<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 14, 1997
REGISTRATION NO. 333-34395
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AMERICAN COMMUNICATIONS SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 4813 52-1947746
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) 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.
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:
GEORGE W. BILICIC, JR., ESQ.
CRAVATH, SWAINE & MOORE
WORLDWIDE PLAZA
825 EIGHTH AVENUE
NEW YORK, NEW YORK 10019-7475
(212) 474-1000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED DISTRIBUTION OF THE SECURITIES
TO THE PUBLIC: As soon as practicable after the Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
------------------------
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
Subject to Completion, Dated November 14, 1997
PROSPECTUS
$170,000,000
[AMERICAN COMMUNICATIONS SERVICES LOGO]
OFFER TO EXCHANGE ITS 13 3/4% SENIOR NOTES DUE 2007,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
FOR UP TO $170,000,000 AGGREGATE PRINCIPAL AMOUNT OF ITS OUTSTANDING 13 3/4%
SENIOR NOTES DUE 2007
The Exchange Offer will expire at , New York City time, on
, unless extended.
------------------------
American Communications Services, Inc. (the "Company" or "ACSI") hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying letter of transmittal (the "Letter of
Transmittal" and, together with this Prospectus, the "Exchange Offer"), to
exchange its 13 3/4% Senior Notes due 2007 (the "New Notes") which have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to a Registration Statement of which this Prospectus is a part, for up
to $170,000,000 aggregate principal amount of its outstanding 13 3/4% Senior
Discount Notes due 2007 (the "Old Notes"), of which $220,000,000 aggregate
principal amount is outstanding as of the date hereof. The New Notes and the Old
Notes are collectively referred to herein as the "Notes."
The Company will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to 5:00 P.M., New York City time, on the
date the Exchange Offer expires (the "Expiration Date"), which will be
, 1997 (20 business days following the commencement of the Exchange
Offer), unless the Exchange Offer is extended. Old Notes held by affiliates of
the Company (within the meaning of Rule 405 under the Securities Act) will not
be accepted in the Exchange Offer based on interpretations by the staff of the
Securities and Exchange Commission (the "SEC"). $50,000,000 aggregate principal
amount of Old Notes were sold to an entity that may be deemed an affiliate of
the Company. A Registration Statement on Form S-3 has been filed as of the date
hereof to allow resales by such entity and therefore any tender of Old Notes by
such entity in the Exchange Offer will not be accepted. Tenders of Old Notes may
be withdrawn at any time prior to 5:00 P.M., New York City time, on the
Expiration Date. The Exchange Offer is not conditioned upon any minimum
principal amount of Old Notes being tendered for exchange. Old Notes may be
tendered only in integral multiples of $1,000. See "The Exchange Offer."
The New Notes will be obligations of the Company evidencing the same
indebtedness as the Old Notes and will be entitled to the benefits of the same
Indenture (as defined), which governs both the Old Notes and the New Notes. The
form and terms of the New Notes are generally the same as the form and terms of
the Old Notes, except that the New Notes do not contain terms with respect to
the interest rate step-up provisions and the New Notes have been registered
under the Securities Act and therefore will not bear legends restricting the
transfer thereof. See "Description of the Notes." The interest rate step-up
provisions are intended to benefit holders of the Old Notes if the Company
breaches its obligations under the Registration Rights Agreement (as defined).
By consummating the Exchange Offer, the Company will satisfy its obligations to
the holders of the Old Notes, and hence the New Notes do not contain interest
rate step-up provisions. See "Description of the Notes -- Exchange Offer;
Registration Rights."
The Company placed approximately $70 million of the net proceeds realized
from the sale of the Old Notes, representing funds sufficient to pay the first
five interest payments on the Notes, into an Escrow Account (as defined herein)
to be held by the Escrow Agent (as defined herein) for the benefit of the
holders of the Notes. The New Notes will bear interest at a rate of 13 3/4% per
annum, payable semi-annually in arrears on January 15 and July 15 commencing
January 15, 1998. The New Notes will be redeemable, in whole or in part, at the
option of the Company on or after January 15, 2002, at the redemption prices set
forth herein, plus accrued interest to the date of redemption. In addition, at
any time on or prior to July 15, 2000, the Company may, at its option, redeem up
to 35% of the aggregate principal amount at maturity of the New Notes with the
net cash proceeds of one or more Equity Offerings (as defined), at a redemption
price equal to 113.75% of the principal amount thereof; provided, however, that
after giving effect to any such redemption, at least $143 million aggregate
principal amount of the New Notes remains outstanding. Upon a Change of Control
(as defined), each holder of the New Notes will have the right to require the
Company to repurchase such holder's New Notes at a price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest to the date of
repurchase. In addition, the Company will be obligated to offer to repurchase
the New Notes in the event of certain Asset Sales (as defined). See "Description
of the Notes."
The New Notes will be unsecured senior obligations of the Company and will
rank pari passu with any existing and future senior indebtedness of the Company
and will rank senior in right of payment to all subordinated obligations of the
Company. As of June 30, 1997, the Company had approximately $193.0 million of
senior indebtedness outstanding. In addition, the New Notes will be structurally
subordinated to liabilities (including trade payables) of the Company's
subsidiaries. As of June 30, 1997, liabilities of the Company's Subsidiaries
were approximately $62.7 million. See "Description of the Notes."
Based on interpretations by the staff of the SEC, as set forth in no-action
letters issued to third parties, the Company believes that the New Notes issued
pursuant to the Exchange Offer may be offered for resale, resold or otherwise
transferred by holders thereof (other than any holder that is an "affiliate" of
the Company as defined under Rule 405 of the Securities Act), provided that such
New Notes are acquired in the ordinary course of such holders' business and such
holders are not engaged in, and do not intend to engage in, a distribution of
such New Notes and have no arrangement with any person to participate in the
distribution of such New Notes. However, the staff of the SEC has not considered
the Exchange Offer in the context of a no-action letter and there can be no
assurance that the staff of the SEC would make a similar determination with
respect to the Exchange Offer as in such other circumstances. By tendering the
Old Notes in exchange for New Notes, each holder, other than a broker-dealer,
will represent to the Company that: (i) it is not an affiliate of the Company
(as defined under Rule 405 of the Securities Act); (ii) any New Notes to be
received by it were acquired in its ordinary business; and (iii) it is not
engaged in, and does not intend to engage in, a distribution of such New Notes
and has no arrangement or understanding to participate in a distribution of the
New Notes. Each broker-dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Notes where such Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities. The Company has agreed that, starting on the Expiration Date
and ending on the close of business 180 days after the Expiration Date, it will
make this Prospectus available to any broker-dealer for use in connection with
any such resale. See "Plan of Distribution."
Prior to this Exchange Offer, there has been no public market for the Old
Notes or New Notes. If such a market were to develop, the New Notes could trade
at prices that may be higher or lower than their principal amount. The Company
does not intend to apply for listing or quotation of the New Notes on any
securities exchange or stock market. Therefore, there can be no assurance as to
the liquidity of any trading market for the New Notes or that an active public
market for the New Notes will develop. See "Risk Factors -- Lack of Public
Market; Exchange Offer."
BT Securities Corporation, Alex. Brown & Sons Incorporated, ING Baring
(U.S.) Securities, Inc. and Societe Generale Securities Corporation (the
"Initial Purchasers") have agreed that one or more of them will act as
market-makers for the New Notes. However, the Initial Purchasers are not
obligated to so act and they may discontinue any such market-making at any time
without notice. The Company will not receive any proceeds from this Exchange
Offer. The Company has agreed to pay the expenses of the Exchange Offer. No
underwriter is being used in connection with this Exchange Offer.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS OF
OLD NOTES WHO TENDER THEIR OLD NOTES IN THE EXCHANGE OFFER, SEE "RISK FACTORS"
BEGINNING ON PAGE 13 OF THIS PROSPECTUS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is , 1997.
<PAGE> 3
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 SEC. Such reports, proxy and information statements and
other information may be inspected and copied at the public reference facilities
of the SEC 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 SEC by mail at prescribed rates, or in certain cases by accessing the
SEC's World Wide Web site at http://www.sec.gov. Requests should be directed to
the SEC'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 SEC a registration statement on Form S-4
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the New Notes
offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all of the information set forth or incorporated by
reference 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 SEC. For further information with respect to the Company and the New
Notes offered hereby, reference is made to the Registration Statement. This
Prospectus contains summaries of the material terms and provisions of certain
documents and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement. Copies of the Registration
Statement and the exhibits thereto may be inspected, without charge, at the
offices of the SEC at the address set forth above.
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." The
Company expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any of the forward-looking statements contained
herein to reflect any change in the Company's expectations, with regard thereto
or any changes in events, conditions or circumstances on which any statement is
based.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents previously filed with the SEC (File No. 0-25314)
are hereby incorporated by reference into this Prospectus:
(i) the Company's Annual Report on Form 10-KSB for the fiscal year
ended June 30, 1996;
(ii) the Company's Annual Report on Form 10-KSB/A for the fiscal year
ended June 30, 1996;
(iii) the Company's Transition Report on Form 10-KSB for the fiscal
period from July 1, 1996 to December 31, 1996;
(iv) the Company's Transition Report on Form 10-KSB/A for the fiscal
period from July 1, 1996 to December 31, 1996;
(v) the Company's Quarterly Reports on Form 10-QSB for the quarterly
periods ended March 31, and June 30, 1997;
i
<PAGE> 4
(vi) the Company's Current Reports on Form 8-K, dated January 8, 1997,
January 9, 1997, February 7, 1997, July 29, 1997, October 24, 1997 and
November 7, 1997; and
(vii) the description of the Company's Common Stock contained in its
registration statement on Form 8-A filed with the SEC on December 23, 1994,
including any amendments or reports filed for the purpose of updating such
description.
All documents subsequently filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the Expiration Date to which
this Prospectus relates shall be deemed to be incorporated by reference into
this Prospectus and to be part hereof from the date of filing thereof.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein or in any other subsequently filed
document which also is incorporated herein modifies or replaces such statement.
Any statement so modified or superseded shall not be deemed, in its unmodified
form, to constitute a part of this Prospectus.
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. These documents are available from Riley M.
Murphy, Executive Vice President -- Legal and Regulatory Affairs, American
Communications Services, Inc., at the Company's executive offices located at 131
National Business Parkway, Suite 100, Annapolis Junction, MD 20701, telephone
(301) 617-4200. In order to ensure timely delivery of the documents, any request
should be made by , 1997.
ii
<PAGE> 5
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and notes thereto appearing
elsewhere or incorporated by reference 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 are for the
six-month period then ended. Please refer to the "Glossary" for the definitions
of certain capitalized terms used herein and elsewhere in this Prospectus. As
used in this Prospectus, unless the context otherwise requires, "ACSI" or the
"Company" refers to American Communications Services, Inc. and its subsidiaries.
THE COMPANY
American Communications Services, Inc. ("ACSI" or the "Company") provides a
broad range of integrated local voice and data communications services primarily
to commercial customers in mid-sized markets in the southern United States. As a
competitive local exchange carrier ("CLEC"), the Company has constructed its own
local fiber optic networks in 32 markets, is now evaluating additional markets
in which it may construct local networks and expects to offer services on its
own networks or on a resale basis in up to 50 markets by the end of 1998. The
Company uses its own facilities and leases network capacity from others to
provide long distance carriers, Internet service providers ("ISPs") and
business, government and institutional end-users with an alternative to the
incumbent local phone companies for high-quality voice, data, video transport
and other telecommunications services. The Company believes that its customers
choose ACSI's telecommunications services because of the reliability and breadth
of the Company's services, discounted pricing relative to the incumbent local
exchange carrier ("ILEC") and a high level of customer service.
From the formation of the Company through 1996, the Company derived
substantially all of its revenues from the sale of dedicated services to
interexchange carriers ("IXCs") and ISPs. Since the passage of the
Telecommunications Act of 1996 (the "Federal Telecommunications Act"), however,
the Company has enhanced its product offerings to meet the needs of commercial
end-users, and is aggressively expanding the sales and marketing capabilities
necessary to deliver these products to such customers. Specifically, the Company
introduced local switched voice services, including local exchange services
(dial tone) in late 1996, and has also added capabilities to provide other
services such as high speed video conferencing, frame relay, asynchronous
transfer mode ("ATM") and Internet access.
PRODUCTS AND SERVICES
The Company currently provides a wide range of local telecommunications
services including dedicated and private line, local switched voice services,
high-speed data services and Internet services. The Company's SONET-based local
fiber optic networks and its coast-to-coast leased high broadband backbone data
network ("ACSINet") are designed to support this wide range of enhanced
communications services, provide increased network reliability and reduce costs
for its customers, as follows:
- Dedicated Services. The Company's special access services, switched
transport services and private line services provide high capacity
non-switched interconnections: (1) between points of presence ("POPs") of
the same IXC; (2) between POPs of different IXCs; (3) between large
business and government end-users and their selected POPs; (4) between an
IXC POP and an ILEC central office, or between two such central offices;
and (5) between different locations of business or government end-users.
During 1996, such dedicated services provided substantially all of the
Company's revenues.
- Local Switched Voice Services. The Company began offering local switched
voice services (including dial tone) in late 1996. As of September 30,
1997, the Company offered such local switched services using its own
facilities in markets and offered such services on a resale basis in a
total of 32 markets. The Company expects to offer facilities-based
services in 16 of the markets in which it has operational local networks
by the end of 1997, and it expects to offer local services on a resale
basis in additional markets. As an adjunct to its local switched
services, the Company anticipates providing calling card and other
interLATA services by the end of fiscal 1997.
1
<PAGE> 6
- Data Services. During 1996, the Company deployed ACSINet and as of
September 30, 1997 had a total of 44 data POPs. ACSI provides a full
range of high-speed data services over this network, including Internet
connectivity, frame relay, ATM and managed services (such as network
design, configuration and installation) to businesses, government, health
care providers, educational institutions and ISPs for local and wide area
network solutions.
STRATEGY
The Company's objective is to become a full-service alternative to the ILEC
primarily for business, government and institutional end-users in its markets by
offering superior products with excellent customer service at competitive
prices. In order to achieve this objective, the Company seeks to:
Leverage Existing Infrastructure.
The Company believes that its integrated telecommunications networks, both
its local fiber networks and ACSINet, are capable of providing a broad range of
voice and data communications services to its customers. The Company is focusing
its efforts on improving penetration in the markets it already serves by
continuing to offer additional services. The Company believes that providing
switched local voice services permits it to increase the traffic and revenue
associated with its networks. The Company plans to seek certification to offer
calling-card, teleconferencing and other long distance services. In markets in
which it does have operational networks, the Company's decision to pursue a
resale strategy would help position the Company as a full-service provider,
capable of providing its customers with a one-stop-shopping alternative to the
ILEC. In markets in which it does not currently have an operational network,
this resale strategy may position the Company to eventually construct networks
in those markets, which networks would benefit immediately from an existing
customer base.
Develop Direct and Indirect Sales Channels to Commercial End-Users.
The Company has divided its sales and marketing efforts into three
different channels: direct sales to end-users, sales to IXCs and ISPs and sales
of private-label services through alternative distribution channels.
- Direct Sales. The Company's local sales force continues to focus on the
commercial end-users in each of the markets it serves. The Company
believes that its 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's
major account sales force targets large national accounts. As of June 30,
1997, the Company's sales force in this area was made up of 153 sales
people, which represents an increase of 98 sales people since December
31, 1996, and is expected to increase to 210 sales people by the end of
1997.
- Sales to IXCs and ISPs. The Company sells dedicated services to long
distance carriers and ISPs who use the Company's products and services to
provide local access for their own products. For example, the Company
recently entered into an agreement with MCImetro in which, subject to
certain conditions, MCI has agreed to name ACSI as its preferred local
provider for dedicated and transport services in 21 ACSI markets for at
least a five-year period. See "Recent Developments."
- Sales Through Alternative Distribution Channels. As of September 30,
1997, the Company had executed 63 sales agency agreements and is actively
recruiting additional telecommunications sales agents to market the
Company's services. In addition, the Company intends to expand
distribution of its services by attempting to contract with IXCs,
utilities, cable television service providers ("CATVs"), out-of-region
regional Bell operating companies ("RBOCs"), other 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 the support of sales
through these and other alternative distribution channels.
2
<PAGE> 7
Market the Company's Services Under the ACSI Brand Name.
The Company is establishing the ACSI brand name by marketing and packaging
its broad array of communications services directly to end-users. In markets in
which it has local networks established, both switched services and data
services are marketed under the ACSI brand name; in markets in which the Company
has no network installed, it resells local switched services under the ACSI
brand name. In both types of markets, the Company also pursues opportunities to
bundle its services together to strengthen the ACSI identity as a full-service
provider of telecommunications services.
Provide Superior Customer Service.
The Company is developing and implementing an integrated customer care
strategy that is intended to provide a heightened level of responsive customer
service across its full range of existing and planned products and services.
This strategy comprises infrastructure, training, performance monitoring and
image/brand recognition and would serve to leverage the Company's operational
support systems, other information/financial systems and customer care
organizations. For example, the Company has made significant capital investments
in its integrated network management platform, which monitors and manages all
voice and data network elements. The Company expects to have completed customer
care and billing systems by as early as the end of 1998, which are intended to
improve the Company's provision of integrated customer service on a cost
efficient basis. These and other quality management and improvement programs,
when implemented, are expected to enable the Company to differentiate itself in
the marketplace by providing a level of customer care and customer service that
is of a higher quality than that which is available in today's market.
Expand Resale of Exchanged Local Voice Services.
Management believes that the Company can successfully enter new markets
with lower capital investment by acting as a reseller of either local switched
voice or data services. This strategy is intended to allow the Company to build
brand name awareness and develop a customer base without incurring the initial
capital costs typically incurred by facilities-based entrants. This strategy
also enables the Company to make capital decisions based on where its customers
are most highly concentrated. Once the Company has established a customer base,
the Company plans to invest in extending its network infrastructure in those
markets that it already serves.
Accelerate Financial Return on Incremental Expenditures.
The Company is pursuing opportunities that accelerate the return on the
Company's invested capital. The Company believes that it will achieve an earlier
return on its investment by focusing on new customer applications in existing
markets rather than continuing to increase the number of new networks built. For
this reason, the Company has modified its earlier goal of constructing 50 local
networks by the end of 1998, is now evaluating additional markets in which it
may construct local networks and is establishing a presence in additional
markets through resale of switched services and data POPs. The Company plans to
redeploy into customer applications in existing markets the capital that was
scheduled to be used to develop those additional networks. While management
continues to believe in the long-term return on capital afforded by the
constructed networks, it believes that the investment in customer applications
will have a more immediate return. As part of this strategy, the Company has
also implemented a shift in its incentive-based compensation for a number of its
key executives away from new network development and growth to revenue and
EBITDA (as defined herein).
MANAGEMENT TEAM
The Company's senior management is among the most experienced in the
emerging competitive local telecommunications industry. Members of ACSI's
executive team developed and/or operated CAP networks
3
<PAGE> 8
in 25 major metropolitan markets for companies such as MFS Communications and
Teleport Communications Group. Key executives include:
ANTHONY J. POMPLIANO, CHAIRMAN OF THE BOARD OF DIRECTORS, had more than 30
years of experience in the telecommunications industry before joining ACSI in
August 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.
JACK E. REICH, PRESIDENT AND CHIEF EXECUTIVE OFFICER, 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 he 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.
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.
RILEY M. MURPHY, GENERAL COUNSEL, EXECUTIVE VICE PRESIDENT -- LEGAL AND
REGULATORY AFFAIRS AND SECRETARY, had 12 years of experience in the private
practice of telecommunications regulatory law for interexchange, cellular,
paging and other competitive telecommunications services prior to joining the
Company in April 1994. Since February 1995, she has served as an officer and
director of the Association for Local Telecommunications Services.
RECENT DEVELOPMENTS
Junior Preferred Stock Offering. On October 16, 1997, the Company
consummated the sale of 150,000 shares (the "Junior Preferred Stock Offering"
and, together with the Unit Offering and the Private Placement, the "Recent
Offerings"), consisting of its 12 3/4% Junior Redeemable Preferred Stock due
2009 (the 12 3/4% Preferred Stock"). Total net proceeds to the Company from the
Junior Preferred Stock Offering were approximately $145.7 million.
Management Change. Effective September 3, 1997, George M. Tronsrue, III
resigned from his position as President and Chief Operating Officer -- Strategy
and Technology Development. The Company and Mr. Tronsrue have entered into a
separation agreement.
Unit Offering. On July 10, 1997, the Company consummated the issuance and
sale of 75,000 units (the "Unit Offering"), consisting of its 14 3/4% Redeemable
Preferred Stock due 2008 (the "14 3/4% Preferred Stock") and warrants (the
"Warrants") to purchase approximately 6,023,800 shares (subject to adjustment)
of common stock (the "Common Stock"). Total net proceeds to the Company from the
Unit Offering were approximately $67 million.
Common Equity Offering. On April 15, 1997, the Company consummated (i) the
issuance and sale of 5,060,000 shares of Common Stock (inclusive of the May 14,
1997 exercise by the underwriters of their over-allotment option) at a price per
share of $5.00 in an underwritten public offering and (ii) the issuance and sale
directly to certain of its principal stockholders of 3,600,000 shares of Common
Stock at a purchase price of $4.70 per share (together, the "Common Stock
Offering"). Total net proceeds to the Company from the Common Stock Offering
were approximately $40 million.
MCImetro Agreement. Effective March 6, 1997, the Company and MCImetro
entered into an agreement in which MCI named 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
4
<PAGE> 9
choice provider in MCI's provisioning system for all new dedicated access
circuits in the designated markets and on June 19, 1997, executed 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. 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. 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. On September 30, 1997, the Company issued 37,582 of such
warrants with an exercise price of $9.503 per share. Of the 620,000 warrants
issued to MCI on March 6, 1997, 360,000 warrants have vested and the remaining
260,000 warrants will vest only upon execution of the switched services resale
agreement. MCI has certain registration rights with respect to any shares of
Common Stock issued to MCI in connection with the MCI Transaction.
Cybergate Acquisition. 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 $750,000 for the year ended December 31, 1996. The Company
believes the Cybergate Acquisition will help ACSI 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.
5
<PAGE> 10
THE EXCHANGE OFFER
REGISTRATION RIGHTS
AGREEMENT...............The Old Notes were sold by the Company on July 23, 1997,
to the Initial Purchasers, which placed the Old Notes
with institutional investors (the "Private Placement").
In connection therewith, the Company executed and
delivered for the benefit of the holders of the Old
Notes the Registration Rights Agreement (as defined)
providing, among other things, for the Exchange Offer.
THE EXCHANGE OFFER......New Notes are being offered in exchange for up to
$170,000,000 aggregate principal amount of Old Notes. As
of the date hereof, $220,000,000 aggregate principal
amount of Old Notes are outstanding. Since the New Notes
will be recorded in the Company's accounting records at
the same carrying value as the Old Notes, no gain or
loss will be recognized by the Company upon the
consummation of the Exchange Offer. See "The Exchange
Offer -- Accounting Treatment." Holders of the Old Notes
do not have appraisal or dissenter's rights in
connection with the Exchange Offer under the Delaware
General Corporation Law, the governing law of the state
of incorporation of the Company.
Due to the interpretations of the staff of the SEC
described in the next paragraph, Old Notes held by
affiliates of the Company (within the meaning of Rule
405 under the Securities Act) will not be accepted in
the Exchange Offer based on interpretations by the staff
of the SEC. $50,000,000 aggregate principal amount of
Old Notes were sold to an entity that may be deemed an
affiliate of the Company. A registration statement on
Form S-3 has been filed as of the date hereof to allow
resales by such entity and therefore any tender of Old
Notes by such entity in the Exchange Offer will not be
accepted.
Based on interpretations by the staff of the SEC, as set
forth in no-action letters issued to third parties, the
Company believes that holders of Old Notes (other than
any holder who is an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act) who
exchange their Old Notes for New Notes pursuant to the
Exchange Offer may offer such New Notes for resale,
resell such New Notes and otherwise transfer such New
Notes without compliance with the registration and
prospectus delivery provisions of the Securities Act;
provided such New Notes are acquired in the ordinary
course of the holder's business and such holders are not
engaged in, and do not intend to engage in, a
distribution of such New Notes and have no arrangement
or understanding with any person to participate in a
distribution of such New Notes. The staff of the SEC has
not considered the Exchange Offer in the context of a
no-action letter and there can be no assurance that the
staff of the SEC would make a similar determination with
respect to the Exchange Offer. Each broker-dealer that
receives New Notes for its own account in exchange for
Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or
other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of
such New Notes. See "Plan of Distribution." To comply
with the securities laws of certain jurisdictions, it
may be necessary to qualify for sale or register the New
Notes prior to offering or selling such New Notes. The
Company has agreed, pursuant to the Registration Rights
Agreement and subject to certain specified limitations
therein, to register or qualify the New Notes for offer
or sale under the securities or "blue sky" laws of such
jurisdictions as may be necessary to permit the holders
of New Notes to trade the New Notes without any
restrictions or limitations under the securities laws of
the several states of the United States. If a holder of
Old Notes does not exchange such Old Notes for
6
<PAGE> 11
New Notes pursuant to the Exchange Offer, such Old Notes
will continue to be subject to the restrictions on
transfer contained in the legend thereon. In general,
the Old Notes may not be offered or sold, unless
registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to,
the Securities Act and applicable state securities laws.
See "Risk Factors -- Consequences of Failure to
Exchange" and "Description of the Notes -- Exchange
Offer; Registration Rights."
EXPIRATION DATE.........5:00 p.m., New York City time, on ,
1997 (20 days following the commencement of the Exchange
Offer), unless the Exchange Offer is extended, in which
case the term "Expiration Date" means the latest date
and time to which the Exchange Offer is extended.
CONDITIONS TO THE
EXCHANGE OFFER..........The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See "The
Exchange Offer -- Conditions." Except for the
requirements of applicable Federal and state securities
laws, there are no Federal or state regulatory
requirements to be complied with or obtained by the
Company in connection with the Exchange Offer. NO VOTE
OF THE COMPANY'S SECURITYHOLDERS IS REQUIRED TO EFFECT
THE EXCHANGE OFFER AND NO SUCH VOTE (OR PROXY THEREFOR)
IS BEING SOUGHT HEREBY.
PROCEDURES FOR TENDERING
OLD NOTES...............Each holder of Old Notes wishing to accept the Exchange
Offer must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in accordance with
the instructions contained herein and therein, and mail
or otherwise deliver such Letter of Transmittal, or such
facsimile, together with the Old Notes to be exchanged
and any other required documentation to the Exchange
Agent (as defined) at the address set forth herein and
therein. See "The Exchange Offer -- Procedures for
Tendering."
WITHDRAWAL RIGHTS.......Tenders of Old Notes may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the Expiration
Date. To withdraw a tender of Old Notes, a written or
facsimile transmission notice of withdrawal must be
received by the Exchange Agent at its address set forth
below under "Exchange Agent" prior to 5:00 p.m., New
York City time, on the Expiration Date.
ACCEPTANCE OF OLD NOTES
AND DELIVERY OF
NEW NOTES...............Subject to certain conditions, the Company will accept
for exchange any and all Old Notes which are properly
tendered in the Exchange Offer prior to 5:00 p.m., New
York City time, on the Expiration Date. The New Notes
issued pursuant to the Exchange Offer will be delivered
promptly following the Expiration Date. See "The
Exchange Offer -- Terms of the Exchange Offer."
CERTAIN TAX
CONSIDERATIONS..........The exchange of New Notes for Old Notes should not be a
sale or exchange or otherwise a taxable event for
Federal income tax purposes. See "Certain Federal Income
Tax Considerations."
EXCHANGE AGENT..........The Chase Manhattan Bank is serving as exchange agent
(the "Exchange Agent") in connection with the Exchange
Offer.
USE OF PROCEEDS.........There will be no proceeds to the Company from the
Exchange Offer. The net proceeds to the Company from the
Private Placement were approximately $208 million, after
deducting discounts and other offering expenses payable
by
7
<PAGE> 12
the Company. Approximately $70 million of the net
proceeds from the Private Placement were placed into the
Escrow Account. The Company plans to use the balance of
the net proceeds from the Private Placement
(approximately $138 million) to fund sales, marketing,
and product development costs incurred in connection
with the Company's growth, to expand voice and data
network density and to fund negative operating cash
flow. See "Use of Proceeds" and "Management's Discussion
and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
8
<PAGE> 13
SUMMARY OF TERMS OF NEW NOTES
The Exchange Offer relates to the exchange of up to $170,000,000 aggregate
principal amount of Old Notes for up to an equal aggregate principal amount of
New Notes. The New Notes will be obligations of the Company evidencing the same
indebtedness as the Old Notes, and will be entitled to the benefits of the same
Indenture. The form and terms of the New Notes are generally the same as the
form and terms of the Old Notes, except that the New Notes do not contain terms
with respect to the interest rate step-up provisions and the New Notes have been
registered under the Securities Act and therefore will not bear legends
restricting the transfer thereof. See "Description of the New Notes."
COMPARISON WITH OLD NOTES
FREELY TRANSFERABLE.....Generally, the New Notes will be freely transferable
under the Securities Act by holders who are not
affiliates of the Company. The New Notes otherwise will
be substantially identical in all material respects
(including interest rate and maturity) to the Old Notes
(except with respect to the interest rate step-up
provisions). See "The Exchange Offer -- Terms of the
Exchange Offer."
REGISTRATION RIGHTS.....The holders of Old Notes currently are entitled to
certain registration rights pursuant to a registration
rights agreement (the "Registration Rights Agreement")
dated as of July 23, 1997, between the Company and the
Initial Purchasers. However, upon consummation of the
Exchange Offer, subject to certain exceptions, holders
of Old Notes who do not exchange their Old Notes for New
Notes in the Exchange Offer will no longer be entitled
to registration rights and will not be able to offer or
sell their Old Notes, unless such old Notes are
subsequently registered under the Securities Act (which,
subject to certain limited exceptions, the Company will
have no obligation to do), except pursuant to an
exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. See
"Risk Factors -- Consequences of Failure to Exchange."
THE NEW NOTES
MATURITY DATE...........July 15, 2007.
INTEREST PAYMENT
DATES...................The New Notes will bear interest at a rate of 13 3/4%
per annum. Interest on the New Notes will accrue from
July 23, 1997 (the "Issue Date"), and will be payable
semi-annually on each January 15 and July 15, commencing
January 15, 1998.
ESCROW AND DISBURSEMENT
AGREEMENT...............The Company placed approximately $70 million of the net
proceeds realized from the sale of the Old Notes,
representing funds sufficient to pay the first five
interest payments on the Notes, into an Escrow Account
(as defined herein) to be held by the Escrow Agent (as
defined herein) for the benefit of the holders of the
Notes. Until disbursed in accordance with the Escrow and
Disbursement Agreement (as defined herein), the Escrow
Account is designed to secure a portion of the Company's
obligations under the Notes. Funds will be disbursed
from the Escrow Account only to pay interest on the
Notes and, upon certain repurchases or redemptions of
the Notes, to pay principal of and premium, if any,
thereon. Pending such disbursement, all funds contained
in the Escrow Account will be invested in Marketable
Securities (as defined herein). Pursuant to the Escrow
and Disbursement Agreement, if the Company makes the
first five interest payments on the Notes in a timely
manner, immediately after the fifth interest payment any
remaining Marketable Securities will be released from
the Escrow Account to the Company and thereafter
9
<PAGE> 14
the Notes will be unsecured. See "Description of the
Notes -- Disbursement of Funds -- Escrow Account" and
"Description of the Notes -- Security."
OPTIONAL REDEMPTION.....The New Notes are redeemable, in whole or in part, at
the option of the Company, on or after July 15, 2002, at
the redemption prices set forth herein, plus accrued and
unpaid interest, if any, to the date of redemption. In
addition, on or prior to July 15, 2000, the Company, at
its option, may redeem up to 35% of the aggregate
principal amount of the Notes in the Private Placement
with the net cash proceeds of one or more Equity
Offerings (as defined), at the redemption prices set
forth herein plus accrued interest to the date of
redemption, provided that after any such redemption at
least $143 million aggregate principal amount of Notes
remains outstanding.
CHANGE OF CONTROL.......If a Change of Control (as defined) occurs, each holder
will have the right to require the Company to offer to
repurchase such holder's New Notes at a redemption price
of 101% of the principal amount thereof plus accrued and
unpaid interest, if any, to the date of repurchase.
There can be no assurance that ACSI will have the
financial resources necessary to repurchase the New
Notes upon a Change of Control.
RANKING.................The New Notes will be general unsecured senior
obligations of the Company and will rank pari passu with
all existing and future senior indebtedness of the
Company and will rank senior to all subordinated
indebtedness of the Company. As of June 30, 1997, there
was $193.0 million of senior indebtedness of the Company
outstanding. In addition, the New Notes will be
structurally subordinated to liabilities (including
trade payables) of the Company's subsidiaries. As of
June 30, 1997, liabilities of the Company's subsidiaries
were $62.7 million.
CERTAIN COVENANTS.......The indenture which will govern the New Notes (the
"Indenture") contains certain covenants that limit the
ability of the Company and its subsidiaries to, among
other things, incur additional indebtedness, pay
dividends or make certain other restricted payments,
consummate certain asset sales, enter into certain
transactions with affiliates, incur liens, impose
restrictions on the ability of a subsidiary to pay
dividends or make certain payments to the Company and
its subsidiaries, merge or consolidate with any other
person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the
assets of the Company or its subsidiaries. In addition,
the Indenture requires that the Company apply certain
Excess Proceeds (as defined) of Asset Sales (as defined)
to make an offer to purchase on a pro rata basis, from
all holders, outstanding Notes and Existing Notes (as
defined).
For additional information regarding the New Notes, see "Description of the
Notes."
10
<PAGE> 15
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by holders of Old Notes before tendering their Old Notes in the
Exchange Offer.
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.
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." The
Company expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any of the forward-looking statements contained
herein to reflect any change in the Company's expectations, with regard thereto
or any changes in events, conditions or circumstances on which any statement is
based.
11
<PAGE> 16
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE, NETWORK AND STATISTICAL DATA)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED FISCAL PERIOD ENDED ENDED SIX MONTHS
FISCAL YEAR ENDED JUNE 30, DECEMBER 31, DECEMBER 31,(1) JUNE 30, ENDED JUNE 30,
------------------------------ ------------ ------------------- ------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 1996 1995 1996 1996 1997
-------- ------------------- ------------ ------------------- ------------- -------------------
<CAPTION>
PRO PRO PRO
ACTUAL FORMA(2) ACTUAL FORMA(2) ACTUAL FORMA(2)
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenues.............. $ 389 $ 3,415 $ 7,138 $ 989 $ 6,990 $ 9,626 $ 2,426 $ 19,793 $ 20,011
Operating expenses.... 14,797 24,543 29,027 7,966 34,434 37,548 16,576 58,125 58,371
Loss from
operations.......... (14,408) (21,128) (21,889) (6,977) (27,444) (27,922) (14,150) (38,333) (38,361)
Interest and other
income.............. 218 4,410 4,410 777 2,757 2,773 3,632 1,078 1,083
Interest and other
expense............. (170) (10,477) (10,824) (2,835) (10,390) (10,619) (7,642) (12,421) (12,423)
Loss before minority
interest............ (14,746) (27,195) (28,303) (9,035) (35,077) (35,768) (18,160) (49,676) (49,701)
Minority
interest(3)......... 48 413 413 156 160 160 257 -- --
Net loss.............. (14,698) (26,782) (27,890) (8,879) (34,917) (35,608) (17,903) (49,676) (49,701)
Net loss per common
share............... $ (3.30) $ (4.96) $ (4.40) $ (1.82) $ (5.48) $ (4.84) $ (3.03) $ (2.82) $ (2.81)
Weighted average
shares
outstanding......... 4,772 6,185 7,215 5,901 6,734 7,764 6,572 17,994 18,080
OTHER DATA:
Deficiency in earnings
to cover fixed
charges(4).......... (15,282) (30,246) (31,354) (9,798) (37,345) (38,036) (20,448) (51,207) (51,232)
EBITDA(5)............. $ (7,443) $(14,901) $(14,418) $ (4,855) $(21,822) $(21,620) $ (10,046) $(28,052) $(28,022)
Depreciation and
amortization........ 498 3,078 4,322 763 4,912 5,592 2,316 9,456 9,514
Capital
expenditures........ 15,303 60,856 61,667 17,657 64,574 64,832 43,199 73,213 73,213
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------- JUNE 30, 1997
PRO FORMA AS ------------------------------
ADJUSTED FOR PRO FORMA FOR
THE RECENT THE RECENT
ACTUAL PRO FORMA(6) OFFERINGS(6)(7) ACTUAL OFFERINGS(7)
-------- ------------ ----------------- -------- -----------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................... $ 78,618 $114,854 $ 465,369 $ 8,499 $ 359,014
Total assets................................. 230,038 280,254 716,819 243,381 679,946
Long-term liabilities........................ 216,484 210,637 430,637 224,562 444,562
Redeemable stock, options and warrants....... 2,000 2,000 196,739 2,000 196,739
Stockholders' equity (deficit)............... (27,038) 28,339 50,165 (18,226) 3,600
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1996 1996 1996 1996 1997 1997
------------ --------- -------- ------------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Network and Selected Statistical
Data(8):
Networks in operation................. 9 10 15 19 21 28 31
Route miles........................... 136 200 386 543 697 908 957
Fiber miles........................... 5,957 9,466 28,476 32,774 48,792 75,867 82,693
Buildings connected................... 100 133 216 532 595 858 1,083
VGE circuits in service............... 82,055 125,208 137,431 267,894 384,134 554,883 886,375
Employees............................. 111 142 199 272 322 502 559
</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) For purposes of computing this amount earnings (loss) consists of earnings
(loss) before minority interest and fixed charges. Fixed charges consists of
interest expense (including amortization of debt issuance costs) and
one-third of rent expense which is deemed to be representative of interest
expense.
(5) 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 ("GAAP"). 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, $1.2
million and $550,000 in the six months ended December 31, 1995 and fiscal
period ended December 31, 1996, respectively and $1.5 million and $820,000
in the six months ended June 30, 1996 and 1997, respectively. See Note 6 of
"Notes to Consolidated Financial Statements."
(6) Pro forma to give effect to (i) the Cybergate Acquisition as if consummated
on December 31, 1996, (ii) sale of 5,060,000 shares of Common Stock in the
Common Stock Offering (including shares sold upon exercise of the
underwriters' over-allotment option), sale to certain stockholders of
3,600,000 shares of Common Stock in the Common Stock Offering and
application of the net proceeds therefrom and (iii) conversion upon
consummation of the Common Stock Offering of the previously outstanding
preferred stock and payment of accrued dividends in cash and Common Stock in
connection with such conversion in the same proportion of accrued dividends
payable that were paid in cash and shares of Common Stock upon completion of
the Common Stock Offering.
(7) As adjusted to give effect to the Recent Offerings. The aggregate net
proceeds from the sale of the Units was approximately $67 million, which was
allocated to the 14 3/4% Preferred Stock and the warrants based upon their
relative fair values of $49.1 million for the 14 3/4% Preferred Stock and
$21.8 million for the warrants (also reflects a consulting fee of
approximately $370,000 with respect to the purchase of Units by certain
principal stockholders and certain other parties in the Unit Offering and
consent solicitation fees paid out of the proceeds of the Unit Offering of
$4.375 million, which includes a solicitation agent fee of $500,000). The
net proceeds of the Private Placement were approximately $138 million,
excluding restricted cash of $70 million (also reflects a consulting fee of
$500,000 with respect to the purchase of $50 million of Notes by W.R. Huff
on behalf of investment management accounts for which it acts as investment
advisor and over which it has sole dispositive power and consent
solicitation fees paid out of the proceeds of the Private Placement of
$3.875 million). The net proceeds from the Junior Preferred Stock Offering
were approximately $145.7 million.
(8) Network and Selected Statistical Data are derived from ACSI's records.
12
<PAGE> 17
RISK FACTORS
Holders of Old Notes should carefully consider the following risk factors,
as well as other information set forth or incorporated by reference in this
Prospectus, before tendering their Old Notes in the Exchange Offer. The risk
factors set forth below (other than "Consequences of Failure to Exchange") are
generally applicable to the Old Notes as well as the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register the Old Notes under the Securities Act. Based on
interpretations by the staff of the SEC, as set forth in no-action letters to
third parties, the Company believes that the New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold or
otherwise transferred by holders thereof (other than any such holder that is an
"affiliate" of the issuer within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act provided that such New Notes are acquired in the ordinary
course of such holders' business and such holders are not engaged in, and do not
intend to engage in, a distribution of such New Notes and have no arrangement or
understanding with any person to participate in the distribution of such New
Notes. The staff of the SEC has not considered the Exchange Offer in the context
of a no-action letter and there can be no assurance that the staff of the SEC
would make a similar determination with respect to the Exchange Offer. Each
broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities. The Company
has agreed that, for a period of 180 days after the Expiration Date, it will
make this Prospectus available to any broker-dealer for use in connection with
any such resale. See "Plan of Distribution." However, to comply with the
securities laws of certain jurisdictions, if applicable, the New Notes may not
be offered or sold unless they have been registered or qualified for sale in
such jurisdictions or an exemption from registration or qualification is
available and is complied with. To the extent that Old Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Old Notes could be adversely affected.
