------
<C> <S> <C>
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 .................................................... ++++
</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 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 on January 31, 1997 with this Registration Statement on Form
SB-2 (File No. 333-20867).
+++++ 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 January 17, 1997 and incorporated herein by reference
thereto.
+++++++ Filed on March 12, 1997 with Pre-Effective Amendment No. 1 to the
Company's Registration Statement on Form SB-2 (File No. 333-20867).
++++++++ Filed herewith.
- 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.
-- Previously filed as an exhibit to the Company's Definitive Proxy
Statement filed on October 14, 1996 and incorporated herein by
reference thereto.
--- Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB filed on March 28, 1997 and incorporated herein by reference
thereto.
<PAGE> 1
EXHIBIT 1.1
_________ SHARES
AMERICAN COMMUNICATIONS SERVICES, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
April , 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
1 South 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."
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. 333-20867) 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) deemed to be part of the registration
<PAGE> 2
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."
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, prior to or
on the Closing Date, 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 indirectly, offer, sell, contract to
sell, grant any option to purchase, or otherwise dispose of any Common Stock,
including, without limitation, Common Stock acquired in connection with or
pursuant to the transactions described in the Registration Statement, 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
<PAGE> 3
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 Company'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 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 17,260,864 shares of Common Stock upon the conversion of
the Company's outstanding shares of its Preferred Stock (as described in the
Prospectus) and the issuance of ____________ shares of Common Stock in payment
of $___________ million of accrued dividends thereon, (iii) issue shares of
Common Stock upon the exercise of stock options granted 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,
(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
<PAGE> 4
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, on or prior to the Closing Date,
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
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 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 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).
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 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.
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") 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
<PAGE> 5
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.
AGREEMENTS OF THE COMPANY. The Company agrees with
you:
To use its best efforts to cause the Registration Statement to
become effective at the earliest possible time.
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 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.
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.
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.
<PAGE> 6
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.
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 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.
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.
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.
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
<PAGE> 7
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 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.
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 SAS 71.
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.
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 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
<PAGE> 8
transfer agent and registrar for the Shares.
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.
To apply the proceeds from the sale of the Shares in the
manner set forth under "Use of Proceeds" in the Prospectus.
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.
To comply with all provisions of all undertakings
contained in the Registration Statement.
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.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each Underwriter that:
A registration statement on Form SB-2 (File No. 333-20867)
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 "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.
<PAGE> 9
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.
(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.
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 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.
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.
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, June 30, 1996 and December 31, 1996 appears in the Prospectus,
are independent public accountants with respect to the Company, as
required by and within the meaning of the Act.
<PAGE> 10
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 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.
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.
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
<PAGE> 11
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 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).
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
Indemnification Agreement (as defined below). This Agreement and the
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 term "Indemnification Agreement"
means that certain indemnification agreement dated March 6, 1997
between the Company, on the one hand, and Alex. Brown
<PAGE> 12
and the other Underwriters, on the other hand, pursuant to which the
Company, among other things, agreed to hold you and the Underwriters
harmless against certain matters set forth therein.
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").
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 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.
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
<PAGE> 13
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.
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
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.
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.
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.
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
<PAGE> 14
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.
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 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.
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.
<PAGE> 15
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 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.
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
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 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.
The Company, directly or through one or more of the
subsidiaries, owns or possesses all patents, patent rights, licenses,
inventions, copyrights,
<PAGE> 16
trademarks, know- how (including trade secrets and other unpatented
and/or unpatentable 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.
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 April __, 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 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 the Company
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
<PAGE> 17
Rights have legally and effectively waived their Registration Rights.
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.
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").
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.
(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
<PAGE> 18
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.
(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.
<PAGE> 19
(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).
INDEMNIFICATION.
In addition to the Company's obligations to the Underwriters
provided in the Indemnification Agreement, 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 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.
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
<PAGE> 20
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 (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.
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
<PAGE> 21
paragraph 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.
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 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
<PAGE> 22
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.
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:
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.
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 shall have been
commenced or shall be pending before or contemplated by the Commission.
(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
<PAGE> 23
by Jack E. Reich, in his capacity as the Chief Executive Officer, and
by David L. Piazza, 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 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.
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:
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
<PAGE> 24
(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 respect to
the respective telecommunications businesses of the Company
and the subsidiaries.
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.
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.
<PAGE> 25
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 obligations under, the Underwriting
Agreement, and the consummation of the transactions
contemplated thereby, including, without limitation, the
issuance, sale and delivery of the Shares.
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.
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 will not be able to conduct its
business as the Prospectus indicates is contemplated to be
conducted.
To such counsel's knowledge, neither the Company nor
any subsidiary, nor any other party, is in violation or breach
of, or in default
<PAGE> 26
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
schedules and the other financial and accounting data included
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
<PAGE> 27
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.
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:
The authorized capital stock of the Company as of
March 31, 1997 consisted of (i) 75,000,000 shares of common
stock, par value $0.01 per share and (ii) 1,500,000 shares of
preferred stock, par value $1.00 per share. Of such shares of
preferred stock authorized as of March 31, 1997, 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) 1,500,000 shares of preferred stock,
par value $1.00 per share. Of such shares of preferred stock
authorized as of the date of this letter and giving effect to
the transactions contemplated by the Prospectus, no shares
which have been designated as any specific class or series are
outstanding at the time of the conversion of the Preferred
Stock.
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.
<PAGE> 28
The Company has all requisite corporate power and
authority to execute, deliver and perform its obligations
under the Indemnification Agreement. The Indemnification
Agreement has been duly and validly authorized, executed and
delivered by the Company. The 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
Indemnification Agreement may be limited by federal or state
securities laws or related public policy.
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 (assuming the recently adopted amendments to
Rule 144 became effective as of the date of the Registration
Rights Schedule) 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). To such counsel's knowledge, 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.
<PAGE> 29
To our knowledge, the statements contained
(i)(A) in the first paragraph and (B) in the third paragraph
under the caption "Risk Factors -- Shares Eligible for Future
Sale; Registration Rights" in the Prospectus and (ii)(A) in
the first paragraph and (B) in the third 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 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.
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:
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.
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
<PAGE> 30
described in the Registration Statement and the Prospectus,
except in those cases where the failure to have such power or
authority would not individually or in the aggregate have a
Material Adverse Effect.
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.
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.
The Registration Statement became effective
under the Act on April __, 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.
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.
The capital stock of the Company conforms in
all material respects to the descriptions thereof contained in
the Registration Statement and the Prospectus.
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 certificate of
incorporation, by-laws or similar governing instruments of the
Company or any subsidiary.
To such counsel's knowledge, no consent,
approval, authorization, order, registration, filing,
qualification, license or permit of or
<PAGE> 31
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.
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.
The Shares have been duly authorized for
quotation on the Nasdaq National Market, subject only to
official notice of issuance.
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
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.
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
<PAGE> 32
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).
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.
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.
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
<PAGE> 33
be rendered to you at the request of the Company and shall so state therein.
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:
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.
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.
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.
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
<PAGE> 34
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 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.
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:
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.
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.
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.
The Registration Statement has become
effective under the Act on April __, 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.
<PAGE> 35
The statements under the captions "Description
of Capital Stock" and "Underwriting" in the Registration
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.
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
December 31, 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 December 31, 1996, 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) with respect to the period
subsequent to December 31, 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
<PAGE> 36
occur; (B) that during the period from December 31, 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 (C)
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 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.
The NASD, upon review of the terms of the underwriting
arrangements for the public offering of the Shares, shall have raised
no objections thereto.
The Shares shall have been approved for quotation on the
Nasdaq National Market, subject to official notice of issuance.
On or prior to the Closing Date, 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.
The stockholders listed on Schedule III attached hereto (the
"Purchaser Stockholders") shall have executed and delivered a purchase
agreement, substantially in the form of Annex IV attached hereto,
pursuant to which each such Purchaser Stockholder agrees to purchase
from the Company the number of shares at the per share price set forth
opposite the name of such Purchaser Stockholder on Schedule III.
The purchase of Common Stock by each Purchaser Stockholder
shall have been consummated in accordance with the terms of the
purchase agreement relating to each such Purchaser Stockholder.
The holders of Preferred Stock listed on Schedule IV attached
hereto (the "Investing Preferred Stockholders") shall have executed and
delivered a letter agreement pursuant to which each such Investing
Preferred Stockholder agrees to accept the number of shares of Common
Stock set forth opposite the name of such Investing Preferred
Stockholder on Schedule IV in lieu of the payment of the cash dollar
amount of accrued dividends on the Preferred Stock also as set forth
opposite the name of such Investing Preferred Stockholder on
<PAGE> 37
Schedule IV.
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.
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.
EFFECTIVE DATE OF AGREEMENT; TERMINATION. This Agreement 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 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
<PAGE> 38
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 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.
MISCELLANEOUS. Notices given pursuant to any pro-
vision 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, One South 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 Company, (ii) acceptance of
<PAGE> 39
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:
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
<PAGE> 40
By: ALEX. BROWN & SONS
INCORPORATED
By:
Name: Scott A. Wieler
Title: Managing Director
<PAGE> 41
SCHEDULE I
<TABLE>
<CAPTION>
Number of
Name of Underwriter to be Purchased Firm Shares
- -----------------------------------
<S> <C>
Alex. Brown & Sons Incorporated
Donaldson, Lufkin & Jenrette
Securities Corporation
TOTAL
------------
</TABLE>
<PAGE> 42
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.
</TABLE>
<PAGE> 43
<TABLE>
<S> <C> <C>
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.
<TABLE>
<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.
</TABLE>
<PAGE> 44
SCHEDULE III
PURCHASER STOCKHOLDERS
<TABLE>
<CAPTION>
=======================================================================================================================
Purchaser Number of Shares Purchase Price Aggregate
Stockholder Purchased Per Share Purchase Price
=======================================================================================================================
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
=======================================================================================================================
</TABLE>
<PAGE> 45
SCHEDULE IV
INVESTING PREFERRED STOCKHOLDERS
<TABLE>
<CAPTION>
=================================================================================================================
Investing Preferred Aggregate Amount of Number of Shares
Stockholder Dividends Owed on Received in Lieu of
Preferred Stock Cash Payment
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
=================================================================================================================
</TABLE>
<PAGE> 46
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
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> 47
ANNEX II
STOCKHOLDERS SUBJECT TO 90-DAY LOCK-UP PERIOD
Brad Peery Capital, L.P.
Brad Peery Capital International
Prime II Management, L.P.
<PAGE> 48
ANNEX III
LISTED CONTRACTS
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;
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;
Loan and Security Agreement, dated October 17, 1994, between
AT&T Credit Corporation and American Communication Services
of Louisville, Inc.;
Loan and Security Agreement, dated February 28, 1995,
between AT&T Credit Corporation and American Communication
Services of Fort Worth, Inc.;
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.;
Loan and Security Agreement, dated September 8, 1995,
between AT&T Credit Corporation and American Communications
Services of El Paso, Inc.;
Parent Support and Pledge Agreement (Louisville) dated
October 17, 1994, between the Company and AT&T Credit
Corporation;
Parent Support and Pledge Agreement (El Paso) dated
September 8, 1995, between the Company and AT&T Credit
Corporation;
Amendment No. 1 to Parent Support and Pledge Agreement
(Louisville) between the Company and AT&T Credit
Corporation;
Amendment No. 1 to Parent Support and Pledge Agreement (Fort
Worth) between the Company and AT&T Credit Corporation;
Amendment No. 1 to Loan and Security Agreement between
American Communications Services of Louisville, Inc. and
AT&T Credit Corporation;
Stock Purchase Agreement, dated October 17, 1994, between the Company
and AT&T Credit Corporation;
<PAGE> 49
Stock Purchase Agreement, dated October 17, 1994, between
the American Communications Services of Louisville, Inc. and
AT&T Credit Corporation;
AT&T Credit Facility Master Agreement;
AT&T Credit Facility Addendums for Louisville, Fort Worth,
Greenville, Columbia and El Paso subsidiaries;
Master IRU Agreement, dated June 23, 1995, by and between
MCImetro Access Transmission Services, Inc. and the Company;
Agreement, dated as of June 15, 1996, by and between AT&T
Communications, Inc. and the Company;
Access Service Agreement, dated June 15, 1996, by and between LCI
International Telecom Corp. and the Company, and Addendum, dated
February 22, 1996;
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.
Preferred Provider Amendment to Master Capacity Agreement
dated as of March 6, 1997 by and between MCImetro Access
Transmission Services, Inc. and the Company.
Settlement Agreement and Release dated March 11, 1997
between Richard A. Kozak and the Company
Employment Agreement dated as of February 28, 1997 by and
between the Company and David L. Piazza.