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,
December 31, 1996 and June 30, 1997, the Company had accumulated deficits of
$47.5 million, $82.4 million and $132.1 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.
During the six months ended June 30, 1997, the Company incurred a net operating
loss of $38.3 million and generated negative cash flow from operations of $36.8
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
implementing and marketing its local switched voice and high-speed data services
and establishing and expanding its local networks. There can be no assurance
that the Company's networks or any
13
<PAGE> 18
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 further development and enhancement of new services,
including local switched voice and high-speed data services, as well as the
continued development, construction, expansion, operation and potential
acquisition of local networks, 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 September 30, 1997, the Company
had raised approximately $475 million from debt and equity financings, $31.2
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"), approximately $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 "2005 Warrants"), approximately $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 "Existing Notes"), approximately $40.0 million of
which had been raised in the Common Stock Offering, approximately $67 million of
which had been raised in the Unit Offering and approximately $138 million of
which had been raised in the Private Placement. The 2005 Notes were issued under
the indenture dated November 14, 1995 and the 2006 Notes were issued under the
indenture dated March 21, 1996 (collectively, the "Existing Indentures"). The
Company estimates that from June 30, 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 $40.0 million and $144.0 million, respectively. At September 30,
1997, the Company had approximately $153.0 million of cash and cash equivalents
available for this purpose. The Company continues to use the estimated net
proceeds from the Private Placement and the Junior Preferred Stock Offering
principally to fund sales, marketing and product development costs incurred in
connection with the Company's growth, to expand voice and data network density
and to fund negative operating cash flow. 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, and may also
require that the Company obtain the consent of its debt holders..
Management anticipates that the Company's current cash resources are
sufficient to fund the Company's continuing negative cash flow and required
capital expenditures into the first quarter of 2000. Without an infusion of
additional cash, the Company will exhaust its cash resources during the first
quarter of 2000. To meet its additional remaining capital requirements and to
successfully implement its strategy, the Company 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 debt holders. 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
strategy successfully, in which event the Company will be unable to fund its
ongoing operations, which 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."
SUBSTANTIAL LEVERAGE; RECENT DEFAULT; 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 Existing 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. In addition, the Company will have substantial
cash interest requirements with
14
<PAGE> 19
respect to the Notes issued in the Private Placement. As of June 30, 1997, the
Company (through five of its subsidiaries) had approximately $31.2 million in
debt outstanding under the AT&T Credit Facility. The credit provided 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 June 30, 1997, the
Company had approximately $224.6 million of consolidated outstanding long-term
indebtedness. As of June 30, 1997, the total consolidated liabilities of the
Company were approximately $259.6 million. As of June 30, 1997, after giving pro
forma effect on a consolidated basis to the completion of the Private Placement,
the Company would have had approximately $444.6 million of outstanding long term
indebtedness. It is expected that the Company and its subsidiaries will incur
additional indebtedness, including increasing the borrowing capacity under the
AT&T Credit Facility to $35 million the maximum amount permitted to be incurred
under the Indenture (as defined herein) and the Existing Indentures. 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, the Existing 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, the Existing Notes and its other debt. See "Description of Certain
Indebtedness."
On June 11, 1997, the Company notified the trustee under each of the
Existing Indentures that, as of June 10, 1997, it had approximately $13.0
million in the aggregate of ordinary course trade accounts payable that were
more than 60 days overdue. As of June 30, 1997, the Company had approximately
$17.4 million in the aggregate of ordinary course trade accounts payable that
were more than 60 days overdue. These overdue amounts constituted Indebtedness
of the Company, as that term is defined in each of the Existing Indentures. The
incurrence by the Company of such Indebtedness is not permitted under each of
the Existing Indentures and, therefore, constituted an Event of Default (as
defined in the Existing Indentures) under each Existing Indenture. The Company
used a portion of the proceeds of the Unit Offering to pay in full all ordinary
course trade accounts payable that were more than 60 days overdue to cure such
Event of Default.
In addition, in connection with the Unit Offering the Company issued the
14 3/4% Preferred Stock, dividends on which may be paid, at the Company's
option, either in cash or by the issuance of additional shares of 14 3/4%
Preferred Stock; provided, however, that after June 30, 2002, to the extent and
so long as the Company is not precluded from paying cash dividends on the
14 3/4% Preferred Stock by the terms of any then outstanding indebtedness or any
other agreement or instrument to which the Company is then subject, the Company
shall pay dividends on the 14 3/4% Preferred Stock in cash.
The level of the Company's indebtedness and its other obligations could
have important consequences to holders of the Notes, including the following:
(i) the debt service requirements of the Company's existing indebtedness and any
additional indebtedness could make it difficult for the Company to make payments
on the Notes; (ii) the ability of the Company to obtain any necessary financing
in the future for working capital, capital expenditures, debt service
requirements or other purposes may be limited; (iii) any cash flow from the
operations of certain of the Company's subsidiaries may need to be dedicated to
debt service payments and might not be available for other purposes; (iv) the
Company's level of indebtedness could limit its flexibility in planning for, or
reacting to, changes in its business; (v) the Company is more highly leveraged
than most of its competitors, which may place it at a competitive disadvantage;
and (vi) the Company's high degree of indebtedness will make it more vulnerable
to a downturn in its business.
HOLDING COMPANY STRUCTURE; SOURCE OF REPAYMENT OF NEW NOTES; EFFECTIVE
SUBORDINATION OF NEW NOTES TO INDEBTEDNESS OF SUBSIDIARIES
As a holding company that conducts virtually all of its business through
its subsidiaries, ACSI has no source of operating cash flow other than from
dividends and distributions from its subsidiaries. In order to pay interest on
the New Notes or the principal amount of the New Notes at maturity, or to redeem
or repurchase the New Notes, ACSI will be required to obtain distributions from
its subsidiaries, refinance its indebtedness, raise funds in a public or private
equity or debt offering, or sell some or all of its or its subsidiaries' assets.
Moreover, the Indenture and the Existing Indentures limit the Company's ability
to incur additional
15
<PAGE> 20
indebtedness and the AT&T Credit Facility imposes restrictions on the ability of
those five subsidiaries of ACSI that incur indebtedness thereunder to transfer
funds to ACSI in the form of dividends or other distributions. The AT&T Credit
Facility, the Indenture, the Existing Indentures and the Certificate of
Designation relating to the 12 3/4% Preferred Stock also impose restrictions on
the ability of such subsidiaries to raise capital by incurring additional
indebtedness. These factors could limit ACSI's ability to meet its obligations
with respect to the New Notes.
If ACSI is required to conduct an offering of its capital stock or to
refinance the New Notes, its ability to do so on acceptable terms, if at all,
will be affected by several factors, including financial market conditions and
the value and performance of the Company at the time of such offering or
refinancing, which in turn may be affected by many factors, including economic
and industry cycles. There can be no assurance that an offering of ACSI's
Capital Stock (as defined) or a refinancing of the New Notes can or will be
completed on satisfactory terms, that they would be sufficient to enable ACSI to
make any payments with respect to the New Notes if required, or that they would
be permitted by the terms of the debt instruments of ACSI and its subsidiaries
then in effect.
The New Notes will be senior obligations only of ACSI, will be pari passu
in right of payment with certain other indebtedness of ACSI and will not be
secured by any assets. ACSI's subsidiaries will have no obligation to pay
amounts due on the New Notes and will not guarantee the New Notes. Therefore,
the New Notes will be effectively subordinated to all liabilities of ACSI's
subsidiaries, including trade payables. As of June 30, 1997, the total
liabilities of the Company's subsidiaries (after the elimination of loans and
advances by the Company to its subsidiaries) were approximately $62.7 million.
Of that amount, approximately $31.2 million in indebtedness was secured by first
priority liens in favor of AT&T on all the assets of the borrowing subsidiaries
and a pledge of the stock of such subsidiaries. See "Description of Certain
Indebtedness." Any rights of ACSI and its creditors, including the holders of
the New Notes, to participate in the assets of any of ACSI's subsidiaries upon
any liquidation or reorganization of any such subsidiary will be subject to the
prior claims of that subsidiary's creditors, including trade creditors.
CERTAIN FINANCIAL AND OPERATING RESTRICTIONS
The Existing Indentures, the AT&T Credit Facility, the Indenture and the
Certificate of Designation relating to the 12 3/4% Preferred Stock impose
operating and financial restrictions on the Company and its subsidiaries. These
restrictions affect, and in certain cases significantly limit or prohibit, among
other things, the ability of 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 the Notes -- Certain
Covenants" and "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.
RAPID EXPANSION OF OPERATIONS
Subject to the sufficiency of its cash resources, the Company plans to
continue to expand its business rapidly. There can be no assurance that a market
will develop for any of the Company's 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. 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.
16
<PAGE> 21
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 year, the
Company has effected a management reorganization in connection with which the
Company hired several new members of senior management and saw the departure of
several significant employees and former members of senior management. 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 additional management personnel 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
information 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 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.
DEPENDENCE ON BILLING, CUSTOMER SERVICES AND INFORMATION SYSTEMS
Sophisticated information and processing systems are vital to the Company's
growth and its ability to monitor costs, bill customers, provision customer
orders and achieve operating efficiencies. Billing and information systems for
the Company's historical lines of business have been produced largely in-house
with partial reliance on third-party vendors. These systems have generally met
the Company's needs due in part to the low volume of customer billing. As the
Company transitions to the provisioning of local services and as its long
distance and Internet operations continue to expand, the need for sophisticated
billing and information systems will increase significantly. The Company's plans
for the development and implementation of its billing systems rely, for the most
part, on the delivery of products and services by third party vendors.
Similarly, the Company is developing customer call centers to provision service
orders. Information systems are vital to the success of the call centers, and
the information systems for these call centers are largely being developed by
third party vendors. Failure of these vendors to deliver proposed products and
services in a timely and effective manner and at acceptable costs, failure of
the Company to adequately identify all of its information and processing needs,
failure of the Company's related processing or information systems, or the
failure of the Company to upgrade systems as necessary could have a material
adverse effect on the ability of the Company to reach its objectives, on its
financial condition and on its results of operations.
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, the fiscal period ended
December 31, 1996 and the six months ended June 30, 1997, approximately 60%, 40%
and 29% 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, repackage
17
<PAGE> 22
unbundled network elements and/or resell the local services of ACSI's
competitors, which may materially adversely affect the Company. Additionally, in
the six months ended June 30, 1997, approximately 18% of the Company's revenues
were generated by ISPs. See "-- Competition," "Business -- Competition" and "--
Regulation."
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, network
capacity and switching 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 and facilities to the Company and its customers. The Company has from
time to time experienced delays in receiving telecommunications services and
facilities, and there can be no assurance that the Company will be able to
obtain such services or facilities 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 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 and networks
upon which it depends 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 or to expand its existing markets, and there can be no
assurance that the Company will be able to obtain and maintain local approvals
on acceptable terms or that ILECs, CLECs or other competitors 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. Certain utilities have challenged the
constitutionality of mandatory access to poles and other facilities in ongoing
litigation. 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
18
<PAGE> 23
access in these contracts. In this event, the Company may have to consider
alternative means for building out its local networks.
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, ILECs 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 June 30, 1997, the Company had posted approximately $8.8
million in performance bonds and letters of credit and expects to post
additional bonds or letters of credit in the future. As of June 30, 1997, the
Company had been required to pledge approximately $5.0 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 -- Implementation of Integrated Network -- Rights-of-Way"
and "-- Regulation."
EFFECT 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 Federal Communications Commission (the "FCC") for construction or
installation. However, the Company may file FCC tariffs stating its rates, terms
and conditions of service for access services, and must file tariffs covering
its international traffic. State regulatory agencies regulate intrastate
communications, while local authorities control the Company's access to and use
of municipal rights-of-way. The Federal Telecommunications Act preempted all
state and local legal requirements which prohibit or have the effect of
prohibiting any entity from providing any intrastate telecommunications service.
However, many states continue to require telecommunications carriers to obtain a
certificate, license, permit or similar approval before providing services.
Thus, the Company's ability to provide additional intrastate services is
dependent upon its receipt of requisite state regulatory approval. The inability
to obtain the approvals necessary to provide intrastate switched services could
have a material adverse effect on the Company's business, results of operations
and financial condition.
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. Some local interconnection agreements must be filed with state Public
Service Commissions ("PSC") for approval. In the event that negotiations with
the ILECs do not succeed, the Company has a right to seek PSC arbitration of any
unresolved issues.
The Federal Telecommunications Act also 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 regulatory relief 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 information 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 whether additional regulations
should be applied to Internet services and whether Internet service providers
should pay interexchange access charges. Moreover, as discussed hereafter, the
Federal Telecommunications Act and similar State laws create civil and criminal
penalties for the knowing transmission of "indecent" material over the Internet.
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. These and other
19
<PAGE> 24
changes in the regulatory environment relating to the telecommunications or
Internet-related services industry could have an adverse effect on the Company's
Internet-related services business.
The Company cannot predict the effect that the Federal Telecommunications
Act or any future legislation, regulation or regulatory changes may have on its
business.
COMPETITION
The Company operates in a highly competitive environment for all of its
services. An increasing trend toward strategic business alliances in the
telecommunications industry may create significant new competition for ACSI.
- Dedicated and Switched Voice Services. The Company's competitors in this
market are predominantly ILECs, other CLECs and CATVs and may potentially
include microwave carriers, satellite carriers, teleports, public
utilities, wireless telecommunications providers, IXCs, integrated
communications providers and private networks built by large end-users.
With the passage of the Federal Telecommunications Act and the entry of
RBOCs into the long distance market, the Company believes that IXCs may
construct their own local facilities and/or resell local services in
order to compete with the bundled local and long distance services to be
offered by the ILECs as a result of the Federal Telecommunications Act.
Given that a substantial portion of the Company's revenues are billed to
IXCs for services provided for the benefit of their customers, such
action could have a material adverse effect on the Company. See
"Business -- Competition."
Currently, the Company does not have a significant market share in any
market. Most of the Company's actual and potential competitors have
substantially greater financial, technical and marketing resources than
the Company. In particular, ILECs have long-standing relationships with
their customers, have the potential to subsidize access services with
monopoly service revenue and benefit from certain existing federal, state
and local regulations that the Company believes, in certain respects,
favor ILECs over the Company. See "Business -- Regulation." For example,
the Interconnection Decisions issued by the FCC and the Federal
Telecommunications Act, which allow CLECs to interconnect with ILECs'
facilities, have been accompanied by increased pricing flexibility and
partially relaxed regulatory oversight of ILECs. The Company believes
that ILECs are offering and will continue to offer term 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.
Although these problems have been encountered with several ILECs, the
Company has filed formal complaints with the FCC alleging that BellSouth
in particular has imposed reconfiguration charges in an unreasonable and
discriminatory manner and has failed to convert customers to ACSI's local
services on a timely basis.
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
20
<PAGE> 25
capacity, reliability and security of its network infrastructure; ease of
access to and navigation of the Internet; the pricing policies of its
competitors and suppliers; the timing of the introduction of new services
by the Company and its competitors; the Company's ability to support
industry standards; and industry and general economic trends. The
Company's success in this market will depend heavily upon its ability to
provide high quality Internet connectivity and value-added Internet
services at competitive prices. See "Business -- Competition."
- Internet Services. The market for Internet access services is extremely
competitive. There are no substantial barriers to entry, and the Company
expects that competition will intensify in the future. The Company has
entered this market principally through the Cybergate Acquisition and
believes that its ability to compete successfully will depend upon a
number of factors, including: market presence; the capacity, reliability
and security of its network infrastructure; ease of access to and
navigation of the Internet; the pricing policies of its competitors and
suppliers; the timing of introductions of new products and services by
the Company and its competitors; the Company's ability to support
existing and emerging industry standards; and industry and general
economic trends.
The Company's current and prospective competitors include many large
companies that have substantially greater market presence and financial,
technical, marketing and other resources than the Company. The Company
competes or expects to compete directly or indirectly with the following
categories of companies: (1) other international, national and regional
commercial Internet service providers; (2) established on-line services
companies that currently offer or are expected to offer Internet access;
(3) computer hardware and software and other technology companies; (4)
IXCs; (5) RBOCs; (6) CATVs; and (7) nonprofit or educational Internet
service providers. The ability of these competitors or others to bundle
services and products with Internet connectivity services could place the
Company at a significant competitive disadvantage in this services
market.
IMPACT OF TECHNOLOGICAL CHANGE
The telecommunications industry is subject to rapid and significant
technological change that could materially affect the continued use of fiber
optic cable or the electronics utilized in the Company's networks. Future
technological changes, including changes related to the emerging wireline and
wireless transmission and switching technologies and Internet-related services
and technologies, could have a material adverse effect on the Company's
business, results of operations and financial condition.
The market for the Company's telecommunications services is characterized
by rapidly changing technology, evolving industry standards, emerging
competition and frequent new product and service introductions. There can be no
assurance that the Company will successfully identify new service opportunities
and develop and bring new services to market. The Company is also at risk from
fundamental changes in the way telecommunications services are marketed and
delivered. The Company's data communications service strategy assumes that
technology such as 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.
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
21
<PAGE> 26
partner will be reached on terms acceptable to the Company. As of the date
hereof, no acquisitions with related parties are being or will be considered. An
investment, business combination or strategic alliance could constitute a Change
of Control (as defined in the Indenture) requiring the Company to offer to
purchase all outstanding Notes and Existing 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 and Existing Notes tendered or at a time
when the Company is prohibited from purchasing the Notes and the Existing Notes,
an Event of Default (as defined in the Indenture) could occur under the relevant
indenture. The Company expects to actively pursue over the next several months
one or more acquisitions of companies engaged in business similar or related to
the business of the Company. If any such acquisition is consummated, it is
likely to require the issuance by the Company of capital stock in an amount that
could be material. There can be no assurance that the Company will identify any
suitable candidate for acquisition or that any such acquisition will be
consummated. At this time, 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.
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 Federal 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. However, this provision was recently
found to be unconstitutional by the U.S. Supreme Court in American Civil
Liberties Union v. Janet Reno. Nonetheless, many states have adopted or are
considering adopting similar requirements, and the constitutionality of such
state requirements remains unsettled at this time. 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. (907 F. Supp. 1361 (N.D.
Cal. 1995), 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. Another court recently extended the
Netcom holding to operators of electronic bulletin boards (Sega Enterprises Ltd.
v. Maphia, 848 F. Supp. 923 (N.D. Cal. 1996)). 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 services altogether.
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 Company in
consultation with its advisors is considering whether to acquire key person life
insurance coverage although it has no such coverage at this time. The loss of
key management personnel would likely have a material adverse impact on the
Company. See "Management."
CONTROL BY CERTAIN STOCKHOLDERS AND MANAGEMENT
As of June 30, 1997, the Company's directors and executive officers
beneficially owned approximately 6.6% of the outstanding Common Stock. As of
June 30, 1997, the principal stockholders of the Company beneficially owned
approximately 70.5% of the outstanding Common Stock, including 39.6%, 22.1% and
8.8% of the outstanding Common Stock which is beneficially owned by The Huff
Alternative Income Fund, L.P.
22
<PAGE> 27
("Huff"), the designees of which occupy three positions on the Board of
Directors, ING Equity Partners, L.P. I ("ING"), the designees of which occupy
two positions on the Board of Directors and affiliates of First Analysis
Corporation ("FAC"), a designee of which occupies one position on the Board of
Directors, respectively. In addition, at the date hereof Huff is the beneficial
owner of approximately 13% of the 14 3/4% Preferred Stock, which shares have
voting rights in certain circumstances. At the date hereof, ING Baring (U.S.)
Securities, Inc., which may be deemed an affiliate of ING, is the beneficial
owner of 10% of the 14 3/4% Preferred Stock issued in connection with the Unit
Offering. 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 of Common Stock by one or more of the principal
stockholders to third parties could trigger the right of the holders of the
Notes and the Existing Notes to require the Company to repurchase the Notes and
the Existing 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
Indenture) for all Notes and Existing Notes tendered, or at a time when the
Company is prohibited from purchasing the Notes and the Existing Notes, an Event
of Default (as defined in the relevant indenture) could occur under the relevant
indenture. In certain circumstances, in determining whether the approval of
holders of the required principal amount of Notes has been received, the Notes
held by W.R. Huff, on behalf of investment management accounts for which it acts
as investment advisor and over which it has sole dispositive power, shall be
disregarded. See "Management," "Principal Stockholders," "Description of the
Notes" and "Description of Certain Indebtedness -- 2005 Notes and 2006 Notes."
LACK OF PUBLIC MARKET; EXCHANGE OFFER
The New Notes will be new securities for which there is currently no
market. The Old Notes are eligible for trading in the PORTAL Market. However,
ACSI does not intend to apply for listing of the New Notes or the Old Notes on
any securities exchange or to seek approval for quotation through any automated
quotation system. There can be no assurance as to the development or liquidity
of any market for the New Notes or the Old Notes. If an active market does not
develop, the market price and liquidity of the New Notes or the Old Notes will
be adversely affected. Many possible events could adversely affect the
development or liquidity of any market for such securities. Although the Initial
Purchasers have informed the Company that they currently intend to make a market
in the Notes, they are not obligated to do so and any such market-making may be
discontinued at any time without notice. In addition, such market-making
activity may be limited during the Exchange Offer and the pendency of any shelf
registration statement with respect to resale of the Notes.
23
<PAGE> 28
USE OF PROCEEDS
There will be no proceeds to the Company from the Exchange Offer. The net
proceeds to the Company from the Private Placement were approximately $208
million. Approximately $70 million of the proceeds of the Private Placement,
representing funds sufficient to pay the first five interest payments on the
Notes, were placed into the Escrow Account and, pending disbursement, the
Trustee (as defined herein) for the benefit of the holders of the Notes has a
first priority lien on the Escrow Account. Funds may be disbursed from the
Escrow Account only to pay interest on the Notes and, upon certain repurchases
or redemptions of the Notes, to pay principal of and premium, if any, thereon.
See "Description of the New Notes -- Disbursement of Funds -- Escrow Account"
and "Description of New Notes -- Security." The Company intends to use the
balance of the net proceeds from the Private Placement, approximately $138
million, to fund sales, marketing and product development costs incurred in
connection with the Company's growth, to expand voice and data networks and to
fund negative operating cash flow. Pending such uses, the Company has invested
the net proceeds from the Private Placement in Marketable Securities.
The Company has estimated that as of September 30, 1997, 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 $40.0 million and $144.0 million, respectively.
Management anticipates that the Company's current cash resources are sufficient
to fund the Company's continuing negative cash flow and required capital
expenditures into the first quarter of 2000. If during the first quarter of 2000
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 unable to fund its operations.
The Company expects to actively pursue over the next several months one or
more acquisitions of companies engaged in business similar or related to the
business of the Company. If any such acquisition is consummated, it is likely to
require the issuance by the Company of capital stock in an amount that could be
material. There can be no assurance that the Company will identify any suitable
candidate for acquisition or that any such acquisition will be consummated. At
this time, however, the Company has no agreements, understandings or
arrangements for any such acquisitions or alliances. Future acquisitions or
alliances may require additional equity or debt financing, which the Company
will seek to obtain, as required, and may also require that the Company obtain
the consent of the holders of the Notes and the Existing Notes and the holders
of certain other instruments.
24
<PAGE> 29
CAPITALIZATION
The following table sets forth the total cash and cash equivalents and
capitalization of the Company (i) as of June 30, 1997, and (ii) as adjusted to
give effect to the Unit Offering, the Private Placement and the Junior Preferred
Stock Offering and application of the estimated net proceeds therefrom. For this
purpose, the net proceeds of the Unit Offering were approximately $67 million
and the net proceeds from the Private Placement were approximately $138 million,
excluding restricted cash of approximately $70 million. The solicitation fees
were approximately $8,250,000 for the consent related to the Private Placement.
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 in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------------------------
AS ADJUSTED FOR
THE RECENT
ACTUAL OFFERINGS(1)
-------------- ----------------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents......................................... $ 8,499 $ 359,014
Restricted assets invested in Marketable Securities(2)............ -- 70,000
--------- ---------
Total cash and restricted assets.................................. $ 8,499 $ 429,014
========= =========
Long term debt
12 3/4% Senior Discount Notes due 2006.......................... $ 75,423 $ 75,423
13% Senior Discount Notes due 2005.............................. 117,608 117,608
13 3/4% Senior Notes due 2007................................... -- 220,000
Notes payable(3)................................................ 30,722 30,722
Other long-term liabilities..................................... 809 809
--------- ---------
Total long-term debt.................................... 224,562 444,562
Redeemable stock and options...................................... 2,000 196,739(1)
Stockholders' equity (deficit):
Common Stock, par value $0.01 per share, 75,000,000 shares
authorized, 35,926,902 shares issued and outstanding at June
30, 1997(4)(5)............................................... 359 359
Additional paid-in capital(1)................................... 113,565 135,391
Accumulated deficit............................................. (132,149) (132,149)
--------- ---------
Total stockholders' equity (deficit).................... (18,226) 3,600
--------- ---------
Total capitalization.................................... $ 208,336 $ 644,901
========= =========
</TABLE>
- ---------------
(1) As adjusted to give effect to the Recent Offerings as if each of them
occurred on June 30, 1997. The aggregate net proceeds from the sale of the
Units was approximately $67 million, which was allocated to the 14 3/4%
Preferred Stock and the warrants based upon their relative fair values of
$49.1 million for the 14 3/4% Preferred Stock and $21.8 million for the
warrants (also reflects a consulting fee of approximately $370,000 with
respect to the purchase of Units by certain principal stockholders and
certain other parties in the Unit Offering and consent solicitation fees
paid out of the proceeds of the Unit Offering of $4.375 million, which
includes a solicitation agent fee of $500,000). The net proceeds of the
Private Placement were approximately $138 million, excluding restricted cash
of $70 million (also reflects a consulting fee of $500,000 with respect to
the purchase of $50 million of Notes by W.R. Huff on behalf of investment
management accounts for which it acts as investment advisor and over which
it has sole dispositive power and consent solicitation fees paid out of the
proceeds of the Private Placement of $3.875 million). The net proceeds from
the Junior Preferred Stock Offering were approximately $145.7 million.
(2) Represents investments in Marketable Securities sufficient to make the first
five interest payments on the Notes. The Company placed approximately $70
million of the net proceeds realized from the Private Placement,
representing funds sufficient to pay the first five interest payments on the
Notes, into the Escrow Account.
(3) Consists primarily of the AT&T Credit Facility totaling $31.2 million, of
which approximately $31.2 million had been drawn as of June 30, 1997.
(4) Excludes 7,853,741 and 5,312,476 shares reserved for issuance upon exercise
of options and warrants, respectively, outstanding at June 30, 1997, at a
weighted average exercise price of $4.62 and 500,000 shares issuable in
connection with the Company's Employee Stock Purchase Plan (as defined).
Also excludes 251,567 additional shares issuable upon exercise of the 2005
Warrants as a result of the Common Stock Offering. ACSI has also agreed to
issue warrants to purchase up to an aggregate of approximately 1.7 million
shares of Common Stock to MCI. Also excludes the 6,023,850 shares (subject
to an increase of 1,684,875 additional shares in the event the Company fails
to raise net proceeds of at least $50,000,000 through the issue and sale of
its qualified capital stock (other than preferred stock) on or before
December 31, 1998) reserved for issuance upon exercise of the 75,000
warrants issued in connection with the Unit Offering on July 10, 1997. See
"Summary -- Recent Developments."
(5) The aggregate proceeds from the exercise of all warrants and options
outstanding at June 30, 1997, would be approximately $61.2 million.
25
<PAGE> 30
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, for the fiscal period ended December
31, 1996 and for the six months ended June 30, 1997 and 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:
Revenues......................... $ 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>
26
<PAGE> 31
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED JUNE 30, 1997
--------------------------------------
THE
COMPANY
THE PRO
COMPANY CYBERGATE(6) FORMA
-------- ------------ --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................... $ 19,793 $218 $ 20,011
Operating expenses:
Network development and operations......................... 18,026 94 18,120
Selling, general and administrative........................ 29,818 94 29,912
Noncash stock and compensation............................. 824 -- 824
Depreciation and amortization.............................. 9,456 58 9,514
-------- ---- --------
Total operating expenses................................... 58,125 246 58,371
-------- ---- --------
Operating income (loss).................................... (38,333) (28) (38,361)
Non-operating income (expense)............................. (11,343) 3 (11,340)
-------- ---- --------
Income (loss) before minority interest..................... (49,676) (25) (49,701)
Minority interest.......................................... -- -- --
-------- ---- --------
Net income (loss).......................................... (49,676) (25) (49,701)
Preferred stock dividends and accretion.................... (1,095) -- (1,095)
-------- ---- --------
Net income (loss) to common stockholders................... $(50,770) $(25) $(50,795)
======== ==== ========
Net loss per common stockholder............................ $ (2.82) $ (2.81)
======== ========
Weighted average number of common shares outstanding....... 17,994 18,080
</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 Existing Notes.
(5) Excludes adjustment for shares of Common Stock issuable if Cybergate meets
certain performance measures. Inclusion of such shares would be
anti-dilutive.
(6) Reflects Cybergate activity for the period from January 1, 1997, to January
17, 1997 (the date of acquisition).
27
<PAGE> 32
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 Existing Notes in order to
obtain their consent to amend the Existing 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.
28
<PAGE> 33
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 and as of and for
the six months ended June 30, 1996 and June 30, 1997 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 and
the six months ended June 30, 1997 are not necessarily indicative of results for
a twelve-month fiscal year.
<TABLE>
<CAPTION>
FISCAL
FISCAL YEAR SIX MONTHS PERIOD SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, DECEMBER 31, DECEMBER 31, JUNE 30,
-------------------- ------------ ------------ ------------------------
1995 1996 1995 1996 1996 1997
-------- -------- ------------ ------------ --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................... $ 389 $ 3,415 $ 989 $ 6,990 $ 2,426 $ 19,793
Operating expenses.......................... 14,797 24,543 7,966 34,434 16,576 58,125
-------- -------- -------- --------- --------- --------
Income (loss) from operations............... (14,408) (21,128) (6,977) (27,444) (14,150) (38,333)
Interest and other income................... 218 4,410 777 2,757 3,632 1,078
Interest and other expense.................. (170) (10,477) (2,835) (10,390) (7,642) (12,421)
Debt conversion expense..................... (385) -- -- -- -- --
-------- -------- -------- --------- --------- --------
Net income (loss) before minority
interest.................................. (14,746) (27,195) (9,035) (35,077) (18,160) (49,676)
Minority interest(1)........................ 48 413 156 160 257 --
-------- -------- -------- --------- --------- --------
Net income (loss)........................... (14,698) (26,782) (8,879) (34,917) (17,903) (49,676)
Preferred stock dividends and accretion..... (1,071) (3,871) (1,854) (2,003) (2,017) (1,095)
-------- -------- -------- --------- --------- --------
Net income (loss) to common stockholders.... $(15,769) $(30,653) $(10,734) $(36,920) $(19,920) $ (50,770)
======== ======== ======== ========= ========= ========
Net income (loss) per common share.......... $ (3.30) $ (4.96) $ (1.82) $ (5.48) $ (3.03) $ (2.82)
======== ======== ======== ========= ========= ========
Weighted average shares outstanding......... 4,772 6,185 5,901 6,734 6,572 17,994
OTHER DATA:
Deficiency in earnings to cover fixed
charges(2)................................ (15,282) (30,246) (9,798) (37,345) (20,448) (51,207)
EBITDA(3)................................... $ (7,443) $(14,901) $ (4,855) $(21,822) $(10,046) $ (28,052)
Depreciation and amortization............... 498 3,078 763 4,911 2,316 9,456
Capital expenditures........................ 15,303 60,856 17,657 64,574 43,199 73,213
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents................... $ 20,351 $134,116 $ 57,348 $ 78,618 $134,116 $ 8,499
Total assets................................ 37,627 223,600 147,935 230,038 223,600 243,381
Long-term liabilities....................... 4,723 189,072 110,176 216,484 189,072 224,562
Redeemable stock, options and warrants...... 2,931 2,155 2,660 2,000 2,155 2,000
Stockholders' equity (deficit).............. 22,141 8,982 26,308 (27,038) 8,982 (18,226)
</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) For purposes of computing this amount earnings (loss) consists of earnings
(loss) before minority interest and fixed charges. Fixed charges consists of
interest expense (including amortization of debt issuance costs) and
one-third of rent expense which is deemed to be representative of interest
expense.
(3) 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, $1.2 million and
$550,000 in the six months ended December 31, 1995 and fiscal period ended
December 31, 1996, respectively and $1.5 million and $820,000 in the six
months ended June 30, 1996 and 1997, respectively. See Note 6 of "Notes to
Consolidated Financial Statements."
29
<PAGE> 34
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
General
In connection with the sale of the Old Notes pursuant to a Purchase
Agreement dated as of July 18, 1997, between the Company and the Initial
Purchasers, the Initial Purchasers and their assignees became entitled to the
benefits of the Registration Rights Agreement.
Under the Registration Rights Agreement, the Company is obligated to (i)
file the Registration Statement of which this Prospectus is a part for a
registered exchange offer with respect to an issue of new notes identical in all
material respects to the Old Notes within 60 days after July 23, 1997, the date
the Old Notes were issued (the "Issue Date"), and (ii) use its best efforts to
cause the Registration Statement to become effective within 120 days after the
Issue Date. The Exchange Offer being made hereby if commenced and consummated
within such applicable time periods will satisfy those requirements under the
Registration Rights Agreement. See "Description of the Notes -- Exchange Offer;
Registration Rights."
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal (which together constitute the Exchange Offer),
the Company will accept for exchange up to $170,000,000 aggregate principal
amount of Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New
York City time, on the Expiration Date. The Company will issue New Notes in
exchange for an equal principal amount of outstanding Old Notes accepted in the
Exchange Offer.
As of the date of this Prospectus, $220,000,000 aggregate principal amount
of Old Notes was outstanding. This Prospectus, together with the Letter of
Transmittal, is being sent to all registered holders as of , 1997. The
Company's obligation to accept Old Notes for exchange pursuant to the Exchange
Offer is subject to certain conditions as set forth herein under
"-- Conditions."
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Old Notes for the purposes of receiving the New Notes from the Company and
delivering New Notes to such holders.
In the event the Exchange Offer is consummated, subject to certain limited
exceptions, the Company will not be required to register the Old Notes. In such
event, holders of Old Notes seeking liquidity in their investment would have to
rely on exemptions to registration requirements under the U.S. securities laws.
See "Risk Factors -- Consequences of Failure to Exchange."
Expiration Date; Extensions; Amendments
The term "Expiration Date" shall mean , 1997 (20 business days
following the commencement of the Exchange Offer), unless the Company, in its
sole discretion, extends the Exchange Offer, in which case the term "Expiration
Date" shall mean the latest date to which the Exchange Offer is extended. See
"-- Acceptance of Old Notes for Exchange; Delivery of New Notes."
In order to extend the Expiration Date, the Company will notify the
Exchange Agent of any extension by oral or written notice and will mail to the
record holders of Old Notes an announcement thereof, each prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
Expiration Date. Such announcement may state that the Company is extending the
Exchange Offer for a specified period of time.
The Company reserves the right (i) to delay accepting any Old Notes, to
extend the Exchange Offer or to terminate the Exchange Offer and not accept Old
Notes not previously accepted if any of the conditions set forth herein under
"-- Conditions" shall have occurred and shall not have been waived by the
Company, by giving oral or written notice of such delay, extension or
termination to the Exchange Agent, or (ii) to amend the terms of the Exchange
Offer in any manner deemed by it to be advantageous to the holders of the Old
Notes. Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof. If the
Exchange Offer is amended in a manner determined by the Company to constitute a
material change, the Company will promptly disclose such amendment in a manner
reasonably calculated to inform the holders of the Old Notes of such amendment
and the Company will extend the Exchange Offer for a period of five to 10
business days, depending upon the significance of the
30
<PAGE> 35
amendment and the manner of disclosure to holders of the Old Notes, if the
Exchange Offer would otherwise expire during such five to 10 business day
period.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to an appropriate news agency.
NO VOTE OF THE COMPANY'S SECURITY HOLDERS IS REQUIRED UNDER APPLICABLE LAW
TO EFFECT THE EXCHANGE OFFER AND NO SUCH VOTE (OR PROXY THEREFOR) IS BEING
SOUGHT HEREBY.
Holders of Old Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer under the Delaware General Corporation Law,
the state in which the Company is incorporated.
INTEREST ON THE NEW NOTES
The New Notes will bear interest at the rate of 13 3/4% per annum payable
semi-annually in arrears on January 15 and July 15, commencing January 15, 1998.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with any other
required documents, to the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date. In addition, either (i) certificates for such Old
Notes must be received by the Exchange Agent along with the Letter of
Transmittal, (ii) a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Old Notes, if such procedure is available, into the
Exchange Agent's account at The Depository Trust Company (the "Book-Entry
Transfer Facility") pursuant to the procedure for book-entry transfer described
below, must be received by the Exchange Agent prior to the Expiration Date or
(iii) the holder must comply with the guaranteed delivery procedures described
below. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY
IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD
BE SENT TO THE COMPANY. To be tendered effectively, the Old Notes, Letter of
Transmittal and all other required documents must be received by the Exchange
Agent prior to 5:00 p.m., New York City time, on the Expiration Date. Delivery
of all documents must be made to the Exchange Agent at its address set forth
below. Holders may also request their respective brokers, dealers, commercial
banks, trust companies or nominees to effect such tender for such holders.
The tender by a holder of Old Notes will constitute an agreement between
such holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered holder.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder promptly and instruct such
registered holder to tender on his behalf. If such beneficial owner wishes to
tender on his own behalf, such beneficial owner must, prior to completing and
executing the Letter of Transmittal and delivering his Old Notes, either make
appropriate arrangements to register ownership of the Old Notes in such owner's
name or obtain a properly completed bond power from the registered holder. The
transfer of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by any member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.
or a commercial bank or trust company having an office or correspondent in the
U.S. (an
31
<PAGE> 36
"Eligible Institution") unless the Old Notes tendered pursuant thereto are
tendered (i) by a registered holder who has not completed the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions" on the Letter
of Transmittal or (ii) for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantee must be by an
Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by bond powers and a proxy which authorizes such person
to tender the Old Notes on behalf of the registered holder, in each case as the
name of the registered holder or holders appears on the Old Notes.
If the Letter of Transmittal or any Old Notes bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
person should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and withdrawal of the tendered Old Notes will be determined by the
Company in its sole discretion, which determination will be final and binding.
The Company reserves the absolute right to reject any and all Old Notes not
properly tendered or any Old Notes which, if accepted by the Company, would, in
the opinion of counsel for the Company, be unlawful. The Company also reserves
the right to waive any irregularities or conditions of tender as to particular
Old Notes. The Company's interpretation of the terms and conditions of the
Exchange Offer (including the instructions in the Letter of Transmittal) will be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of Old Notes must be cured within such time as the
Company shall determine. None of the Company, the Exchange Agent or any other
person shall be under any duty to give notification of defects or irregularities
with respect to tenders of Old Notes, nor shall any of them incur any liability
for failure to give such notification. Tenders of Old Notes will not be deemed
to have been made until such irregularities have been cured or waived. Any Old
Notes received by the Exchange Agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned without cost to such holder by the Exchange Agent to the tendering
holders of Old Notes, unless otherwise provided in the Letter of Transmittal, as
soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion, subject
to the provisions of the Indenture, to (i) purchase or make offers for any Old
Notes that remain outstanding subsequent to the Expiration Date or, as set forth
under "-- Conditions," to terminate the Exchange Offer in accordance with the
terms of the Registration Rights Agreement and (ii) to the extent permitted by
applicable law, purchase Old Notes in the open market, in privately negotiated
transactions or otherwise. The terms of any such purchases or offers could
differ from the terms of the Exchange Offer.
By tendering, each holder will represent to the Company that: (i) it is not
an affiliate of the Company (as defined under Rule 405 of the Securities Act);
(ii) any New Notes to be received by it were acquired in the ordinary course of
its business; and (iii) at the time of commencement of the Exchange Offer, it
was not engaged in, and did not intend to engage in, a distribution of such New
Notes and had no arrangement or understanding with any person to participate in
the distribution (within the meaning of the Securities Act) of the New Notes. If
a holder of Old Notes is an affiliate of the Company, and is engaged in or
intends to engage in a distribution of the New Notes or has any arrangement or
understanding with respect to the distribution of the New Notes to be acquired
pursuant to the Exchange Offer, such holder could not rely on the applicable
interpretations of the staff of the SEC and must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any secondary resale transaction. Each broker or dealer that receives New Notes
for its own account in exchange for Old Notes, where such Old Notes were
acquired by such broker or dealer as a result of market-making activities, or
other trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See "Plan of Distribution."