<PAGE> 1
EXHIBIT 1.2
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT is made and entered into as of
March 6, 1997 by and between American Communications Services, Inc., a Delaware
corporation (the "Company" or the "Indemnitor"), and Alex. Brown & Sons
Incorporated ("Alex. Brown"), on behalf of the Representatives (as defined
below).
W I T N E S S E T H:
WHEREAS, Alex. Brown and Donaldson, Lufkin & Jenrette
Securities Corporation (together, the "Representatives") are involved in the
formation of a syndicate to be comprised of several underwriters (collectively,
the "Underwriters"), to purchase from the Indemnitor shares of the Indemnitor's
common stock, par value $.01 (the "Common Stock"), in connection with a
proposed public offering (the "Proposed Offering") which, if consummated, will
be reflected in an Underwriting Agreement that would be entered into by the
Indemnitor and the Representatives, on behalf of the Underwriters, on terms and
conditions satisfactory to the Representatives (the "Underwriting Agreement");
WHEREAS, in connection with the Proposed Offering, the
Indemnitor has prepared and filed with the Securities and Exchange Commission
("SEC") in accordance with the Securities Act of 1933, as amended, and the
rules and regulations of the SEC thereunder (collectively, the "Act"), a
registration statement on Form SB-2 (Registration No. 333-20867) (such
registration statement as amended at the time when it becomes effective under
the Act, including any post-effective amendments thereto, is hereinafter
referred to as the "Registration Statement");
WHEREAS, the Indemnitor has from time to time entered into
contracts and agreements with certain of its security holders pursuant to which
such security holders were or may have been granted the right to require
registration under the Act of shares of capital stock or other securities of
the Company because of the filing or effectiveness of the Registration
Statement and the consummation of the transactions contemplated by the
Underwriting Agreement (such rights are hereinafter referred to as
"Registration Rights"); and
WHEREAS, as a condition to its proceeding with the Proposed
Offering and its providing advisory services to the Company in connection with
the Proposed Offering, Alex. Brown has requested the Indemnitor to agree, and
the Indemnitor has agreed, to enter into this Agreement;
<PAGE> 2
NOW, THEREFORE, in consideration of the promises and the
mutual covenants and agreements contained herein, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. Indemnification by the Indemnitor; Reimbursement of Expenses. The
Company will indemnify and hold harmless Alex. Brown, its affiliates, and the
respective directors, officers, agents and employees of Alex. Brown and its
affiliates, and each of the Underwriters and the respective directors,
officers, agents and affiliates of each of the Underwriters (collectively, the
"Indemnified Persons"), from and against any losses, claims, damages,
judgments, assessments, costs and other liabilities (collectively
"Liabilities"), and will reimburse each Indemnified Person for all fees and
expenses (including the reasonable fees and expenses of counsel) (collectively,
"Expenses") as they are incurred in investigating, preparing, pursuing or
defending any claim, action, proceeding or investigation, whether or not in
connection with pending or threatened litigation and whether or not any
Indemnified Person is a party (collectively, "Actions"), arising out of,
relating to or in connection with, directly or indirectly, (i) Alex. Brown's
performance of services to the Company in connection with the preparation for,
or consummation of, the Proposed Offering, including the performance of such
services as are customary for managing underwriters of underwritten public
offerings of securities; (ii) any of the Registration Rights; and (iii) any
litigation or other legal, administrative or arbitrative proceeding between
Richard A. Kozak ("Kozak") and the Indemnitor, or commenced, or threatened to
be commenced, by Kozak against Alex. Brown and/or the Underwriters regarding,
arising from or relating to, directly or indirectly, his rights or obligations
with respect to any Registration Rights or under that certain Third Amended and
Restated Employment Agreement dated as of June 26, 1995, between the Company
and Kozak, or under any other oral or written agreement or arrangement between
the Company and Kozak (the "Kozak Matter") (collectively, the "Indemnifiable
Matters"); provided, however, that the Company will not be responsible for any
Liabilities or Expenses of any Indemnified Person that are determined by a
judgment of a court of competent jurisdiction which is no longer subject to
appeal or further review to have resulted solely from such Indemnified Person's
gross negligence or willful misconduct. The Company also agrees to reimburse
each Indemnified Person for all Expenses as they are incurred in connection
with enforcing such Indemnified Person's rights under this Agreement.
2. Indemnification Procedures. Upon receipt by an Indemnified
Person of actual notice of an Action against such Indemnified Person with
respect to which indemnity may be sought under this Agreement, such Indemnified
Person shall promptly notify the Indemnitor in writing; provided that failure
so to notify the
2
<PAGE> 3
Indemnitor shall not relieve the Indemnitor from any liability which the
Indemnitor may have on account of this indemnity or otherwise, except to the
extent the Indemnitor shall have been materially prejudiced by such failure.
The Indemnitor shall, if requested by Alex. Brown or any such other Indemnified
Person, assume the defense of any such Action including the employment of
counsel reasonably satisfactory to Alex. Brown or any such other Indemnified
Person. Any Indemnified 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 Indemnified Person
unless: (i) the Company has failed promptly to assume the defense and employ
counsel or (ii) the named parties to any such Action (including any impleaded
parties) include such Indemnified Person and the Indemnitor, and such
Indemnified Person shall have been advised by counsel that there may be one or
more legal defenses available to it which are different from or in addition to
those available to the Indemnitor; provided that the Indemnitor shall not in
such event be responsible hereunder for the fees and expenses of more than one
firm of separate counsel in connection with any Action in the same
jurisdiction, in addition to any local counsel. The Indemnitor shall not be
liable for any settlement of any Action effected without its written consent
(which shall not be unreasonably withheld). In addition, the Indemnitor will
not, without prior written consent of Alex. Brown or any such other Indemnified
Person, settle, compromise or consent to the entry of any judgment in or
otherwise seek to terminate any pending or threatened Action in respect of
which indemnification or contribution may be sought hereunder (whether or not
any Indemnified Person is a party thereto) unless such settlement, compromise,
consent or termination includes an unconditional release of each such
Indemnified Person from any and all Liabilities arising out of such Action.
3. Contribution. In the event the foregoing indemnity is
unavailable to an Indemnified Person other than in accordance with this
Agreement, the Indemnitor shall contribute to the Liabilities and Expenses paid
or payable by such Indemnified Person in such proportion as is appropriate to
reflect (i) the relative benefits to the Indemnitor, on the one hand, and to
Alex. Brown and the other Underwriters, on the other hand, of the matters
contemplated by the Proposed Offering or (ii) if the allocation provided by the
immediately preceding clause is not permitted by the applicable law, not only
such relative benefits but also the relative fault of the Indemnitor, on the
one hand, and Alex. Brown and the other Underwriters, on the other hand, in
connection with the matters as to which such Liabilities or Expenses relate, as
well as any other relevant equitable considerations; provided that in no event
shall the Indemnitor contribute less than the amount necessary to ensure that
all Indemnified Persons, in the aggregate, are not liable for any Liabilities
and Expenses in excess of the amount of the underwriting discounts and
commissions actually received by Alex. Brown and the other Underwriters in
connection with the Proposed Offering. For purposes of this paragraph, the
relative benefits to the Indemnitor, on
3
<PAGE> 4
the one hand, and to Alex. Brown and the other Underwriters, on the other hand,
of the matters contemplated to be paid or received or to be in the same
proportion as (a) the total value to be received or contemplated to be received
by the Indemnitor in the Proposed Offering, whether or not the Proposed
Offering is consummated, bears to (b) the underwriting discounts and
commissions paid or to be paid to Alex. Brown and the other Underwriters in
connection with the Proposed Offering and in accordance with the Underwriting
Agreement.
4. Expense Reimbursement. In addition to any rights of an
Indemnified Person under Section 1 hereof, the Company will reimburse Alex.
Brown for all Expenses, as incurred by Alex. Brown, in connection with Alex.
Brown's providing any services to the Company at the Company's or its counsel's
request in connection with, related to or arising from, directly or indirectly,
the Kozak Matter, including, without limitation, Alex. Brown's issuing an
"underwriters' cut-back" or similar letter, executing any affidavit or similar
document or providing testimony (whether in trial, deposition or otherwise),
provided, that Alex. Brown's per diem rate for the provision of any such
testimony shall be as follows: Managing Directors, $4,500; Principals, $3,500;
Vice Presidents, $2,500; and Associates, $2,000. To the extent Alex. Brown is
entitled to be reimbursed for any Expenses under this Section 4, Alex. Brown
will provide the Company written notice of such Expenses, which notice shall
contain a reasonably itemized list of the Expenses incurred by Alex. Brown, and
promptly after receiving such notice, the Company shall reimburse Alex. Brown
for such Expenses.
5. Non-exclusivity. The rights of the Indemnified Persons
hereunder shall be in addition to any other rights, claims or remedies the
Indemnified Persons may have against the Indemnitor under the Underwriting
Agreement and any other agreement with the Indemnitor or at common law or by
statute or rule.
6. Partial Indemnity. If any Indemnified Person is entitled
under any provision of this Agreement to indemnification by the Indemnitor for
some or a portion of Liabilities and Expenses but not, however, for all of the
total amount thereof, the Indemnitor shall nevertheless indemnify such
Indemnified Person for the portion thereof to which such Indemnified Person is
entitled.
7. Severability. Wherever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of
this Agreement.
4
<PAGE> 5
8. GOVERNING LAW SUBMISSION TO JURISDICTION; SELECTION OF FORUM.
THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS
OF THE STATE OF NEW YORK. EACH PARTY AGREES THAT IT SHALL BRING ANY ACTION OR
PROCEEDING IN RESPECT OF ANY CLAIM ARISING OUT OF OR RELATED TO THIS AGREEMENT,
WHETHER IN TORT OR CONTRACT OR AT LAW OR IN EQUITY, EXCLUSIVELY IN THE UNITED
STATED DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK (THE "CHOSEN
COURT") AND (I) IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE CHOSEN
COURT, (II) WAIVES ANY OBJECTION TO LAYING VENUE IN ANY SUCH ACTION OR
PROCEEDING IN THE CHOSEN COURT, (III) WAIVES ANY OBJECTION THAT THE CHOSEN
COURT IS AN INCONVENIENT FORUM OR DO NOT HAVE JURISDICTION OVER ANY PARTY
HERETO AND (IV) AGREES THAT SERVICE OR PROCESS UPON SUCH PARTY IN ANY SUCH
ACTION OR PROCEEDING SHALL BE EFFECTIVE IF NOTICE IS GIVEN IN ACCORDANCE WITH
SECTION 9 OF THIS AGREEMENT.
9. Notices. Any notice or other communication required to be
made pursuant to the provisions of this Agreement shall be sufficiently given
or made if in writing and either delivered in person with receipt acknowledged,
sent by recognized overnight courier or sent by registered or certified mail,
return receipt requested, postage prepaid, or by telecopy and confirmed by
telecopy answerback, addressed as follows:
If to the Indemnitor, at:
American Communications Services, Inc.
131 National Business Parkway
Annapolis Junction, MD 20701
Attention: Chief Executive Officer
Telecopier No.: (301) 617-4279
If to Alex. Brown or any Underwriter, at:
Alex. Brown & Sons Incorporated
One South Street
Baltimore, MD 21202-3220
Attention: Syndicate Department
Telecopier No.: (410) 895-4481
with a copy to:
5
<PAGE> 6
Daniel McIntyre, Esq.
Alex. Brown & Sons Incorporated
One South Street
Baltimore, MD 21202-3220
Telecopier No.: (410) 895-3619
or at such other address or telecopier number as may be substituted by notice
given as herein provided. The giving of any notice required hereunder may be
waived in writing by the party entitled to receive such notice. Every notice
or other communication hereunder shall be deemed to have been duly given or
served on the date on which personally delivered, with receipt acknowledged,
the next business day after delivery to a recognized overnight courier or five
(5) days after the same shall have been deposited in the mail.
10. Headings. The headings in this Agreement are for convenience
of reference only and shall not limit or otherwise affect the meaning hereof.
11. No Commitment to Proceed with Proposed Offering. The Company
understands that Alex. Brown is relying on the agreements and undertakings of
the Company contained herein in proceeding with the Proposed Offering.
However, the execution and delivery of this Agreement shall in no event commit
or obligate Alex. Brown or any other Underwriter to proceed with the Proposed
Offering unless and until the Underwriting Agreement is executed. The terms of
this paragraph shall survive any filing of a registration statement, or any
amendment thereto, with the SEC.
12. Successors and Assigns; Beneficiaries. This Agreement shall
be binding upon the parties hereto and their respective successors and assigns
and shall inure to the benefit of the parties hereto and their respective
successors and assigns. Each of the Representatives and Underwriters and their
respective successors and assigns shall have third party beneficiary rights, as
Indemnified Parties, under this Agreement, and shall be entitled to enforce all
of their rights as Indemnified Parties hereunder as if each of these were party
to this Agreement.