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly
32
<PAGE> 37
after acceptance of the Old Notes. See "-- Conditions" below. For purposes of
the Exchange Offer, the Company shall be deemed to have accepted validly
tendered Old Notes for exchange when, as and if the Company has given oral or
written notice thereof to the Exchange Agent.
For each Old Note accepted for exchange, the holder of such Old Notes will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. If (i) neither the Registration Statement of which this Prospectus is
a part (the "Exchange Offer Registration Statement") relating to the Exchange
Offer nor a shelf registration statement (the "Shelf Registration Statement")
with respect to the Old Notes has been declared effective by November 20, 1997,
or (ii) notwithstanding that the Company has consummated or will consummate the
Exchange Offer, the Company is required to file a Shelf Registration Statement
and such Shelf Registration Statement is not declared effective by November 20,
1997, then commencing on November 21, 1997, additional interest shall be paid on
the Old Notes at a rate per annum equal to 0.5% of the principal amount of the
Old Notes (such additional 0.5% being herein called "Additional Interest"), such
Additional Interest being payable semi-annually in arrears each January 15 and
July 15, commencing January 15, 1998. The aggregate amount of Additional
Interest payable will in no event exceed 1.5% per annum of the principal amount.
Upon the effectiveness of the Exchange Offer Registration Statement or a Shelf
Registration Statement, Additional Interest payable on the Old Notes from the
date of such effectiveness will cease to accrue and all accrued and unpaid
interest as of the occurrence of such effectiveness shall be paid to the holders
of the Old Notes exchanged for New Notes.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Old Notes are not
accepted for any reason set forth in the terms and conditions of the Exchange
Offer or if Old Notes are submitted for a greater principal amount than the
holder desires to exchange, such unaccepted or nonexchanged Old Notes will be
returned without expense to the tendering holder thereof (or, in the case of Old
Notes tendered by book-entry transfer procedures described below, such
nonexchanged Old Notes will be credited to an account maintained with such
Book-Entry Transfer Facility) as promptly as practicable after the expiration or
termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof
with any required signature guarantees and any other required documents must, in
any case, be transmitted to and received by the Exchange Agent at one of the
addresses set forth below under "-- Exchange Agent" on or prior to the
Expiration Date or the guaranteed delivery procedures described below must be
complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes,
and the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedures for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent received from such Eligible Institution a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form provided by the Company (by facsimile
transmission, mail or hand delivery), setting forth the name and address of the
holder of Old Notes and the amount of Old Notes tendered, stating that the
tender is being made thereby and guaranteeing that within five New York Stock
Exchange ("NYSE") trading days after the date of execution of the Notice of
Guaranteed Delivery, the certificates for all physically tendered Old Notes, in
proper form for transfer, or a Book-Entry Confirmation, as
33
<PAGE> 38
the case may be, and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent and (iii)
the certificates for all physically tendered Old Notes, in proper form for
transfer, or a Book-Entry Confirmation, as the case may be, and all other
documents required by the Letter of Transmittal are received by the Exchange
Agent within five NYSE trading days after the date of execution of the Notice of
Guaranteed Delivery.
WITHDRAWAL OF TENDERS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Old Notes to be withdrawn, identify the Old Notes to
be withdrawn (including the principal amount of such Old Notes) and (where
certificates for Old Notes have been transmitted) specify the name in which such
Old Notes are registered, if different from that of the withdrawing holder. If
certificates for Old Notes have been delivered or otherwise identified to the
Exchange Agent, then, prior to the release of such certificates, the withdrawing
holder must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless such holder is an Eligible Institution. If Old Notes
have been tendered pursuant to the procedure for book-entry transfer described
above, any notice of withdrawal must specify the name and number of the account
at the Book-Entry Transfer Facility to be credited with the withdrawn Old Notes
and otherwise comply with the procedures of such facility. All questions as to
the validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company, whose determination shall be final and
binding on all parties. Any Old Notes so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the Exchange Offer. Any Old
Notes which have been tendered for exchange but which are not exchanged for any
reason will be returned to the holder thereof without cost to such holder (or,
in the case of Old Notes tendered by book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry
transfer procedures described above, such Old Notes will be credited to an
account maintained with such Book-Entry Transfer Facility for the Old Notes) as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following one
of the procedures described under "-- Procedures for Tendering" above at any
time on or prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or to issue New Notes in exchange for, any
Old Notes and may terminate or amend the Exchange Offer as provided herein
before the acceptance of such Old Notes, if because of any change in law, or
applicable interpretations thereof by the Commission, the Company determines
that it is not permitted to effect the Exchange Offer, and the Company has no
obligation to, and will not knowingly, accept tenders of Old Notes from
affiliates of the Company (within the meaning of Rule 405 under the Securities
Act) or from any other holder or holders who are not eligible to participate in
the Exchange Offer under applicable law or interpretations thereof by the
Commission, or if the New Notes to be received by such holder or holders of Old
Notes in the Exchange Offer, upon receipt, will not be tradeable by such holder
without restriction under the Securities Act and the Exchange Act and without
material restrictions under the "blue sky" or securities laws of substantially
all of the states.
34
<PAGE> 39
EXCHANGE AGENT
The Chase Manhattan Bank has been appointed as Exchange Agent for the
Exchange Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
<TABLE>
<S> <C>
By Mail/Overnight Delivery: By Hand:
The Chase Manhattan Bank The Chase Manhattan Bank
450 West 33rd Street Corporate Trust -- Securities Window
15th Floor 55 Water Street -- Room 234
New York, New York 10001-2697 North Building
New York, New York 10041
</TABLE>
Facsimile Transmission:
(212) 638-7380
(212) 638-7381
Confirm by Telephone:
Sharon Lewis: (212) 638-0454
Carlos Esteves: (212) 638-0828
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail; however, additional solicitations may be
made by telegraph, telephone, telecopy or in person by officers and regular
employees of the Company.
The Company will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
the Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith. The Company may also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of the Prospectus and related documents to the beneficial
owners of the Old Notes, and in handling or forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Company, including fees and expenses of the Exchange Agent and
Trustee (as hereinafter defined) and accounting, legal, printing and related
fees and expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be registered or issued
in the name of, any person other than the registered holder of the Old Notes
tendered, or if tendered Old Notes are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The New Notes will be recorded in the Company's accounting records at the
same carrying value as the Old Notes as reflected in the Company's accounting
records on the date of the exchange. Accordingly, no gain or loss for accounting
purposes will be recognized upon the consummation of the Exchange Offer. The
expenses of the Exchange Offer will be amortized by the Company over the term of
the New Notes in accordance with generally accepted accounting principles.
35
<PAGE> 40
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. Holders of Old Notes are cautioned that such
statements are only predictions and that actual events or results may differ
materially. In evaluating such statements, holders of Old Notes 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 or incorporated by reference in this Prospectus.
OVERVIEW
ACSI is a provider of integrated local voice and data communications
services to commercial customers primarily in mid-sized metropolitan markets in
the southern United States. The Company is a rapidly growing CLEC, supplying
businesses with advanced telecommunications services on its digital SONET-based
fiber optic local networks and through resale of incumbent local exchange
carrier services. To date, the Company has derived the majority 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, the Company introduced local
switched voice services in two of its markets and began offering local switched
voice services in two additional markets using its own facilities before March
31, 1997. The Company's local switched services include: local exchange services
(dial tone), advanced ISDN and enhanced voice services. In late 1996, the
Company also deployed ACSINet, a coast-to-coast, leased broadband data
communications network through which the Company offers frame relay, ATM and
Internet access services to both ISPs and local businesses. As of June 30, 1997,
the Company had ACSINet data POPs in 44 markets, including all but one of the
markets in which the Company has operational local networks. Additionally,
primarily 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.
As of June 30, 1997, the Company had 31 operational local networks. In an
attempt to improve financial performance and conserve capital, the Company is
reassessing the optimum number of local networks needed to achieve its
objectives.
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. As of June 30, 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. The Company has long-term operating leases
for 9 voice and 40 data switches totaling $20.8 million at interest rates
ranging from 7% to 11% over terms ranging from 3 to 7 years, with annual
payments increasing over the term of each lease, and is currently negotiating
long term operating leases for an additional 8 voice and 20 data switches
totalling $19 million with interest rates and payment structures similar to the
existing operating leases.
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
36
<PAGE> 41
user at rates below those charged by ILECs for similar services. The Company
began generating revenues from its local switched voice services beginning in
the three months ending March 31, 1997.
In December 1996, the Company began providing high-speed data services to
ISPs and corporate, institutional and government customers. ACSI's data services
revenues are generated from either flat rate or usage-based recurring charges
based on network access speed and the data throughput rate 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 throughout the markets it serves.
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 DS-3 bandwidth, enabling the transparent migration of longhaul circuits
to DS-3 capacity as needed. Ultimately, the platform technology is capable of
upgrading the backbone to higher bandwidths 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.
CAPITAL EXPENDITURES; OPERATING CASH FLOW
As of June 30, 1997, the Company was operating 31 digital fiber optic
networks. The costs associated with the initial construction and operation of a
network may vary greatly, primarily due to market variations in geographic and
demographic characteristics, and the types of construction technologies which
can be used to deploy the network. Management estimates that construction of the
initial one-to-three mile fiber optic backbone and installation of related
network transmission equipment for dedicated services for each market will
generally cost between $3.5 million and $6.0 million depending on the size of
the market served. Including planned expansion routes, total capital
expenditures per network are estimated to average $6.0 million. In addition to
capital expenditure requirements, the Company incurs sales and marketing
(including sales commissions) and operating expenses and other expenses such as
property taxes and, in certain markets, franchise fees. Prior to the completion
of network construction, certain of these expenses, to the extent they are
related to pre-service construction, are capitalized. These additional
capitalized expenses, estimated by management to be between approximately
$500,000 and $1.0 million per network, are amortized over the
37
<PAGE> 42
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.
As the Company develops, introduces and rolls out its high-speed data,
enhanced voice messaging and local switched services in each of its target
markets, additional capital expenditures and net operating costs will be
incurred. The amount of these costs will vary, based on the number of customers
served and the actual services provided to the customers.
Although as of June 30, 1997, the Company was generating revenues from 31
of its fiber optic networks, on a consolidated basis, it is still incurring
negative cash flows due, in part, to the funding requirements for the networks
the Company has under construction or development and, to the roll-out of its
new data and switched voice services. The Company expects it will continue to
incur a negative cash flow for at least two years. The Company anticipates that
without an infusion of additional cash it will exhaust its cash resources during
the first quarter of 2000.
RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1997 COMPARED TO THREE AND SIX MONTH
PERIODS ENDED JUNE 30, 1996.
Revenues
The Company recorded revenues of $11.6 million for the three month period
ended June 30, 1997 and revenues of $19.8 million for the six month period ended
June 30, 1997. This compares to revenues of $1.6 million for the three month
period ended June 30, 1996 and revenues of $2.4 million for the six month period
ended June 30, 1996. Although substantially all of the revenues in the 1996
periods were derived from the provision of dedicated services, revenues in the
1997 periods were derived primarily from significant growth in dedicated
services, plus the addition of data services, Internet services and local
switched voice services.
OTHER NETWORK INFORMATION IS AS FOLLOWS:
<TABLE>
<CAPTION>
NETWORK NETWORK VOICE
ROUTE FIBER BUILDINGS GRADE FULL TIME
AS OF THE PERIOD ENDED: MILES MILES CONNECTED EQUIVALENTS EMPLOYEES
-------------------------------- ------- ------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
March 31, 1996.................. 200 9,466 133 125,208 142
June 30, 1996................... 386 28,476 216 137,431 199
March 31, 1997.................. 908 75,867 858 554,883 502
June 30, 1997................... 957 82,693 1,083 886,375 559
</TABLE>
The terms "Voice Grade Equivalents ('VGEs')" or "Voice Grade Equivalent
Circuits" are commonly used measures of telephone service equivalent to one
telephone line (64 kilobits of bandwidth) actually billed to a customer.
Total Operating Expenses
Network development and operating expenses for the three month period ended
June 30, 1997 increased to $9.4 million from $0.4 million in the three month
period ended June 30, 1996, reflecting significant increases in personnel,
network development and non-payroll operating expenses. Related personnel costs
increased to $3.3 million in the quarter ended June 30, 1997, from approximately
$0.3 million in the quarter ended June 30, 1996. Other operating expenses
related to the development of prospective new markets, which include expenses
such as contract labor and legal expenses, travel expenses, rent, utilities,
charges and taxes increased to $6.0 million in the quarter ended June 30, 1997
from approximately $0.1 million in the quarter ended June 30, 1996.
For the six month period ended June 30, 1997, total network development and
operating expenses increased to $18.0 million from $2.3 million in the six month
period ended June 30, 1996, reflecting significant increases in personnel,
network development and non-payroll operating expenses. Related personnel costs
increased to $6.5 million in the six month period ended June 30, 1997, from
approximately $3.0 million in the same period in 1996. Other operating expenses,
which include expenses such as contract labor and legal
38
<PAGE> 43
expenses, travel expenses, rent, utilities, charges and taxes increased to $11.5
million in the six month period ended June 30, 1997 from approximately ($0.7)
million in the six month period ended June 30, 1996.
In the three month period ended June 30, 1997, selling, general and
administrative expenses increased to $15.9 million from $7.7 million in the
three month period ended June 30, 1996. Related personnel costs increased to
$6.7 million in the quarter ended June 30, 1997 from $1.8 million in the quarter
ended June 30, 1996, and corresponding operating costs increased to $9.2 million
in the quarter ended June 30, 1997 from $5.9 million in the quarter ended June
30, 1996. This increase reflected costs associated with the Company's efforts to
expand significantly its national and local city sales and its 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.
In the six month period ended June 30, 1997, selling, general and
administrative expenses increased to $29.8 million from $10.4 million in the six
month period ended June 30, 1996. Related personnel costs increased to $12.1
million in the six month period ended June 30, 1997 from $1.7 million in the six
month period ended June 30, 1996, and corresponding operating costs increased to
$17.7 million in the six month period ended June 30, 1997 from $8.7 million in
the six month period ended June 30, 1996.
Depreciation and amortization expenses increased to $5.3 million in the
three month period ended June 30, 1997 from $1.7 million in the three month
period ended June 30, 1996 and increased to $9.5 million in the six month period
ended June 30, 1997 from $2.3 million in the six month period ended June 30,
1996. As of June 30, 1997, the Company increased its capital assets to $219.9
million, from $144.4 million at December 31, 1996 and from $80.1 million as of
June 30, 1996. Non-cash stock compensation expense increased to $0.6 million for
the quarter ended June 30, 1997 from ($0.5 million) for the quarter ended June
30, 1996. For the six month period ended June 30, 1997, non-cash compensation
expense decreased to $0.8 million from $1.5 million for the same period in 1996.
This expense reflects the Company's accrual of non-cash costs for options and
warrants granted to key executives, employees and others arising from the
difference between the exercise price and the valuation prices used by the
Company to record such costs and from the vesting of those options and warrants.
Certain of these options had put rights and other factors that required variable
plan accounting in both 1996 and 1995 but, at the end of fiscal 1995, the
Company renegotiated contracts with certain of its officers, establishing a
limit of $2,500,000 on the Company's "put right" obligations with respect to
those contracts. During the fiscal period ended December 31, 1996, the limit was
further reduced to $2,000,000.
Interest and Other Expenses
Interest and other income decreased to $0.2 million and $1.1 million for
the three and six month periods ended June 30, 1997, respectively from $3.0
million and $3.6 million in the three and six month periods ended June 30, 1996,
respectively. Interest and other expense increased to $6.3 million and $12.4
million in the quarter and six month period ended June 30, 1997, respectively
from $4.2 million and $7.6 million in the quarter and six month period ended
June 30, 1996, respectively. The decrease in interest and other income reflects
the decrease in available funds from the Company's sale of its 9% Series B
Preferred Stock, the 2005 Notes and the 2006 Notes. 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 began
in the first quarter 1997. Payments of interest on the 2005 Notes will not begin
until May 2001 and payments of interest on the 2006 Notes will not begin until
October 2001.
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.
39
<PAGE> 44
Other network information is as follows:
<TABLE>
<CAPTION>
NETWORKS VOICE
IN ROUTE FIBER BUILDINGS GRADE FULL TIME
AS OF THE PERIOD 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 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 $549,645 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,
40
<PAGE> 45
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.
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 accounted 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
41
<PAGE> 46
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 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 2005 Warrants from which the Company received approximately
$96.1 million in net proceeds. The 2005 Notes will accrue 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 accrue 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. On April 15, 1997, the Company completed the Common
Stock Offering. The Company completed the sale of an additional 660,000 shares
on May 14, 1997 upon exercise of the underwriters' over-allotment option. The
Company received net proceeds of approximately $40.0 million from the sale of
these 8,660,000 shares. On July 10, 1997, the Company completed the Unit
Offering from which the Company received net proceeds of approximately $67
million. The Company used a portion of these funds to pay ordinary course trade
accounts payable that were more than 60 days overdue, thereby curing an Event of
Default under each of the Existing Indentures and intends to continue to use the
remaining funds towards the expansion and construction of local fiber optic
networks, the further expansion and introduction of services and to fund
negative operating cash flow.
In addition, the Company in the past has considered and expects to continue
to consider potential acquisitions or other strategic arrangements that may fit
the Company's strategic plan. Although the Company has had discussions
concerning such potential acquisitions or arrangements, to date, no agreements
have been reached with regard to any particular transaction. Any such
acquisitions or strategic arrangements that the Company might consider are
likely to require additional equity or debt financing, which the Company will
seek to obtain as required. 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 at all, will be available on a
timely basis or on terms that are acceptable to the Company.
Management anticipates that the Company's current cash resources are
sufficient to fund the Company's continuing negative cash flow and required
capital expenditures into the first quarter of 2000. Without an infusion of
additional cash, the Company will exhaust its cash resources during the first
quarter of 2000. 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, enter into
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
42
<PAGE> 47
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 was converted into 7,466,560 shares of Common Stock simultaneous with the
completion of the Common Stock 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 was converted into an aggregate of 9,910,704 shares of
Common Stock simultaneous with the completion of the April Offering.
In July, 1997 the Company issued the 14 3/4% Preferred Stock. Dividends on
the Preferred Stock accrue from the date of issuance, are cumulative and are
payable quarterly in arrears commencing September 30, 1997, at a rate per annum
of 14 3/4% of the liquidation preference per share. Dividends on the 14 3/4%
Preferred Stock will be paid, at the Company's option, either in cash or by the
issuance of additional shares of 14 3/4% Preferred Stock; provided, however,
that after June 30, 2002, to the extent and for so long as the Company is not
precluded from paying cash dividends on the 14 3/4% Preferred Stock by the terms
of any then outstanding indebtedness or any other agreement or instrument to
which the Company is then subject, the Company shall pay dividends on the
14 3/4% Preferred Stock in cash.
In October 1997, the Company issued the 12 3/4% Preferred Stock. Dividends
on the 12 3/4% Preferred Stock accrue from the date of issuance, are cumulative
and are payable quarterly in arrears commencing January 15, 1998, at a rate per
annum of 12 3/4% of the liquidation preference per share. Dividends on the
12 3/4% Preferred Stock will be paid, at the Company's option, either in cash or
by the issuance of additional shares of 12 3/4% Preferred Stock; provided,
however, that after October 15, 2002, to the extent and for so long as the
Company is not precluded from paying cash dividends on the 12 3/4% Preferred
Stock by the terms of any agreement or instrument governing any of its then
outstanding indebtedness, the Company shall pay dividends on the 12 3/4%
Preferred Stock in cash.
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 June 30, 1997, an
aggregate of $31.2 million had been borrowed under these agreements. Principal
amounts payable on the AT&T Credit Facility during 1997 are approximately
$872,000.
The Company has entered into negotiations with AT&T Capital Corporation to
roll-up the five existing loan agreements comprising the AT&T Credit Facility
into one loan agreement to be entered into with the Company, and to be secured
by the existing assets of the Company (including the stock, but not the assets,
of certain of the Company's subsidiaries) (the "New AT&T Facility"). The Company
expects the New AT&T
43
<PAGE> 48
Facility to otherwise be on terms substantially similar to those of the existing
AT&T Credit Facility. The maximum aggregate amount of credit available under the
proposed New AT&T Facility will not exceed $35 million, which is the maximum
amount of credit the Company is allowed to borrow in its Secured Credit Facility
(as defined in the Existing Indentures and in the Indenture (as defined herein)
with respect to the Notes). AT&T Credit Corporation has issued to each of the
Company's Subsidiaries that are parties to the AT&T Credit Facility a waiver
through November 30, 1997, of compliance by such subsidiaries with certain
covenants contained therein. Such covenants are not expected to be included in
the New AT&T Facility. The Company has agreed with the Initial Purchaser that,
after the date of expiration of such waiver (as the same may be extended), upon
the receipt of a demand for payment under the AT&T Credit Facility, the Company
will repay the AT&T Credit Facility in full and, following the consummation of
this Offering, will maintain cash and cash equivalents in an aggregate amount
sufficient for such purpose, unless, on or prior to such demand for payment, the
New AT&T Facility shall have become effective and the Company shall be in
compliance with all covenants contained therein.
On June 11, 1997, the Company notified the trustee under each of the
Existing Indentures that, as of June 10, 1997, it had approximately $13.0
million in the aggregate of ordinary course trade accounts payable that were
more than 60 days overdue. As of June 30, 1997, the Company had approximately
$17.4 million in the aggregate of ordinary course trade accounts payable that
were more than 60 days overdue. These overdue amounts constituted Indebtedness
of the Company, as that term is defined in each of the Existing Indentures. The
incurrence by the Company of such Indebtedness is not permitted under each of
the Indentures and, therefore, constituted an Event of Default (as defined in
the Existing Indentures) under each Existing Indenture. The Company used a
portion of the proceeds of the Unit Offering to pay in full all ordinary course
trade accounts payable that were more than 60 days overdue to cure such Event of
Default.
EFFECTS OF NEW ACCOUNTING STANDARDS
During early 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, Accounting for EPS, which will become effective December 15, 1997,
and will thereafter require the Company to disclose basic earnings (loss) per
share in addition to the common stock equivalent disclosure information already
required. Early adoption of SFAS No. 128 is not permitted.
While the Company does not know precisely the impact of adopting SFAS No.
128, the Company does not expect that the adoption of SFAS No. 128 will have a
material effect on the Company's consolidated financial statements.
44
<PAGE> 49
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
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.
45
<PAGE> 50
- 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 a full service alternative to the ILEC
for business, government and institutional end-users in its markets by offering
superior products with excellent customer service at competitive prices. In
order to achieve this objective, the Company seeks to:
- Leverage Existing Infrastructure. The Company believes that its
integrated telecommunications networks, both its local fiber networks and
ACSINet, are capable of providing a broad range of voice and data
communications services to its customers. The Company is focusing its
efforts on improving penetration in the markets it already serves by
continuing to offer additional services. The Company believes that
providing switched local voice services permits it to increase the
traffic and revenue associated with its networks. As a further example,
the Company has filed for requisite state and federal authority to offer
calling-card, teleconferencing and other long distance services. In
markets in which it does have operational networks, the Company's
decision to pursue a resale strategy would position the Company as a
full-service provider, capable of providing its customers with a
one-stop-shopping alternative to the ILEC. In markets in which it does
not currently have an operational network, this resale strategy positions
the Company to eventually construct networks in those markets, which
networks would benefit immediately from an existing customer base.
- Develop Direct and Indirect Sales Channels to Commercial End-Users. The
Company has divided its sales and marketing efforts into three different
channels: direct sales to end-users, sales to IXCs and ISPs and sales of
private-label services through alternative distribution channels.
Direct Sales. The Company's local sales force continues to focus on the
commercial end-users in each of the markets it serves. The Company
believes that its 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's
major account sales force targets large national accounts. As of June 30,
1997, the Company's sales force in this area was made up of 153 sales
people, which represents an increase of 98 sales people since December
31, 1996, and is expected to increase to 210 sales people by the end of
1997.
Sales to IXCs and ISPs. The Company sells dedicated services to long
distance carriers and ISPs who use the Company's products and services to
provide local access for their own products. For example, the Company
recently entered into an agreement with MCImetro in which, subject to
certain conditions, MCI has agreed to name ACSI as its preferred local
provider for dedicated and transport services in 21 ACSI markets for at
least a five-year period. See "Recent Developments".
46
<PAGE> 51
Sales Through Alternative Distribution Channels. As of September 30,
1997, the Company had executed over 63 sales agency agreements and is
actively recruiting additional telecommunications sales agents to market
the Company's services. In addition, the Company intends to expand
distribution of its services by contracting with IXCs, utilities, CATVs,
RBOCs, other 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 the support of sales through these and other
alternative distribution channels.
- Market the Company's Services Under the ACSI Brand Name. The Company is
establishing the ACSI brand name by marketing and packaging its broad
array of communications services directly to end-users. In markets in
which it has local networks established, both switched services and data
services are marketed under the ACSI brand name; in markets in which the
Company has no network installed, it resells local switched services
under the ACSI brand name. In both types of markets, the Company also
pursues opportunities to bundle its services together to strengthen the
ACSI identity as a full-service provider of telecommunications services.
- Provide Superior Customer Service. The Company is developing and
implementing an integrated customer care strategy that is intended to
provide a heightened level of responsive customer service across its full
range of existing and planned products and services. This strategy
comprises infrastructure, training, performance monitoring and
image/brand recognition and will serve to leverage the Company's
operational support systems, other information/financial systems and
customer care organizations. The Company has made significant capital
investments in its integrated network management platform which monitors
and manages all voice and data network elements. The Company expects to
have completed customer care and billing systems by the end of 1998,
which are intended to improve the Company's provision of integrated
customer service on a cost efficient basis. These and other quality
management and improvement programs, when implemented, are expected to
enable the Company to differentiate itself in the marketplace by
providing a level of customer care and customer service that is of a
higher quality than that which is available in today's market.
- Expand Resale of Exchange Local Voice Services. Management believes that
the Company can successfully enter new markets with lower capital
investment by acting as a reseller of either local switched voice or data
services. This strategy is intended to allow the Company to build brand
name awareness and develop a customer base without incurring the initial
capital costs typically incurred by facilities-based entrants. This
strategy also enables the Company to make capital decisions based on
where its customers are most highly concentrated. Once the Company has
established a customer base, the Company plans to invest in extending its
network infrastructure in those markets that it already serves.
- Accelerate Financial Return on Incremental Expenditures. The Company is
pursuing opportunities that accelerate the return on the Company's
invested capital. The Company believes that it will achieve an earlier
return on its investment by focusing on new customer application in
existing markets rather than continuing to increase the number of new
networks built. For this reason, the Company has modified its earlier
goal of constructing 50 local networks by the end of 1998, is now
evaluating additional markets in which it may construct local networks
and is establishing a presence in additional markets through resale of
switched services and data POPs. The Company plans to redeploy into
customer applications in existing markets the capital that was scheduled
to be used to develop those additional networks. While management
continues to believe in the long-term return on capital afforded by the
constructed networks, it believes that the investment in customer
applications will have a more immediate return. As part of this strategy,
the Company has also implemented a shift in its incentive-based
compensation for a number of its key executives, toward revenue and
EBITDA and away from new network development and growth.
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
47
<PAGE> 52
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 an 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 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 September 30, 1997, the Company is
offering local switched voice services using its own facilities in Columbus,
Georgia; Montgomery, Alabama; Birmingham, Alabama; Ft. Worth, Texas; Louisville,
Kentucky; Little Rock, Arkansas; Albuquerque, New Mexico; Tucson, Arizona; and
New Orleans, Louisiana. In April 1997, the Company began providing local
switched services on a resale basis in 15 markets. As of September 30, 1997, the
Company is offering local switched services on a resale basis in 32 markets 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. As an adjunct
to its local switched services, the Company anticipates providing calling card
and other interLATA services by the fourth quarter of 1997.
The Company's local switched voice services include telephone exchange
service, including optional enhanced services such as call waiting, caller ID
and three-way conference calling; switching traffic between ACSI's switch and a
business customer's PBX and routing local, intraLATA and interLATA phone calls
according to the customers' specific requirements; providing local dial tone
services with functionality such as free internal communications, call
forwarding, call transfer, conference call and speed dialing; ISDN data
services; and origination and termination of long distance traffic between a
customer premise and interexchange carrier via shared trunks utilizing the
Company's local switch.
During the first quarter of 1997, 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.
48
<PAGE> 53
High-Speed Data Services. ACSINet, the Company's coast-to-coast, leased
broadband data communications network, supports the following Company services:
- ACSINet Internet Access Service. The Company provides public Internet
connectivity and IP transport for the business and reseller communities.
This service is targeted to local and regional ISPs and corporate
Internet users requiring dedicated access. The service operates over the
ACSINet DS3 (45 Mbps) backbone, a fully-meshed, coast-to-coast network
with Internet connectivity at multiple network access points (NAPs) to
ensure continuous availability to the Internet.
- Managed Services. These services include design, installation,
maintenance, hardware (such as switches, routers and modems),
configuration management (such as maintaining consistent versions of the
router software and deploying consistent configurations) and overall
network management for a customer's network. The Company's managed
services are designed to eliminate many of the timing, coordination and
inter-operability issues that arise in installations requiring multiple
vendors.
- Frame Relay. Frame relay service is provided to end-users with
LAN-to-LAN and legacy networks, allowing them to share virtual bandwidth
connectivity at high speed. Frame relay services offer low cost data
transmission with generally minimal delay, few errors and high speed
performance. As users' requirements expand into multimedia applications,
which require higher bandwidth, frame relay offers a natural migration
path to ATM.
- ATM. The Company's ATM services include native speed LAN connectivity,
diagnostic imaging, video-conferencing 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 consul-
49
<PAGE> 54
tants, 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 -- 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 indefeasible rights of use),
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
50
<PAGE> 55
network facilities from its fiber optic backbone to provide on-network
service to its customers. In some instances, the Company will design and
construct some or substantially all of its routes outside the central
business district concurrently with the construction of the downtown
network, increasing the speed of overall network construction and, in the
Company's opinion, creating a competitive advantage over other CLECs that
may have entered or are seeking to enter the market. To the extent
possible, the Company engages the third party right-of-way provider to
install ACSI's cable in or on the third party's facilities, usually at a
lower cost and with greater speed than that obtained by using outside
contractors.
The Company's network management center in Annapolis Junction, Maryland
monitors all of the Company's networks from one central location.
Centralized electronic monitoring and control of the Company's networks
allows the Company to avoid duplication of this function in each city.
This consolidated operations center also helps to reduce the Company's
per customer monitoring and customer service costs, such that they are
lower than would be available if monitored on a single-city basis. The
Company also plans to use this facility to monitor the performance of
data and switched voice services. During 1996, the Company performed
various network management services for other telecommunications service
providers and plans to continue to offer these services on a limited
basis.
A critical element of the Company's local network development plan is
integrating the Company's local networks with ACSINet, its coast-to-coast leased
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.
The Company is implementing local switched services through a combination
of facilities-based services and resale of ILEC services. As of September 30,
1997, the Company has installed central office switching facilities in Columbus,
Georgia; Montgomery, Alabama; Birmingham, Alabama; Ft. Worth, Texas; Louisville,
Kentucky; Little Rock, Arkansas; Albuquerque, New Mexico; Tucson, Arizona; and
New Orleans, Louisiana. The Company expects to have switches installed in a
total of 16 markets by December 1997. Toward this end, the Company had long-term
lease commitments for nine initial switches as of June 30, 1997. As of September
30, 1997, the Company is offering local switched services on a resale basis in
32 markets 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 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
51
<PAGE> 56
deployed fiber optic networks in many of the Company's target markets. The
Company currently prices its services at a modest discount compared to the
prices of the ILEC while providing what the Company believes is a higher level
of customer service. The Company's fiber optic networks will provide both
diverse access routing and redundant electronics, design features not widely
deployed by the ILEC's networks (which were originally designed in tree and
branch or star configurations).
Other potential competitors of the Company include CATVs, public utilities,
IXCs, wireless telecommunications providers, microwave carriers, satellite
carriers, teleports, private networks built by large end-users, and other CLECs.
With the passage of the Federal Telecommunications Act and the entry of RBOCs
into the long distance market, the Company believes that IXCs 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, it is believed 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 believed 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
52
<PAGE> 57
most of the original RBOCs, WorldCom, Inc., AT&T, MCI, Sprint and WilTel, Inc. A
number of other data communications providers, CLECs and facilities-based CATVs
have announced their intentions to offer ATM services in the future.
A number of equipment vendors, systems integrators and Internet access and
service providers offer components of managed services. The Company believes
that it will have a competitive advantage over those managed services providers
that do not have local loop facilities.
Local Switched Voice Services. In all of the markets where the Company is
currently operating or plans to operate, the ILEC currently is a de facto
monopoly provider of local switched voice services, including enhanced voice
services. The Company expects that the Federal Telecommunications Act will
enable CLECs, CATVs, electric utilities, cellular and wireless providers, and
others to offer local switched voice services in competition with the ILECs in
the Company's target markets. The Company believes that its strategy to leverage
its basic network infrastructure into higher margin service offerings, migrating
to local switched voice services, will allow it to procure a profitable share of
the market. The Company's ability to cross-market services will create
opportunities to increase margins by migrating customers from off-network to
on-network status. As the number of end-users in a given off-network building
increases for all service offerings, the economics improve to the point where
the capital costs of connecting the building to ACSI's network are more than
covered by the increased margins represented by retaining the portion of
customer revenue paid out to the ILEC.
Competition for enhanced voice services primarily consists of basic voice
mail services offered by ILECs and cellular providers in connection with their
core offerings and customer premise-based voice mail platforms. The voice mail
offerings of the ILECs typically have limited features and flexibility compared
to the services contemplated by the Company; thus, the Company believes its
enhanced voice messaging services and focused sales efforts should be able to
penetrate effectively those segments of the small and mid-sized business market
that require more features and/or flexibility than services offered by the
ILECs. Customer premise-based platform voice mail offerings typically require a
relatively large up front capital investment and recurring maintenance costs and
are generally marketed to large companies rather than the small and mid-sized
end-users targeted by the Company.
Internet Services. The market for Internet access services is extremely
competitive. There are no substantial barriers to entry, and the Company expects
that competition will intensify in the future. The Company has entered this
market principally through the Cybergate Acquisition and believes that its
ability to compete successfully will depend upon a number of factors, including
market presence; the capacity, reliability and security of its network
infrastructure; ease of access to and navigation of the Internet; the pricing
policies of its competitors and suppliers; the timing of introductions of new
products and services by the Company and its competitors; the Company's ability
to support existing and emerging industry standards; and industry and general
economic trends.
The Company's current and prospective competitors include many large
companies that have substantially greater market presence and financial,
technical, marketing and other resources than the Company. The Company expects
to compete directly or indirectly with the following categories of companies:
(1) other international, national and regional commercial Internet service
providers; (2) established on-line services companies that currently offer or
are expected to offer Internet access; (3) computer hardware and software and
other technology companies; (4) IXCs; (5) RBOCs; (6) CATVs; and (7) nonprofit or
educational Internet service providers. The ability of these competitors or
others to bundle services and products with Internet connectivity services could
place the Company at a significant competitive disadvantage in this services
market.
REGULATION
Overview
The Company's services are subject to federal, state and local regulation.
The FCC exercises jurisdiction over all facilities and services of
telecommunications common carriers to the extent those facilities are used to
provide, originate or terminate interstate or international communications.
State regulatory commissions retain jurisdiction over the Company's facilities
and services to the extent they are used to originate or
53
<PAGE> 58
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.
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 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. Other requirements apply when RBOCs manufacture
telecommunications equipment. These safeguards are designed to ensure that the
RBOCs' 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.
Moreover, the Federal Telecommunications Act also granted important legally
binding relief. ILECs were given 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." Three RBOCs,
Ameritech, Southwestern Bell ("SBC") and BellSouth, have filed applications with
the FCC for authority to provide in-region interLATA service in selected states.
The Ameritech and SBC applications have been denied by the FCC while the
BellSouth application for authority to provide long distance services to
consumers in South Carolina is under consideration. Other RBOCs have begun the
process to provide in-region interLATA service by filing with state commissions
notice of their intent to file at the FCC. On July 2, 1997, SBC filed suit in
U.S. District Court in Wichita Falls, Texas challenging the constitutionality of
the provision of the Federal Telecommunications Act governing RBOC entry into
in-region long distance markets. The denial of Ameritech's application also is
the subject of appeals and petitions for rehearing.
54
<PAGE> 59
FCC Rules Implementing the Local Competition Provisions of the Federal
Telecommunications Act. On August 8, 1996, the FCC released a First Report and
Order, a Second Report and Order and a Memorandum Opinion and Order in its CC
Docket 96-98 (combined, the "Interconnection Orders") that established a
framework of minimum, national rules enabling state Public Service Commissions
("PSCs") and the FCC to begin implementing many of the local competition
provisions of the Federal Telecommunications Act. In its Interconnection Orders,
the FCC prescribed certain minimum points of interconnection necessary to permit
competing carriers to choose the most efficient points at which to interconnect
with the ILECs' networks. The FCC also adopted a minimum list of unbundled
network elements that ILECs must make available to competitors upon request and
a methodology for states to use in establishing rates for interconnection and
the purchase of unbundled network elements. The FCC also adopted a methodology
for states to use when applying the Federal Telecommunications Act's "avoided
cost standard" for setting wholesale prices with respect to retail services.
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 were 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. However, as discussed
below, these rules were first stayed, and later vacated, by the U.S.
Court of Appeals for the Eighth Circuit.
- Access Charges for Unbundled Switching and Access Charge Reform. IXCs
which order unbundled switching elements temporarily were required to pay
an access charge to an ILEC when the ILEC provides exchange access
service. Access charges also must be paid when an IXC originates or
terminates interexchange traffic to a customer to which it provides local
services by reselling ILEC exchange services. However, a series of access
charge reforms were announced by the FCC on May 7, 1997. 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 were required
to identify which marketing, billing, collection and other costs will be
avoided or that are avoidable by ILECs when they provide services on a
wholesale basis and to calculate the portion of the retail rates for
those services that is attributable to the avoided and avoidable costs.
However, as discussed below, the specific federal pricing requirements
were stayed, and later vacated, by the U.S. Court of Appeals for the
Eighth Circuit.
55
<PAGE> 60
- Transport and Termination Charges. The FCC rules required that 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. However, as discussed below, the
FCC's pricing and costing rules were first stayed, and later vacated, by
the U.S. Court of Appeals for the Eighth Circuit.
- Access to Rights-of-Way. The FCC established procedures and guidelines
designed to facilitate the negotiation and mutual provision of
nondiscriminatory access by telecommunications carriers and utilities to
their poles, ducts, conduits, and rights-of-way. 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 of its mandatory contribution, but
the Company believes that it will likely be a significant expenditure. On
May 8, 1997, the FCC released an order implementing these requirements by
reforming its existing access charge and universal service rules. See
"-- Other Regulation -- Universal Service Reform" below.
Most provisions of the Interconnection Orders were appealed. Numerous
appeals were consolidated for consideration by the U.S. Court of Appeals for the
Eighth Circuit (captioned Iowa Utilities Board v. FCC). The Court of Appeals
thereupon stayed the effectiveness of most of the pricing and costing provisions
of FCC rules adopted in the Interconnection Orders. On July 18, 1997, the Court
of Appeals released its decision regarding issues raised in the consolidated
appeals of the Interconnection Orders. The Interconnection Orders were upheld in
part and reversed in part. A non-exclusive list of decisions rendered include
that:
- The FCC exceeded its jurisdiction in establishing rules governing the
prices that ILECs may charge competitors for interconnection, unbundled
access and resale. The Court ruled that the authority to establish prices
for local communications facilities and services is reserved to the
States and, thus, vacated the FCC's pricing rules (except as they apply
to CMRS providers).
- The FCC's "pick and choose" rule, which allows competitors to select
terms of previously approved interconnection agreements for their own
use, conflicts with the purposes of the Federal Telecommunications Act,
and also was vacated.
- The FCC lacks authority to hear formal complaints which involve the
review and/or enforcement of certain terms of local interconnection
agreements approved by State commissions.
- The FCC lacks authority to require interconnection agreements which were
negotiated before the enactment of the Federal Telecommunications Act to
be submitted for State commission approval.
- The FCC may not adopt a blanket requirement that State interconnection
rules must be consistent with the FCC's regulations.
- The FCC correctly concluded that ILEC operations support systems,
operator services and vertical switching features qualify as network
elements that are subject to the unbundling requirements of the Federal
Telecommunications Act.
- The FCC's definition of "technically feasible" was upheld for purposes of
deciding where ILECs must permit interconnection by competitors, but the
FCC's use of this term to determine what elements must be unbundled was
rejected.
- The FCC erred in deciding that ILECs could be required by competitors to
provide interconnection and unbundled network elements at levels of
quality which exceed those levels at which ILECs provide such services to
themselves.
- The FCC cannot require ILECs to recombine network elements for
competitors, but competitors may recombine such network elements
themselves as necessary to provide telecommunications services.
- Claims that the unbundling rules effected an unconstitutional taking were
not decided because they were either raised by parties which lacked
standing or were not ripe for review.