13. Amendment; Waiver; Termination. No amendment, modification,
termination or cancellation of this Agreement shall be effective unless made in
a writing signed by each of the parties hereto. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of
any other provision hereof (whether or not similar) nor shall such waiver
constitute a continuing waiver. The reimbursement, indemnity and contribution
obligations of the Indemnitor set forth in this Agreement shall apply to any
amendment or modification of this Agreement and shall remain in full force and
effect after the execution and delivery of the
6
<PAGE> 7
Underwriting Agreement and regardless of whether or not the Proposed Offering
is consummated.
14. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be considered an original, but all of which
taken together shall constitute one and the same Agreement.
7
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date and year first above written.
American Communications Services, Inc.
By: /s/ Jack E. Reich
--------------------------------
Name: Jack E. Reich
Title: President/CEO
Alex. Brown & Sons Incorporated
as a Representative of the
several Underwriters
By: Alex. Brown & Sons Incorporated
By: /s/ Jeffrey S. Amling
--------------------------------
Name: Jeffrey S. Amling
Title: Managing Director
8
<PAGE> 1
_________________ Shares
American Communications Services, Inc.
Common Stock
Purchase Agreement
April , 1997
The Huff Alternative Income Fund, L.P.
[address]
ING Equity Partners, L.P. I
[address]
Apex Investment Fund I, L.P.
[address]
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 "Purchaser Shares") to you in the amounts listed
opposite your name in Schedule I hereto (the "Purchaser Stockholders"), subject
to the terms and conditions set forth below. Reference is made to the
Underwriting Agreement, dated _________________, by and among Alex. Brown & Sons
Incorporated and Donaldson, Lufkin & Jenrette Securities Corporation, as
Representatives of the several underwriters named in Schedule I thereto (the
"Underwriting Agreement").
1. Except to the extent set forth in Section 2 below, the terms
and conditions of the Underwriting Agreement are incorporated by reference
herein and specifically made a part hereof:
a. Section 1, in its entirety;
b. The first paragraph of Section 2;
c. The first and third paragraphs of Section 4;
d. Paragraphs (a) through (f) and (h) through (r) of
Section 5;
e. Section 6, in its entirety
f. Section 7, in its entirety, except for the text
before the first comma in paragraph (a);
g. All but the last paragraph of Section 8;
h. Section 9 in its entirety;
i. All but the first paragraph of Section 10.
2. When incorporating herein by reference thereto the provisions
of the Underwriting Agreement:
a. the terms "Underwriter(s)" and "Representative(s)"
are replaced by the term Purchaser Stockholder;
b. the term "Purchase Price" shall mean $_____ ;
c. the term "Firm Shares" and "Shares" are replaced by
Purchaser Shares.
d. all references to "Additional Shares" and "Option
Closing Date" shall be deleted;
e. all references to this Purchase Agreement shall be
replaced with the term Underwriting Agreement in paragraph (o) of Section 8;
and
f. reference to New York in Section 10 shall be replaced
with Maryland.
<PAGE> 2
3. You represent and warrant that, together, the Purchaser
Stockholders have the ability to waive, on behalf of, and your execution and
delivery of this Purchase Agreement shall be conclusive evidence of the waiver
by, the holders of the Preferred Stock of the Company of their and your
preemptive rights, if any, in connection with the transactions contemplated by
the Underwriting Agreement and this Purchase Agreement.
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the Purchaser Stockholders.
Very truly yours,
AMERICAN COMMUNICATIONS SERVICES, INC.
By.
----------------------------------
Name:
Title:
Accepted as of the date first above written.
THE HUFF ALTERNATIVE INCOME FUND, L.P.
By.
---------------------------------------------
Name:
Title:
ING EQUITY PARTNERS, L.P. I
By.
---------------------------------------------
Name:
Title:
APEX INVESTMENT FUND I, L.P.
By.
---------------------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 5.1
[PIPER & MARBURY LETTERHEAD]
April 10, 1997
American Communications Services, Inc.
131 National Business Parkway
Annapolis Junction, Maryland 20701
Re: Registration Statement on Form SB-2
Dear Sirs:
We have acted as counsel to American Communications Services, Inc., a
Delaware corporation (the "Company"), in connection with the registration under
the Securities Act of 1933, as amended (the "Act") of 8,000,000 shares (the
"Shares") of Common Stock, par value $.01 per share, of the Company. All of
the Shares are to be issued and sold by the Company.
We are familiar with the Company's charter and by-laws and with the
Registration Statement, and we have examined and relied upon such corporate
records of the Company and other documents and certificates as to factual
matters as we have deemed necessary or appropriate for the purpose of rendering
the opinion expressed herein. We have assumed, without independent
verification the genuineness of the signatures on and the authenticity of all
documents furnished to us by the Company.
Based upon the foregoing, we are of the opinion and advise you that the
Shares to be sold by the Company have been duly authorized and, when issued and
paid for in the manner contemplated by the Registration Statement, will have
been validly and legally issued and will be fully paid and non-assessable.
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an Exhibit to the Registration Statement and to the use
of our name under the caption "Legal Matters" in the Prospectus included
therein.
Very truly yours,
/s/ PIPER & MARBURY L.L.P.
<PAGE> 1
AMERICAN COMMUNICATIONS SERVICES, INC.
NON-QUALIFIED STOCK OPTION CERTIFICATE
A. A STOCK OPTION for the purchase of a total of 350,000
shares of the common stock, par value $0.01 (the "Common Stock"), of American
Communications Services, Inc. (the "Company") has been granted to Anthony J.
Pompliano (the "Optionee"), pursuant to subparagraph 5(c)(iii) of a Third
Amended and Restated Employment Agreement dated as of June 30, 1995 between the
Optionee and the Company (the "Third Employment Agreement"). This option is in
replacement of the option originally granted as of June 30, 1995, and reflects
an amendment to the Third Employment Agreement (as amended, the "Employment
Agreement") dated as of the date hereof. This option shall be governed by the
Employment Agreement and, except as otherwise specifically set forth herein,
the provisions of the Employment Agreement shall control in the event of any
conflict between the terms set forth herein and the provisions of the
Employment Agreement. Unless otherwise defined herein, all initially
capitalized terms used herein shall have the same meaning as set forth in the
Employment Agreement.
B. The per share exercise price of this option is as set
forth below in paragraph E (the "Exercise Price").
C. This option may not be exercised if the issuance of
shares of Common Stock of the Company upon such exercise would constitute a
violation of any applicable Federal or state securities or other law or
regulation. The Optionee, as a
<PAGE> 2
condition to his exercise of this option, shall (i) represent to the Company
that the shares of Common Stock of the Company that he acquires upon exercise
of this option are being acquired by him for investment and not with a view to
distribution or resale, and that he will not sell or otherwise transfer such
shares unless such shares are then registered under a currently effective
registration statement under the Securities Act of 1933, as amended (the
"Act"), or counsel for the Company is then of the opinion that such
registration is not required under the Act or any other applicable law,
regulation, or rule of any governmental agency and (ii) if the shares of Common
Stock underlying this option are not registered under the Act, acknowledge that
the certificate evidencing such shares may be stamped with a restrictive legend
and such shares will be "restricted securities" as defined in Rule 144
promulgated under the Act.
D. This option may not be transferred in any manner
otherwise than by will or the laws of descent and distribution, and may be
exercised during the lifetime of the Optionee only by the Optionee. The terms
of this option shall be binding upon the executors, administrators, heirs,
successors, and assigns of the Optionee.
E. This option shall vest and become exercisable as to
all shares set forth below (each group of shares set forth below referred to
herein as a "tranche") on August 24, 2001 if Optionee shall then be employed by
the Company; provided, however, that this option immediately shall vest and
become exercisable provided that
-2-
<PAGE> 3
Optionee is then employed by the Company (i) as to each tranche of shares upon
the occurrence of the events described below; and (ii) as to all of the
tranches of shares upon a Change in Control, whichever is the first to occur.
This option shall be exercisable at the per share exercise price set forth
below, and to the extent not exercised shall terminate and be of no further
effect with respect to each tranche of shares as of 5:00 p.m. New York City
time five (5) years from the date on which the option first became exercisable
as to such tranche of shares.
<TABLE>
<CAPTION>
PER SHARE
NUMBER OF EXERCISE
SHARES EVENT PRICE
------ ----- -----
<S> <C> <C>
100,000 Prior to June 30, 1996 the Company executes an effective agreement with a major $2.25
strategic partner/investor as approved by the Board of Directors.
</TABLE>
-3-
<PAGE> 4
<TABLE>
<CAPTION>
PER SHARE
NUMBER OF EXERCISE
SHARES EVENT PRICE
------ ----- -----
<S> <C> <C>
187,500 125,000 of such options were scheduled to vest upon the attainment of certain $2.80
performance goals determined by the compensation committee of the board of directors
relating to the Company's annual plan approved by the board of directors for the fiscal
year ending June 30, 1997 ("Old Fiscal 1997"), such as the level of appreciation of the
publicly-traded price (as defined in paragraph 5(h) of the Employment Agreement) of the
Common Stock during Old Fiscal 1997 and the consummation of strategic business
combinations, and other performance goals deemed important by the compensation
committee. The performance goals for Old Fiscal 1997 were to be determined by the
compensation committee no later than June 30, 1996. In recognition of the change in
fiscal year to a calendar year basis, 62,500 of the 125,000 options have vested prior
to the date hereof. The remaining 62,500 options, as well as an additional 62,500
options (previously scheduled to vest during Old Fiscal 1998 (as defined below)), will
vest in accordance with the above-referenced criteria but during the fiscal year ending
December 31, 1997 ("New Fiscal 1997"). The performance goals for New Fiscal 1997 have
been determined by the Compensation Committee.
</TABLE>
-4-
<PAGE> 5
<TABLE>
<CAPTION>
PER SHARE
NUMBER OF EXERCISE
SHARES EVENT PRICE
------ ----- -----
<S> <C> <C>
62,500 Such options, as well as an additional 62,500 options, were scheduled to vest upon the $2.80
attainment of certain performance goals determined by the compensation committee of the
board of directors relating to the Company's annual plan approved by the board of
directors for the fiscal year ending June 30, 1998 ("Old Fiscal 1998"), such as the
level of appreciation of the publicly-traded price (as defined in paragraph 5(h) of the
Employment Agreement) of the Common Stock during Old Fiscal 1998 and the consummation
of strategic business combinations, and other performance goals deemed important by the
compensation committee. The performance goals for Old Fiscal 1998 were to be determined
by the compensation committee no later than June 30, 1997. In recognition of the change
in fiscal year to a calendar year basis, the additional 62,500 are now scheduled to
vest during New Fiscal 1997, as described above. The remaining 62,500 options
(previously scheduled to vest during Old Fiscal 1998), will vest in accordance with the
above-referenced criteria but during the fiscal year ending December 31, 1998 ("New
Fiscal 1998"). The performance goals for New Fiscal 1998 will be determined by the
Compensation Committee no later than December, 1997.
</TABLE>
F. Notwithstanding the foregoing, this option shall not
become exercisable as to a tranche of shares if Optionee voluntarily leaves the
Company's employ or if Optionee is terminated For Cause (as defined in
paragraph 11 of the Employment Agreement) prior to the date the option becomes
exercisable as to such shares as set forth in paragraph E hereof.
G. Subject to the provisions of paragraphs E and F, the
rights represented by this option may be exercised by the Optionee by delivery
of:
-5-
<PAGE> 6
a. the exercise form annexed hereto (the "Exercise
Form") duly executed and specifying the number of shares to be purchased, to
the Company at the offices of the Company located at 131 National Business
Parkway, Suite 100, Annapolis Junction, Maryland 20701 (or such other office
or agency of the Company as it may designate by notice to the Optionee at the
address of such Optionee appearing on the books of the Company) during normal
business hours on any day other than a Saturday, Sunday or day on which
national banks are authorized to close in the City of New York, State of New
York (a "Business Day").
b. Payment to the Company, for the account of the
Company, by cash or by certified or bank cashier's check or wire transfer, of
the Exercise Price for the number of shares specified in the Exercise Form in
lawful money of the United States of America.
The Company agrees that such shares shall be deemed to be
issued to the Optionee as the record owner of such shares as of the
commencement of business on the date on which this option shall have been
surrendered and payment made for the shares as aforesaid. Certificates for the
shares specified in the Exercise Form shall be delivered to the Optionee as
promptly as practicable, and in any event within ten (10) days thereafter. If
this option shall have been exercised only in part, the Company shall, at the
time of delivery of the certificate or certificates delivered to the Optionee,
deliver a new option evidencing the right to purchase the remaining shares
issuable under this option, which new option shall
-6-
<PAGE> 7
in all other respects be identical to this option. No adjustment shall be made
on shares issuable on exercise of this option for any cash dividends paid or
payable to holders of record of Common Stock out of consolidated earnings or
earned surplus prior to the date as of which the Optionee shall be deemed to be
the record-holder of such shares.