56
<PAGE> 61
- FCC rules and policies regarding the ILECs' duty to provide for physical
collocation of equipment were upheld.
- The FCC's rules requiring ILECs to allow the resale of promotional prices
lasting more than 90 days were upheld.
The Interconnection Decisions, and resulting local interconnection rules, were
vacated in part consistent with these decisions. A companion appeal (captioned
Competitive Telecommunications Association v. FCC) was decided on June 27, 1997.
In the latter case, the court upheld the FCC's decision that the term
"interconnection" as used in the Federal Telecommunications Act relates to
physical access, and does not include transmission and routing services as well.
Various parties have sought reconsideration and filed appeals of the Eighth
Circuit decisions. The Company cannot predict whether the Eighth Circuit
decisions will stand, or what actions the FCC may or may not take in response to
these appellate decisions. Notably, the FCC recently made the use of forward
looking, economic costs for the pricing of local interconnection, transport and
termination and unbundled network elements, a temporary condition of its
approval of the merger of Bell Atlantic and NYNEX. Similarly, the FCC indicated
in its denial of Ameritech's application for in-region long distance authority
that an RBOC's use of such forward looking, economic costs is relevant to the
issue of whether it has satisfied the conditions necessary for approval of such
an application, although that ruling has been appealed.
Other Regulation. In general, the FCC has a policy of encouraging the
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. With the
exception of informational tariffs for operator-assisted services and
interexchanges 10xxx-2x digital services, the FCC has ruled that
interexchange carriers must cancel their tariffs for domestic, interstate
interexchange services. However, the FCC's interexchange de-tariffing
order was recently stayed by order of the U.S. Court of Appeals for D.C.
Tariffs are still required to be filed for international services. On
June 19, 1997, the FCC issued an order granting petitions filed by
Hyperion and Time-Warner to provide CLECs the option to cease filing
tariffs for interstate interexchange access services and has proposed to
make the withdrawal of CLEC access service tariffs mandatory. However,
nondominant carriers like the Company must offer interstate services on a
nondiscriminatory basis, at just and reasonable rates, and remain subject
to FCC complaint procedures.
Pursuant to these FCC requirements, the Company has filed and maintains
tariffs for its interstate services with the FCC. All of the interstate
access and 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.
The Company has not yet decided whether it will elect to cease filing
interstate interexchange access tariffs.
Nondomestic carriers such as the Company also are required to obtain FCC
authorization pursuant to Section 214 of the Communications Act before
providing international communications services. The Company recently
applied to the FCC for authority to provide voice and data communications
services between the United States and all foreign points.
- ILEC Price Cap Regulation Reform. 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, 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
57
<PAGE> 62
increasingly competitive and ultimately would result in granting ILECs
nondominant status. 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. On
May 7, 1997, the FCC took further action in its CC Docket No. 94-1
updating and reforming its price cap plan for ILECs. The changes require
price cap LECs to reduce their price cap indices by 6.5 percent annually,
less an adjustment for inflation. The FCC also eliminated rules that
require ILECs earning more than certain specified rates of return to
"share" portions of the excess with their access customers during the
next year in the form of lower access rates. These actions could have a
significant impact on the interstate access prices charged by the ILECs
with which the Company competes.
- Access Charges. Over the past few years, the FCC has granted ILECs
significant flexibility in pricing their interstate special and switched
access services. 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. On May 7,
1997, the FCC took action in its CC Docket No. 96-262 to reform the
current interstate access charge system. The FCC adopted an order which
makes various reforms to the existing rate structure for interstate
access that are designed to move access charges, over time, to more
economically efficient rate levels and structures. The following is a
nonexclusive list of actions announced by the FCC:
Subscriber Line Charge ("SLC"). The maximum permitted amount which an
ILEC may charge for SLC's on certain lines was increased. Specifically,
the ceiling was increased significantly for second and additional
residential lines, and for multi-line business customers. SLC ceiling
increases began in July 1997 and will be phased-in over a two-year
period.
Presubscribed Interchange Carrier Charge ("PICC"). The FCC created a new
PICC access charge rate element. The PICC is a flat-rated, per-line
charge that is recovered by LECs from IXCs. The charge is designed to
recover common line revenues not recovered through SLCs. Effective
January 1, 1998, the maximum permitted PICC charge will be $0.53 per
month for primary residential lines and $1.50 per month for second and
additional residential lines. The initial maximum PICC for multi-line
business will be $2.75. The ceilings will be permitted to increase over
time.
Carrier Common Line Charge ("CCL"). As the ceilings on the SLCs and
PICCs increase, the per-minute CCL charge will be eliminated. Until then,
the CCL will be assessed on originating minutes of use. Thus, ILECs will
charge lower rates for terminating then originating access. In addition,
Long Term Support ("LTS") payments for universal service will be
eliminated from the CCL charge.
Local Switching. Effective January 1, 1998, ILECs subject to price-cap
regulation will be required to move non-traffic-sensitive ("NTS") costs
of local switching associated with line ports to common line and recover
them through the common line charge discussed above. Local switching
costs attributable to dedicated trunk ports must be moved to the trunking
basket and recovered through flat-rate monthly charges.
Transport. The "unitary" rate structure option for tandem-switched
transport will be eliminated effective July 1, 1998. For price cap LECs,
additional rate structure charges will become effective on January 1,
1998, which will alter the recovery of certain NTS costs of
tandem-switching and multiplexing and the minutes-of-use assumption
employed to determine tandem-switched transport prices. Also effective
January 1, 1998, certain costs currently recovered through Transport
Interconnection Charge ("TIC") will be reassigned to specified facilities
charges. The reassignment of tandem costs currently recovered through the
TIC to the tandem switching charge will be phased in evenly over
58
<PAGE> 63
a three-year period. Residual TIC charges will be recovered in part
through the PICC, and price cap reductions will be targeted at the
per-minute residual TIC until it is eliminated.
In other actions, the FCC clarified that incumbent LECs may not assess
interstate access charges on the purchasers of unbundled network elements
or information services providers (including ISPs). Further regulatory
actions affecting ISPs are being considered in a notice of inquiry
released December 24, 1996. The FCC also decided not to adopt any
regulations governing the provision of terminating access by CLECs. ILECs
also were ordered to adjust their access charge rate levels to reflect
contributions to and receipts from the new universal service funding
mechanisms.
The FCC also announced that it will, in a subsequent Report and Order to
be issued during summer 1997, provide detailed rules for implementing a
market-based approach to further access charge reform. That process will
give incumbent LECs progressively greater flexibility in setting rates as
competition develops, gradually replacing regulation with competition as
the primary means of setting prices. The FCC also adopted a "prescriptive
safeguard" to bring access rates to competitive levels in the absence of
competition. For all services then still subject to price caps and not
deregulated in response to competition, the FCC required incumbent LECs
subject to price caps to file Total Service Long Run Incremental Cost
("TSLRIC") costs studies no later than February 8, 2001.
This series of decisions is likely to have a significant impact on the
operations, expenses, pricing and revenue of the Company. On June 18, 1997, the
FCC denied petitions filed by several ILECs asking the FCC to stay the
effectiveness of its access charge reform decision. Various parties have sought
reconsideration or approval of the FCC's access charge rulings and all or part
of the order ultimately could be set aside or revised.
Universal Service Reform. On May 8, 1997, the FCC released an order in its
CC Docket No. 96-45, which reforms the current system of intrastate universal
service support and implements the universal services provisions of the Federal
Telecommunications Act. The FCC established a set of policies and rules that
ensure that low-income consumers and consumers that live in rural, insular and
high cost areas received a defined set of local telecommunications services at
affordable rates. This is accomplished in part through expansion of direct
consumers subsidy programs and in part by ensuring that rural, small and high
cost LECs continue to receive universal service subsidy support. The FCC also
created new programs to subsidize connection of eligible schools, libraries and
rural health care providers to telecommunications networks. These programs will
be funded by assessment of eligible revenues of nearly all providers of
intrastate telecommunications carriers, including competitive LECs such as the
Company.
The Company, like other telecommunications carriers that provide intrastate
telecommunications services, will be required to contribute a portion of its
end-user telecommunications revenues to fund universal service programs.
However, the Company also is eligible to qualify as a recipient of universal
service support if it elects to service areas designated for universal service
support over its own network. The eligibility criteria established by the FCC
provide that carriers must be a common carrier, and offer and advertise,
throughout a designated service area, all of the services supported by universal
service subsidies. Such carriers must provide the support services, at least in
part, over their own facilities or through use of unbundled network elements
purchased from incumbent LECs. The FCC's decisions in CC Docket No. 96-45 could
have a significant impact on future operations of the Company.
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
59
<PAGE> 64
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 June 30, 1997 the Company had obtained intrastate authority for the
provision of dedicated services and a full range of local switched services in
Alabama, Arizona, Arkansas, Colorado, the District of Columbia, Florida,
Georgia, Kentucky, Louisiana, Maryland, Mississippi, Missouri, Nevada, New
Mexico, Oklahoma, South Carolina, Tennessee, Texas and Virginia. In addition,
the Company is seeking PSC certification to provide interLATA services in these
and other states. There can be no assurances that the Company will receive the
authorizations it may seek in the future to the extent it expands into other
states or seeks additional services from the above-named PSCs. See "Risk
Factors -- Rapid Expansion of Operations." In most states, the Company is
required to file tariffs setting forth the terms, conditions and prices for
services that are classified as intrastate.
The Company believes that, as the degree of intrastate competition
increases, the states will offer the ILECs increasing pricing flexibility. This
flexibility may present the ILECs with an opportunity to subsidize services that
compete with the Company's services with revenues generated from non-competitive
services, thereby allowing ILECs to offer competitive services at prices below
the cost of providing the service. The Company cannot predict the extent to
which this may occur or its impact on the Company's business.
Local Interconnection. The 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. The Company has
negotiated or arbitrated interconnection arrangements with each of the
following: BellSouth (North Carolina, South Carolina, Georgia, Florida, Alabama,
Mississippi, Louisiana, Tennessee and Kentucky), Southwestern Bell (Texas,
Arkansas, Kansas, Missouri and Oklahoma), US West (Arizona, New Mexico and
Colorado), Bell Atlantic (Maryland, Virginia and the District of Columbia), GTE
(Texas, Kentucky and Florida) and Sprint/ Central Telephone (Nevada).
Arbitration decisions involving interconnection arrangements in several states
have been challenged in lawsuits filed in U.S. District Court by the affected
ILECs.
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. The Company is considering the
possibility of filing similar actions against other ILECs.
Local Government Authorizations. The Company is required to obtain street
use and construction permits and licenses and/or franchises to install and
expand its fiber optic networks using municipal rights-of-way. In some
municipalities where the Company has installed or anticipates constructing
networks, it will be required to pay license or franchise fees based on a
percentage of gross revenues or on a per linear foot basis, as well as post
performance bonds or letters of credit. There can be no assurance that the
Company will not be required to post similar bonds in the future, nor is there
any assurance that, following the expiration of existing franchises, fees will
remain at their current levels. In many markets, the ILECs do not pay such
franchise fees or pay fees that are substantially less than those required to be
paid by the Company. To the extent that competitors do not pay the same level of
fees as the Company, the Company could be at a competitive disadvantage.
However, the Telecommunications Act provides that any compensation extracted by
states and localities for use of public rights-of-way must be "fair and
reasonable," applied on a "competitively neutral and nondiscriminatory basis"
and be "publicly disclosed" by such government entity. Termination of the
60
<PAGE> 65
existing franchise or license agreements prior to their expiration dates could
have a materially adverse effect on the Company.
EMPLOYEES
As of June 30, 1997, the Company employed a total of 559 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
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.
A Houston, Texas based company named "American Communication Services,
Inc." has initiated litigation against the Company in the District Court of
Travis County, Texas, contending that the Company's use of the "American
Communications Services, Inc." name in the State of Texas violates Texas law.
The Company intends to litigate the matter vigorously if an out of court
resolution cannot be reached.
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 23,925 and 6,619 square feet of office space in
Annapolis Junction, Maryland for its corporate headquarters and network
management center for $29,506 and $8,522, respectively per month as of September
30, 1997 subject to periodic increases in specified amounts. The primary lease
expires in 2002 with an option to renew for two additional five year periods.
The secondary lease is currently on a month-to-month term. Additional office
space of 16,561 square feet is leased in Laurel, Maryland for corporate offices
and local network operations. The leases expire in 2006 and 1997. The Company
leases 3,063 square feet of corporate office space in Rosemont, Illinois under a
lease which expires in 2000. The Company leases a 1,358 square foot field office
in Lombard, Illinois which houses its local network development operations. This
lease expires in 1999.
As of September 30, 1997, the Company's various operating subsidiaries have
leased facilities for their offices and network nodes. The aggregate monthly
rent on these properties is approximately $265,000. The various leases expire on
dates ranging from December, 1997, to April, 2007. Most leases include renewal
options. Additional office space and equipment rooms will be leased as
additional networks are constructed and the Company's operations are expanded.
The Company believes that its insurance coverage on these properties is
adequate and in compliance with the related leases.
61
<PAGE> 66
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 Chairman of the Board of Directors
Jack E. Reich........................... 47 President and Chief Executive Officer and
Director
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).................. 51 Director
Edwin M. Banks(2)....................... 35 Director
Christopher L. Rafferty(1).............. 49 Director
Benjamin P. Giess....................... 35 Director
Olivier L. Trouveroy(1)(2).............. 42 Director
Peter C. Bentz.......................... 32 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Anthony J. Pompliano, 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, had 22 years of
telecommunications industry and management experience before joining ACSI in
December 1996. Mr. Reich was elected to the Board of Directors in October 1997.
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.
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 interexchange, 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
62
<PAGE> 67
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 Magellan Health Services.
Christopher L. Rafferty, Director, was elected a director of the Company in
October 1994. Mr. Rafferty has been employed by WRH Partners, L.L.C., the
general partner of Huff since June 1994. From January 1993 to February 1994, Mr.
Rafferty was Vice President -- Acquisitions for Windsor Pet Care, Inc., a
venture capital-backed firm focusing on consolidating the pet care services
industry. From October 1990 to January 1993, Mr. Rafferty was a consultant
specializing in merchant banking, leveraged acquisitions and venture capital
transactions. From June 1987 to the time he started his consulting business, Mr.
Rafferty was a Managing Director of Chase Manhattan Capital Corporation, the
merchant banking and private equity investment affiliate of Chase Manhattan
Corporation. Mr. Rafferty 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 Partner 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, CMI Holding Corp.
and TransCare Corporation. 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 Partner
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., Cost Plus, Inc. and
TransCare Corporation. 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
63
<PAGE> 68
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.
The Board is comprised of seven members who were 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.
LIMITATION OF LIABILITY OF DIRECTORS
The Charter provides that a director of the Company will not be personally
liable for monetary damages to the Company or its stockholders for breach of
fiduciary duty as a director, except for liability, (i) for any breach of the
director's duty of loyalty to such corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for unlawful payments of dividends or unlawful
stock repurchases or redemption as provided in Section 174 of the DGCL or (iv)
for any transaction from which the director derived an improper personal
benefit.
This provision is intended to afford directors additional protection and
limit their potential liability from suits alleging a breach of the duty of care
by a director. As a result of the inclusion of such a provision, stockholders
may be unable to recover monetary damages against directors for actions taken by
them that constitute negligence or gross negligence or that are otherwise in
violation of their fiduciary duty of care, although it may be possible to obtain
injunctive or other equitable relief with respect to such actions. If equitable
remedies are found not to be available to stockholders in any particular
situation, stockholders may not have an effective remedy against a director in
connection with such conduct.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Amended and Restated Certificate of Incorporation and the By-laws
provide that directors and officers of the Company (as well as agents and
employees of the Company at the discretion of the Board) shall, to the fullest
extent authorized by the DGCL or any other applicable laws then in effect, be
indemnified against liabilities arising from their service as directors and
officers. Additionally, the Company has entered into indemnification agreements
with each of its executive officers and directors to reimburse them for certain
liabilities incurred in connection with the performance of their fiduciary
duties. Section 145 of the DGCL empowers a corporation to indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise, against expenses (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
64
<PAGE> 69
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.
65
<PAGE> 70
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 ANNUAL UNDERLYING ALL OTHER
DECEMBER 31, 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 1996 239,583 175,000(3) -- -- 6,187(4)
of 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
Riley M. Murphy.............................. 1996* 91,250 -- -- -- --
Executive Vice President -- Legal 1996 162,499 81,500(8) 37,004(10) 50,000 3,536(4)
and Regulatory Affairs, General 1995 150,000 81,500(9) -- 250,001(12) 9,783(4)
Counsel and Secretary 1994 37,500 -- 48,620(11) --
Robert H. Ottman(13)......................... 1996* 90,667 -- -- -- --
Executive Vice President/Network 1996 170,000 50,000(3) 100,000(10) -- --
Services and Technical Support 1995 28,333 -- -- 250,000 --
Richard A. Kozak(14)......................... 1996* 129,167 137,500(3) -- 83,334(15) 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(15) 3,750(4)
Acting Chief Financial Officer 1994 87,500 -- 39,728(5) 899,932 --
George M. Tronsrue, III(16).................. 1996* 100,000 -- -- -- 2,400(4)
President and Chief Operating 1996 191,128 54,116(17) -- 50,000 4,800(4)
Officer -- Strategy and Technology 1995 150,000 135,417(17) 68,800(10) 350,001(12) --
Development 1994 53,827 50,000 -- --
</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 cash bonus, $81,500 of which was
paid in January 1997.
(9) This payment represents the first installment of a $244,500 cash bonus.
(10) 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.
(11) Consists of $43,620 received for performing legal services for the Company
as outside counsel and a $5,000 for relocation expenses.
(12) 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 Offering.
(13) Mr. Ottman commenced employment with the Company in May 1995 and his
employment was terminated in February 1997.
(14) Mr. Kozak served as the Company's President and Chief Executive Officer
during fiscal year 1996. He became Acting Chief Financial Officer in
December 1996 upon the resignation of the Company's previous Chief
Financial Officer. In connection with the Company's December 1996
management reorganization, Mr. Kozak became President and Chief Executive
Officer -- Corporate Services. Effective February 2, 1997, Mr. Kozak's
employment with the Company was terminated.
(15) 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 "Certain
Transactions."
(16) Mr. Tronsrue served as Chief Operating Officer during fiscal year 1996,
until November when he became President and Chief Operating
Officer -- Strategy and Technology Development. Effective September 3,
1997, Mr. Tronsrue resigned from such position. The Company and Mr.
Tronsrue have entered into a separation agreement.
(17) Represents an installment of a $244,500 bonus, $54,116 of which was due on
February 24, 1997.
66
<PAGE> 71
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.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
-----------------------------------------
NUMBER OF % OF TOTAL MARKET PRICE
SECURITIES OPTIONS OF UNDERLYING
UNDERLYING GRANTED TO EXERCISE OR SECURITIES ON
OPTIONS EMPLOYEES BASE PRICE DATE OF EXPIRATION
NAME GRANTED IN PERIOD (PER/SHARE) 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
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)
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
</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.
Ms. Murphy's options will vest on March 31, 1998 provided, that she does not
voluntarily terminate her employment with the Company or is not terminated
for cause prior to the applicable vesting date. Due to Mr. Tronsrue's
resignation effective as of September 3, 1997, these options were cancelled.
(3) These options were granted on July 6, 1995, with an exercise price of $3.40.
Ms. Murphy's options will vest on March 31, 1999 provided, that she does not
voluntarily terminate her employment with the Company or is not terminated
for cause prior to the vesting date. Due to Mr. Tronsrue's resignation
effective as of September 3, 1997, these options were cancelled.
(4) These options were canceled in connection with the settlement of the dispute
relating to the termination of Mr. Kozak's employment. See "Certain
Transactions."
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
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
George M. Tronsrue, III.................. 250,000 150,000(4) 2,125,000 1,217,500
</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 "Certain Transactions."
(4) Of Mr. Tronsrue's unexercisable options, 50,000 vested in February, 1997,
and the remainder have been cancelled due to Mr. Tronsrue's resignation
effective as of September 3, 1997.
67
<PAGE> 72
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. 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 the fiscal period 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 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 $275,000 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 $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, 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 agreement
also contains non-compete, non-solicitation and confidentiality provisions.
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 $200,000 and a guaranteed bonus of $244,500, payable in annual
installments through January 1997. Under this employment agreement, Ms. Murphy
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. Ms. Murphy's
employment agreement also contains non-compete, non-solicitation and
confidentiality provisions.
The shares of Common Stock underlying the stock options held by Messrs.
Pompliano and Reich 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
68
<PAGE> 73
demand an underwritten registration of at least 300,000 shares of Common Stock
beginning 120 days after the Common Stock Offering. Mr. Tronsrue is also a
signatory to 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, 5,000,000 shares of Common Stock have been reserved for discretionary
and 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.
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.
Currently, all 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. On June 25, 1997, the Company's stockholders approved the
Company's adoption of an amendment to the 1994 Plan authorizing the inclusion of
a provision in stock option agreements relating to options granted to Outside
Directors which permits the transfer by such Outside Director of the options
granted pursuant to such stock option agreement.
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,
69
<PAGE> 74
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 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 ended 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.
70
<PAGE> 75
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 Series
B 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 Series B 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 Series B 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 Series B Preferred Stock, certain holders of Common Stock and
certain holders of options or warrants convertible into Common Stock (the
"Equity Registration Rights Agreement") wherein the parties were granted
piggyback 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 Equity
Registration Rights Agreement, and certain demand registration rights following
the occurrence of, among other things, a qualifying offering. The Common Stock
Offering was a qualifying offering. Huff and certain of its affiliates purchased
an aggregate of 10,000 Units in the Unit Offering, acquiring thereby 10,000
shares of Preferred Stock and 10,000 Warrants. ING Baring (U.S.) Securities,
Inc., which may be deemed an affiliate of ING, purchased 7,500 Units in the Unit
Offering, acquiring thereby 7,500 shares of Preferred Stock and 7,500 Warrants.
The Company has in place policies and procedures that enable it to comply with
the covenants in the Existing Indentures and in the Indenture regarding
transactions with affiliates.
The Initial Purchasers have informed the Company that W.R. Huff (an
affiliate of Huff) on behalf of investment management accounts for which W.R.
Huff acts as investment advisor and over which it has sole dispositive power,
purchased $50 million of the Old Notes in the Private Placement, for which the
Company paid W.R. Huff, on behalf of such accounts, a fee of $750,000 with
respect to such purchase.
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 would (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 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 terminated upon completion of the Common Stock
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 Equity
Registration Rights Agreement with respect to the Common Stock Offering and,
upon consummation of the Common Stock Offering, he waived all rights under the
Equity Registration Rights Agreement. 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.
71
<PAGE> 76
PRINCIPAL STOCKHOLDERS
The following table sets forth as of June 30, 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) 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>
NUMBER PERCENTAGE
NAME OF BENEFICIAL OWNER(1) OF SHARES OF TOTAL(2)
------------------------------------------------------------- ------------ -----------
<S> <C> <C>
Anthony J. Pompliano(3)...................................... 1,662,499 4.4%
Jack E. Reich................................................ -- --
Riley M. Murphy(4)........................................... 193,752 *
George M. Middlemas(5)....................................... 1,748,147 4.9
Christopher L. Rafferty(6)................................... 8,000 *
Edwin M. Banks(6)............................................ -- --
Peter C. Bentz(6)............................................ -- --
Olivier L. Trouveroy(7)...................................... -- --
Benjamin P. Giess(7)......................................... -- --
Richard A. Kozak(8).......................................... 1,041,598 2.8
Robert H. Ottman(9).......................................... 175,000 *
George M. Tronsrue, III(10).................................. 300,000 *
The Huff Alternative Income Fund, L.P.(11)................... 14,286,960 39.6
ING Equity Partners, L.P. I(12).............................. 7,946,828 22.1
First Analysis Corporation(13).)............................. 3,156,420 8.8
All executive officers and directors as a group (10
persons)................................................... 2,520,800 6.6
</TABLE>
- ---------------
<TABLE>
<C> <S>
* Less than one percent.
(1) The addresses of all officers and directors listed above are in the care of the Company.
(2) 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 June 30, 1997 by (ii) the sum of (A) the
number of shares of Common Stock outstanding as of June 30, 1997 plus (B) the number of shares of Common Stock
issuable upon the exercise of options or warrants held by such stockholder which were exercisable as of June
30, 1997 or will become exercisable within 60 days after June 30, 1997 ("currently exercisable").
(3) Includes currently exercisable options to purchase 1,662,399 shares.
(4) Includes currently exercisable options to purchase 193,752 shares.
(5) Includes currently exercisable options to purchase 20,000 shares. Also includes 788,905 shares of Common Stock
owned by Apex II and 278,973 shares of Common Stock currently owned by Apex I. Mr. Middlemas is a general
partner of Apex Management Partnership which is the general partner of Apex I and Apex II. Mr. Middlemas
disclaims beneficial ownership of the shares owned by Apex I and Apex II, except to the extent of his ownership
in the general partner of Apex I and in the general partner of Apex II.
(6) 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. William R. Huff is the President
of the General Manager of WRH Partners, L.L.C. Messrs. Huff, Rafferty, Bentz and Banks disclaim beneficial
ownership of all shares held by Huff.
(7) 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.
(8) Includes currently exercisable options to purchase 1,041,598 shares. Mr. Kozak's employment was terminated
effective February 2, 1997. See "Certain Transactions."
(9) Includes currently exercisable options to purchase 175,000 shares. Mr. Ottman's employment with the Company was
terminated in February 1997.
(10) Includes currently exercisable options to purchase 300,000 shares.
(11) Includes currently exercisable warrants to purchase 200,000 shares. The address for Huff is 1776 On the Green,
67 Park Place, Morristown, NJ 07960.
(12) Includes currently exercisable warrants to purchase 100,000 shares. The address for ING is 135 East 57th
Street, 16th Floor, New York, NY 10022.
(13) Includes 1,034,465 shares of Common Stock currently owned by Apex II. Includes 103,800 and 175,173 shares of
Common Stock owned by Apex I. Includes 359,214 and 732,213 shares of Common Stock owned by The Productivity
Fund II, L.P. ("Productivity"). Includes 714,293 shares of Common Stock 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. F. Oliver Niklan, Jr. is the president of FAC and therefor may be deemed to be the beneficial owner of
the shares that may be deemed beneficially owned by FAC. Mr. Niklan disclaims beneficial ownership of these
shares. The address for First Analysis Corporation is 233 South Wacker Drive, Suite 9600, Chicago, IL 60093.
</TABLE>
72
<PAGE> 77
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 June 30, 1997,
outstanding borrowings under the AT&T Credit Facility totaled approximately
$31.2 million, including accrued interest of approximately $3.9 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 $21.9 million in capital to its subsidiaries through June 30,
1997, 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.
The Company has entered into negotiations with AT&T Credit Corporation to
roll-up the five existing loan agreements comprising the AT&T Credit Facility
into the New AT&T Credit Facility (to be secured by the existing assets of the
Company including the stock, but not the assets, of certain of the Company's
subsidiaries), which the Company expects will otherwise be on terms
substantially similar to those of the existing AT&T Credit Facility. The maximum
aggregate amount of credit available under the proposed New AT&T Facility will
not exceed $35 million, which is the maximum amount of credit the Company is
allowed to borrow in its Secured Credit Facility (as defined in the Existing
Indentures and in the Indenture with respect to the Notes). AT&T Credit
Corporation has issued to each of the Company's Subsidiaries that are parties to
the AT&T Credit Facility a waiver through November 30, 1997, of compliance by
such subsidiaries with certain covenants contained therein. Such covenants are
not expected to be included in the New AT&T Facility. The Company has agreed
with the initial purchaser in the Junior Preferred Stock Offering that, after
the date of expiration of such waiver (as the same may be extended), upon the
receipt of a demand for
73
<PAGE> 78
payment under the AT&T Credit Facility, the Company will repay the AT&T Credit
Facility in full and will maintain cash and cash equivalents in an aggregate
amount sufficient for such purpose, unless, on or prior to such demand for
payment, the New AT&T Facility shall have become effective and the Company shall
be in compliance with all covenants contained therein.
2005 NOTES AND 2006 NOTES
The terms of the 2005 Notes and the 2006 Notes include those stated in the
applicable Existing Indenture and those made a part of the applicable Existing
Indenture by reference to the Trust Indenture Act of 1939, as in effect on the
date of that Existing Indenture. The terms of the Existing Indentures are
substantially similar. The following summaries of certain provisions of the
Existing 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 Existing Indenture.
The Existing Notes are general unsubordinated and unsecured senior
obligations of ACSI and 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 have no obligation to pay amounts due on the Notes and do
not guarantee the Notes. Therefore, the Existing 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
Existing Notes, to participate in the assets of any of ACSI's subsidiaries upon
any liquidation or reorganization of any such subsidiary are subject to the
prior claims of that subsidiary's creditors (including trade creditors).
Upon a Change of Control (as defined in the Existing Indentures), each
holder of the Existing Notes will have the right to require ACSI to repurchase
all or any part of such holder's Existing Notes at 101% of the respective
Accreted Value (as defined in the Existing Indentures) 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
respective 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, certain
affiliates of First Analysis Corporation, ING or Huff, acquires more than 35% of
the total voting power of the Company.
Each of the Existing 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.
On June 11, 1997, the Company notified the trustee under each of the
Existing Indentures that, as of June 10, 1997, it had approximately $13.0
million in the aggregate of ordinary course trade accounts payable that were
more than 60 days overdue. As of June 30, 1997, the Company had approximately
$17.4 million in the aggregate of ordinary course trade accounts payable that
were more than 60 days overdue. These overdue amounts constituted Indebtedness
of the Company, as that term is defined in each of the Existing Indentures. The
incurrence by the Company of such Indebtedness is not currently permitted under
Section 4.09 of each of the Existing Indentures and, therefore, constituted an
Event of Default (as defined in the Existing Indentures) under each Existing
Indenture. The Company used a portion of the proceeds of the Unit Offering to
pay in full all ordinary course trade accounts payable that were more than 60
days overdue to cure such Event of Default.
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
74
<PAGE> 79
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 April 1, 2001, 2002 and 2003, respectively, plus accrued and
unpaid interest, if any, thereon, to the date of repurchase.
75
<PAGE> 80
DESCRIPTION OF THE NOTES
GENERAL
The Old Notes were and the New Notes will be issued under an indenture,
dated as of July 23, 1997 (the "Indenture"), between the Company and The Chase
Manhattan Bank, as trustee under the Indenture (the "Trustee"). For purposes of
this Description of the New Notes, the term "Company" refers to American
Communications Services, Inc. and does not include its subsidiaries except for
purposes of financial data determined on a consolidated basis.
The terms of the New Notes include those stated in the Indenture and those
made a part of the Indenture by reference to the Trust Indenture Act of 1939 as
in effect on the date of the Indenture (the "Trust Indenture Act"). The
following summaries of certain provisions of the Indenture do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all of the provisions of the Indenture. A copy of the Indenture is available
from the Company upon request. Whenever particular defined terms of the
Indenture not otherwise defined herein are referred to, such defined terms are
incorporated herein by reference. The New Notes are subject to all such terms,
and holders of the New Notes are referred to the Indenture and the Trust
Indenture Act for a complete statement of such terms. Certain terms used herein
are defined below under " -- Certain Definitions."
The New Notes will rank pari passu in right of payment with all existing
and future senior unsecured indebtedness of the Company, including the 2005
Notes and the 2006 Notes, and will be senior in right of payment to all existing
and future subordinated indebtedness of the Company. As of June 30, 1997, the
total outstanding indebtedness of the Company that would rank pari passu with
the New Notes was approximately $193.0 million. The New Notes will not be
secured by any assets and will be effectively subordinated to any secured
indebtedness of the Company to the extent of the value of the assets securing
such indebtedness. As of June 30, 1997, the Company, on a consolidated basis,
had approximately $31.2 million outstanding of secured indebtedness.
The operations of the Company are conducted through its subsidiaries and,
therefore, the Company is dependent upon cash flow from those entities to meet
its obligations. The Company's subsidiaries will have no direct obligation to
pay amounts due on the New Notes and will not guarantee the New Notes. As a
result, the New Notes effectively will be subordinated to all existing and
future third-party indebtedness and other liabilities of the Company's
subsidiaries (including trade payables). As of June 30, 1997, the total
liabilities of the Company's subsidiaries (after the elimination of loans and
advances by the Company to its subsidiaries) were approximately $62.7 million.
Of that amount, approximately $31.2 million in indebtedness was secured by first
priority liens on all the assets of the borrowing subsidiaries. See "Description
of Certain Indebtedness." Any rights of the Company and its creditors, including
the holders of Notes, to participate in the assets of any of the Company's
subsidiaries upon any liquidation or reorganization of any such subsidiary will
be subject to the prior claims of that subsidiary's creditors (including trade
creditors).
PRINCIPAL, MATURITY AND INTEREST
The Notes will be limited in aggregate principal amount to $220,000,000 and
will mature on July 15, 2007. Interest on the New Notes will accrue at the rate
of 13 3/4% per annum and will be payable semi annually in cash on each January
15 and July 15, commencing January 15, 1998, to the Persons who are registered
Holders at the close of business on January 1 and July 1, respectively,
immediately preceding the applicable interest payment date. Interest on the New
Notes will accrue from the most recent date to which interest has been paid on
the Old Notes, or, if no interest has been paid, from July 23, 1997. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months.
If the Company does not comply with certain deadlines set forth in the
Registration Rights Agreement with respect to the Exchange Offer or the
registration of the New Notes for resale under a shelf registration statement,
holders of the New Notes will be entitled to Additional Interest. See
"-- Exchange Offer; Registration Rights."
76
<PAGE> 81
Principal and interest will be payable at the office of the Paying Agent
but, at the option of the Company, interest may be paid by check mailed to the
registered holders at their registered addresses. The New Notes will be issued
without coupons and in fully registered form, in denominations of $1,000 and
integral multiples thereof. Unless otherwise designated by the Company, the
Company's office or agency in New York is the office of the Trustee maintained
for such purpose.
OPTIONAL REDEMPTION
The New Notes will not be redeemable at the option of the Company prior to
July 15, 2002. Thereafter, the New Notes will be subject to redemption at the
option of the Company, in whole or in part, upon not less than 30 nor more than
60 days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below, plus accrued and unpaid interest thereon (if any), if
redeemed during the twelve months beginning July 15 of the years indicated
below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
------------------------------------------------------------------ ----------
<S> <C>
2002.............................................................. 106.875
2003.............................................................. 105.156
2004.............................................................. 103.438
2005.............................................................. 101.719
2006 and thereafter............................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to July 15, 2000, the
Company may redeem up to 35% of the aggregate principal amount of New Notes with
the net proceeds from one or more Equity Offerings of the Company at a
redemption price equal to 113.750% of the aggregate principal amount thereof on
the date of redemption; provided, however, that, after giving effect to any such
redemption, at least $143 million aggregate principal amount of the New Notes
remain outstanding.
MANDATORY REDEMPTION
Except as set forth under "-- Repurchase at the Option of Holders Upon a
Change of Control" and "-- Asset Sales," the Company is not required to make
mandatory redemption payments or sinking fund payments with respect to the New
Notes.
REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of New Notes shall
have the right to require the Company to repurchase all or any part (equal to
$1,000 principal amount or an integral multiple thereof) of such holder's New
Notes pursuant to the offer described below (the "Change of Control Offer") at a
purchase price (the "Change of Control Purchase Price") equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest, if any, to
any Change of Control Payment Date (as defined below).
Within 30 days following any Change of Control, the Company or the Trustee
(at the expense of the Company) shall mail a notice to each holder stating: (1)
that a Change of Control Offer is being made pursuant to the covenant in the
Indenture entitled "Repurchase at the Option of Holders upon a Change of
Control" and that all New Notes timely tendered will be accepted for payment;
(2) the Change of Control Purchase Price and the purchase date (the "Change of
Control Payment Date"), which shall be no earlier than 30 days nor later than 40
days from the date such notice is mailed; (3) that any New Notes or portions
thereof not tendered or accepted for payment will continue to accrue interest;
(4) that, unless the Company defaults in the payment of the Change of Control
Purchase Price, all New Notes or portions thereof accepted for payment pursuant
to the Change of Control Offer shall cease to accrue interest, from and after
the Change of Control Payment Date; (5) that holders electing to have any New
Notes or portions thereof purchased pursuant to a Change of Control Offer will
be required to surrender the New Notes, with the form entitled "Option of Holder
to Elect Purchase" on the reverse of the New Notes completed, to the Paying
Agent at the address specified in the notice prior to the close of business on
the third Business Day preceding the Change of Control Payment Date; (6) that
holders will be entitled to withdraw their election if the Paying Agent
77
<PAGE> 82
receives, not later than the close of business on the second Business Day
preceding the Change of Control Payment Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the holder, the principal
amount of Notes delivered for purchase, and a statement that such holder is
withdrawing his election to have such New Notes or portions thereof purchased;
and (7) that holders whose New Notes are being purchased only in part will be
issued New Notes equal in principal amount to the unpurchased portion of the New
Note or New Notes surrendered, which unpurchased portion must be equal to $1,000
in principal amount or an integral multiple thereof.
The Company will comply with the requirements of Section 14(e) under the
Exchange Act and any other securities laws and regulations, to the extent such
laws and regulations are applicable, in connection with the repurchase of New
Notes pursuant to a Change of Control Offer.
On the Change of Control Payment Date, the Company will (1) accept for
payment New Notes or portions thereof properly tendered pursuant to the Change
of Control Offer; (2) irrevocably deposit with the Paying Agent in immediately
available funds an amount equal to the Change of Control Purchase Price in
respect of all New Notes or portions thereof so tendered; and (3) deliver, or
cause to be delivered, to the Trustee the New Notes so accepted together with an
Officers' Certificate listing the New Notes or portions thereof tendered to the
Company and accepted for payment. The Paying Agent shall promptly mail to each
holder of New Notes so accepted payment in an amount equal to the Change of
Control Purchase Price for such New Notes, and the Trustee shall promptly
authenticate and mail to each holder a New Note equal in principal amount to any
unpurchased portion of the New Notes surrendered, if any; provided that each
such New Note shall be in a principal amount of $1,000 or any integral multiple
thereof.
The existence of the holders' right to require, subject to certain
conditions, the Company to repurchase New Notes upon a Change of Control may
deter a third party from acquiring the Company in a transaction that constitutes
a Change of Control. If a Change of Control Offer is made, there can be no
assurance that the Company will have sufficient funds to pay the Change of
Control Purchase Price for all New Notes tendered by holders seeking to accept
the Change of Control Offer. In addition, instruments governing other
indebtedness of the Company may prohibit the Company from purchasing any New
Notes prior to their stated maturity, including pursuant to a Change of Control
Offer. See "Description of Certain Indebtedness." In the event that a Change of
Control Offer occurs at a time when the Company does not have sufficient
available funds to pay the Change of Control Purchase Price for all New Notes
tendered pursuant to such offer or a time when the Company is prohibited from
purchasing the New Notes (and the Company is unable either to obtain the consent
of the holders of the relevant indebtedness or to repay such indebtedness), an
Event of Default would occur under the Indenture. In addition, one of the events
that constitutes a Change of Control under the Indenture is a sale, conveyance,
transfer or lease of all or substantially all of the property of the Company.
The Indenture is governed by New York law, and there is no established
definition under New York law of "substantially all" of the assets of a
corporation. Accordingly, if the Company were to engage in a transaction in
which it disposed of less than all of its assets, a question of interpretation
could arise as to whether such disposition was of "substantially all" of its
assets and whether the Company was required to make a Change of Control Offer.
Except as described herein with respect to a Change of Control, the
Indenture does not contain any other provisions that permit holders of New Notes
to require that the Company repurchase or redeem New Notes in the event of a
takeover, recapitalization or similar restructuring.
DISBURSEMENT OF FUNDS -- ESCROW ACCOUNT
Pursuant to the Indenture, the Company placed approximately $70 million of
the net proceeds realized from the Private Placement, representing funds
sufficient to pay the first five interest payments on the Old Notes or the New
Notes, as the case may be, in an escrow account (the "Escrow Account") held by
the Escrow Agent for the benefit of the Trustee under the Indenture in
accordance with the Escrow and Disbursement Agreement. The Company entered into
the Escrow and Disbursement Agreement, which provides, among other things, that
funds may be disbursed from the Escrow Account only to pay interest on the Old
Notes or the New Notes, as the case may be, (or, if a portion of the Notes has
been retired by the
78
<PAGE> 83
Company, funds representing the interest payment on the retired Notes may be
paid to the Company) and, upon certain repurchases or redemptions thereof, to
pay principal of and premium, if any, thereon. Pending such disbursement, the
Company has caused all funds contained in the Escrow Account to be invested in
Marketable Securities. Interest earned on these Marketable Securities will be
added to the Escrow Account.
ASSET SALES
The Company will not, and will not permit any Restricted Subsidiary to,
consummate an Asset Sale unless (i) no Event of Default shall have occurred and
be continuing or shall occur as a consequence thereof; (ii) the Company or such
Restricted Subsidiary, as the case may be, receives net consideration at the
time of such Asset Sale at least equal to the Fair Market Value (as evidenced by
a Board Resolution delivered to the Trustee) of the Property or assets sold or
otherwise disposed of; (iii) at least 75% of the consideration received by the
Company or such Restricted Subsidiary for such Property or assets consists of
Cash Proceeds or Telecommunications Assets; and (iv) the Company or such
Restricted Subsidiary, as the case may be, uses the Net Cash Proceeds from such
Asset Sale in the manner set forth in the next paragraph.
Within 270 days after any Asset Sale, the Company or such Restricted
Subsidiary, as the case may be, may at its option (i) reinvest (or enter a
binding agreement to reinvest, provided that such reinvestment is completed
within 180 days of the date of such agreement) an amount equal to the Net Cash
Proceeds (or any portion thereof) from such Asset Sale in Telecommunications
Assets and/or (ii) apply an amount equal to such Net Cash Proceeds (or remaining
Net Cash Proceeds) to the permanent reduction of Indebtedness of the Company
(other than Indebtedness to a Restricted Subsidiary) that is pari passu with the
New Notes or to the permanent reduction of Indebtedness or preferred stock of
any Restricted Subsidiary (other than Indebtedness to, or preferred stock owned
by, the Company or another Restricted Subsidiary); provided, however, that any
Net Cash Proceeds applied to the reduction of Indebtedness represented by the
2005 Notes and 2006 Notes shall be in accordance with the next paragraph. Any
Net Cash Proceeds from any Asset Sale that are not used to reinvest in
Telecommunications Assets and/or reduce pari passu Indebtedness of the Company
or Indebtedness or preferred stock of its Restricted Subsidiaries shall
constitute Excess Proceeds.
If at any time the aggregate amount of Excess Proceeds (including any Net
Cash Proceeds applied to the permanent reduction of Indebtedness represented by
the 2005 Notes and 2006 Notes) calculated as of such date exceeds $10 million,
the Company shall, within 30 days of the date the amount of Excess Proceeds
exceeds $10 million, use such Excess Proceeds to make an offer to purchase (an
"Asset Sale Offer") on a pro rata basis, from all holders, outstanding New
Notes, Old Notes, 2005 Notes and 2006 Notes in an aggregate principal amount
equal to the maximum principal amount that may be purchased out of Excess
Proceeds, at a purchase price (the "Offer Purchase Price") in cash equal to (a)
with respect to the Existing Notes, 100% of the Accreted Value thereof (as
defined in the relevant indenture) and (b) with respect to the Old Notes and the
New Notes, 100% of the principal amount thereof, plus, in each case, accrued and
unpaid interest, if any, to the purchase date, in accordance with the procedures
set forth in the relevant indenture. Upon completion of an Asset Sale Offer
(including payment of the Offer Purchase Price), any surplus Excess Proceeds
that were the subject of such offer shall cease to be Excess Proceeds, and the
Company may then use such amounts for general corporate purposes.
The Company will comply with the requirements of Section 14(e) under the
Exchange Act and any other securities laws and regulations, to the extend such
laws and regulations are applicable, in connection with the repurchase of New
Notes pursuant to an Asset Sale Offer.
CERTAIN COVENANTS
Set forth below are certain covenants contained in the Indenture:
Limitation on Indebtedness
The Company will not, and will not permit its Restricted Subsidiaries to,
directly or indirectly, incur any Indebtedness (including Acquired Indebtedness)
and the Company will not issue any Disqualified Stock or permit any of its
Restricted Subsidiaries to issue any Disqualified Stock or preferred stock;
provided that the
79
<PAGE> 84
Company may incur Indebtedness or issue Disqualified Stock if, after giving
effect to such issuance or incurrence on a pro forma basis, the Debt to EBITDA
Ratio of the Company does not exceed 5.5x in the case of any issuance or
incurrence on or before November 1, 1998, or 5.0x in the case of any issuance or
incurrence thereafter.
The foregoing limitation will not apply to: (a) the incurrence by the
Company or any of its Restricted Subsidiaries of Indebtedness under the Secured
Credit Facility; provided that the aggregate principal amount of Indebtedness
under such facility does not exceed $35 million at any one time outstanding; (b)
the Existing Indebtedness; (c) the incurrence by the Company or any of its
Restricted Subsidiaries of intercompany Indebtedness between or among the
Company and any of its Restricted Subsidiaries; (d) the incurrence by the
Company or any of its Restricted Subsidiaries of Interest Hedging Obligations
with respect to any floating rate Indebtedness that is permitted by the covenant
described in this paragraph; (e) the incurrence by the Company of any Exchange
Rate Obligations, provided that such Exchange Rate Obligations were entered into
in connection with transactions in the ordinary course of business or the
incurrence of Indebtedness that is permitted by the covenant described in this
paragraph; (f) the incurrence by the Company of Indebtedness represented by the
Existing Notes; (g) Indebtedness of the Company in connection with one or more
standby letters of credit issued in the ordinary course of business; (h)
Indebtedness in respect of performance, surety or appeal bonds provided by the
Company in the ordinary course of business; (i) Indebtedness of the Company not
to exceed, at any one time outstanding, one and a half times the amount of the
Net Cash Proceeds received by the Company from the issuance and sale of its
Qualified Stock (other than preferred stock) subsequent to the Issue Date;
provided such Indebtedness shall have a stated maturity no earlier than that of
the New Notes and is subordinated in right of payment to the New Notes; (j) the
incurrence by the Company or any of its Restricted Subsidiaries of Refinancing
Indebtedness issued in exchange for, or the proceeds of which are used to
refinance, repurchase, replace, refund or defease ("Refinance" and,
correlatively, "Refinanced" and "Refinancing") Indebtedness permitted pursuant
to clause (b) or (f) of this paragraph; provided that (i) the amount of such
Refinancing Indebtedness shall not exceed the principal amount of, premium, if
any, and accrued interest on the Indebtedness so Refinanced (or if such
Indebtedness was issued with original issue discount, the original issue price
plus amortization of the original issue discount at the time of the repayment of
such Indebtedness) plus the fees, expenses and costs of such Refinancing and
reasonable prepayment premiums, if any, in connection therewith; (ii) such
Refinancing Indebtedness shall have a stated maturity no earlier than the
Indebtedness being Refinanced; (iii) such Refinancing Indebtedness shall have an
Average Life equal to or greater than the Average Life of the Indebtedness being
Refinanced; (iv) if the Indebtedness being Refinanced is subordinated in right
of payment to the New Notes, such Refinancing Indebtedness shall be subordinated
in right of payment to the New Notes on terms at least as favorable to the
holders of New Notes as those contained in the documentation governing the
Indebtedness being so Refinanced; and (v) no Restricted Subsidiary shall incur
Refinancing Indebtedness to Refinance Indebtedness of the Company or another
Subsidiary; (k) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness of any Person which incurrence resulted directly
from an Investment described in clause (ix) of the definition of "Permitted
Investments" herein; provided that, (i) immediately after giving effect to such
Investment on a pro forma basis (and treating any Indebtedness which becomes, or
is anticipated to become, an obligation of the Company or any Restricted
Subsidiary as a result of such Investment as having been incurred by the Company
or such Restricted Subsidiary at the time of such Investment), the Company would
(A) be permitted to incur $1.00 of additional Indebtedness under the immediately
preceding paragraph or (B) have a Debt to EBITDA Ratio which is equal to or not
worse than the Debt to EBITDA Ratio of the Company immediately prior to such
Investment or (ii) such incurrence is otherwise permitted; provided further that
Indebtedness incurred by the Company and its Restricted Subsidiaries under this
clause (k) as a result of any such Investment does not exceed 50 percent of the
Fair Market Value of the Qualified Stock used as consideration in such
Investment; provided further that the aggregate principal amount of Indebtedness
incurred under this clause (k) does not exceed $50,000,000; (l) the incurrence
by the Company of Permitted Subordinated Financing; and (m) Indebtedness not
otherwise permitted to be incurred pursuant to the covenant described in this
paragraph in an aggregate amount not to exceed $428,634.
80
<PAGE> 85
Limitation on Issuances of Guarantees by Restricted Subsidiaries
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to the Indenture providing for a Guarantee
(a "Subsidiary Guarantee") of payment of the Notes by such Restricted Subsidiary
and (ii) such Restricted Subsidiary waives, and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the Company
or any other Restricted Subsidiary as a result of any payment by such Restricted
Subsidiary under its Subsidiary Guarantee. If the Guaranteed Indebtedness is (i)
pari passu with the Notes then the Guarantee of such Guaranteed Indebtedness
shall be pari passu with, or subordinated to, the Subsidiary Guarantee or (ii)
subordinated to the Notes, then the Guarantee of such Guaranteed Indebtedness
shall be subordinated to the Subsidiary Guarantee at least to the extent that
the Guaranteed Indebtedness is subordinated to the Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary shall provide by its terms that it shall be automatically and
unconditionally released and discharged upon the release or discharge of the
Guarantee which resulted in the creation of such Subsidiary Guarantee, except a
discharge or release by, or as a result of, payment under such Guarantee.
Limitation on Liens
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into, create, incur, assume or
suffer to exist any Liens of any kind, other than Permitted Liens, on or with
respect to any of its Property or assets now owned or hereafter acquired, or any
interest therein or any income or profits therefrom, without effectively
providing that the Notes shall be secured equally and ratably with (and provided
the Notes shall be secured prior to any secured obligation that is subordinated
in right of payment to the Notes) the obligations so secured for so long as such
obligations are so secured.
Limitation on Sale and Leaseback Transactions
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into, assume, Guarantee or
otherwise become liable with respect to any Sale and Leaseback Transaction,
unless (i) the Company or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Sale and Leaseback Transaction at
least equal to the Fair Market Value (as evidenced by a Board Resolution
delivered to the Trustee) of the Property or assets subject to such transaction;
(ii) the Attributable Indebtedness of the Company or such Restricted Subsidiary
with respect thereto is included as Indebtedness and would be permitted by the
covenant described under " -- Limitation on Indebtedness"; (iii) the Company or
such Restricted Subsidiary would be permitted to create a Lien on such Property
or assets without securing the Notes by the covenant described under
" -- Limitation on Liens"; and (iv) the Net Cash Proceeds from such transaction
are applied in accordance with the covenant described under " -- Asset Sales."
Restricted Payments
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, make any Restricted Payment unless, at
the time of and after giving effect to such proposed Restricted Payment, (i) no
Default or Event of Default shall have occurred and be continuing or shall occur
as a consequence thereof; (ii) after giving effect, on a pro forma basis, to
such Restricted Payment and the incurrence of any Indebtedness the net proceeds
of which are used to finance such Restricted Payment, the Company could incur at
least $1.00 of additional Indebtedness pursuant to the first paragraph of
"-- Limitation on Indebtedness"; and (iii) after giving effect to such
Restricted Payment on a pro forma basis, the aggregate amount expended or
declared for all Restricted Payments after the Issue Date does not exceed the
sum of (A) 50% of the Consolidated Net Income of the Company (or, if
Consolidated Net Income shall be a deficit, minus 100% of such deficit) for the
period (taken as one accounting period) beginning on the last day of the fiscal
quarter immediately preceding the Issue Date and ending on the last day of the
fiscal quarter
81
<PAGE> 86
immediately preceding the date of such Restricted Payment, plus (B) 100% of the
aggregate Net Cash Proceeds received by the Company subsequent to the Issue Date
from the issuance or sale (other than to a Restricted Subsidiary) of shares of
its Qualified Stock, including Qualified Stock issued upon the exercise of
options, warrants or rights to purchase Qualified Stock, plus (C) 100% of the
amount of any Indebtedness of the Company or any of its Restricted Subsidiaries
(as expressed on the face of a balance sheet in accordance with GAAP), or the
carrying value of any Disqualified Stock, which has been converted into,
exchanged for or satisfied by the issuance of shares of Qualified Stock of the
Company subsequent to the Issue Date, less the amount of any cash, or the value
of any other Property distributed by the Company or its Restricted Subsidiaries
upon such conversion, exchange or satisfaction, plus (D) 100% of the net
reduction in Investments, subsequent to the Issue Date, in any Person, resulting
from payments of interest on Indebtedness, dividends, repayments of loans or
advances, or other transfers of Property (but only to the extent such interest,
dividends, repayments or other transfers of Property are not included in the
calculation of Consolidated Net Income), in each case to the Company or any
Restricted Subsidiary from any Person (including, without limitation, from
Unrestricted Subsidiaries) or from redesignations of Unrestricted Subsidiaries
as Restricted Subsidiaries (valued in each case as provided in the definition of
"Investments"), not to exceed in the case of any Person the amount of
Investments previously made by the Company or any Restricted Subsidiary in such
Person and which was treated as a Restricted Payment, minus (E) 100% of the
amount of Investments made pursuant to clause (vii) of the following paragraph
subsequent to the Issue Date.
The foregoing limitations shall not prevent the Company from (i) paying a
dividend on its Capital Stock at any time within 60 days after the declaration
thereof if, on the declaration date, the Company could have paid such dividend
in compliance with the Indenture; (ii) retiring (A) any Capital Stock of the
Company or any Restricted Subsidiary of the Company or (B) Indebtedness of the
Company that is subordinate to the Notes or (C) Indebtedness of a Restricted
Subsidiary of the Company, in exchange for, or out of the proceeds of, the
substantially concurrent sale of Qualified Stock of the Company; (iii) retiring
any Indebtedness of the Company subordinated in right of payment to the Notes in
exchange for, or out of the proceeds of, the substantially concurrent incurrence
of Indebtedness of the Company (other than Indebtedness to a Subsidiary of the
Company), provided that such new Indebtedness (A) is subordinated in right of
payment to the Notes at least to the same extent as, (B) has an Average Life at
least as long as, and (C) has no scheduled principal payments due in any amount
earlier than, any equivalent amount of principal under the Indebtedness so
retired; (iv) retiring any Indebtedness of a Restricted Subsidiary of the
Company in exchange for, or out of the proceeds of, the substantially concurrent
incurrence of Indebtedness of the Company or any Restricted Subsidiary that is
permitted under the covenant described under " -- Limitation on Indebtedness"
and that (A) is not secured by any assets of the Company or any Restricted
Subsidiary to a greater extent than the retired Indebtedness was so secured, (B)
has an Average Life at least as long as the retired Indebtedness and (C) is
subordinated in right of payment to the Notes at least to the same extent as the
retired Indebtedness; (v) retiring any Capital Stock of the Company or any
Restricted Subsidiary of the Company held by any member of the Company's (or any
of its Subsidiaries') management pursuant to any management equity subscription
agreement or stock option plan in effect on the Issue Date or upon the death or
termination of such member, provided that the aggregate price paid for all such
retired Capital Stock shall not exceed, in the aggregate, the sum of $2.0
million plus the aggregate cash proceeds received by the Company subsequent to
the Issue Date from any reissuance of Capital Stock by the Company to members of
management of the Company and its Subsidiaries; (vi) making loans to members of
management of the Company as required pursuant to employment agreements with
such members, provided that the aggregate amount of all such loans shall not
exceed $2.2 million; (vii) making Investments in an aggregate amount not to
exceed $20,000,000 in joint ventures or other risk sharing arrangements (which
may include partnerships, limited liability companies, corporations or other
arrangements) (each a "Joint Venture Entity") the purpose of which is to engage
in the same or complementary lines of business as the Company or a Restricted
Subsidiary or in businesses consistent with the fundamental nature of the
operating business of the Company or a Restricted Subsidiary; provided the
management and operations of any such Joint Venture Entity are controlled by the
Company pursuant to (a) the charter documents of such Joint Venture Entity, or
(b) an agreement between or among the holders of the Voting Stock of such Joint
Venture Entity, or (c) a management agreement of a minimum duration of three or
more years between the Company and such Joint Venture Entity; (viii) permitting
a Restricted Subsidiary which became a Restricted Subsidiary as a result of
82
<PAGE> 87
an Investment by the Company or a Restricted Subsidiary described in clause
(vii) of this paragraph to declare or pay any dividend or distribution on any
Capital Stock of such Subsidiary to all holders of Capital Stock of such
Subsidiary on a pro rata basis; and (ix) permitting a Restricted Subsidiary to
pay a dividend with respect to any shares of Capital Stock of such Subsidiary
held by a lender, which shares of Capital Stock were acquired by such lender in
connection with the Secured Credit Facility.
Not later than the date of making any Restricted Payment (including any
Restricted Payment Permitted to be made pursuant to the previous paragraph), the
Company shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
required calculations were computed, which calculations may be based upon the
Company's latest available financial statements.
Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, cause or suffer to exist or become effective, or enter
into, any encumbrance or restriction (other than pursuant to law or regulation)
on the ability of any Restricted Subsidiary (i) to pay dividends or make any
other distributions in respect of its Capital Stock or pay any Indebtedness or
other obligation owed to the Company or any Restricted Subsidiary of the
Company; (ii) to make loans or advances to the Company or any Restricted
Subsidiary of the Company; or (iii) to transfer any of its Property or assets to
the Company or any other Restricted Subsidiary of the Company, except: (a) any
encumbrance or restriction existing as of the Issue Date pursuant to an
agreement relating to the Secured Credit Facility or the Existing Indebtedness;
(b) any encumbrance or restriction pursuant to an agreement relating to an
acquisition of assets or Property, so long as the encumbrances or restrictions
in any such agreement relate solely to the assets or Property so acquired; (c)
any encumbrance or restriction relating to any Indebtedness of any Restricted
Subsidiary existing on the date on which such Restricted Subsidiary is acquired
by the Company or any Restricted Subsidiary (other than Indebtedness issued by
such Restricted Subsidiary in connection with or in anticipation of its
acquisition), provided that the EBITDA of such Restricted Subsidiary is not
taken into account in determining whether such acquisition is permitted by the
terms of the Indenture; (d) any encumbrance or restriction pursuant to an
agreement effecting a permitted Refinancing of Indebtedness issued pursuant to
an agreement referred to in the foregoing clauses (a) through (c), so long as
the encumbrances and restrictions contained in any such Refinancing agreement
are not materially more restrictive than the encumbrances and restrictions
contained in such agreements; (e) customary provisions restricting subletting or
assignment of any lease of the Company or any Restricted Subsidiary or customary
provisions in certain agreements that restrict the assignment of such agreement
or any rights thereunder; (f) any temporary encumbrance or restriction with
respect to a Restricted Subsidiary pursuant to an agreement that has been
entered into for the sale or disposition of all or substantially all of the
Capital Stock of, or Property and assets of, such Restricted Subsidiary; and (g)
any restriction on the sale or other disposition of assets or Property securing
Indebtedness as a result of a Permitted Lien on such assets or Property
permitted by the covenant described under "-- Limitation on Liens."
Limitation on Issuance and Sale of Capital Stock of Restricted Subsidiaries
The Company (i) shall not permit any Restricted Subsidiary to issue any
Capital Stock other than to the Company or a Restricted Subsidiary and (ii)
shall not permit any Person other than the Company or a Restricted Subsidiary to
own any Capital Stock of any Restricted Subsidiary (other than directors'
qualifying shares), except for (a) a sale of 100% of the Capital Stock of a
Restricted Subsidiary sold in a transaction not prohibited by the covenant
described under "-- Asset Sales"; (b) Capital Stock of a Restricted Subsidiary
issued and outstanding on the Issue Date and held by Persons other than the
Company or any Restricted Subsidiary; (c) Capital Stock of a Restricted
Subsidiary issued and outstanding prior to the time that such Person becomes a
Restricted Subsidiary so long as such Capital Stock was not issued in
contemplation of such Person's becoming a Restricted Subsidiary or otherwise
being acquired by the Company; (d) any Disqualified Stock permitted to be issued
under "Limitation on Indebtedness"; (e) Capital Stock of a Subsidiary issued to
a lender or lenders under the Secured Credit Facility in an aggregate amount not
to exceed 7.25% of the
83
<PAGE> 88
outstanding Capital Stock of such Subsidiary; and (f) Capital Stock of a Person
which became or will become a Restricted Subsidiary as a result of an Investment
by the Company or a Restricted Subsidiary described in clause (vii) of the
second paragraph of the covenant described under "Restricted Payments" herein,
provided that, (A) the Company or such Restricted Subsidiary, as the case may
be, receives net consideration at the time of such issuance at least equal to
the Fair Market Value (as evidenced by a Board Resolution delivered to the
Trustee) of the Capital Stock issued, (B) any consideration received by the
Company or such Restricted Subsidiary in respect of such issuance consist of
Cash Proceeds and/or Telecommunications Assets and (C) the Company or such
Restricted Subsidiary, as the case may be, within 270 days of such issuance,
uses the Net Cash Proceeds from such issuance to (1) reinvest (or enters a
binding agreement to reinvest, provided that such reinvestment is completed
within 180 days of the date of such agreement) an amount equal to the Net Cash
Proceeds (or any portion thereof) from such issuance in Telecommunications
Assets and/or (2) apply an amount equal to such Net Cash Proceeds (or remaining
Net Cash Proceeds) from such issuance to repurchase or redeem Notes or to
permanently reduce Indebtedness of the Company (other than Indebtedness to a
Restricted Subsidiary) that is pari passu with the Notes or to permanently
reduce Indebtedness or preferred stock of any Restricted Subsidiary (other than
Indebtedness to, or preferred stock owned by, the Company or another Restricted
Subsidiary).
Transactions with Affiliates
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, sell, lease, transfer, or otherwise
dispose of any of its Properties or assets to, or purchase any Property or
assets from, or enter into any contract, agreement, understanding, loan, advance
or Guarantee with or for the benefit of, any Affiliate (each of the foregoing,
an "Affiliate Transaction"), unless (a) such Affiliate Transaction is on terms
that are no less favorable to the Company or such Restricted Subsidiary than
those that would have been obtained in a comparable arm's-length transaction by
the Company or such Restricted Subsidiary with a Person that is not an Affiliate
and (b) the Company delivers to the Trustee (i) with respect to any Affiliate
Transaction involving aggregate payments in excess of $1.0 million, a Board
Resolution certifying that such Affiliate Transaction complies with clause (a)
above and that such Affiliate Transaction has been approved by a majority of the
Independent Directors, who have determined that such Affiliate Transaction is in
the best interests of the Company or such Restricted Subsidiary and (ii) with
respect to any Affiliate Transaction (other than Permitted Subordinated
Financing) involving aggregate payments in excess of $5.0 million, an opinion as
to the fairness from a financial point of view to the Company or such Restricted
Subsidiary issued by an investment banking firm of national standing together
with an Officers' Certificate to the effect that such opinion complies with this
clause (ii); provided that the following shall not be deemed Affiliate
Transactions: (i) any employment agreement entered into by the Company or any of
its Restricted Subsidiaries in the ordinary course of business and consistent
with industry practice; (ii) any agreement or arrangement with respect to the
compensation of a director of the Company or any Restricted Subsidiary approved
by the Board of Directors and consistent with industry practice; (iii)
transactions between or among the Company and its Restricted Subsidiaries; (iv)
transactions permitted by the covenant described under "-- Restricted Payments";
(v) transactions pursuant to contracts existing on the Issue Date and listed in
a schedule to the Indenture; and (vi) loans and advances to employees and
officers of the Company or a Restricted Subsidiary in the ordinary course of
business and consistent with the past practice of the Company or such Restricted
Subsidiary, provided that the aggregate principal amount of all such loans and
advances shall not exceed $3.0 million at any one time outstanding, and
provided, further, that in the event the aggregate principal amount of all such
loans or advances exceeds $1.0 million at any one time outstanding, the Company
shall, within 180 days of the date such amount first exceeds $1.0 million,
reduce such amount to an amount less than $1.0 million.
Restricted and Unrestricted Subsidiaries
(a) The Company may designate a Subsidiary (including a newly formed or
newly acquired Subsidiary) of the Company or any of its Restricted Subsidiaries
as an Unrestricted Subsidiary if such Subsidiary does not have any obligations
which, if in Default, would result in a cross default on Indebtedness of the
Company or a Restricted Subsidiary (other than Indebtedness to the Company or a
Restricted Subsidiary), and (i) such
84
<PAGE> 89
subsidiary has total assets of $1,000 or less or (ii) such designation is
effective immediately upon such Person becoming a Subsidiary. Unless so
designated as an Unrestricted Subsidiary, any Person that becomes a Subsidiary
of the Company or any of its Restricted Subsidiaries shall be classified as a
Restricted Subsidiary thereof. Except as provided in clause (a)(i), no
Restricted Subsidiary may be redesignated as an Unrestricted Subsidiary.
(b) The Company will not, and will not permit any of its Restricted
Subsidiaries to, take any action or enter into any transaction or series of
transactions that would result in a Person (other than a newly formed Subsidiary
having no outstanding Indebtedness other than Indebtedness to the Company or a
Restricted Subsidiary at the date of determination) becoming a Restricted
Subsidiary (whether through an acquisition, the redesignation of an Unrestricted
Subsidiary or otherwise) unless, after giving effect to such action, transaction
or series of transactions, on a pro forma basis, (i) the Company could incur at
least $1.00 of additional Indebtedness pursuant to the first paragraph of
"-- Limitation on Indebtedness" and (ii) no Default or Event of Default would
occur; provided, however,that the foregoing restriction shall not apply to a
Person which becomes a Restricted Subsidiary as a result of (a) an Investment
described in clause (ix) of the definition of "Permitted Investments" herein or
(b) an Investment described in clause (vii) of the second paragraph of the
covenant described under "Restricted Payments" herein. Subject to this clause
(b), an Unrestricted Subsidiary may be redesignated as a Restricted Subsidiary.
(c) The designation of a Subsidiary as an Unrestricted Subsidiary or the
designation of an Unrestricted Subsidiary as a Restricted Subsidiary in
compliance with clause (b) shall be made by the Board of Directors pursuant to a
Board Resolution delivered to the Trustee and shall be effective as of the date
specified in such Board Resolution, which shall not be prior to the date such
Board Resolution is delivered to the Trustee.
Reports
Whether or not the Company is subject to Section 13(a) or 15(d) of the
Exchange Act, or any successor provision thereto, the Company shall file with
the SEC the annual reports, quarterly reports and other documents which the
Company would have been required to file with the SEC pursuant to such Section
13(a) or 15(d) or any successor provision thereto if the Company were subject
thereto, such documents to be filed with the SEC on or prior to the respective
dates (the "Required Filing Dates") by which the Company would have been
required to file them. The Company shall also (whether or not it is required to
file reports with the SEC), within 30 days of each Required Filing Date, (i)
transmit by mail to all holders of Notes, as their names and addresses appear in
the Security Register and to any Persons that request such reports in writing,
without cost to such holders or Persons, and (ii) file with the Trustee copies
of the annual reports, quarterly reports and other documents (without exhibits)
which the Company has filed or would have filed with the SEC pursuant to Section
13(a) or 15(d) of the Exchange Act, any successor provisions thereto or this
covenant. The Company shall not be required to file any report with the SEC if
the SEC does not permit such filing. In addition to the foregoing, commencing
with the unaudited information for the fiscal quarter ended September 30, 1997,
the Company will file with the SEC and will thereafter transmit by mail to the
Holders and file with the Trustee within the same time periods as set forth in
the second next preceding sentence, unaudited information, on an aggregate Fiber
Network basis (before headquarter allocations) segmented by the calendar year in
which each such Fiber Network became operational, setting forth the investment
in plant, property and equipment to date, revenue, EBITDA, EBIT, access lines,
fiber miles, route miles, buildings connected and voice grade equivalents;
provided, however, that the Company will provide such unaudited information with
respect to (i) all Fiber Networks that were initially operational at any time
prior to December 31, 1995 (all such Fiber Networks shall be deemed to have
become operational in calendar year 1995) and (ii) all Fiber Networks that were
initially operational in each succeeding calendar year (including all or any
portion of the then current year); and provided, further, that the Company need
no longer comply with the information requirements of this sentence after four
consecutive fiscal quarters for which the ratio of EBITDA of the Company to
Consolidated Interest Expense (other than dividends or distributions with
respect to preferred stock or Disqualified Stock of the Company) of the Company
is greater than 1.0 or after the occurrence of a Change of Control.
85
<PAGE> 90
Limitation on Construction of Fiber Networks
The Company may construct Fiber Networks in no more than 45 Metropolitan
Areas until the earlier of such time as (i) the ratio of EBITDA of the Company
to Consolidated Interest Expense (other than dividends or distributions with
respect to preferred stock or Disqualified Stock of the Company) of the Company
is greater than 1.0 for four consecutive fiscal quarters and (ii) the occurrence
of a Change of Control.
CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER
The Company will not, in any transaction or series of transactions,
consolidate with, or merge with or into, any other Person (other than a merger
of a Restricted Subsidiary into the Company in which the Company is the
continuing corporation), or sell, convey, assign, transfer, lease or otherwise
dispose of all or substantially all of the Property and assets of the Company
and the Restricted Subsidiaries taken as a whole to any other Person, unless:
(i) either (a) the Company shall be the continuing corporation or (b)
the corporation (if other than the Company) formed by such consolidation or
into which the Company is merged, or the Person which acquires, by sale,
assignment, conveyance, transfer, lease or disposition, all or
substantially all of the Property and assets of the Company and the
Restricted Subsidiaries taken as a whole (such corporation or Person, the
"Surviving Entity"), shall be a corporation organized and validly existing
under the laws of the United States of America, any political subdivision
thereof, any state thereof or the District of Columbia, and shall expressly
assume, by a supplemental indenture, the due and punctual payment of the
principal of (and premium, if any) and interest on all the Notes and the
performance of the Company's covenants and obligations under the Indenture;
(ii) immediately after giving effect to such transaction or series of
related transactions on a pro forma basis (including, without limitation,
any Indebtedness incurred or anticipated to be incurred in connection with
or in respect of such transaction or series of related transactions), no
Event of Default or Default shall have occurred and be continuing or would
result therefrom; and
(iii) immediately after giving effect to such transaction or series of
related transactions on a pro forma basis (including, without limitation,
any Indebtedness incurred or anticipated to be incurred in connection with
or in respect of such transaction or series of related transactions), the
Company (or the Surviving Entity, if the Company is not continuing) would
(A) be permitted to incur $1.00 of additional Indebtedness pursuant to the
first paragraph of "-- Limitation on Indebtedness" or (B) have a Total
Market Capitalization of at least $1.0 billion and total Indebtedness in an
amount less than 40% of its Total Market Capitalization.
SECURITY
The Old Notes are and the New Notes will be secured, pending disbursement
pursuant to the Escrow and Disbursement Agreement, by a pledge of the Escrow
Account, which initially contains approximately $70 million of the net proceeds
from the sale of the Old Notes (the "Collateral"), representing funds sufficient
to pay the first five interest payments on the Old Notes or the New Notes, as
the case may be.
The Company entered into the Escrow and Disbursement Agreement which
provided for the grant by the Company to the Trustee for the benefit of the
Holders of security interests in the Collateral. All such security interests
will secure the payment and performance when due of all of the obligations of
the Company under the Indenture with respect to the Notes and under such Notes,
as provided in the Escrow and Disbursement Agreement. The Liens created by the
Escrow and Disbursement Agreement will be first priority security interests in
the Collateral. The ability of holders to realize upon any such funds or
securities may be subject to certain bankruptcy law limitations in the event of
the bankruptcy of the Company.
Funds will be disbursed from the Escrow Account only to pay interest on the
Old Notes or the New Notes, as the case may be, and, upon certain repurchases or
redemptions of the Old Notes or the New Notes, as the case may be, to pay
principal of and premium, if any, thereon. Pending such disbursements, all funds
contained in the Escrow Account will be invested in Marketable Securities. Upon
the acceleration of the maturity of the Old Notes or the New Notes, as the case
may be, or the failure to pay principal at maturity or
86
<PAGE> 91
upon certain redemptions and repurchases of the Old Notes or the New Notes, as
the case may be, the Escrow and Disbursement Agreement provides for the
foreclosure by the Trustee upon the net proceeds of the Escrow Account. Under
the terms of the Indenture, the proceeds of the Escrow Account shall be applied,
first, to amounts owing to the Trustee in respect of fees and expenses of the
Trustee and second, to the obligations under the Notes and the Indenture.
Pursuant to the Escrow and Disbursement Agreement, if the Company makes the
first five interest payments on the Notes in a timely manner, immediately after
the fifth interest payment any remaining Marketable Securities will be released
from the Escrow Account to the Company and thereafter the Notes will be
unsecured.
EVENTS OF DEFAULT
Each of the following is an "Event Of Default" under the Indenture:
(a) default in the payment of interest on any Note when the same
becomes due and payable, and the continuance of such default for a period
of 30 days;
(b) default in the payment of the principal of (or premium, if any,
on) any Note at its maturity, upon optional redemption, required repurchase
(including pursuant to a Change of Control Offer or an Asset Sale Offer) or
otherwise or the failure to make an offer to purchase any Note as required;
(c) the Company fails to comply with any of its covenants or
agreements contained in "-- Limitation on Indebtedness," "-- Limitation on
Sale and Leaseback Transactions" or "-- Restricted Payments," or fails to
perform or comply with the provisions described under "-- Repurchase at the
Option of the Holders Upon a Change of Control," "-- Asset Sales" or
"-- Consolidation, Merger, Conveyance, Lease or Transfer";
(d) default in the performance, or breach, of any covenant or warranty
of the Company in the Indenture (other than a covenant or warranty
addressed in (a), (b) or (c) above) and continuance of such Default or
breach for a period of 30 days after written notice thereof has been given
to the Company by the Trustee or to the Company and the Trustee by holders
of at least 25% of the aggregate principal amount of the outstanding Notes;
(e) Indebtedness of the Company or any Restricted Subsidiary is not
paid when due within the applicable grace period, if any, or is accelerated
by the holders thereof and, in either case, the principal amount of such
unpaid or accelerated Indebtedness exceeds $10 million;
(f) the entry by a court of competent jurisdiction of one or more
final judgments against the Company or any Restricted Subsidiary in an
uninsured or unindemnified aggregate amount in excess of $10 million which
is not discharged, waived, appealed, stayed, bonded or satisfied for a
period of 60 consecutive days;
(g) the entry by a court having jurisdiction in the premises of (i) a
decree or order for relief in respect of the Company or any Significant
Restricted Subsidiary in an involuntary case or proceeding under U.S.
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal, state or foreign bankruptcy, insolvency or other similar law or
(ii) a decree or order adjudging the Company or any Significant Restricted
Subsidiary a bankrupt or insolvent, or approving as properly filed a
petition seeking reorganization, arrangement, adjustment or composition of
or in respect of the Company or any Significant Restricted Subsidiary under
U.S. bankruptcy laws, as now or hereafter constituted, or any other
applicable Federal, state or foreign bankruptcy, insolvency or similar law,
or appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or any Significant
Restricted Subsidiary or of any substantial part of the Property or assets
of the Company or any Significant Restricted Subsidiary, or ordering the
winding up or liquidation of the affairs of the Company or any Significant
Restricted Subsidiary, and the continuance of any such decree or order for
relief or any such other decree or order unstayed and in effect for a
period of 60 consecutive days; or
87
<PAGE> 92
(h) (i) the commencement by the Company or any Significant Restricted
Subsidiary of a voluntary case or proceeding under U.S. bankruptcy laws, as
now or hereafter constituted, or any other applicable Federal, state or
foreign bankruptcy, insolvency or other similar law or of any other case or
proceeding to be adjudicated a bankrupt or insolvent; or (ii) the consent
by the Company or any Significant Restricted Subsidiary to the entry of a
decree or order for relief in respect of the Company or any Significant
Restricted Subsidiary in an involuntary case or proceeding under U.S.
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal, state or foreign bankruptcy, insolvency or other similar law or to
the commencement of any bankruptcy or insolvency case or proceeding against
the Company or any Significant Restricted Subsidiary; or (iii) the filing
by the Company or any Significant Restricted Subsidiary of a petition or
answer or consent seeking reorganization or relief under U.S. bankruptcy
laws, as now or hereafter constituted, or any other applicable Federal,
state or foreign bankruptcy, insolvency or other similar law; or (iv) the
consent by the Company or any Significant Restricted Subsidiary to the
filing of such petition or to the appointment of or taking possession by a
custodian, receiver, liquidator, assignee, trustee, sequestrator or similar
official of the Company or any Significant Restricted Subsidiary or of any
substantial part of the Property or assets of the Company or any
Significant Restricted Subsidiary, or the making by the Company or any
Significant Restricted Subsidiary of an assignment for the benefit of
creditors; or (v) the admission by the Company or any Significant
Restricted Subsidiary in writing of its inability to pay its debts
generally as they become due; or (vi) the taking of corporate action by the
Company or any Significant Restricted Subsidiary in furtherance of any such
action.
If any Event of Default (other than an Event of Default specified in clause
(g) or (h) above) occurs and is continuing, then and in every such case the
Trustee or the holders of not less than 25% of the outstanding aggregate
principal amount of Notes may declare all unpaid principal of, and any accrued
and unpaid interest on, all Notes then outstanding to be immediately due and
payable by a notice in writing to the Company (and to the Trustee if given by
holders of the Notes), and upon any such declaration, such amount will become
and be immediately due and payable. If any Event of Default specified in clause
(g) or (h) above occurs, all unpaid principal of, and any accrued and unpaid
interest on, the Notes then outstanding shall become immediately due and payable
without any declaration or other act on the part of the Trustee or any holder of
Notes. In the event of a declaration of acceleration because an Event of Default
set forth in clause (e) above has occurred and is continuing, such declaration
of acceleration shall be automatically rescinded and annulled if the event of
default triggering such Event of Default pursuant to clause (e) shall be
remedied, or cured or waived by the holders of the relevant Indebtedness, within
60 days after such event of default. Under certain circumstances, the holders of
a majority in principal amount of the outstanding Notes by notice to the Company
and the Trustee may rescind an acceleration and its consequences.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required, within 30
days after becoming aware of any Default or Event of Default, to deliver to the
Trustee a statement describing such Default or Event of Default, its status and
what action the Company is taking or proposes to take with respect thereto.
AMENDMENT, SUPPLEMENT AND WAIVER
The Company and the Trustee may, at any time and from time to time, without
notice to or consent of any holder of Notes, enter into one or more indentures
supplemental to the Indenture (l) to evidence the succession of another Person
to the Company and the assumption by such successor of the covenants of the
Company in the Indenture and the Notes; (2) to add to the covenants of the
Company, for the benefit of the holders, or to surrender any right or power
conferred upon the Company by the Indenture; (3) to add any additional Events of
Default; (4) to provide for uncertificated Notes in addition to or in place of
certificated Notes; (5) to evidence and provide for the acceptance of
appointment under the Indenture of a successor Trustee; (6) to secure the Notes;
(7) to cure any ambiguity in the Indenture, to correct or supplement any
provision in the Indenture which may be inconsistent with any other provision
therein or to add any other provisions with respect to matters or questions
arising under the Indenture; provided such actions shall not adversely affect
the interests of the holders in any material respect; or (8) to comply with the
requirements of
88
<PAGE> 93
the Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act.
With the consent of the holders of not less than a majority in principal
amount of the outstanding Notes, the Company and the Trustee may enter into one
or more indentures supplemental to the Indenture for the purpose or adding any
provisions to or changing in any manner or eliminating any of the provisions of
the Indenture or modifying in any manner the rights of the holders; provided
that no such supplemental indenture shall, without the consent of the holders of
not less than 75% in principal amount of the outstanding Notes, modify the
obligations of the Company to make offers to purchase Notes upon a Change of
Control or from the proceeds of Asset Sales; and, provided, further, that no
such supplemental indenture shall, without the consent of the holder of each
outstanding Note: (l) change the stated maturity of the principal of, or any
installment of interest on, any Note, or reduce the principal amount thereof (or
premium, if any), or the interest thereon that would be due and payable upon
maturity thereof, or change the place of payment where, or the coin or currency
in which, any Note or any premium or interest thereon is payable, or impair the
right to institute suit for the enforcement of any such payment on or after the
maturity thereof; (2) reduce the percentage in principal amount of the
outstanding Notes, the consent of whose holders is necessary for any such
supplemental indenture or required for any waiver of compliance with certain
provisions of the Indenture or certain Defaults thereunder; (3) subordinate in
right of payment, or otherwise subordinate, the Notes to any other Indebtedness;
or (4) modify any provision of this paragraph (except to increase any percentage
set forth herein).
The holders of not less than a majority in principal amount of the
outstanding Notes may, on behalf of the holders of all the Notes, waive any past
Default under the Indenture and its consequences, except Default (1) in the
payment of the principal of (or premium, if any) or interest on any Note, or (2)
in respect of a covenant or provision hereof which under the first proviso to
the prior paragraph cannot be modified or amended without the consent of the
holders of not less than 75% in principal amount of the outstanding Notes, or
(3) in respect of a covenant or provision hereof which under the second proviso
to the prior paragraph cannot be modified or amended without the consent of the
holder of each outstanding Note affected; provided with respect to any past
Default referred to in clause (2) of this paragraph, the holders of not less
than 75% in principal amount of the outstanding Notes may waive such Default.