H. Certain Adjustments.
H.1. The number of shares purchasable upon the exercise of
this option and the Exercise Price shall be subject to adjustment as follows:
(a) In case the Company shall (i) pay a dividend in
shares of Common Stock or make a distribution in shares of Common Stock, (ii)
subdivide its outstanding shares of Common Stock (including, without
limitation, by way of stock splits and the like), (iii) combine its outstanding
shares of Common Stock into a smaller number of shares of Common Stock or (iv)
issue by reclassification of its shares of Common Stock other securities of the
Company (including any such reclassification in connection with a consolidation
or merger in which the Company is the surviving corporation), the number of
shares purchasable upon exercise of this option immediately prior thereto shall
be adjusted so that the Optionee shall be entitled to receive the kind and
number of shares or other securities of the Company which he would have owned
or have been entitled to receive after the happening of any of the events
described above had this option been exercised immediately prior to the
happening of such event or any record date with
-7-
<PAGE> 8
respect thereto. An adjustment made pursuant to this paragraph (a) shall
become effective immediately after the effective date of each such event
retroactive to the record date, if any, for such event, without amendment or
modification required to this document.
(b) In case the Company shall issue rights, options or
warrants to all or substantially all holders of its outstanding Common Stock,
without any charge to such holders, entitling them to subscribe for or purchase
shares of Common Stock at a price per share which is lower at the record date
mentioned below than the then current market price per share of Common Stock
(as defined in paragraph (d) below), the number of shares thereafter
purchasable upon the exercise of this option shall be determined by multiplying
the number of shares theretofore purchasable upon exercise of this option by a
fraction, of which the numerator shall be the number of shares of Common Stock
outstanding on the date of issuance of such rights, options or warrants plus
the number of additional shares of Common Stock offered for subscription or
purchase, and of which the denominator shall be the number of shares of Common
Stock outstanding on the date of issuance of such rights, options or warrants
plus the number of shares which the aggregate offering price of the total
number of shares of Common Stock so offered would purchase at the current
market price per share of Common Stock at such record date. Such adjustment
shall be made whenever such rights, options or warrants are issued, and shall
become effective immediately after the record date for the determination
-8-
<PAGE> 9
of stockholders entitled to receive such rights, options or warrants.
(c) In case the Company shall distribute to all or
substantially all holders of its shares of Common Stock evidences of its
indebtedness or assets (excluding cash dividends or distributions payable out
of consolidated earnings or earned surplus and dividends or distributions
referred to in paragraph (a) above) or rights, options or warrants, or
convertible or exchangeable securities containing the right to subscribe for or
purchase shares of Common Stock (excluding those referred to in paragraph (b)
above), then in each case the number of shares thereafter purchasable upon the
exercise of this option shall be determined by multiplying the number of shares
theretofore purchasable upon the exercise of this option by a fraction, of
which the numerator shall be the then current market price per share of Common
Stock (as defined in paragraph (d) below) on the date of such distribution, and
of which the denominator shall be the then current market price per share of
Common Stock, less the then fair value (as determined in good faith by the
Board of Directors of the Company, or if requested by the Optionee, by a
leading firm of investment bankers selected by the Optionee and reasonably
acceptable to the Company and whose reasonable fees and expenses shall be paid
by the Company or as otherwise agreed upon by the Company and the Optionee), of
the portion of the assets or evidences of indebtedness so distributed or of
such subscription rights, options or warrants, or of such convertible or
exchangeable
-9-
<PAGE> 10
securities, applicable to one share of Common Stock. Such adjustment shall be
made whenever any such distribution is made, and shall become effective on the
date of distribution retroactive to the record date for the determination of
shareholders entitled to receive such distribution.
(d) For the purpose of computation under paragraphs (b)
and (c) of this paragraph H.1, the current market price per share of Common
Stock at any date shall be:
(x) from and after 30 trading days after
consummation of a Qualifying Offering (as such term is defined
in the Company's Certificate of Incorporation, as amended),
the average of the daily closing prices for the 30 consecutive
trading days immediately preceding such computation. The
closing price for each day shall be the last reported sales
price regular way or, in case no such reported sale takes
place on such day, the average of the closing bid and asked
prices regular way for such day, in each case on the principal
national securities exchange on which the shares of Common
Stock are listed or admitted to trading, or, if reported on
NASDAQ-National Market System, the last reported sales price,
or, if not so listed or admitted to trading or reported, the
average of the closing bid and asked prices of the Common
Stock in the over-the-counter market as reported by NASDAQ or
any comparable system; and
-10-
<PAGE> 11
(y) on or prior to the expiration of the 30
trading day period set forth in clause (x) above, the fair
market value per share of Common Stock determined by a leading
firm of investment bankers selected by the Optionee and
reasonably acceptable to the Company and whose reasonable fees
and expenses shall be paid by the Company.
(e) No adjustment in the number of shares purchasable
hereunder shall be required unless such adjustment would require an increase or
decrease of at least one percent (1%) in the number of shares purchasable upon
the exercise of this option; provided, however, that any adjustments which by
reason of this paragraph (e) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
shall be made to the nearest one-thousandth of a share.
(f) Whenever the number of shares purchasable upon the
exercise of this option is adjusted, as herein provided, the Exercise Price
payable upon the exercise of this option shall be adjusted by multiplying such
Exercise Price immediately prior to such adjustment by a fraction, of which the
numerator shall be the number of shares purchasable upon the exercise of this
option immediately prior to such adjustment, and of which the denominator shall
be the number of shares purchasable immediately thereafter.
(g) No adjustment in the number of shares purchasable
upon the exercise of this option need be made under paragraphs (b) and (c) if
the Company issues or distributes to the Optionee the rights, options,
warrants, or convertible or exchangeable
-11-
<PAGE> 12
securities, or evidences of indebtedness or assets referred to in those
paragraphs which the Optionee would have been entitled to receive had the
option been exercised prior to the happening of such event or the record date
with respect thereto. No adjustment in the number of shares purchasable upon
the exercise of this option may be made for sale of shares pursuant to a
Company plan for reinvestment of dividends or interest. No adjustment need be
made for a change in the par value of the shares.