SATISFACTION AND DISCHARGE OF THE INDENTURE, DEFEASANCE
The Company may terminate its obligations under the Indenture when (i)
either (A) all outstanding Notes have been delivered to the Trustee for
cancellation or (B) all such Notes not theretofore delivered to the Trustee for
cancellation have become due and payable, will become due and payable within one
year or are to be called for redemption within one year under irrevocable
arrangements satisfactory to the Trustee for the giving of notice of redemption
by the Trustee in the name and at the expense of the Company, and the Company
has irrevocably deposited or caused to be deposited with the Trustee funds in an
amount sufficient to pay and discharge the entire indebtedness on the Notes, not
theretofore delivered to the Trustee for cancellation, for principal of
(premium, if any, on) and interest to the date of deposit or maturity or date of
redemption; (ii) the Company has paid or caused to be paid all sums payable by
the Company under the Indenture; and (iii) the Company has delivered an
Officers' Certificate and an Opinion of Counsel relating to compliance with the
conditions set forth in the Indenture.
The Company, at its election, shall (a) be deemed to have paid and
discharged its debt on the Notes and the Indenture shall cease to be of further
effect as to all outstanding Notes (except as to (i) rights of registration of
transfer, substitution and exchange of Notes and the Company's right of optional
redemption, (ii) rights of holders to receive payments of principal of, premium,
if any, and interest on the Notes (but not the Change of Control Purchase Price
or the Offer Purchase Price) and any rights of the holders with respect to such
amounts, (iii) the rights, obligations and immunities of the Trustee under the
Indenture and (iv) certain other specified provisions in the Indenture) or (b)
cease to be under any obligation to comply with certain restrictive covenants
including those described under "-- Certain Covenants," after the irrevocable
deposit by the Company with the Trustee, in trust for the benefit of the
holders, at any time prior to the maturity of the Notes, of (A) money in an
amount, (B) U.S. Government Obligations which through the
89
<PAGE> 94
payment of interest and principal will provide, not later than one day before
the due date of payment in respect of the Notes, money in an amount, or (C) a
combination thereof, sufficient to pay and discharge the principal of, and
interest on, the Notes then outstanding on the dates on which any such payments
are due in accordance with the terms of the Indenture and of the Notes. Such
defeasance or covenant defeasance shall be deemed to occur only if certain
conditions are satisfied, including, among other things, delivery by the Company
to the Trustee of an opinion of outside counsel acceptable to the Trustee to the
effect that (i) such deposit, defeasance and discharge will not be deemed, or
result in, a taxable event for federal income tax purposes with respect to the
holders; and (ii) the Company's deposit will not result in the trust or the
Trustee being subject to regulation under the Investment Company Act of 1940.
THE TRUSTEE
The Chase Manhattan Bank is the Trustee under the Indenture.
The holders of not less than a majority in principal amount of the
outstanding Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. Except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. The Indenture provides that in case an Event of Default shall
occur (which shall not be cured or waived), the Trustee will be required, in the
exercise of its rights and powers under the Indenture, to use the degree of care
of a prudent person in the conduct of such person's own affairs. Subject to such
provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any of the holders of the
Notes, unless such holders shall have offered to the Trustee indemnity
satisfactory to it against any loss, liability or expense.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes or the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation, solely by reason of such person's or
entity's status as a director, officer, employee, incorporator or stockholder of
the Company. By accepting a Note, each holder waives and releases all such
liability (but only such liability). The waiver and release are part of the
consideration for issuance of the Notes. Nonetheless, such waiver way not be
effective to waive liabilities under the federal securities laws and it has been
the view of the SEC that such a waiver is against public policy.
EXCHANGE OFFER; REGISTRATION RIGHTS
In connection with the Private Placement, the Company and the Initial
Purchasers entered into the Registration Rights Agreement pursuant to which the
Company agreed that it will, at its cost, for the benefit of the Holders of Old
Notes, (i) on or prior to September 21, 1997, file the Exchange Offer
Registration Statement with respect to the Exchange Offer to exchange the Old
Notes for the New Notes, which New Notes will have terms substantially identical
in all material respects to the Old Notes (except that the New Notes will not
contain terms with respect to transfer restrictions) and (ii) use commercially
reasonable efforts to cause the Exchange Offer Registration Statement to be
declared effective under the Securities Act on or prior to November 20, 1997.
Upon the Exchange Offer Registration Statement being declared effective, the
Company will offer the New Notes in exchange for surrender of the Old Notes. The
Company will keep the Exchange Offer open for not less than 20 business days (or
longer if required by applicable law) after the date notice of the Exchange
Offer is mailed to the Holders. For each of the Old Notes surrendered to the
Company pursuant to the Exchange Offer, the Holder who surrendered such Old
Notes will receive a New Note having a principal amount equal to that of the
surrendered Old Notes. Interest on each New Note will accrue (A) from the later
of (i) the last interest payment date on which interest was paid on the New Note
surrendered in exchange therefor, or (ii) if the New Note is surrendered for
exchange on a date in a period which includes the record date for an interest
payment date to occur on or after the date of such exchange and as to which
interest will be paid, the date of such interest payment date or (B) if no
interest has been paid on the Old Notes, from July 23, 1997.
90
<PAGE> 95
Under existing interpretations of the SEC contained in several no-action
letters to third parties, the New Notes will be freely transferable by holders
thereof (other than affiliates of the Company) after the Exchange Offer without
further registration under the Securities Act; provided, however, that each
Holder that wishes to exchange its Old Notes for New Notes will be required to
represent (i) that any New Notes to be received by it will be acquired in the
ordinary course of its business, (ii) that at the time of the commencement of
the Exchange Offer it has no arrangement or understanding with any person to
participate in the distribution (within the meaning of Securities Act) of the
New Notes in violation of the Securities Act, (iii) that it is not an
"affiliate" (as defined in Rule 405 promulgated under the Securities Act) of the
Company, (iv) if such Holder is not a broker-dealer, that it is not engaged in,
and does not intend to engage in, the distribution of New Notes and (v) if such
Holder is a broker-dealer (a "Participating Broker-Dealer") that will receive
New Notes for its own account in exchange for Old Notes that were acquired as a
result of market-making or other trading activities, that it will deliver a
prospectus in connection with any resale of such New Notes. The SEC has taken
the position that Participating Broker-Dealers may fulfill their prospectus
delivery requirements with respect to the New Notes (other than a resale of an
unsold allotment from the original sale of the Old Notes) with the prospectus
contained in the Exchange Offer Registration Statement. The Company has agreed
to make available, for a period of 180 days after consummation of the Exchange
Offer, a prospectus meeting the requirements of the Securities Act for use by
Participating Broker-Dealers and other persons, if any, with similar prospectus
delivery requirements for use in connection with any resale of New Notes.
If, (i) because of any change in law or in currently prevailing
interpretations of the staff of the SEC, the Company is not permitted to effect
an Exchange Offer, (ii) the Exchange Offer Registration Statement is not
declared effective within 120 days of the Issue Date, (iii) in certain
circumstances, certain holders of unregistered Notes so request or (iv) in the
case of any Holder that participates in the Exchange Offer, such Holder does not
receive New Notes on the date of the exchange that may be sold without
restriction under state and federal securities laws (other than due solely to
the status of such Holder as an affiliate of the Company within the meaning of
the Securities Act), then in each case, the Company will (x) promptly deliver to
the Holders and the Trustee written notice thereof and (y) at its sole expense,
(a) as promptly as practicable (but in no event later than 60 days after the
Issue Date), file a Shelf Registration statement covering resales of the Old
Notes or the New Notes as the case may be, (b) use its commercially reasonable
efforts to cause the Shelf Registration Statement to be declared effective under
the Securities Act and (c) use its commercially reasonable efforts to keep
effective the Shelf Registration Statement until the earlier of three years
after the Issue Date and such time as all of the applicable Notes have been sold
thereunder. The Company will, in the event that a Shelf Registration Statement
is filed, provide to each Holder copies of the prospectus that is a part of the
Shelf Registration Statement, notify each such Holder when the Shelf
Registration Statement for the Notes has become effective and take certain other
actions as are required to permit unrestricted resales of the Notes. A Holder
that sells Notes pursuant to the Shelf Registration Statement will be required
to be named as a selling security holder in the related prospectus and to
deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under Securities Act in connection with such sales and will
be bound by the provisions of the Registration Rights Agreement that are
applicable to such a Holder (including certain indemnification rights and
obligations).
If the Company fails to comply with the above provision or if the Exchange
Offer Registration Statement or the Shelf Registration Statement fails to become
effective, then, as liquidated damages, additional interest (the "Additional
Interest") shall become payable in respect of the Notes as follows:
(i) if (A) neither the Exchange Offer Registration Statement nor the
Shelf Registration Statement is filed with the SEC within 60 days following
the Issue Date or (B) notwithstanding that the Company has consummated or
will consummate an Exchange Offer, the Company is required to file a Shelf
Registration Statement and such Shelf Registration Statement is not filed
on or prior to the date required by the Registration Rights Agreement, then
commencing on the day after either such required filing date, Additional
Interest shall be paid on the principal amount of the Notes at a rate per
annum equal to 0.5% of the principal amount of the Notes; or
(ii) if (A) neither the Exchange Offer Registration Statement nor a
Shelf Registration Statement is declared effective by the SEC within 120
days following the Issue Date or (B) notwithstanding that the
91
<PAGE> 96
Company has consummated or will consummate an Exchange Offer, the Company
is required to file a Shelf Registration Statement and such Shelf
Registration Statement is not declared effective by the Commission on or
prior to the 120th day following the Issue Date, then, commencing on the
day after either such required effective date, Additional Interest shall be
paid on the principal amount of the Notes at a rate per annum equal to 0.5%
of the principal amount of the Notes; or
(iii) if applicable, the Shelf Registration Statement has been
declared effective and such Shelf Registration Statement ceases to be
effective at any time prior to the second anniversary of the Issue Date
(other than after such time as all Notes have been disposed of thereunder),
then Additional Interest shall be paid on the principal amount of the Notes
at a rate per annum equal to 0.5% of the principal amount of the Notes
commencing on the day such Shelf Registration Statement ceases to be
effective;
provided, however, that the Additional Interest rate on the Notes may not exceed
in the aggregate 1.5% per annum of the principal amount; provided, further,
however, that (1) upon the filing of the Exchange Offer Registration Statement
or a Shelf Registration Statement (in the case of clause (i) above), (2) upon
the effectiveness of the Exchange Offer Registration Statement or a Shelf
Registration Statement (in the case of clause (ii) above), or (3) upon the
effectiveness of the Shelf Registration Statement which had ceased to remain
effective (in the case of clause (iii) above), Additional Interest on the Notes
as a result of such clause (or the relevant subclause thereof), as the case may
be, shall cease to accrue and the terms of the Notes shall revert to the
original terms set forth on the cover page of this Prospectus.
Any amounts of Additional Interest due pursuant to clause (i), (ii) or
(iii) above will be payable in cash on January 15 and July 15 of each year.
In addition, certain investment management accounts for which W.R. Huff
acts as investment advisor and on behalf of which W.R. Huff purchased Old Notes
in the Private Placement are entitled to demand registration rights with respect
to Notes, if any, held by them after the expiration date of the Shelf
Registration Statement.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by, all the provisions of the Registration Rights Agreement, a copy
of which will be available upon request to the Company.
BOOK-ENTRY; DELIVERY AND FORM
All New Notes will be represented by a single permanent global certificate
in definitive, fully registered form (the "Global Note"). The Global Note will
be deposited on the Issue Date with, or on behalf of, The Depository Trust
Company, New York, New York ("DTC") and registered in the name of a nominee of
DTC.
The Global Note. The Company expects that pursuant to procedures
established by DTC (i) upon the issuance of the Global Note, DTC or its
custodian will credit, on its internal system, the principal amount of New Notes
of the individual beneficial interests represented by such Global Note to the
respective accounts of persons who have accounts with such depositary and (ii)
ownership of beneficial interests in the Global Note will be shown on, and the
transfer of such ownership will be effected only through, records maintained by
DTC or its nominee (with respect to interests of participants) and the records
of participants (with respect to interests of persons other than participants).
Such accounts initially were designated by or on behalf of the Initial
Purchasers and ownership of beneficial interests in the Global Note will be
limited to persons who have accounts with DTC ("participants") or persons who
hold interests through participants.
So long as DTC, or its nominee, is the registered owner or holder of the
Notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the New Notes represented by such Global Note for all
purposes under the Indenture. No beneficial owner of an interest in the Global
Note will be able to transfer that interest except in accordance with DTC's
procedures, in addition to those provided for under the Indenture with respect
to the Notes.
92
<PAGE> 97
Payments of the principal of, premium (if any), and interest (including
Additional Interest) on, the Global Note will be made to DTC or its nominee, as
the case may be, as the registered owner thereof. None of the Company, the
Trustee or any Paying Agent will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, interest (including Additional Interest) on the
Global Note, will credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of the Global Note as shown on the records of DTC or its nominee. The Company
also expects that payments by participants to owners of beneficial interests in
the Global Note held through such participants will be governed by standing
instructions and customary practice, as is now the case with securities held for
the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a holder requires physical delivery of a Note in
definitive form (a "Certificated Security") for any reason, including to sell
Notes to persons in states which require physical delivery of the Notes, or to
pledge such securities, such holder must transfer its interest in the Global
Note, in accordance with the normal procedures of DTC and with the procedures
set forth in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange as
described below) only at the direction of one or more participants to whose
account the DTC interests in the Global Note are credited and only in respect of
such portion of the aggregate principal amount of Notes as to which such
participant or participants has or have given such direction. However, if there
is an Event of Default under the Indenture, DTC will exchange the Global Note
for Certificated Securities, which it will distribute to its participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Note and a successor depositary is not
appointed by the Company within 90 days, Certificated Securities will be issued
in exchange for the Global Note.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Notes in accordance with the Indenture.
The Company, the Registrar and the Trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a holder to pay any taxes and fees required by law or
permitted by the Indenture.
93
<PAGE> 98
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any capitalized terms used herein for which no definition
is provided.
"Acquired Indebtedness" means, with respect to any specified Person,
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person,
but excluding Indebtedness which is extinguished, retired or repaid in
connection with such other Person merging with or into or becoming a Subsidiary
of such specified Person.
"Affiliate" means, as to any Person, any other Person which directly or
indirectly controls, or is under common control with, or is controlled by, such
Person; provided that each Unrestricted Subsidiary shall be deemed to be an
Affiliate of the Company and of each other Subsidiary of the Company; provided,
further, neither the Company nor any of its Restricted Subsidiaries shall be
deemed to be Affiliates of each other; and provided, further, any lender under
the Secured Credit Facility and its Affiliates shall not be deemed to be
Affiliates of the Company or any Restricted Subsidiary solely as a result of the
existence of the Secured Credit Facility or their holdings of Capital Stock of
the Company or any Restricted Subsidiary acquired in connection with the Secured
Credit Facility. For purposes of this definition, "control" (including, with
correlative meanings, the terms "controlling," "under common control with" and
"controlled by"), and as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of Voting Stock, by agreement or otherwise; provided that beneficial
ownership of 10% or more of the Voting Stock of a Person shall be deemed to be
control.
"Asset Sale" means, with respect to any Person, any transfer, conveyance,
sale, lease or other disposition (including, without limitation, by way of
consolidation or merger, but excluding by means of any Sale and Leaseback
Transaction or by the granting of a Lien permitted under "-- Limitation on
Liens") by such Person or any of its Restricted Subsidiaries to any Person other
than the Company or a Restricted Subsidiary of the Company, in one transaction,
or a series of related transactions (each hereinafter referred to as a
"Disposition"), of Property or assets of such Person or any of its Restricted
Subsidiaries, the Fair Market Value of which exceeds $2 million, other than (i)
a Disposition of Property in the ordinary course of business consistent with
industry practice, (ii) a Disposition that constitutes a Restricted Payment
permitted under "-- Restricted Payments" and (iii) a Disposition by the Company
in connection with a transaction permitted under "-- Consolidation, Merger,
Conveyance, Lease or Transfer."
"Attributable Indebtedness" means, with respect to any Sale and Leaseback
Transaction of any Person, as at the time of determination, the greater of (i)
the capitalized amount in respect of such transaction that would appear on the
balance sheet of such Person in accordance with GAAP and (ii) the present value
(discounted at a rate consistent with accounting guidelines, as determined in
good faith by such Person) of the payments during the remaining term of the
lease (including any period for which such lease has been extended or may, at
the option of the lessor, be extended) or until the earliest date on which the
lessee may terminate such lease without penalty or upon payment of a penalty (in
which case the rental payments shall include such penalty).
"Average Life" means, as of any date, with respect to any debt security or
Disqualified Stock, the quotient obtained by dividing (i) the sum of the
products of (x) the number of years from such date to the dates of each
scheduled principal payment or redemption payment (including any sinking fund or
mandatory redemption payment requirements) of such debt security or Disqualified
Stock multiplied in each case by (y) the amount of such principal or redemption
payment, by (ii) the sum of all such principal or redemption payments.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board of Directors.
94
<PAGE> 99
"Board Resolution" means a duly adopted resolution of the Board of
Directors in full force and effect at the time of determination and certified as
such.
"Capital Lease Obligation" of any Person means the obligation to pay rent
or other payment amounts under a lease of (or other Indebtedness arrangement
conveying the right to use) real or personal property of such Person which is
required to be classified and accounted for as a capital lease or a liability on
the face of a balance sheet of such Person in accordance with GAAP and the
stated maturity thereof shall be the date of the last payment of rent or any
amount due under such lease prior to the first date upon which such lease may be
terminated by the lessee without payment of a penalty.
"Capital Stock" in any Person means any and all shares, interests,
participations or other equivalents in the equity interest (however designated)
in such Person and any rights (other than Indebtedness convertible into an
equity interest), warrants or options to acquire an equity interest in such
Person.
"Cash Proceeds" means, with respect to any Asset Sale or issuance or sale
of Capital Stock by any Person, the aggregate consideration received in respect
of such sale or issuance by such Person in the form of cash or Eligible Cash
Equivalents.
"Change of Control" shall be deemed to occur if (i) the sale, conveyance,
transfer or lease of all or substantially all of the assets of the Company to
any "Person" or "group" (within the meaning of Sections 13(d)(3) and 14(d)(2) of
the Exchange Act or any successor provision to either of the foregoing,
including any group acting for the purpose of acquiring, holding or disposing of
securities within the meaning of Rule 13d-5(b)(i) under the Exchange Act) (other
than any Permitted Holder or any Restricted Subsidiary of the Company) shall
have occurred; (ii) any "Person" or "group" (within the meaning of Sections
13(d)(3) and 14(d)(2) of the Exchange Act or any successor provision to either
of the foregoing, including any group acting for the purpose of acquiring,
holding or disposing of securities within the meaning of Rule 13d-5(b)(i) under
the Exchange Act), other than any Permitted Holder, becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 35% of the
total voting power of all classes of the Voting Stock of the Company and/or
warrants or options to acquire such Voting Stock, calculated on a fully diluted
basis, and such voting power percentage is greater than or equal to the total
voting power percentage then beneficially owned by the Permitted Holders in the
aggregate; or (iii) during any period of two consecutive years, individuals who
at the beginning of such period constituted the Board of Directors (together
with any new directors whose election or appointment by such board or whose
nomination for election by the shareholders of the Company was approved by a
vote of a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors then in office.
"Consolidated Interest Expense" means, with respect to any Person for any
period, without duplication, (A) the sum of (i) the aggregate amount of cash and
non-cash interest expense (including capitalized interest) of such Person and
its Restricted Subsidiaries for such period as determined on a consolidated
basis in accordance with GAAP in respect of Indebtedness (including, without
limitation, (v) any amortization of debt discount, (w) net costs associated with
Interest Hedging Obligations (including any amortization of discounts), (x) the
interest portion of any deferred payment obligation, (y) all accrued interest
and (z) all commissions, discounts and other fees and charges owed with respect
to letters of credit, bankers' acceptances or similar facilities) paid or
accrued, or scheduled to be paid or accrued, during such period; (ii) dividends
or distributions with respect to preferred stock or Disqualified Stock of such
Person (and of its Restricted Subsidiaries if paid to a Person other than such
Person or its Restricted Subsidiaries) declared and payable in cash; (iii) the
portion of any rental obligation of such Person or its Restricted Subsidiaries
in respect of any Capital Lease Obligation allocable to interest expense in
accordance with GAAP; (iv) the portion of any rental obligation of such Person
or its Restricted Subsidiaries in respect of any Sale and Leaseback Transaction
allocable to interest expense (determined as if such were treated as a Capital
Lease Obligation); and (v) to the extent any Indebtedness of any other Person is
Guaranteed by such Person or any of its Restricted Subsidiaries, the aggregate
amount of interest paid, accrued or scheduled to be paid or accrued, by such
other Person during such period attributable to any such Indebtedness, less (B)
to the extent included in
95
<PAGE> 100
(A) above, amortization or write-off of deferred financing costs of such Person
and its Restricted Subsidiaries during such period and any charge related to any
premium or penalty paid in connection with redeeming or retiring any
Indebtedness of such Person and its Restricted Subsidiaries prior to its stated
maturity; in the case of both (A) and (B) above, after elimination of
intercompany accounts among such Person and its Restricted Subsidiaries and as
determined in accordance with GAAP.
"Consolidated Net Income" of any Person means, for any period, the
aggregate net income (or net loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis determined in accordance
with GAAP; provided that there shall be excluded therefrom, without duplication,
(i) all items classified as extraordinary, (ii) any net income of any Person
other than such Person and its Restricted Subsidiaries, except to the extent of
the amount of dividends or other distributions actually paid to such Person or
its Restricted Subsidiaries by such other Person during such period; (iii) the
net income of any Person acquired by such Person or any of its Restricted
Subsidiaries in a pooling-of-interests transaction for any period prior to the
date of the related acquisition; (iv) any gain or loss, net of taxes, realized
on the termination of any employee pension benefit plan; (v) net gains (but not
net losses) in respect of Asset Sales by such Person or its Restricted
Subsidiaries; (vi) the net income (but not net loss) of any Restricted
Subsidiary of such Person to the extent that the payment of dividends or other
distributions to such Person is restricted by the terms of its charter or any
agreement, instrument, contract, judgment, order, decree, statute, rule,
governmental regulation or otherwise, except for any dividends or distributions
actually paid by such Restricted Subsidiary to such Person; (vii) with regard to
a non-wholly owned Restricted Subsidiary, any aggregate net income (or loss) in
excess of such Person's or such Restricted Subsidiary's pro rata share of such
non-wholly owned Restricted Subsidiary's net income (or loss); and (viii) the
cumulative effect of changes in accounting principles.
"Consolidated Tangible Assets" of any Person means, as of any date, the sum
for such Person and its Restricted Subsidiaries (after eliminating intercompany
items) of the net book value of all Property and assets of such Person and its
Restricted Subsidiaries reflected on a balance sheet of such Person or such
Restricted Subsidiary, as the case may be, prepared in accordance with GAAP,
less the net book value of all items that would be classified as intangibles
under GAAP, including, without limitation, (i) licenses, patents, patent
applications, copyrights, trademarks, trade names, goodwill, noncompete
agreements and organizational expenses, and (ii) un-amortized deferred financing
costs, debt discount and expenses.
"Debt to EBITDA Ratio" means, as at any date of determination, the ratio of
(i) the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis as at the date of determination to (ii) the
aggregate amount of EBITDA of the Company and its Restricted Subsidiaries for
the four preceding fiscal quarters for which financial information is available
immediately prior to the date of determination; provided that any Indebtedness
incurred or retired by the Company or any of its Restricted Subsidiaries during
the fiscal quarter in which the date of determination occurs shall be calculated
as if such Indebtedness was so incurred or retired on the first day of the
fiscal quarter in which the date of determination occurs; and provided, further,
that (x) if the transaction giving rise to the need to calculate the Debt to
EBITDA Ratio would have the effect of increasing or decreasing Indebtedness or
EBITDA in the future, Indebtedness or EBITDA shall be calculated on a pro forma
basis as if such transaction had occurred on the first day of such four fiscal
quarter period preceding the date of determination and (y) if during such four
fiscal quarter period the Company or any of its Restricted Subsidiaries shall
have engaged in any Asset Sale, EBITDA for such period shall be reduced by an
amount equal to the EBITDA (if positive), or increased by an amount equal to the
EBITDA (if negative), directly attributable to the assets which are the subject
of such Asset Sale and any related retirement of Indebtedness as if such Asset
Sale and related retirement of Indebtedness had occurred on the first day of
such period or (z) if during such four fiscal quarter period the Company or any
of its Restricted Subsidiaries shall have acquired any material assets outside
the ordinary course of business, EBITDA shall be calculated on a pro forma basis
as if such asset acquisition and related financing had occurred on the first day
of such period.
"Default" means any event, act or condition, the occurrence of which is, or
after notice or the passage of time or both would be, an Event of Default.
96
<PAGE> 101
"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, or otherwise, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, or is exchangeable for
Indebtedness at any time, in whole or in part, on or prior to the date on which
the Notes mature.
"EBIT" means the amount calculated in the same manner as EBITDA, but not
including clauses (iii) and (iv) of the definition thereof.
"EBITDA" means, with respect to any Person for any period, the sum for such
Person for such period of Consolidated Net Income plus, to the extent reflected
in the income statement of such Person for such period from which Consolidated
Net Income is determined, without duplication, (i) Consolidated Interest
Expense, (ii) income tax expense, (iii) depreciation expense, (iv) amortization
expense, (v) any non-cash expense related to the issuance to employees of such
Person of options to purchase Capital Stock of such Person and (vi) any charge
related to any premium or penalty paid in connection with redeeming or retiring
any Indebtedness prior to its stated maturity and minus, to the extent reflected
in such income statement, any non-cash credits that had the effect of increasing
Consolidated Net Income of such Person for such period. This definition of
EBITDA is used only for the purpose of this Description of the Notes and the
Indenture.
"Eligible Cash Equivalents" means (i) securities issued or directly and
fully guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof), (ii) time deposits and
certificates of deposit of any commercial bank organized in the United States
having capital and surplus in excess of $500 million with a maturity date not
more than one year from the date of acquisition, (iii) repurchase obligations
with a term of not more than seven days for underlying securities of the types
described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (ii) above, (iv) direct obligations issued by
any state of the United States of America or any political subdivision of any
such state or any public instrumentality thereof maturing, or subject to tender
at the option of the holder thereof within ninety days after the date of
acquisition thereof and, at the time of acquisition, having a rating of A or
better from Standard & Poor's Ratings Group ("Standard & Poor's") or A-2 or
better from Moody's Investors Service, Inc. ("Moody's"), (v) commercial paper
issued by the parent corporation of any commercial bank organized in the United
States having capital and surplus in excess of $500 million and commercial paper
issued by others having one of the two highest ratings obtainable from either
Standard & Poor's or Moody's and in each case maturing within ninety days after
the date of acquisition, (vi) overnight bank deposits and bankers' acceptances
at any commercial bank organized in the United States having capital and surplus
in excess of $500 million, (vii) deposits available for withdrawal on demand
with a commercial bank organized in the United States having capital and surplus
in excess of $500 million and (viii) investments in money market funds
substantially all of whose assets comprise securities of the types described in
clauses (i) through (vi).
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus of not less than $500 million or its equivalent in
foreign currency, whose debt is rated "A" (or higher) according to Standard &
Poor's or Moody's at the time as of which any investment or rollover therein is
made.
"Equity Offering" means an offering of Common Stock of the Company
resulting in net proceeds to the Company in excess of $20 million.
"Escrow Account" means an escrow account for the deposit of approximately
$70 million of the net proceeds from the sale of the Notes under the Escrow and
Disbursement Agreement.
"Escrow Agent" means The Bank of New York, as Escrow Agent under the Escrow
and Disbursement Agreement, or any successor thereto appointed pursuant to such
agreement.
"Escrow and Disbursement Agreement" means the Escrow and Disbursement
Agreement, dated as of the date of the Indenture, by and among the Escrow Agent,
the Trustee and the Company, governing the disbursement of funds from the Escrow
Account.
97
<PAGE> 102
"Exchange Rate Obligation" means, with respect to any Person, any currency
swap agreements, forward exchange rate agreements, foreign currency futures or
options, exchange rate collar agreements, exchange rate insurance and other
agreements or arrangements, or combination thereof, designed to provide
protection against fluctuations in currency exchange rates.
"Existing Indebtedness" means Indebtedness outstanding on the date of the
Indenture (other than under the Secured Credit Facility), including the 2005
Notes and the 2006 Notes, and disclosed in a schedule attached to the Indenture,
and the incurrence by the Company of Indebtedness represented by the 2005 Notes
and the 2006 Notes.
"Fair Market Value" means, with respect to any asset or Property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy, as determined in good faith by the Board of
Directors.
"Fiber Network" means a digital fiber optic telecommunications network
wholly owned by the Company that serves a Metropolitan Area.
"GAAP" means United States generally accepted accounting principles,
consistently applied, as set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board, or in such other statements by such other entity as may be
approved by a significant segment of the accounting profession of the United
States, that are applicable to the circumstances as of the date of
determination; provided that, except as otherwise specifically provided, all
calculations made for purposes of determining compliance with the terms of the
provisions of the Indenture shall utilize GAAP as in effect on the Issue Date.
"Guarantee" means any direct or indirect obligation, contingent or
otherwise, of a Person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other Person in any manner (and
"Guaranteed," "Guaranteeing" and "Guarantor" shall have meanings correlative to
the foregoing).
"incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), extend,
assume, Guarantee or otherwise become liable in respect of such Indebtedness or
other obligation or the recording, as required pursuant to GAAP or otherwise, of
any such Indebtedness or obligation on the balance sheet of such Person (and
"incurrence," "incurred," "incurrable" and "incurring," shall have meanings
correlative to the foregoing); provided that a change in GAAP that results in an
obligation of such Person that exists at such time becoming Indebtedness shall
not be deemed an incurrence of such Indebtedness. Indebtedness otherwise
incurred by a Person before it becomes a Subsidiary of the Company shall be
deemed to have been incurred at the time at which it becomes a Subsidiary.
"Indebtedness" means at any time (without duplication), with respect to any
Person, whether recourse is to all or a portion of the assets of such Person,
and whether or not contingent, (i) any obligation of such Person for money
borrowed, (ii) any obligation of such Person evidenced by bonds, debentures,
notes, Guarantees or other similar instruments, including, without limitation,
any such obligations incurred in connection with acquisition of Property, assets
or businesses, excluding trade accounts payable made in the ordinary course of
business, (iii) any reimbursement obligation of such Person with respect to
letters of credit, bankers' acceptances or similar facilities issued for the
account of such Person, (iv) any obligation of such Person issued or assumed as
the deferred purchase price of Property or services (but excluding trade
accounts payable or accrued liabilities arising in the ordinary course of
business, which in either case are not more than 60 days overdue or which are
being contested in good faith), (v) any Capital Lease Obligation of such Person,
(vi) the maximum fixed redemption or repurchase price of Disqualified Stock of
such Person and, to the extent held by other Persons, the maximum fixed
redemption or repurchase price of Disqualified Stock of such Person's Restricted
Subsidiaries, at the time of determination, (vii) the notional amount of any
Interest Hedging Obligations or Exchange Rate Obligations of such Person at the
time of determination, (viii) any Attributable Indebtedness with respect to any
Sale and Leaseback Transaction to which such Person is a party and (ix) any
obligation of the type referred to in clauses (i) through (viii) of this
definition of another Person and all dividends and distributions of another
Person the payment of which, in either case, such Person has
98
<PAGE> 103
Guaranteed or is responsible or liable for, directly or indirectly, as obligor,
Guarantor or otherwise. For purposes of the preceding sentence, the maximum
fixed repurchase price of any Disqualified Stock that does not have a fixed
repurchase price shall be calculated in accordance with the terms of such
Disqualified Stock as if such Disqualified Stock were repurchased on any date on
which Indebtedness shall be required to be determined pursuant to the Indenture;
provided that if such Disqualified Stock is not then permitted to be
repurchased, the repurchase price shall be the book value of such Disqualified
Stock. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability of any Guarantees at such date; provided that
for purposes of calculating the amount of the 2005 Notes or 2006 Notes
outstanding at any date, the amount of such 2005 Notes or 2006 Notes shall be
the Accreted Value (as defined in the relevant indenture) thereof as of such
date unless cash interest has commenced to accrue pursuant to the relevant
indenture, in which case the amount of the 2005 Notes or 2006 Notes outstanding
will be determined pursuant to the relevant indenture and will not include any
accrued and unpaid cash interest which would otherwise be included in Accreted
Value because of clause (iii) of the definition thereof in the relevant
indenture.
"Interest Hedging Obligation" means, with respect to any Person, an
obligation of such Person pursuant to any interest rate swap agreement, interest
rate cap, collar or floor agreement or other similar agreement or arrangement
designed to protect against or manage such Person's or any of its Subsidiaries'
exposure to fluctuations in interest rates.
"Investment" in any Person means any direct, indirect or contingent (i)
advance or loan to, Guarantee of any Indebtedness of, extension of credit or
capital contribution to such Person, (ii) the acquisition of any shares of
Capital Stock, bonds, notes, debentures or other securities of such Person, or
(iii) the acquisition, by purchase or otherwise, of all or substantially all of
the business, assets or stock or other evidence of beneficial ownership of such
Person; provided that Investments shall exclude commercially reasonable
extensions of trade credit. The amount of any Investment shall be the original
cost of such Investment, plus the cost of all additions thereto and minus the
amount of any portion of such investment repaid to such Person in cash as a
repayment of principal or a return of capital, as the case may be, but without
any other adjustments for increases or decreases in value, or write-ups,
write-downs or write-offs with respect to such Investment. In determining the
amount of any Investment involving a transfer of any Property other than cash,
such Property shall be valued at its Fair Market Value at the time of such
transfer.
"Issue Date" means the date on which the Notes were first authenticated and
delivered under the Indenture.
"Lien" means, with respect to any Property or other asset, any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien (statutory or other), charge, easement, encumbrance, preference,
priority or other security or similar agreement or preferential arrangement of
any kind or nature whatsoever on or with respect to such Property or other asset
(including, without limitation, any conditional sale or title retention
agreement having substantially the same economic effect as any of the
foregoing).
"Marketable Securities" means (i) U.S. Government Securities maturing not
more than two years after the date of acquisition; (ii) any certificate of
deposit maturing not more than 270 days after the date of acquisition issued by
or time deposit of an Eligible Institution; (iii) commercial paper maturing not
more than 270 days after the date of acquisition issued by a corporation (other
than an Affiliate of the Company) with a rating, at the time as of which any
investment therein is made, of "A-1" (or higher) according to Standard & Poor's
or "P-1" (or higher) according to Moody's; (iv) any banker's acceptances or
money market deposit accounts issued or offered by an Eligible Institution; and
(v) any fund investing exclusively in investments of the types described in
clauses (i) through (iv) above.
"Maturity" means, when used with respect to a Note, the date on which the
principal of such Note becomes due and payable as provided therein or in the
Indenture, whether on the date specified in such Note as the fixed date on which
the principal of such Note is due and payable, on the Change of Control Payment
Date or purchase date established pursuant to the terms of the Indenture with
regard to a Change of Control Offer or an Asset Sale Offer, as applicable, or by
declaration of acceleration, call for redemption or otherwise.
99
<PAGE> 104
"Metropolitan Area" means the 31 metropolitan areas in which the Company,
as of June 30, 1997, has a Fiber Network and other metropolitan areas deemed in
the reasonable business judgment of the management of the Company to provide an
opportunity for the building and operation of such a Fiber Network with the
reasonable potential to produce financial results for the Company at least
substantially comparable to the metropolitan areas in which the Company has such
operational Fiber Networks.
"Net Cash Proceeds" means, with respect to the sale of any Property or
assets by any Person or any of its Restricted Subsidiaries, Cash Proceeds
received net of (i) all reasonable out-of-pocket expenses of such Person or such
Restricted Subsidiary incurred in connection with such sale, including, without
limitation, all legal, title and recording tax expenses, commissions and other
fees and expenses incurred (but excluding any finder's fee or broker's fee
payable to any Affiliate of such Person) and all federal, state, foreign and
local taxes arising in connection with such sale that are paid or required to be
accrued as liability under GAAP by such Person or its Restricted Subsidiaries,
(ii) all payments made or required to be made by such Person or its Restricted
Subsidiaries on any Indebtedness which is secured by such Properties or other
assets in accordance with the terms of any Lien upon or with respect to such
Properties or other assets or which must, by the terms of such Lien, or in order
to obtain a necessary consent to such transaction or by applicable law, be
repaid in connection with such sale and (iii) all contractually required
distributions and other payments made to minority interest holders (but
excluding distributions and payments to Affiliates of such Person) in Restricted
Subsidiaries of such Person as a result of such transaction; provided that, in
the event that any consideration for a transaction (which would otherwise
constitute Net Cash Proceeds) is required to be held in escrow pending
determination of whether a purchase price adjustment will be made, such
consideration (or any portion thereof) shall become Net Cash Proceeds only at
such time as it is released to such Person or its Restricted Subsidiaries from
escrow; provided, further, that any non-cash consideration received in
connection with any transaction, which is subsequently converted to cash, shall
be deemed to be Net Cash Proceeds at such time, and shall thereafter be applied
in accordance with the Indenture.
"Officers' Certificate" means a certificate signed by the Chairman of the
Board, a Vice Chairman of the Board, the President or a Vice President, and by
the Chief Financial Officer, the Chief Accounting Officer, the Treasurer, an
Assistant Treasurer, the Secretary or an Assistant Secretary of the Company and
delivered to the Trustee, which shall comply with the Indenture.
"Permitted Holders" means The Huff Alternative Income Fund, L.P., ING
Equity Partners, L.P.I., Apex Investment Fund I, L.P., Apex Investment Fund II,
L.P., The Productivity Fund II, L.P. and Anthony J. Pompliano and the respective
Affiliates (other than the Company and the Restricted Subsidiaries) of each of
the foregoing.
"Permitted Investments" means (i) Eligible Cash Equivalents; (ii)
Investments in Property used in the ordinary course of business; (iii)
investments in any Person as a result of which such Person becomes a Restricted
Subsidiary in compliance with the Indenture; (iv) Investments pursuant to
certain agreements or obligations of the Company or a Restricted Subsidiary, in
effect an the Issue Date, to make such Investments, and disclosed in a Schedule
attached to the Indenture; (v) Investments in prepaid expenses, negotiable
instruments held for collection and lease, utility and workers' compensation,
performance and other similar deposits; (vi) Interest Hedging Obligations with
respect to any floating rate Indebtedness that is permitted by the terms of the
Indenture to be outstanding; (vii) Exchange Rate Obligations; provided that such
Exchange Rate Obligations were entered into in connection with transactions in
the ordinary course of business or the incurrence of Indebtedness that is
permitted by the terms of the Indenture to be outstanding; (viii) bonds, notes,
debentures or other debt securities received as a result of Asset Sales
permitted under the covenant described under "-- Asset Sales"; (ix) Investments
by the Company or a Restricted Subsidiary in or in respect of a Person to the
extent the consideration for such Investment consists of shares of Qualified
Stock of the Company; and (x) Investments in existence at the Issue Date.
"Permitted Liens" means (i) Liens on Property or assets of a Person
existing at the time such Person is merged into or consolidated with the Company
or any Subsidiary of the Company, provided that such Liens were in existence
prior to the contemplation of such merger or consolidation and do not secure any
Property or assets of the Company or any of its Subsidiaries other than the
Property or assets subject to the Liens prior to
100
<PAGE> 105
such merger or consolidation; (ii) Liens on Telecommunications Assets existing
during the time of the construction thereof; (iii) Liens incurred or deposits
made to secure the performance of tenders, bids, leases, statutory or regulatory
obligations, surety or appeal bonds, performance bonds or other obligations of a
like nature incurred in the ordinary course of business consistent with industry
practice; (iv) Liens existing as of the Issue Date; (v) Liens to secure
borrowings permitted under clause (a) of the second paragraph of "-- Limitation
on Indebtedness"; (vi) any Lien on Property of the Company in favor of the
United States of America or any state thereof, or any instrumentality of either,
to secure certain payments pursuant to any contract or statute; (vii) any Lien
for taxes or assessments or other governmental charges or levies not then due
and payable (or which, if due and payable, are being contested in good faith and
for which adequate reserves are being maintained, to the extent required by
GAAP); (viii) easements, rights-of-way, licenses and other similar restrictions
on the use of Properties or minor imperfections of title that, in the aggregate,
are not material in amount and do not in any case materially detract from the
Properties subject thereto or interfere with the ordinary conduct of the
business of the Company or its Subsidiaries; (ix) any Lien to secure obligations
under workmen's compensation laws or similar legislation, including any Lien
with respect to judgments which are not currently dischargeable; (x) any
statutory warehousemen's, materialmen's or other similar Liens for sums not then
due and payable (or which, if due and payable, are being contested in good faith
and with respect to which adequate reserves are being maintained, to the extent
required by GAAP); (xi) any interest or title of a lessor in Property subject to
a Capital Lease Obligation; (xii) Liens to secure any Vendor Financing
Indebtedness; provided that such Liens do not extend to any Property or assets
other than the Property or assets the acquisition of which was financed by such
Indebtedness; (xiii) Liens in favor of the Company or any Restricted Subsidiary;
(xiv) Liens on Property or assets of a Person existing prior to the time such
Person is acquired by the Company as a result of (a) an Investment described in
clause (ix) of the definition of "Permitted Investments" herein or (b) an
Investment described in clause (vii) of the second paragraph of the covenant
described under "Restricted Payments" herein; provided that such Liens were in
existence prior to the contemplation of such Investment and do not secure any
Property or assets of the Company or any of its Subsidiaries other than the
Property or assets subject to the Liens prior to such Investment; (xv) Liens
securing reimbursement obligations with respect to letters of credit that
encumber documents and other Property relating to such letters of credit and the
products and proceeds thereof; (xvi) Liens on the Escrow Account and all funds
and securities therein securing only the Notes equally and ratably and (xvii)
Liens to secure any permitted extension, renewal, refinancing or refunding (or
successive extensions, renewals, refinancings or refundings), in whole or in
part, of any Indebtedness secured by Liens referred to in the foregoing clauses
(i) through (v) and (xii), provided that such Liens do not extend to any other
Property or assets and the principal amount of the Indebtedness secured by such
Liens is not increased.
"Permitted Subordinated Financing" means Indebtedness or preferred stock of
the Company issued to a Permitted Holder on terms specified in the Indenture,
provided that (i) in the case of Permitted Subordinated Financing that
constitutes Indebtedness, such Indebtedness is subordinated in right of payment
to the Notes and has a maturity of 180 days or less and (ii) in the case of
Permitted Subordinated Financing that constitutes preferred stock, such
preferred stock is retired within 180 days of issuance.
"Person" means any individual, corporation, partnership, joint venture,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Property" means, with respect to any Person, any interest of such Person
in any kind of property or asset, whether real, personal or mixed, or tangible
or intangible, excluding Capital Stock in any other Person.
"Qualified Stock" of any Person means a class of Capital Stock other than
Disqualified Stock.
"Refinancing Indebtedness" means any Indebtedness incurred in connection
with the Refinancing of other Indebtedness.
"Restricted Payment" means (i) a dividend or other distribution declared or
paid on the Capital Stock of the Company or to the Company's stockholders (in
their capacity as such), or declared or paid to any Person other than the
Company or a Restricted Subsidiary of the Company on the Capital Stock of any
Restricted Subsidiary of the Company, in each case, other than dividends,
distributions or payments made solely in Qualified Stock of the Company or such
Restricted Subsidiary, (ii) a payment made by the Company or any
101
<PAGE> 106
of its Restricted Subsidiaries (other than to the Company or any Restricted
Subsidiary) to purchase, redeem, acquire or retire any Capital Stock of the
Company or of a Restricted Subsidiary, (iii) a payment made by the Company or
any of its Restricted Subsidiaries (other than a payment made solely in
Qualified Stock of the Company) to redeem, repurchase, defease (including an
in-substance or legal defeasance) or otherwise acquire or retire for value
(including pursuant to mandatory repurchase covenants), prior to any scheduled
maturity, scheduled sinking fund or mandatory redemption payment, Indebtedness
of the Company or such Restricted Subsidiary which is subordinate (whether
pursuant to its terms or by operation of law) in right of payment to the Notes
and which was scheduled to mature on or after the maturity of the Notes or (iv)
an Investment in any Person, including an Unrestricted Subsidiary or the
designation of a Subsidiary as an Unrestricted Subsidiary, other than (a) a
Permitted Investment, (b) an Investment by the Company in a Restricted
Subsidiary or (c) an Investment by a Restricted Subsidiary in the Company or a
Restricted Subsidiary.
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been classified as an "Unrestricted Subsidiary."
"Sale and Leaseback Transaction" means, with respect to any Person, any
direct or indirect arrangement pursuant to which Property is sold or transferred
by such Person or a Restricted Subsidiary of such Person and is thereafter
leased back from the purchaser or transferee thereof by such Person or one of
its Restricted Subsidiaries.
"Secured Credit Facility" means the AT&T Credit Facility as in effect on
the Issue Date and additional secured credit agreements to which the Company is
or becomes a party, in an aggregate amount not to exceed $35 million, and all
related amendments, notes, collateral documents, guarantees, instruments and
other agreements executed in connection therewith, as the same may be amended,
modified, supplemented, restated, renewed, extended, refinanced, substituted or
replaced from time to time.
"Significant Restricted Subsidiary" means a Restricted Subsidiary that is a
"significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X under the
Securities Act and the Exchange Act.
"Subsidiary" means, with respect to any Person, (i) any corporation more
than 50% of the outstanding shares of Voting Stock of which is owned, directly
or indirectly, by such Person, or by one or more other Subsidiaries of such
Person, or by such Person and one or more other Subsidiaries of such Person,
(ii) any general partnership, joint venture or similar entity, more than 50% of
the outstanding partnership or similar interests of which are owned, directly or
indirectly, by such Person, or by one or more other Subsidiaries of such Person,
or by such Person and one or more other Subsidiaries of such Person and (iii)
any limited partnership of which such Person or any Subsidiary of such Person is
a general partner.
"Telecommunications Assets" means, with respect to any Person, assets
(including, without limitation, rights-of-way, trademarks and licenses to use
copyrighted material), that are utilized by such Person, directly or indirectly,
in a Telecommunications Business. Telecommunications Assets shall include stock,
joint venture or partnership interests in another Person, provided that
substantially all of the assets of such other Person consist of
Telecommunications Assets, and provided, further, that if such stock, joint
venture or partnership interests are held by the Company or a Restricted
Subsidiary, such other Person either is, or immediately following the relevant
transaction shall become, a Restricted Subsidiary of the Company pursuant to the
Indenture. The determination of what constitutes Telecommunication Assets shall
be made by the Board of Directors and evidenced by a Board Resolution delivered
to the Trustee.
"Telecommunications Business" means the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data through
owned or leased transmission facilities, (ii) creating, developing or marketing
communications-related network equipment, software and other devices for use in
(i) above or (iii) evaluating, participating or pursuing any other activity or
opportunity that is related to those specified in (i) or (ii) above.
"Telecommunications Company" means any Person substantially all of the
assets of which consist of Telecommunications Assets.
102
<PAGE> 107
"Total Market Capitalization" of any Person means, at the time of
determination, the product of (i) the aggregate amount of outstanding shares of
common stock of such Person (which shall not include any common stock issuable
upon the exercise of options or warrants on, or securities convertible or
exchangeable into, shares of common stock of such Person) and (ii) the average
closing price of such common stock over the preceding 20 consecutive Trading
Days. If no such closing price exists with respect to shares of any such class,
the value of such shares shall be determined by the Board of Directors in good
faith as evidenced by a Board Resolution delivered to the Trustee.
"Trading Day" means, with respect to a security traded on a securities
exchange, automated quotation system or market, a day on which such exchange,
system or market is open for a full day of trading.
"U.S. Government Obligations" means (x) securities that are (i) direct
obligations of the United States of America for the payment of which the full
faith and credit of the United States of America is pledged or (ii) obligations
of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America, which, in either case, are not callable or redeemable at the
option of the issuer thereof, and (y) depository receipts issued by a bank (as
defined in Section 3(a)(2) of the Securities Act) as custodian with respect to
any U.S. Government Obligation which is specified in clause (x) above and held
by such bank for the account of the holder of such depository receipt, or with
respect to any specific payment of principal or interest on any U.S. Government
Obligation which is so specified and held, provided that (except as required by
law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by the
custodian in respect of the U.S. Government Obligation or the specific payment
of principal or interest of the U.S. Government Obligation evidenced by such
depository receipt.
"Unrestricted Subsidiary" means any Subsidiary of the Company that the
Company has classified as an "Unrestricted Subsidiary" and that has not been
reclassified as a Restricted Subsidiary, pursuant to the terms of the Indenture.
"Vendor Financing Indebtedness" of any Person means an obligation owed by
such Person to a vendor of any Telecommunications Assets solely in respect of
the purchase price of such assets, provided that the amount of such Indebtedness
does not exceed the Fair Market Value of such assets, and provided, further,
that such Indebtedness is incurred within 180 days of the acquisition of such
assets.
"Voting Stock" means, with respect to any Person, securities of any class
or classes of Capital Stock in such Person entitling the holders thereof
(whether at all times or at the times that such class of Capital Stock has
voting power by reason of the happening of any contingency) to vote in the
election of members of the board of directors or comparable body of such Person.
103
<PAGE> 108
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER
The following is a general discussion of the material U.S. Federal income
tax consequences of the Exchange Offer to holders of Old Notes. This summary is
based upon current provisions of the Internal Revenue Code of 1986, as amended,
regulations of the Treasury Department, administrative rulings and
pronouncements of the Internal Revenue Service and judicial decisions currently
in effect, all of which are subject to change, possibly with retroactive effect.
The discussion does not deal with all aspects of U.S. Federal income taxation
that may be relevant to particular investors in light of their personal
investment circumstances, nor does it address considerations applicable to
investors subject to special treatment under the U.S. Federal income tax laws.
In addition, the discussion does not consider the effect of any foreign, state,
local, gift, estate or other tax laws that may be applicable to a particular
investor. EACH POTENTIAL INVESTOR SHOULD CONSULT ITS TAX ADVISOR REGARDING THE
PARTICULAR TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF THE NOTES
INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS.
The exchange of an Old Note for a New Note pursuant to the Exchange Offer
should not constitute a taxable exchange.
Upon failure to comply with certain of its obligations under the
Registration Rights Agreement, the Company would be required to pay Additional
Interest on the Notes. Although the matter is not free from doubt, if Additional
Interest becomes payable on the Notes, all or a portion of any interest or
Additional Interest earned on the Notes might constitute original issue discount
for U. S. Federal income tax purposes, which must be reported as income by
holders of the Notes as such original issue discount accrues.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Notes where such
Notes were acquired as a result of market-making activities or other trading
activities. The Company has agreed that, starting on the Expiration Date and
ending on the close of business 180 days after the Expiration Date, it will make
this Prospectus, as amended or supplemented, available to any broker-dealer for
use in connection with any such resale. In addition, until , 1997, all
dealers effecting transactions in the New Notes may be required to deliver a
prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit of any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
Holders of the Notes) other than commissions
104
<PAGE> 109
or concessions of any brokers or dealers and will indemnify the Holders of the
New Notes (including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the New Notes will be passed upon for
the Company by Riley M. Murphy, Annapolis Junction, Maryland.
EXPERTS
The consolidated financial statements of American Communications Services,
Inc. as of June 30, 1995 and 1996 and December 31, 1996, and for the years ended
June 30, 1995 and 1996 and six months 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 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.
105
<PAGE> 110
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.
CLEC (COMPETITIVE LOCAL EXCHANGE CARRIER) -- a CAP that also provides
Switch Local Services such as local dial tone and centrex.
CO-CARRIER STATUS -- A relationship between a CLEC and an ILEC 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.
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
106
<PAGE> 111
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 (INCUMBENT LOCAL EXCHANGE CARRIER) -- An incumbent carrier providing
local exchange 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 (INTEGRATED SERVICES DIGITAL NETWORK) -- 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 video-conferencing 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.
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
107
<PAGE> 112
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.
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 ILEC or a CAP
(such as the Company), whose lines or circuit run to or from the long distance
carrier POPs. Examples of special access services are telecommunications lines
running between POPs of a single long distance carrier, from one long distance
carrier POP to the POP of another long distance carrier or from an end-user to
its long distance carrier POP. Special access services do not require the use of
switches.
SWITCH -- A sophisticated computer that accepts instructions from a caller
in the form of a telephone number. Like an address on an envelope, the numbers
tell the switch where to route the call. The switch opens or closes circuits or
selects the paths or circuits to be used for transmission of information.
Switching is a process of interconnecting circuits to form a transmission path
between 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.
108
<PAGE> 113
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-5
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-6
Consolidated Statements of Cash Flows for the Years Ended June 30, 1995 and 1996 and
for the Six Months Ended December 31, 1996.......................................... F-7
Notes to Consolidated Financial Statements............................................ F-8
Condensed Consolidated Balance Sheets (Unaudited) as of December 31, 1996 and June 30,
1997................................................................................ F-22
Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six
Months Ended June 30, 1996 and 1997................................................. F-23
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended
June 30, 1996 and 1997.............................................................. F-24
Notes to Unaudited Condensed Consolidated Interim Financial Statements................ F-25
</TABLE>
F-1
<PAGE> 114
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> 115
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
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 116
AMERICAN COMMUNICATIONS SERVICES, INC.
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
1995 1996 1996
----------- ------------ ------------
<S> <C> <C> <C>
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-4
<PAGE> 117
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-5
<PAGE> 118
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 COMMON
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK STOCK
--------------------- ------------------- ------------------- ---------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
------ ----------- ------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1994........................ 1,700 $ 1,700,000 -- $ -- -- $ -- 2,755,005
Preferred Stock exchange (note 12)............... (1,700) (1,700,000) -- -- -- -- 548,387
Set par value for common stock (note 5).......... -- -- -- -- -- -- --
Acquisition of Piedmont Teleport, Inc. (note
13)............................................. -- -- -- -- -- -- 62,000
Write-off of note receivable for common stock.... -- -- -- -- -- -- --
Series A Preferred private placement, net of
related costs (note 3).......................... -- -- 186,664 186,664 -- -- --
Series B Preferred private placement, net of
related costs (note 3).......................... -- -- -- -- 227,500 227,500 --
Issuance of put right obligations (notes 6 and
9).............................................. -- -- -- -- -- -- --
Cancelation of put right obligation (note 9)..... -- -- -- -- -- -- --
Warrant and stock option exercises and stock
grant (note 6).................................. -- -- -- -- -- -- 2,379,390
Establish limitation on common stock put right
obligation (note 6)............................. -- -- -- -- -- -- --
Series A Preferred Stock dividends accrued (note
3).............................................. -- -- -- -- -- -- --
Net loss......................................... -- -- -- -- -- -- --
------ ----------- ------- -------- ------- -------- ---------
Balances at June 30, 1995........................ -- $ -- 186,664 $186,664 227,500 $227,500 5,744,782
Issuance of Series B-4 Preferred Stock (note
3).............................................. -- -- -- -- 50,000 50,000 --
Issuance of detachable warrants (notes 4 and
6).............................................. -- -- -- -- -- -- --
Warrants and stock options exercised (note 6).... -- -- -- -- -- -- 900,909
Series A and B Preferred Stock dividends accrued
(note 3)........................................ -- -- -- -- -- -- --
Cancelation of and adjustments to put right
obligations (note 6)............................ -- -- -- -- -- -- --
Stock compensation expense....................... -- -- -- -- -- -- --
Net loss......................................... -- -- -- -- -- -- --
------ ----------- ------- -------- ------- -------- ---------
Balances at June 30, 1996........................ -- $ -- 186,664 $186,664 277,500 $277,500 6,645,691
Warrants and stock options exercised (note 6).... -- -- -- -- -- -- 139,305
Series A and B Preferred Stock dividends accrued
(note 3)........................................ -- -- -- -- -- -- --
Accretion of consulting agreement credit to
exercise price of warrants (note 9)............. -- -- -- -- -- -- --
Cancelation 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 6,784,996
====== =========== ======= ======== ======= ======== =========
<CAPTION>
NOTES
RECEIVABLE TOTAL
COMMON ADDITIONAL ON SALE OF STOCKHOLDERS'
STOCK PAID-IN COMMON ACCUMULATED EQUITY
------
AMOUNT CAPITAL STOCK DEFICIT (DEFICIT)
------- ----------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1994........................ $ -- $ 1,080,566 $ (2,750) $ (6,043,573) $ (3,265,757)
Preferred Stock exchange (note 12)............... -- 1,700,000 -- -- --
Set par value for common stock (note 5).......... 33,033 (33,033) -- -- --
Acquisition of Piedmont Teleport, Inc. (note
13)............................................. -- -- -- -- --
Write-off of note receivable for common stock.... -- (2,750) 2,750 -- --
Series A Preferred private placement, net of
related costs (note 3).......................... -- 15,009,461 -- -- 15,196,125
Series B Preferred private placement, net of
related costs (note 3).......................... -- 20,434,000 -- -- 20,661,500
Issuance of put right obligations (notes 6 and
9).............................................. -- (53,303) -- -- (53,303)
Cancelation of put right obligation (note 9)..... -- 487,500 -- -- 487,500
Warrant and stock option exercises and stock
grant (note 6).................................. 23,794 349,030 -- -- 372,824
Establish limitation on common stock put right
obligation (note 6)............................. -- 4,510,962 -- -- 4,510,962
Series A Preferred Stock dividends accrued (note
3).............................................. -- (1,070,985) -- -- (1,070,985)
Net loss......................................... -- -- -- (14,697,649) (14,697,649)
------- ----------- ------- ------------ ------------
Balances at June 30, 1995........................ $56,827 $42,411,448 $ -- $(20,741,222) $ 22,141,217
Issuance of Series B-4 Preferred Stock (note
3).............................................. -- 4,950,000 -- -- 5,000,000
Issuance of detachable warrants (notes 4 and
6).............................................. -- 8,684,000 -- -- 8,684,000
Warrants and stock options exercised (note 6).... 9,010 289,360 -- -- 298,370
Series A and B Preferred Stock dividends accrued
(note 3)........................................ -- (3,871,328) -- -- (3,871,328)
Cancelation of and adjustments to put right
obligations (note 6)............................ -- 775,753 -- -- 775,753
Stock compensation expense....................... -- 2,735,845 -- -- 2,735,845
Net loss......................................... -- -- -- (26,782,044) (26,782,044)
------- ----------- ------- ------------ ------------
Balances at June 30, 1996........................ $65,837 $55,975,078 $ -- $(47,523,266) $ 8,981,813
Warrants and stock options exercised (note 6).... 1,393 175,945 -- -- 177,338
Series A and B Preferred Stock dividends accrued
(note 3)........................................ -- (2,003,630) -- -- (2,003,630)
Accretion of consulting agreement credit to
exercise price of warrants (note 9)............. -- 18,750 -- -- 18,750
Cancelation of and adjustments to put right
obligations (note 6)............................ 620 154,405 -- -- 155,025
Stock compensation expense....................... -- 549,646 -- -- 549,646
Net loss......................................... -- -- -- (34,916,514) (34,916,514)
------- ----------- ------- ------------ ------------
Balances at December 31, 1996.................... $67,850 $54,870,194 $ -- $(82,439,780) $ (27,037,572)
======= =========== ======= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 119
AMERICAN COMMUNICATIONS SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX
------------------------------ 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
Offerings.......................................................... $ 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-7
<PAGE> 120
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 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).
F-8
<PAGE> 121
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-9
<PAGE> 122
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Income Taxes
Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities and loss
carryforwards and tax credit carryforwards for which income tax benefits are
expected to be realized in future years. A valuation allowance is established to
reduce deferred tax assets if it is more likely than not that all, or some
portion, of such deferred tax assets will not be realized. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.
F-10
<PAGE> 123
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-11
<PAGE> 124
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 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
F-12
<PAGE> 125
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(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>
F-13
<PAGE> 126
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-14
<PAGE> 127
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-15
<PAGE> 128
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
secured convertible notes of $77,281 was retired by a cash payment from the
proceeds of the Series A Preferred Stock private 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.
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
F-16
<PAGE> 129
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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>
SIX
YEAR ENDED MONTHS ENDED
JUNE 30, DECEMBER 31,
1996 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
------------------- ------------------ ------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE (000) 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>
F-17
<PAGE> 130
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about fixed stock options at
December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------
WEIGHTED- OPTIONS EXERCISABLE
AVERAGE WEIGHTED- -----------------------
NUMBER REMAINING AVERAGE NUMBER WEIGHTED-
RANGE EXERCISABLE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE AVERAGE
EXERCISE PRICE AT 12/31/96 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>
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.
F-18
<PAGE> 131
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Legal Proceedings
On July 24, 1996, the Company was named as a codefendant in a lawsuit
arising from a personal injury sustained during the construction of one of its
networks. At the time of the incident giving rise to the lawsuit, the plaintiff
was an employee of a subcontractor hired by the Company's general contractor for
the construction project. The lawsuit seeks recovery from the Company and the
general contractor of at least $25 million plus punitive damages. The Company,
the general contractor, and the Company's insurance carrier have begun
investigations into the facts surrounding the incident and intend to defend
against this suit vigorously. In addition, the Company is a party to certain
litigation and regulatory proceedings arising in the ordinary course of
business.
In the opinion of management, based upon the advice of counsel, the
ultimate disposition of these matters will not have a material adverse effect on
the Company's consolidated financial position or results of operations.
(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.
F-19
<PAGE> 132
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective July 1, 1994, the Company engaged SGC Advisory Services, Inc.
("SGC") as a financial and business consultant for three years. SGC is an
affiliate of a former director of the Company. Pursuant to the agreement, the
Company will compensate SGC as follows: (1) a monthly fee of $5,000; and (2)
options to purchase up to 50,000 shares of the Company's Common Stock which vest
on July 1, 1997, and are exercisable on or before July 1, 1999. At the end of
each month of the term of the agreement, SGC earns a credit against the exercise
price of those options equal to 1/36th of the exercise price. The shares issued
upon exercise of the options will be priced at $2.25 per share and the shares
issued will have piggy back registration rights.
(10) INCOME TAXES
Temporary differences and carryforwards that give rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER
JUNE 30, JUNE 30, 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> 133
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> 134
AMERICAN COMMUNICATIONS SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1997
1996 (UNAUDITED)
------------- -------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents..................................... $ 78,618,544 $ 8,499,115
Restricted cash............................................... 2,342,152 5,156,258
Accounts receivable, net...................................... 2,429,077 6,653,925
Other current assets.......................................... 1,202,711 1,461,345
------------- -------------
Total current assets....................................... 84,592,484 21,770,643
------------- -------------
Networks, furniture and equipment, gross........................ 144,403,123 219,933,362
(less: Accumulated depreciation)........................... (8,320,372) (17,029,394)
------------- -------------
136,082,751 202,903,968
Deferred financing fees......................................... 8,380,283 10,340,377
Goodwill (net of accumulated amortization)...................... -- 7,748,679
Other assets.................................................... 982,649 617,309
------------- -------------
Total assets............................................... $ 230,038,167 $ 243,380,976
------------- -------------
Liabilities, Redeemable Stock, Options and Warrants and
Stockholders' Equity
Current Liabilities
Accounts payable.............................................. $ 33,587,407 $ 28,621,966
Accrued liabilities........................................... 4,132,132 5,097,044
Notes payable -- current portion.............................. 872,031 1,325,532
------------- -------------
Total current liabilities.................................. 38,591,570 35,044,542
------------- -------------
Long Term Liabilities
Notes payable................................................. 209,538,226 223,753,180
Other Long Term Liabilities................................... -- 808,781
Dividends payable............................................. 6,945,943 --
------------- -------------
Total liabilities.......................................... 255,075,739 259,606,503
------------- -------------
Redeemable stock, options and warrants.......................... 2,000,000 2,000,000
------------- -------------
Stockholders' Equity/(Deficit)
Preferred stock, $1.00 par value, 186,664 shares authorized
and designated as 9% Series A-1 Convertible Preferred
Stock, 186,664 and 0 shares, respectively, issued and
outstanding................................................ 186,664 --
Preferred stock, $1.00 par value, 277,500 shares designated as
9% Series B Convertible Preferred Stock, authorized,
277,500 and 0, respectively, issued and outstanding........ 277,500 --
Common Stock, $0.01 par value, 75,000,000 shares authorized,
6,784,996 and 35,926,902 shares, respectively, issued and
outstanding................................................ 67,850 359,269
Additional paid-in-capital.................................... 54,870,194 113,564,536
Accumulated deficit........................................... (82,439,780) (132,149,332)
------------- -------------
Total stockholders' equity/(deficit)............................ (27,037,572) (18,225,527)
------------- -------------
Total Liabilities, Redeemable Stock, Options and Warrants and
Stockholders' Equity/(deficit)................................ $ 230,038,167 $ 243,380,976
------------- -------------
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements
F-22
<PAGE> 135
AMERICAN COMMUNICATIONS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
--------------------------------- ---------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996 1997 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............................................ $ 1,609,621 $ 11,615,836 $ 2,426,260 $ 19,792,511
Operating Expenses
Network, development and operations............... 388,347 9,357,277 2,342,861 18,026,390
Selling, general and administrative............... 7,735,834 15,893,562 10,386,097 29,818,429
Non-cash compensation expense..................... (454,339) 584,458 1,531,426 824,002
Depreciation and amortization..................... 1,685,765 5,338,596 2,315,769 9,456,250
------------ ---- ------------ ---- ----------- ---- ------------
Total Operating Expenses............................ 9,355,607 31,173,893 16,576,153 58,125,071
Non-operating income/expenses
Interest and other income......................... (2,970,916) (193,620) (3,632,229) (1,077,691)
Interest and other expense........................ 4,141,366 6,287,621 7,641,990 12,420,763
------------ ---- ------------ ---- ----------- ---- ------------
Net loss before minority interest................... 8,916,436 25,652,058 18,159,654 49,675,632
Minority interest................................... (154,671) -- (256,745) --
------------ ---- ------------ ---- ----------- ---- ------------
Net loss............................................ 8,761,765 25,652,058 17,902,909 49,675,632
------------ ---- ------------ ---- ----------- ---- ------------
Preferred stock dividends/accretion................. 1,061,344 106,201 2,016,833 1,094,839
------------ ---- ------------ ---- ----------- ---- ------------
Net loss to common stockholders..................... 9,823,109 25,758,259 19,919,742 50,770,471
------------ ---- ------------ ---- ----------- ---- ------------
Net loss per common/common equivalent share......... ($1.49) ($0.92) ($3.03) ($2.82)
Average number of common/common
equivalent shares outstanding....................... 6,605,501 28,025,238 6,572,061 17,994,161
------------ ---- ------------ ---- ----------- ---- ------------
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements
F-23
<PAGE> 136
AMERICAN COMMUNICATIONS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
-----------------------------
JUNE 30, 1996 JUNE 30, 1997
------------- -------------
<S> <C> <C>
Cash Flow from Operating Activities
Net Loss........................................................ $ (17,902,909) $ (49,675,632)
Adjustments to reconcile net loss to net cash used in operating
activities: Depreciation and amortization..................... 2,294,569 9,456,250
Interest deferral and accretion............................... 7,573,427 12,239,366
Amortization of deferred financing fees....................... 668,317 473,666
Provision for doubtful accounts............................... 151,934 859,621
Loss attributable to minority interest........................ (324,012) --
Noncash compensation.......................................... 1,531,426 824,002
Changes in operating assets and liabilities:
Restricted cash related to operating activities............ -- (2,814,106)
Trade accounts receivable.................................. (330,530) (5,084,469)
Other current assets....................................... (458,272) (258,634)
Other assets............................................... (107,574) 365,340
Accounts payable........................................... 16,271,487 (4,162,403)
Other accrued liabilities.................................. (1,666,634) 964,912
-------------- --------------
Net cash provided by (used in) operating activities............. 7,701,229 (36,812,087)
-------------- --------------
Cash flows from investing activities:
Restricted cash related to network activities................. (890,152) --
Purchase of furniture and equipment........................... (1,538,943) (4,911,864)
Network development costs..................................... (41,660,076) (68,301,375)
-------------- --------------
Net cash (used in) investing activities......................... (44,089,171) (73,213,239)
-------------- --------------
Cash flows from financing activities:
Issuance of notes payable and warrants........................ 66,234,486 1,737,297
Issuance of common stock...................................... -- 40,702,000
Issuance of Series B Preferred Stock.......................... 274,682
Payment of notes payable...................................... -- (238,291)
Payment of dividends.......................................... -- (290,193)
Payment of deferred financing fees............................ (3,459,582) (3,299,499)
Warrant and stock option exercises............................ 279,233 1,294,583
-------------- --------------
Net cash flow provided by financing activities.................. 63,328,819 39,905,897
-------------- --------------
Net increase/(decrease) in cash and cash equivalents............ 26,940,877 (70,119,429)
Cash and cash equivalents -- beginning of period................ $ 107,175,104 $ 78,618,544
-------------- --------------
Cash and cash equivalents -- end of period...................... $ 134,115,981 $ 8,499,115
-------------- --------------
Supplemental disclosure of cash flow information:
Dividends declared with preferred stock....................... $ 2,016,833 $ 1,094,839
-------------- --------------
(Decrease) in accrued redeemable warrant cost................. $ (504,554) $ --
-------------- --------------
(Increase) in goodwill........................................ $ -- $ (8,118,632)
-------------- --------------
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements
F-24
<PAGE> 137
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS
BUSINESS AND ORGANIZATION
American Communications Services, Inc. (ACSI or the Company) provides a
broad range of integrated local voice and data communications services primarily
to commercial customers in mid-sized markets in the southern United States. The
Company manages and operates its own local fiber optic networks.
BASIS OF PRESENTATION AND RELATED MATTERS
Effective December 31, 1996, the Company changed its fiscal year from a
twelve month period ended June 30, to a twelve month period ended December 31.
The consolidated financial statements include the accounts of ACSI and its
majority-owned subsidiaries. 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% ownership interest. All
material intercompany accounts and transactions have been eliminated in
consolidation.
On January 17, 1997, the Company acquired 100% of the outstanding stock of
Cybergate, Inc. (Cybergate), a Florida based Internet Service Provider. The
accounts of Cybergate are included in the Company's consolidated results of
operations from the date of acquisition.
In the opinion of management, the accompanying unaudited interim financial
information reflects all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation thereof. Certain information and footnote
disclosure normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to instructions, rules and regulations prescribed by the Securities and Exchange
Commission. Although the Company believes that the disclosures provided are
adequate to make the information presented not misleading, these unaudited
interim condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996. Operating results for the three and six months periods ended
June 30, 1997 are not necessarily indicative of the results expected for the
full year.
SIGNIFICANT ACCOUNTING POLICIES
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 December 31, 1996 and June 30, 1997, 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 $2,342,152 and $5,156,258 at December 31, 1996 and June 30, 1997,
respectively. The face amount of all bonds and letters of credits was
approximately $6,200,000 as of December 31, 1996, and $8,072,000 as of June 30,
1997.
F-25
<PAGE> 138
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
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.
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-26
<PAGE> 139
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS -- (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, 1996 consolidated
financial statements to conform to the June 30, 1997 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.
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. The Company provides managed
services to certain Internet service providers. Such companies operate in a
highly competitive and uncertain environment.
FINANCING ACTIVITIES
To date, the Company has funded the construction of its networks and its
operations with external financings, as described below.
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
F-27
<PAGE> 140
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
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. As of June 30, 1997, an aggregate of $31.2 million had
been borrowed under these agreements. Principal amounts payable on the AT&T
Credit Facility during 1997 are approximately $872,000.
The Company has entered into negotiations with AT&T Capital Corporation to
roll-up the five existing loan agreements comprising the AT&T Credit Facility
into one loan agreement to be entered into with the Company, and to be secured
by the existing assets of the Company (including the stock, but not the assets,
of certain of the Company's subsidiaries) (the "New AT&T Facility"). The Company
expects the New AT&T Facility to otherwise be on terms substantially similar to
those of the existing AT&T Credit Facility. The maximum aggregate amount of
credit available under the proposed New AT&T Facility will not exceed $35.0
million as defined by the Company's existing indentures. On June 26, 1997, each
of the Company's Subsidiaries that are parties to the AT&T Credit Facility
entered into an agreement with AT&T Credit Corporation to waive, for a period of
90 business days commencing on the date thereof, compliance by such subsidiaries
with certain covenants contained therein. Such covenants are not expected to be
included in the New AT&T Facility.
9% SERIES A CONVERTIBLE 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 was converted
into 7,466,560 shares of Common Stock simultaneous with the completion of the
Offering) with accompanying warrants to purchase an aggregate of 2,674,506
shares of Common Stock, for an aggregate consideration of $16.8 million (before
deduction of estimated offering expenses), including the conversion of $4.3
million of outstanding debt. Of the warrants sold in October 1994, warrants to
acquire 1,491,222 shares of Common Stock were exercised by a principal
stockholder for an aggregate exercise price of approximately $100,000. The
Series A Preferred Stock was converted into an aggregate of 7,350,160 shares of
common stock simultaneously with the completion of the April Offering discussed
below.
9% SERIES B CONVERTIBLE PREFERRED STOCK
In June 1995, the Company completed a private placement of 227,500 shares
of its Series B Preferred Stock with accompanying warrants to purchase an
aggregate of 1,584,303 shares of Common Stock, for an aggregate consideration of
$22.8 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 was converted into an aggregate of 9,910,704 shares of
Common Stock simultaneously with the completion of the April Offering discussed
below.
2005 SENIOR DISCOUNT NOTES (2005 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 "2005 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 on November 1 and May 1, commencing May 1, 2001.
The Company received net proceeds of approximately $96,105,000 from the sale of
the Units. The value ascribed to the 2005 Warrants was $8,684,000.
F-28
<PAGE> 141
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
2006 SENIOR DISCOUNT NOTES (2006 NOTES)
On March 21, 1996, the Company completed an offering of $120,000,000 of
12-3/4% Senior Discount Notes due 2006 (the "2006 Notes") resulting in net
proceeds of approximately $61,800,000. The 2006 Notes will accrete at a rate of
12-3/4% compounded semi-annually, to an aggregate principal amount of
$120,000,000 by April 1, 2001. Thereafter, interest on the 2006 Notes will
accrue at the annual rate of 12-3/4% and will be payable in cash semi-annually
on April 1 and October 1, commencing on October 1, 2001. The 2006 Notes will
mature on April 1, 2006.
ACQUISITION
On January 17, 1997, the Company acquired 100% of the outstanding stock of
Cybergate in exchange for 1,030,000 shares of Common Stock plus up to an
additional 150,000 shares if certain performance goals are met. The acquisition
has been accounted for using the purchase method and, therefore, the Company's
consolidated financial statements include the results of operations of Cybergate
from the date of acquisition. The purchase price of $8,755,000 plus transaction
expenses of approximately $500,000 has been allocated to assets and liabilities
acquired based on their fair values and goodwill of approximately $8,400,000 has
been recorded. The goodwill is being amortized on a straight line basis over a
ten year period.
COMMON EQUITY (APRIL OFFERING)
On April 15, 1997, the Company consummated the issuance and sale of
5,060,000 shares of Common Stock (inclusive of the May 14, 1997 exercise by the
underwriters of their overallotment option) at a price per share of $5.00 in an
underwritten public offering, and the issuance and sale directly to certain of
its principal stockholders of 3,600,000 shares of Common Stock at a purchase
price of $4.70 per share (together, the "April Offering"). Total net proceeds to
the Company from the April Offering were approximately $40 million.
In addition, the Company recently completed additional financings,
described below.
14-3/4% REDEEMABLE PREFERRED STOCK (UNIT OFFERING)
On July 10, 1997, the Company consummated the private placement of 75,000
units, (the "Unit Offering"), consisting of its 14-3/4% Redeemable Preferred
Stock due 2008 (the "Redeemable Preferred Stock") and warrants to purchase
shares of common stock. The Company received net proceeds of approximately $67
million from the sale of these units. Each unit includes a warrant to purchase
80.318 shares of ACSI common stock subject to an increase of 22.645 additional
shares of common stock in the event that the Company fails to raise net proceeds
of at least $50 million through the issuance and sale of its qualified capital
stock on or before December 31, 1998. Dividends on the Redeemable Preferred
Stock will accrue from the date of issuance, are cumulative and will be payable
in arrears on March 31, June 30, September 30 and December 31, commencing
September 30, 1997. Dividends may be paid, at the Company's option, on any
dividend payment date either in cash or by the issuance of additional shares of
preferred stock, provided however, that after June 30, 2002, to the extent and
for so long as the Company is not precluded from paying cash dividends on the
Redeemable Preferred Stock by the terms of any then outstanding indebtedness or
any other agreement or instrument to which the Company is subject, the Company
shall pay the dividends in cash. The company is required to redeem all the
Redeemable Preferred Stock outstanding on June 30, 2008 at a redemption price
equal to 100.00% of the liquidation preference thereof, plus, without
duplication, accrued and unpaid dividends to the date of redemption.
F-29
<PAGE> 142
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
2007 SENIOR NOTES (2007 NOTES)
On July 18, 1997, the Company completed the private placement of $220
million of 13-3/4% Senior Notes due 2007. The Company received net proceeds of
approximately $209 million from the sale of the 2007 Notes, of which,
approximately $70 million has been placed in escrow solely to fund the first
five interest payments or otherwise for the benefit of the holders of the 2007
Notes. The 2007 Notes bear interest at 13-3/4% compounded semi-annually in
arrears, payable on January 15 and July 15 each year, commencing on January 15,
1998. The notes mature on July 15, 2007. The 2007 Notes will not be redeemable
at the option of the Company prior to July 15, 2002, except that any time prior
to July 15, 2000, the Company may redeem up to 35% of the aggregate principal
amount of the 2007 Notes with the net proceeds from one or more equity offerings
of the Company, at a redemption price equal to 113.75% of the aggregate
principal amount thereof on the date of the redemption, subject to other
conditions.
F-30
<PAGE> 143
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SECURITIES TO WHICH IT RELATES, NOR DOES IT CONSTITUTE
AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES OR IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM 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 THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF NOR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information................ i
Documents Incorporated by Reference... i
Summary............................... 1
Risk Factors.......................... 13
Use of Proceeds....................... 24
Capitalization........................ 25
Unaudited Pro Forma Condensed
Consolidated Financial Data......... 26
Selected Consolidated Financial
Data................................ 29
Exchange Offer........................ 30
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 36
Business.............................. 45
Management............................ 62
Certain Transactions.................. 71
Principal Stockholders................ 72
Description of Certain Indebtedness... 73
Description of the New Notes.......... 76
U.S. Federal Income Tax Consequences
of the Exchange Offer............... 104
Plan of Distribution.................. 104
Legal Matters......................... 105
Experts............................... 105
Change in Independent Public
Accountants......................... 105
Glossary.............................. 106
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
---------------------------------------------
PROSPECTUS
---------------------------------------------
$170,000,000
LOGO
OFFER TO EXCHANGE ITS
13 3/4% SENIOR NOTES
DUE 2007, WHICH HAVE BEEN
REGISTERED UNDER THE
SECURITIES ACT OF 1933,
AS AMENDED, FOR UP TO $170,000,000
AGGREGATE PRINCIPAL AMOUNT OF ITS
OUTSTANDING 13 3/4% SENIOR NOTES
DUE 2007
, 1997
======================================================
<PAGE> 144
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Second Restated Certificate of Incorporation provides that a director
of the Company will not be personally liable for monetary damages to the Company
or its stockholders for breach of fiduciary duty as a director, except for
liability, (i) for any breach of the director's duty of loyalty to such
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases or redemption as
provided in Section 174 of the DGCL or (iv) for any transaction from which the
director derived an improper personal benefit.
The Second Restated Certificate of Incorporation and the Amended and
Restated 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 Registrant
has been advised that in the opinion of the SEC 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
II-1
<PAGE> 145
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 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- --------------------------------------------------------------------- --------------
<C> <S> <C>
3.1 Second Restated Certificate of Incorporation of the Company. ........ --
3.2 Certificate of Designation of the Company's 14.75% Redeemable
Preferred Stock due 2008. ........................................... --
3.3 Certificate of Amendment of the Certificate of Designation of the
Company's 14.75% Redeemable Preferred Stock due 2008. ............... --
3.4 Amended and Restated By-Laws of the Company. ........................
---
3.5 Governance Agreement dated November 8, 1995, between the Company and
the holders of its Preferred Stock. ................................. ++
3.6 Certificate of Designation of the Company's 12 3/4% Junior Redeemable
Preferred Stock due 2009. ...........................................
---
3.7 Certificate of Correction dated March 11, 1996....................... -
3.8 Supplemental Governance Agreement dated February 26, 1996............ -
4.1 Specimen Certificate of the Company's Common Stock. ................. *
4.2 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"). ............................................. ++
4.3 March 11, 1996 Supplement to 1995 indenture.......................... ++++
4.4 Initial Global Note dated November 14, 1995. ........................ ++
4.5 Warrant Agreement dated November 14, 1995, between the Company and
Smith Barney Inc. and Salomon Brothers Inc. ......................... +++
4.6 Initial Global Warrant dated November 14, 1995. ..................... +++
4.7 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"). ........................................ +++++
4.8 Supplemental Indenture dated as of January 13, 1997, between the
Company and The Chase Manhattan Bank, as trustee, to the Indenture
dated November 14, 1995, as amended, relating to the Company's 13%
Senior Discount Notes due 2005. ..................................... ++++
4.9 Supplemental Indenture dated as of January 13, 1997, between the
Company and The Chase Manhattan Bank, as trustee, to the Indenture
dated March 26, 1996, as amended, relating to the Company's 12 3/4%
Senior Discount Notes due 2006. ..................................... ++++
4.10 Supplemental Indenture dated as of July 7, 1997, between the Company
and The Chase Manhattan Bank, as trustee, to the Indenture dated
November 14, 1995, as amended, relating to the Company's 13% Senior
Discount Notes due 2005. ............................................ --
4.11 Supplemental Indenture dated as of July 7, 1997, between the Company
and The Chase Manhattan Bank, as trustee, to the Indenture dated
March 26, 1996, as amended, relating to the Company's 12 3/4% Senior
Discount Notes due 2006. ............................................ --
4.12 Specimen Certificate of the Company's 14.75% Redeemable Preferred
Stock due 2008. ..................................................... --
4.13 Warrant Agreement dated as of July 10, 1997, between the Company and
The Chase Manhattan Bank, as warrant agent. ......................... --
4.14 Form of Warrant. .................................................... --
4.15 Indenture dated as of July 23, 1997, between the Company and The
Chase Manhattan Bank, as trustee, relating to the Company's 13 3/4%
Senior Notes due 2007. .............................................. --
4.16 Escrow and Disbursement Agreement dated as of July 23, 1997, among
the Company, The Bank of New York, as escrow agent, and The Chase
Manhattan Bank, as trustee, relating to the Company's 13 3/4% Senior
Notes due 2007. ..................................................... --
4.17 Specimen Certificate of the Company's 12 3/4% Junior Redeemable
Preferred Stock due 2009. ...........................................