(h) The Company shall not, by amendment of its
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities, rights, options or warrants or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be observed
or performed under this paragraph H.1 by the Company, but will at all times in
good faith assist in carrying out all of the provisions of this paragraph H.1
and in the taking of such actions as may be necessary or appropriate in order
to protect the rights of the Optionee under this paragraph H.1 against
impairment.
(i) For the purpose of this paragraph H.1, the term
"shares of Common Stock" shall mean (i) the class of stock designated as the
common stock of the Company at the date of this Certificate, or (ii) any other
class of stock resulting from successive changes or reclassification of such
shares consisting solely of changes in par value, or from par value to no par
value. In the event that at any time, as a result of an adjustment made
-12-
<PAGE> 13
pursuant to paragraph (a) above, the Optionee shall become entitled to purchase
any securities of the Company other than shares of Common Stock, thereafter the
number of such other shares so purchasable upon exercise of this option, and
the Exercise Price of such shares, shall be subject to adjustment from time to
time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the shares contained in paragraphs (a) through (h),
inclusive, above, and the paragraphs H.2 through H.4, inclusive, with respect
to the shares, shall apply on like terms to any such other securities.
(j) Upon the expiration of any rights, options, warrants
or conversion or exchange privileges, if any thereof shall not have been
exercised, the Exercise Price and the number of shares shall, upon such
expiration, be readjusted and shall thereafter be such as it would have been
had it been originally adjusted (or had the original adjustment not been
required, as the case may be), as if (A) the only shares of Common Stock so
issued were the shares of Common Stock, if any, actually issued or sold upon
the exercise of such rights, options, warrants or conversion or exchange rights
and (B) such shares of Common Stock, if any, were issued or sold for the
consideration actually received by the Company upon such exercise plus the
aggregate consideration, if any, actually received by the Company for the
issuance, sale or grant of all such rights, options, warrants or conversion or
exchange rights whether or not exercised; provided, further, that no such
readjustment shall have the effect of increasing the Exercise Price or
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<PAGE> 14
decreasing the number of shares by an amount in excess of the amount of the
adjustment initially made in respect to the issuance, sale or grant of such
rights, options, warrants or conversion or exchange rights.
H.2. Notice of Adjustment. Whenever the number of shares
or the Exercise Price payable upon exercise of this option is adjusted, as
herein provided, the Company shall promptly mail by first class, postage
prepaid, to the Optionee, notice of such adjustment or adjustments and a
certificate of a firm of independent public accountants selected by the Board
of Directors of the Company (who may be the regular accountants employed by the
Company) setting forth the number of shares and the Exercise Price payable upon
exercise of this option after such adjustment, setting forth a brief statement
of the facts requiring such adjustment and setting forth the computation by
which such adjustment was made.
H.3. No Adjustment for Dividends. Except as provided in
paragraph H.1, no adjustment in respect of any dividends shall be made during
the term of this option or upon the exercise of this option.
H.4. Preservation of Purchase Rights Upon Merger,
Consolidation, etc. In case of any consolidation of the Company with or merger
of the Company into another corporation or otherwise or in case of any sale,
transfer or lease to another corporation of all or substantially all the
property of the Company, the Company or such successor or purchasing
corporation, as the case may be, shall execute with the Optionee an agreement
that the Optionee
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<PAGE> 15
shall have the right thereafter upon payment of the Exercise Price in effect
immediately prior to such action to purchase upon exercise of this option the
kind and amount of shares and other securities and property which such holder
would have owned or have been entitled to receive after the happening of such
consolidation, merger, sale, transfer or lease had this option been exercised
immediately prior to such action, provided that such agreement shall provide
for adjustments thereafter, which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this paragraph H. The
provisions of this paragraph H shall similarly apply to successive
consolidations, mergers, sales, transfers or leases.
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<PAGE> 16
I. Registration Rights. Optionee shall have the registration
rights with respect to this option as set forth in the Amended and Restated
Registration Rights Agreement dated as of June 30, 1995 and entered into by and
among the Company, the Optionee and the other executive officers of the Company
set forth therein.
AMERICAN COMMUNICATIONS SERVICES, INC.
By:
--------------------
Jack E. Reich
President and Chief Executive
Officer - Communications Services
Division
Dated: As of , 1997
--------- ---
ATTEST:
----------------------
Riley M. Murphy, Secretary
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<PAGE> 17
PURCHASE FORM
Date: _________
TO: Chief Financial Officer
The undersigned hereby irrevocably elects to exercise the attached
Non-Qualified Stock Option Certificate to the extent of options to
purchase _______ shares and hereby makes payment of $_____ in payment
of the purchase price thereof.
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name:
------------------------------------
Address:
---------------------------------
---------------------------------
---------------------
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<PAGE> 1
EXHIBIT 11.1
COMPUTATION OF PER SHARE EARNINGS (LOSS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------- SIX MONTHS ENDED
JUNE 30, JUNE 30, DECEMBER 31,
1995 1996 1996
----------- ----------- ----------------
<C> <S> <C> <C> <C>
NET LOSS
1. Net loss............................... $14,697,649 $26,782,044 $ 34,916,514
2. Less; preferred stock accretion........ 1,070,985 3,871,328 2,003,630
----------- ----------- ------------
3. Net loss to common stockholders........ 15,768,643 30,653,372 36,920,144
4. Add; effect on interest expense........ 170,095 2,301,864 2,719,685
Add; convertible preferred dividends
saved.................................. 1,070,985 3,871,328 2,003,630
----------- ----------- ------------
5. Net loss to common stockholders, anti-
dilutive basis......................... $14,527,554 $24,480,180 $ 32,196,829
=========== =========== ============
AVERAGE SHARES OUTSTANDING
6. Weighted average number of common
shares outstanding..................... 4,771,689 6,185,459 6,733,759
7. Net additional shares assuming stock
options and warrants exercised and
proceeds used first to purchase
treasury shares to 20% of shares
outstanding at year end, the balance to
reduce long-term debt.................. 4,078,907 9,133,070 10,871,922
Additional shares assuming conversion
of preferred shares.................... 5,264,492 17,377,264 17,377,264
----------- ----------- ------------
8. Weighted average number of common and
common equivalent shares outstanding... 14,115,088 32,695,793 34,982,945
=========== =========== ============
PER SHARE AMOUNTS
9. Net loss per common share as presented
in statement of operations (3/6)....... $ (3.30) $ (4.96) $ (5.48)
=========== =========== ============
10. Net loss per share as antidilutive
basis (5/8)............................ $ (1.03) $ (0.75) $ (0.92)
=========== =========== ============
</TABLE>