---
5 Opinion of Riley M. Murphy, General Counsel of the Company. .........
---
</TABLE>
II-2
<PAGE> 146
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- --------------------------------------------------------------------- --------------
<C> <S> <C>
9.1 Standstill Agreement dated June 26, 1995, between the Company and
certain of its Preferred Stockholders. .............................. ****
9.2 Standstill Agreement dated November 8, 1995, between the Company and
certain of its Preferred Stockholders. .............................. ++
9.3 Voting Rights Agreement dated November 8, 1995, between the Company
and certain of its Preferred Stockholders. .......................... ++
9.4 Amendment to Voting Rights Agreement dated December 14, 1995. ....... -
10.1 Exchange Agreement, dated June 1, 1994, between the Company and
certain of its Preferred Shareholders. .............................. *
10.2 Exchange Agreement, dated June 26, 1995, between the Company and its
9% Series A Preferred Shareholders. ................................. **
10.3 Company's Amended 1994 Stock Option Plan. ........................... ++
10.4 Company's Employee Stock Purchase Agreement. ........................ ++++
10.5 Registration Rights Agreement dated July 1, 1992, between American
Lightwave, Inc. and persons named therein. .......................... *
10.6 Supplemental Registration Rights Agreement dated June 26, 1995. ..... ****
10.7 Management Registration Rights Agreement dated June 30, 1995. ....... ****
10.8 Registration Rights Agreement dated June 26, 1995, between the
Company and certain Preferred Stockholders. ......................... **
10.9 Form of Warrant Agreement issued to certain Preferred Stockholders on
June 26, 1995. ...................................................... ****
10.10 Form of $.01 Warrant Agreement. ..................................... ****
10.11 Form of $1.79 Warrant Agreement. .................................... ****
10.12 Form of $2.25 Warrant Agreement. .................................... ****
10.13 Stockholders Agreement dated June 26, 1995, between the Company and
certain Preferred Stockholders. ..................................... ****
10.14 Third Amended and Restated Employment Agreement between the Company
and Anthony J. Pompliano. ........................................... ****
10.15 Third Amended and Restated Employment Agreement between the Company
and George M. Tronsrue, III. ........................................ ****
10.16 Third Amended and Restated Employment Agreement between the Company
and Riley M. Murphy. ................................................ ****
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. ......................................... *
</TABLE>
II-3
<PAGE> 147
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- --------------------------------------------------------------------- --------------
<C> <S> <C>
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 Rights Agreement dated November 9, 1995, between the
Company and certain 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........... (o)
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 Registration Rights Agreement dated as of July 10, 1997, among the
Company, BT Securities Corporation, Alex. Brown & Sons Incorporated,
The Huff Alternative Income Fund, L.P., General Motors Domestic Group
Pension Trust, Societe Generale Securities Corporation, ING Baring
(U.S.) Securities, Inc. and McDermott Inc. Master Trust. ............ --
10.53 Registration Rights Agreement dated as of July 23, 1997 among the
Company and BT Securities Corporation as representatives of the
Initial Purchasers named therein. ................................... --
10.54 Supplemental Registration Rights Agreement, dated as of July 10,
1997, among the Company, The Huff Alternative Income Fund, L.P.,
General Motors Domestic Group Pension Trust and McDermott Inc. Master
Trust. .............................................................. (oo)
10.55 Registration Rights Agreement, dated as of October 16, 1997, between
the Company and Bear, Stearns & Co. Inc. ............................
---
10.56 Second Amended and Restated Registration Rights Agreement............
---
11.1 Statement re: computation of per share earnings (loss). ............. +
12.1 Statement re: Ratio of Earnings to Fixed Charges.....................
---
16.1 Letter re: change in certifying accountant. ......................... ***
</TABLE>
II-4
<PAGE> 148
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- --------------------------------------------------------------------- --------------
<C> <S> <C>
21.1 Subsidiaries of the Registrant. ..................................... ++++
23.1 Consent of KPMG Peat Marwick LLP. ...................................
---
23.2 Consent of Riley M. Murphy (included in Exhibit 5) ..................
---
24.1 Power of Attorney. ..................................................
----
25.1 Statement of Eligibility and Qualification on Form T-1 of The Chase
Manhattan Bank under the Indenture dated July 23, 1997. .............
----
99.1 Form of Letter of Transmittal. ......................................
----
99.2 Form of Notice of Guaranteed Delivery. ..............................
----
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies
and Other Nominees. .................................................
----
99.4 Form of Letter to Clients. ..........................................
----
99.5 Form of Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9........................................
----
</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 Transition Report on
Form 10-KSB for the transition period from July 1, 1996 to December
31, 1996, and the Company's Quarterly Report on Form 10-QSB for the
fiscal quarter ended June 30, 1997, both of which are incorporated
herein by reference thereto.
++ Previously filed as an exhibit to the Company's Registration
Statement on Form S-4 (File No. 33-80305) and incorporated herein by
reference thereto.
+++ Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (File No. 33-80673) and incorporated herein by reference
thereto.
++++ Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (File No. 333-20867) and incorporated herein by reference
thereto.
+++++ Previously filed as an exhibit to the Company's Current Report on Form
8-K dated March 26, 1996 and incorporated herein by reference thereto.
++++++ Previously filed as an exhibit to the Company's Current Report on Form
8-K dated January 17, 1997 and incorporated herein by reference
thereto.
+++++++ To be filed by amendment.
- Previously filed as an exhibit to the Company's Registration
Statement on Form S-4 (File No. 333-3632) and incorporated herein by
reference thereto.
-- Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the fiscal quarter ended June 30, 1997 and
incorporated by reference hereto.
--- Filed herewith.
---- Previously filed.
(o) Previously filed as an exhibit to the Company's Definitive Proxy
Statement filed on October 14, 1996 and incorporated herein by
reference thereto.
(oo) Previously filed as an exhibit to the Company's Registration
Statement on Form S-3 (File No. 333-35925)
ITEM 22. UNDERTAKINGS.
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
II-5
<PAGE> 149
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.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
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, 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-6
<PAGE> 150
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF ANNAPOLIS JUNCTION, STATE
OF MARYLAND, ON THIS 14TH DAY OF NOVEMBER, 1997.
AMERICAN COMMUNICATIONS SERVICES, INC.,
Registrant
By: /s/ JACK E. REICH
------------------------------------
Jack E. Reich
Director, President and
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- --------------------------------- ------------------
<S> <C> <C>
* Chairman of the November 14, 1997
- ---------------------------------------- Board of Directors
Anthony J. Pompliano
/s/ JACK E. REICH Director, President and November 14, 1997
- ---------------------------------------- Chief Executive Officer
Jack E. Reich (Principal Executive Officer)
/s/ DAVID L. PIAZZA Chief Financial Officer November 14, 1997
- ---------------------------------------- (Principal Financial and
David L. Piazza Accounting Officer)
* Director November 14, 1997
- ----------------------------------------
George M. Middlemas
* Director November 14, 1997
- ----------------------------------------
Edwin M. Banks
* Director November 14, 1997
- ----------------------------------------
Christopher L. Rafferty
* Director November 14, 1997
- ----------------------------------------
Benjamin P. Giess
</TABLE>
II-7
<PAGE> 151
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- --------------------------------- ------------------
<S> <C> <C>
* Director November 14, 1997
- ----------------------------------------
Olivier L. Trouveroy
* Director November 14, 1997
- ----------------------------------------
Peter C. Bentz
</TABLE>
- ---------------
* The undersigned, by signing his name hereto, does hereby sign this
registration statement or amendment thereto on behalf of the above indicated
directors and officers of American Communications Services, Inc. pursuant to
powers of attorney executed on behalf of each such director and officer.
By: /s/ DAVID L. PIAZZA
---------------------------------
David L. Piazza
Attorney-in-Fact
II-8
<PAGE> 152
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
INCORPORATION NUMBERED
EXHIBIT NO. DESCRIPTION BY REFERENCE PAGE
- ----------- ------------------------------------------------------------ ------------- ------------
<C> <S> <C> <C>
3.1 Second Restated Certificate of Incorporation of the
Company. ................................................... --
3.2 Certificate of Designation of the Company's 14.75%
Redeemable Preferred Stock due 2008. ....................... --
3.3 Certificate of Amendment of the Certificate of Designation
of the Company's 14.75% Redeemable Preferred Stock due
2008. ...................................................... --
3.4 Amended and Restated By-Laws of the Company. ...............
---
3.5 Governance Agreement dated November 8, 1995, between the
Company and the holders of its Preferred Stock. ............ ++
3.6 Certificate of Designation of the Company's 12 3/4% Junior
Redeemable Preferred Stock due 2009. .......................
---
3.7 Certificate of Correction dated March 11, 1996. ............ -
3.8 Supplemental Governance Agreement dated February 26,
1996. ...................................................... -
4.1 Specimen Certificate of the Company's Common Stock. ........ *
4.2 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"). ............................................... ++
4.3 March 11, 1996 Supplement to 1995 indenture. ............... ++++
4.4 Initial Global Note dated November 14, 1995. ............... ++
4.5 Warrant Agreement dated November 14, 1995, between the
Company and Smith Barney Inc. and Salomon Brothers Inc. .... +++
4.6 Initial Global Warrant dated November 14, 1995. ............ +++
4.7 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"). ............................................... +++++
4.8 Supplemental Indenture dated as of January 13, 1997, between
the Company and The Chase Manhattan Bank, as trustee, to the
Indenture dated November 14, 1995, as amended, relating to
the Company's 13% Senior Discount Notes due 2005. .......... ++++
4.9 Supplemental Indenture dated as of January 13, 1997, between
the Company and The Chase Manhattan Bank, as trustee, to the
Indenture dated March 26, 1996, as amended, relating to the
Company's 12 3/4% Senior Discount Notes due 2006. .......... ++++
4.10 Supplemental Indenture dated as of July 7, 1997, between the
Company and The Chase Manhattan Bank, as trustee, to the
Indenture dated November 14, 1995, as amended, relating to
the Company's 13% Senior Discount Notes due 2005. .......... --
4.11 Supplemental Indenture dated as of July 7, 1997, between the
Company and The Chase Manhattan Bank, as trustee, to the
Indenture dated March 26, 1996, as amended, relating to the
Company's 12 3/4% Senior Discount Notes due 2006. .......... --
4.12 Specimen Certificate of the Company's 14.75% Redeemable
Preferred Stock due 2008. .................................. --
4.13 Warrant Agreement dated as of July 10, 1997, between the
Company and The Chase Manhattan Bank, as warrant agent. .... --
4.14 Form of Warrant. ........................................... --
4.15 Indenture dated as of July 23, 1997, between the Company and
The Chase Manhattan Bank, as trustee, relating to the
Company's 13 3/4% Senior Notes due 2007. ................... --
</TABLE>
<PAGE> 153
<TABLE>
<CAPTION>
SEQUENTIALLY
INCORPORATION NUMBERED
EXHIBIT NO. DESCRIPTION BY REFERENCE PAGE
- ----------- ------------------------------------------------------------ ------------- ------------
<C> <S> <C> <C>
4.16 Escrow and Disbursement Agreement dated as of July 23, 1997,
among the Company, The Bank of New York, as escrow agent,
and The Chase Manhattan Bank, as trustee, relating to the
Company's 13 3/4% Senior Notes due 2007. ................... --
4.17 Specimen Certificate of the Company's 12 3/4% Junior
Redeemable Preferred Stock due 2009.........................
---
5 Opinion of Riley M. Murphy, General Counsel of the
Company. ...................................................
---
9.1 Standstill Agreement dated June 26, 1995, between the
Company and certain of its Preferred Stockholders. ......... ****
9.2 Standstill Agreement dated November 8, 1995, between the
Company and certain of its Preferred Stockholders. ......... ++
9.3 Voting Rights Agreement dated November 8, 1995, between the
Company and certain of its Preferred Stockholders. ......... ++
9.4 Amendment to Voting Rights Agreement dated December 14,
1995. ...................................................... -
10.1 Exchange Agreement, dated June 1, 1994, between the Company
and certain of its Preferred Shareholders. ................. *
10.2 Exchange Agreement, dated June 26, 1995, between the Company
and its 9% Series A Preferred Shareholders. ................ **
10.3 Company's Amended 1994 Stock Option Plan. .................. ++
10.4 Company's Employee Stock Purchase Agreement. ............... ++++
10.5 Registration Rights Agreement dated July 1, 1992, between
American Lightwave, Inc. and persons named therein. ........ *
10.6 Supplemental Registration Rights Agreement dated June 26,
1995. ...................................................... ****
10.7 Management Registration Rights Agreement dated June 30,
1995. ...................................................... ****
10.8 Registration Rights Agreement dated June 26, 1995, between
the Company and certain Preferred Stockholders. ............ **
10.9 Form of Warrant Agreement issued to certain Preferred
Stockholders on June 26, 1995. ............................. ****
10.10 Form of $.01 Warrant Agreement. ............................ ****
10.11 Form of $1.79 Warrant Agreement. ........................... ****
10.12 Form of $2.25 Warrant Agreement. ........................... ****
10.13 Stockholders Agreement dated June 26, 1995, between the
Company and certain Preferred Stockholders. ................ ****
10.14 Third Amended and Restated Employment Agreement between the
Company and Anthony J. Pompliano. .......................... ****
10.15 Third Amended and Restated Employment Agreement between the
Company and George M. Tronsrue, III. ....................... ****
10.16 Third Amended and Restated Employment Agreement between the
Company and Riley M. Murphy. ............................... ****
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. .................................. *
</TABLE>
<PAGE> 154
<TABLE>
<CAPTION>
SEQUENTIALLY
INCORPORATION NUMBERED
EXHIBIT NO. DESCRIPTION BY REFERENCE PAGE
- ----------- ------------------------------------------------------------ ------------- ------------
<C> <S> <C> <C>
10.23 Lease Agreement for the Company's executive offices at 131
National Business Parkway, Suite 100, Annapolis Junction,
Maryland, as amended. ...................................... ****
10.24 Loan and Security Agreement, dated October 17, 1994, between
AT&T Credit Corporation and American Communication Services
of Louisville, Inc. ........................................ *
10.25 Loan and Security Agreement, dated February 28, 1995,
between AT&T Credit Corporation and American Communication
Services of Fort Worth, Inc. ............................... ****
10.26 Loan and Security Agreement, dated June 30, 1995, between
AT&T Credit Corporation and American Communication Services
of Greenville, Inc. and American Communication Services of
Columbia, Inc. ............................................. ****
10.27 Amendment No. 1 to Parent Support and Pledge Agreement
(Louisville) between the Company and AT&T Credit
Corporation. ............................................... ****
10.28 Amendment No. 1 to Parent Support and Pledge Agreement (Fort
Worth) between the Company and AT&T Credit Corporation. .... ****
10.29 Amendment No. 1 to Loan and Security Agreement between
American Communications Services of Louisville, Inc. and
AT&T Credit Corporation. ................................... ****
10.30 Consulting Agreement, dated October 25, 1993, between the
Company and Thurston Partners, Inc. ........................ *
10.31 Consulting Agreement, effective July 1, 1994, between the
Company and SGC Advisory Services, Inc. .................... *
10.32 Consulting Agreement, dated June 16, 1994, between the
Company and Thurston Partners, Inc. and Global Capital,
Inc. ....................................................... *
10.33 Note Purchase Agreement, dated June 28, 1994. .............. *
10.34 Investment Agreement dated October 21, 1994, between the
Company and the Purchasers named therein. .................. *
10.35 Stock Purchase Agreement, dated October 17, 1994, between
the Company and AT&T Credit Corporation. ................... *
10.36 American Communication Services of Louisville, Inc. Common
Stock Purchase Agreement, dated October 17, 1994. .......... *
10.37 Stock Purchase Agreement, dated November 28, 1994, by and
among the Company, CitiLink Corp., and the former directors
and shareholders of CitiLink Corp., as amended August 3,
1995. ...................................................... ****
10.38 Stock Purchase Agreement dated December 17, 1996 by and
between the Company and Cybergate, Inc. .................... ++++
10.39 Stock Purchase Agreement, dated May 12, 1995, by and among
the Company, Piedmont Teleport, Inc., Randal Holcombe and
Karen Holcombe, as amended. ................................ ****
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 Rights Agreement dated November 9, 1995,
between the Company and certain 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. ............................................... ++
</TABLE>
<PAGE> 155
<TABLE>
<CAPTION>
SEQUENTIALLY
INCORPORATION NUMBERED
EXHIBIT NO. DESCRIPTION BY REFERENCE PAGE
- ----------- ------------------------------------------------------------ ------------- ------------
<C> <S> <C> <C>
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. ................................................... (o)
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 Registration Rights Agreement dated as of July 10, 1997,
among the Company, BT Securities Corporation, Alex. Brown &
Sons Incorporated, The Huff Alternative Income Fund, L.P.,
General Motors Domestic Group Pension Trust, Societe
Generale Securities Corporation, ING Baring (U.S.)
Securities, Inc. and McDermott Inc. Master Trust. .......... --
10.53 Registration Rights Agreement dated as of July 23, 1997
among the Company and BT Securities Corporation as
representatives of the Initial Purchasers named therein. ... --
10.54 Supplemental Registration Rights Agreement, dated as of July
10, 1997, among the Company, The Huff Alternative Income
Fund, L.P., General Motors Domestic Group Pension Trust and
McDermott Inc. Master Trust. ............................... (oo)
10.55 Registration Rights Agreement, dated as of October 16, 1997,
between the Company and Bear, Stearns & Co., Inc. ..........
---
10.56 Second Amended and Restated Registration Rights Agreement...
---
11.1 Statement re: computation of per share earnings (loss). .... +
12.1 Statement re: Ratio of Earnings to Fixed Charges............
---
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 Riley M. Murphy (included in Exhibit 5). ........
---
24.1 Power of Attorney. .........................................
----
25.1 Statement of Eligibility and Qualification on Form T-1 of
The Chase Manhattan Bank under the Indenture dated July 23,
1997. ......................................................
----
99.1 Form of Letter of Transmittal. .............................
----
99.2 Form of Notice of Guaranteed Delivery. .....................
----
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees. ..............................
----
99.4 Form of Letter to Clients. .................................
----
99.5 Form of Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9. ..............
----
</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.
<PAGE> 156
*** 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 Transition Report on
Form 10-KSB for the transition period from July 1, 1996 to December
31, 1996, and the Company's Quarterly Report on Form 10-QSB for the
fiscal quarter ended June 30, 1997, both of which are incorporated
herein by reference thereto.
++ Previously filed as an exhibit to the Company's Registration
Statement on Form S-4 (File No. 33-80305) and incorporated herein by
reference thereto.
+++ Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (File No. 33-80673) and incorporated herein by reference
thereto.
++++ Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (File No. 333-20867) and incorporated herein by reference
thereto.
+++++ Previously filed as an exhibit to the Company's Current Report on Form
8-K dated March 26, 1996 and incorporated herein by reference thereto.
++++++ Previously filed as an exhibit to the Company's Current Report on Form
8-K dated January 17, 1997 and incorporated herein by reference
thereto.
+++++++ To be filed by amendment.
- Previously filed as an exhibit to the Company's Registration
Statement on Form S-4 (File No. 333-3632) and incorporated herein by
reference thereto.
-- Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the fiscal quarter ended June 30, 1997 and
incorporated by reference hereto.
--- Filed herewith.
---- Previously filed.
() (o) Previously filed as an exhibit to the Company's Definitive Proxy
Statement filed on October 14, 1996 and incorporated herein by
reference thereto.
() (oo) Previously filed as an exhibit to the Company's Registration
Statement on Form S-3 (File No. 333-35925)
<PAGE> 1
EXHIBIT 3.4
AMERICAN COMMUNICATIONS SERVICES, INC.
AMENDED AND RESTATED BY-LAWS 1/
ARTICLE I
OFFICES
SECTION 1. Registered Office. The registered office of American
Communications Services, Inc. (the "Corporation") in the State of Delaware shall
be at 1209 Orange Street, City of Wilmington, County of New Castle, and the
registered agent in charge thereof shall be The Corporation Trust Company.
SECTION 2. Other Offices. The Corporation may also have an office or
offices at other place or places within or without the State of Delaware.
ARTICLE II
MEETINGS OF STOCKHOLDERS; STOCKHOLDERS'
CONSENT IN LIEU OF MEETING
SECTION 1. Annual Meeting. The annual meeting of the stockholders
(unless the context clearly requires otherwise, the term "Stockholders" as used
herein shall refer to all holders of the Corporation's securities which then
have voting rights) for the election of directors, and for the transaction of
such other business as may properly come before the meeting, shall be held at
such place, date and hour as shall be fixed by the Board of Directors (the
"Board") and designated in the notice or waiver of notice thereof; except that
no annual meeting need be held if all actions, including the election of
directors, required by the General Corporation Law of the State of Delaware to
be taken at a stockholders' annual meeting are taken by written consent in lieu
of meeting pursuant to Section 10 or this Article II.
SECTION 2. Special Meetings. A special meeting of the stockholders for
any purpose or purposes may be called by the Board, the Chairman, the President
or the holders of at least 12.5% of the Corporation's voting stock, to be held
at such place, date and hour as shall be designated in the notice thereof.
Special meetings of the stockholders may also be called and convened as
- --------------------------------------------------------------------------------
1/As amended by unanimous consent of the Board of Directors on July 2, 1997 and
further amended by a Board of Directors meeting on September 22, 1997.
-1-
<PAGE> 2
provided in the Certificate of Incorporation.
SECTION 3. Notice of Meetings. Except as otherwise required by statute
or by the Certificate of Incorporation or these By-laws, notice of each annual
or special meeting of the stockholders shall be given to each stockholder of
record entitled to vote at such meeting not less than 10 or more than 60 days
before the day on which the meeting is to be held, by delivering a typewritten
or printed notice thereof to him personally, or by mailing a copy of such
notice, postage prepaid, directly to each such stockholder at his address as it
appears in the records of the Corporation, or by transmitting notice thereof to
him at such address by telegraph, cable or radio. Every such notice shall state
the place and the date and hour of the meeting, and, in case of a special
meeting, the purpose or purposes for which the meeting is called. Notice of any
meeting of stockholders shall not be required to be given to any stockholder who
shall attend such meeting in person or by proxy, or who shall, in person or by
attorney thereunto authorized, waive such notice in writing, either before or
after such meeting. Except as otherwise provided in these By-laws, neither the
business to be transacted at, nor the purpose of, any meeting of the
stockholders need be specified in any such waiver of notice. Notice of any
adjourned meeting of stockholders shall not be required to be given, except when
expressly required by law.
SECTION 4. Quorum. At each meeting of the stockholders, except where
otherwise provided by the Certificate of Incorporation or these By-Laws, the
holders of a majority of the issued and outstanding shares of stock of the
Corporation entitled to vote at such meeting, present in person or represented
by Proxy shall constitute a quorum for the transaction of business. In the
absence of a quorum, a majority in interest of the stockholders present in
person or represented by proxy and entitled to vote, or, in the absence of all
the stockholders entitled to vote, any officer entitled to preside at, or act as
secretary of such meeting, shall have the power to adjourn the meeting from time
to time, until stockholders holding the requisite amount of stock shall be
present or represented. At any such adjourned meeting at which a quorum shall be
present, any business may be transacted which might have been transacted at the
meeting as originally called.
SECTION 5. Organization. At each meeting of the stockholders, one of
the following shall act as chairman of the meeting and preside thereat, in the
following order of precedence:
(a) the Chairman of the Board, if any;
(b) the President;
(c) any other officer of the Corporation designated by the
Board of Directors to act as chairman of such meeting and to preside
thereat if the Chairman of the Board, if any, or the President shall be
absent from such meeting.
The Secretary, or if he shall be presiding over the meeting in accordance with
the provisions of this Section, or if he shall be absent from such meeting, the
person whom the chairman of such
-2-
<PAGE> 3
meeting shall appoint, shall act as secretary of such meeting and keep the
minutes thereof.
SECTION 6. Order of Business. The order of business at each meeting of
the stockholders shall be determined by the chairman of such meeting, but such
order of business may be changed by a majority in voting interest of those
present in person or by proxy at such meeting and entitled to vote thereat.
SECTION 7. Voting. Except as otherwise provided by law or by the
Certificate of Incorporation or these By-laws, at each meeting of the
stockholders, every stockholder of the Corporation shall be entitled to one vote
in person or by proxy for each share of common stock of the corporation held by
him and registered in his name on the books of the Corporation:
(a) on the date fixed pursuant to Section 7 of Article V as
the record date for the determination of stockholders entitled to vote
at such meeting; or
(b) if no such record date shall have been fixed, at the close
of business on the day next preceding the day on which notice is given,
or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held.
A determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of such meeting;
provided, however, that the Board may fix a new record date for the adjourned
meeting. Only the record holders of the Corporation's stock or their proxies
will be entitled to vote such shares. If shares or other securities having
voting power stand in the record of two or more persons, whether fiduciaries,
members of a partnership, joint tenants, tenants in common, tenants by the
entirety or otherwise, or if two or more persons have the same fiduciary
relationship respecting the same shares, unless the Secretary shall be given the
written notice to the contrary and shall be furnished with a copy of the
instrument or order appointing them or creating the relationship wherein it is
so provided, their acts with respect to voting shall have the following effect:
(a) if only one votes, his act binds all;
(b) if more than one votes, the act of the majority so voting
binds all; and
(c) if more than one votes, but the vote is evenly split on
any particular matter, such shares shall be voted in the manner
provided by law.
If the instrument so filed shows that any such tenancy is held in unequal
interests, a majority or even-split for the purposes of this Section shall be
the majority or even-split in interest. The Corporation shall not vote directly
or indirectly any share of its own capital stock. Any vote of stock may be given
by the stockholder entitled thereto in person or by his proxy appointed by an
instrument in writing, subscribed by such stockholder or by his attorney
thereunto authorized, delivered to the secretary of the meeting; provided,
however, that no proxy shall be voted after
-3-
<PAGE> 4
three years from its date, unless said proxy provides for a longer period. At
all meetings of the stockholders, all matters (except where other provision is
made by law, by the Certificate of Incorporation or these By-laws) shall be
decided by the vote of a majority in interest of the stockholders present in
person or by proxy at such meeting and entitled to vote thereon, a quorum being
present. Unless demanded by a stockholder present in person or by proxy at any
meeting and entitled to vote thereon, the vote on any question need not be by
ballot. Upon a demand by any such stockholder for a vote by ballot upon any
question, such vote by ballot shall be taken. On a vote by ballot, each ballot
shall be signed by the stockholder voting, or by his proxy, if there be such
proxy, and shall state the number of shares voted.
SECTION 8. Inspection. The chairman of the meeting may at any time
appoint two or more inspectors to serve at any meeting of the stockholders. Any
inspector may be removed, and a new inspector or inspectors may be appointed by
the Board at any time. Such inspectors shall decide upon the qualifications of
voters, accept and count the votes for and against the matter to be voted upon,
respectively, declare the results of such vote, and subscribe and deliver to the
secretary of the meeting a certificate stating the number of shares of stock
issued and outstanding and entitled to vote thereon and the number of shares
voted for and against the matter to be voted upon, respectively. The inspectors
need not be stockholders of the Corporation, and any director or officer of the
Corporation may be an inspector on any question other than a vote for or against
his election to any position with the Corporation or on any other question in
which he may be directly interested. Before acting as herein provided, each
inspector shall subscribe an oath faithfully to execute the duties of an
inspector with strict impartiality and according to the best of his ability.
SECTION 9. List of Stockholders. It shall be the duty of the Secretary
or other officer of the Corporation who shall have charge of its stock ledger to
prepare and make, at least 10 days before every meeting of the stockholders, a
complete list of the stockholders entitled to vote thereat, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to any such meeting,
during ordinary business hours, for a period of at least 10 days prior to such
meeting, either at a place within the city where such meeting is to be held,
which place shall be specified in the notice of the meeting or, if not so
specified, at the place where the meeting is to be held. Such list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
SECTION 10. Stockholders' Consent In Lieu of Meeting. Subject to the
requirements of the Certificate of Incorporation, any action required by law to
be taken at any annual or special meeting of the stockholders of the
Corporation, or any action which may be taken at any annual or special meeting
of such stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent or consents in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled
-4-
<PAGE> 5
to vote thereon were present and voted and shall be delivered to the Corporation
by delivery to its registered office in the State of Delaware, its principal
place of business, or an officer or agent of the Corporation having custody of
the book in which proceedings of meetings of stockholders are recorded. Delivery
made to the Corporation's registered office shall be by hand or by certified or
registered mail, return receipt requested. Every written consent shall bear the
date of signature of each stockholder who signs the consent and the number of
shares which the stockholder is entitled to vote. No written consent shall be
effective to take the corporate action referred to therein unless, within 60
days of the earliest dated consent delivered in the manner required by law to
the Corporation, written consents signed by a sufficient number of holders to
take action are delivered to the Corporation by delivery to its registered
office in Delaware, its principal place of business, or an officer or an agent
of the corporation having custody of the book in which proceedings of meetings
of stockholders are recorded. Delivery made to the Corporation's registered
office shall be by hand or by certified or registered mail, return receipt
requested. Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
ARTICLE III
BOARD OF DIRECTORS
SECTION 1. General Powers. The business, property and affairs of the
Corporation shall be managed by the Board, which may exercise all such powers of
the Corporation and do all such lawful acts and things as are not by law or by
the Certificate of Incorporation directed or required to be exercised or done by
the stockholders.
SECTION 2. Number and Term of Office. The number of directors shall be
eight or as otherwise provided in the Certificate of Incorporation. Except as
otherwise provided in the Certificate of Incorporation, each Director shall hold
office for a term expiring at the next annual meeting of shareholders or until
his earlier death, removal or resignation.
Section 3. Election of Directors. Except as otherwise provided by the
Certificate of Incorporation, at each meeting of the stockholders for the
election of directors at which a quorum is present, the persons receiving the
greatest number of votes, up to the number of directors to be elected, of the
stockholders present in person or by proxy and entitled to vote thereon shall be
the directors. Unless an election by ballot shall be demanded as provided in
Section 7 of Article II, election of directors be conducted in any manner
approved at such a meeting.
Section 4. Resignation, Removal and Vacancies. Any director may resign
at any time by giving written notice to the Board, the Chairman, if any, the
President or the Secretary. Such resignation shall take effect at the time
specified thereon or, if the time be not specified, upon receipt thereof; and,
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
-5-
<PAGE> 6
Any or all directors may be removed, with or without cause, at any time
by vote of the holders of a majority of the shares then entitled to vote for
such directors at an election of directors, or by written consent of the
stockholders entitled to vote for such directors pursuant to Section 10 of
Article II.
Any vacancy caused by the death or resignation of a director may be
filled by the stockholders in the manner provided in the Certificate of
Incorporation of the Corporation and these By-laws, or may be filled by a vote
of the directors elected by the stockholders.
SECTION 5. Meetings.
(A) Annual Meeting. As soon as practicable after each annual election
of directors, the Board shall meet for the purpose of organization and the
transaction of other business, unless it shall have transacted all such business
by written consent pursuant to Section 6 of this Article III.
(B) Other Meetings. Other meetings of the Board shall be held at such
times and places as the Board, the Chairman, if any, or the President shall from
time to time determine.
(C) Notice of Meetings. The Secretary shall give notice to each
director of each meeting, including the time, place and purpose of such meeting.
Notice of each such meeting shall be mailed to each director, addressed to him
at his residence or usual place of business, at least two days before the day on
which such meeting is to be held, or shall be sent to him at such place by
facsimile, telegraph, cable, wireless or other form of recorded communication,
or be delivered personally or by telephone not later than the day before the day
on which such meeting is to be held, but notice need not be given to any
director who attends such meetings. A written waiver of notice, signed by the
person entitled thereto, whether before or after the time of the meeting stated
therein, shall be deemed equivalent to notice.
(D) Place of Meetings. The Board may hold its meetings at such place or
places within or without the State of Delaware as the Board may from time to
time determine, or as shall be designated in the respective notices or waivers
of notice thereof.
(E) Quorum and Manner of Acting. Except as otherwise required by the
Certificate of Incorporation, a majority of the total number of directors then
in office (but not less than two if the number of Directors is greater than one)
shall be present in person at any meeting of the Board in order to constitute a
quorum for the transaction of business at such meeting, and except as otherwise
required by the Certificate of Incorporation or by law, the vote of a majority
of those directors present at any such meeting at which a quorum is present
shall be necessary for the passage of any resolution or act of the Board.
(F) Organization. At each meeting of the Board, one of the following
shall act as chairman of the meeting and preside, in the following order of
precedence
-6-
<PAGE> 7
(a) the Chairman of the Board, in any;
(b) the President (if a director);
(c) any director chosen by a majority of the directors
present.
The Secretary or, in the case of his absence, any person (who shall be an
Assistant Secretary, if an Assistant Secretary is present) whom the Chairman
shall appoint shall act as secretary of such meeting and keep the minutes
thereof.
SECTION 6. Directors' Consent in Lieu of Meeting. Any action required
or permitted to be taken at any meeting of the Board may be taken without a
meeting, without prior notice, without a vote, if a consent in writing, setting
forth the action so taken, shall be signed by all the directors and such consent
is filed with the minutes of the proceedings of the Board.
SECTION 7. Action by Means of Conference Telephone or Similar
Communications Equipment. Any one or more members of the Board may participate
in a meeting of the Board by means of conference telephone or similar
communications equipment by which all persons participating in the meeting can
hear each other, and participation in a meeting by such means shall constitute
presence in person at such meeting.
SECTION 8. Committees of the Board. The Board may, by resolution passed
by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the directors of the corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board to act at the meeting in the place of any such
absent or disqualified member. Any such committee, to the extent provided in the
resolution of the Board, shall have and may exercise all the powers and
authority of the Board in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the Certificate of Incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the Corporation's property and
assets, recommending to the stockholders a dissolution of the Corporation or a
revocation of a dissolution, or amending the By-laws of the Corporation; and,
unless the resolution designating it expressly so provides, no such committee
shall have the power or authority to declare a dividend or to authorize the
issuance of stock.
Without limiting the generality of the foregoing, the board of
directors shall establish and maintain a compensation committee comprised of
three directors, none of whom may be an employee of the Company or any of its
subsidiaries. The compensation committee shall be responsible for recommending
to the full board of directors all stock option grants, bonuses and other
compensation arrangements for executives and key employees and loans and other
non-
-7-
<PAGE> 8
salary payments and other benefits and arrangements with employees and
affiliates and associates of the Company. The compensation committee shall have
such additional powers and duties as the board of directors from time to time
determines.
The board of directors shall establish and maintain an audit committee
comprised of three directors, one of whom shall be a senior executive officer of
the Company (but not the chief financial or chief accounting officer) and two of
whom may not be employees of the Company or any of its subsidiaries. The audit
committee shall be responsible for selecting the Company's independent auditors
and reviewing their audit, as well as reviewing and approving the Company's
internal controls and accounting systems. The audit committee shall have such
additional powers and duties as the board of directors from time to time
determines.
In the event that the group of directors of the Company that are
specified to select a committee member as provided herein is deadlocked over its
selection of such committee member for more than 30 days, the full board of
directors shall select such committee member from among such group of directors.
ARTICLE IV
OFFICERS
SECTION 1. Executive Officers. The executive officers of the
Corporation shall be a Chief Executive Officer, a President, a Chief Financial
Officer, a Secretary and a Treasurer and may include a Chairman of the Board, a
Chief Operating Officer and such other officers as the Board may appoint
pursuant to Section 3 of this Article IV. Any two or more offices may be held by
the same person, provided that the offices of President and Secretary shall be
held by different persons.
SECTION 2. Authority and Duties. All officers as between themselves and
the Corporation, shall have such authority and perform such duties in the
management of the Corporation as may be provided in these By-laws or, to the
extent so provided, by the Board.
SECTION 3. Other Officers. The Corporation may have such other
officers, agents and employees as the Board may deem necessary, including one or
more Vice-Presidents, one or more Assistant Secretaries and one or more
Assistant Treasurers, each of whom shall hold office for such period, have such
authority, and perform such duties as the Board, the Chief Executive Officer,
the President, or the Chief Operating Officer may from time to time determine.
The Board may delegate to any executive officer the power to appoint or remove
any such officer, agents or employees.
SECTION 4. Term of Office, Resignation and Removal. All officers shall
be elected or appointed by the Board and shall hold office for such term as may
be prescribed by the Board. Each officer shall hold office until his successor
has been elected or appointed and qualified or
-8-
<PAGE> 9
his earlier death or resignation or removal in the manner hereinafter provided.
The Board may require any officer to give security for the faithful performance
of his duties.
Any officer may resign at any time by giving written notice to the
Board or to the Chief Executive Officer, or to the President or to the Chief
Operating Officer, or to the Secretary, and such resignation shall take effect
at the time specified therein or, if the time when it shall become effective is
not specified therein, at the time it is accepted by action of the Board. Except
as aforesaid, the acceptance of such resignation shall not be necessary to make
it effective.
All officers and agents elected or appointed by the Board shall be
subject to removal at any time by the Board with or without cause.
SECTION 5. Vacancies. If the office of the Chief Executive Officer, the
President, Chief Financial Officer, the Secretary or the Treasurer or any other
office becomes vacant for any reason, the Board shall fill such vacancy or may
elect not to fill such vacancy. An officer so appointed or elected by the Board
shall serve only until such time as the unexpired term of his predecessor shall
have expired unless reelected or reappointed by the Board.
SECTION 6. Chairman of the Board. If there shall be a Chairman of the
Board, he shall, unless provided otherwise by the Board by resolution, preside
at meetings of the Board and of the stockholders at which he is present, and
shall give counsel and advice to the Board and the officers of the Corporation
on all subjects concerning the welfare of the Corporation and the conduct of its
business. He shall perform such other duties as the Board may from time to time
determine.
SECTION 7. The Chief Executive Officer. The Chief Executive Officer
shall be the most senior officer of the Corporation and unless the Chairman of
the Board be appointed and present or the Board has provided otherwise by
resolution, he shall preside at all meetings of the Board and the stockholders
at which is he present. He shall have responsibility for the short and long term
strategy of the Corporation, corporate development and investor relations and
shall cause decisions concerning the attainment of strategic, corporate
development and investor relations' objectives to be implemented.
SECTION 8. The President. The President, unless the Chairman of the
Board be appointed and present, or the Chief Executive Officer be appointed and
present or the Board has provided otherwise by resolution shall preside at all
meetings of the Board and the stockholders at which he is present. He shall,
along with the Chief Operating Officer (if one is appointed by the Board), have
the day-to-day, general and active management and control of the business and
affairs of the Corporation subject to the control of the Chief Executive Officer
and subject to the control of the Board, and shall see that all orders of the
Chief Executive Officer and orders and resolutions of the Board are carried into
effect.
SECTION 9. The Chief Operating Officer. He shall, along with the
President, have the
-9-
<PAGE> 10
day-to-day, general and active management and control of the business and
affairs of the Corporation subject to the control of the Chief Executive Officer
and subject to the control of the Board, and shall see that all orders of the
Chief Executive Officer and orders and resolutions of the Board are carried into
effect.
SECTION 10. Chief Financial Officer. He shall have responsibility for
the financial matters of the Corporation, including the books and records, and
such other responsibilities as determined by the Board.
SECTION 11. Vice-President. A Vice-President, which officer may have
such additional designations such as "Executive" or "Senior" as the Board may
provide, shall perform such duties as may be prescribed by the Board, the Chief
Executive Officer, the President, or Chief Operating Officer under whose
supervision he shall act.
SECTION 12. The Secretary. The Secretary shall, to the extent
practicable, attend all meetings of the Board and all meetings of the
stockholders and shall record all votes and the minutes of all proceedings in a
book to be kept for that purpose. He shall give, or cause to be given, notice of
all meetings of the stockholders and of the Board, and shall perform such other
duties as may be prescribed by the Board, the Chief Executive Officer, or the
President or Chief Operating Officer, under whose supervision he shall act. He
shall keep in safe custody the seal of the Corporation and affix the same to any
duly authorized instrument requiring it and, when so affixed, it shall be
attested by his signature or by the signature of the Treasurer or, if appointed,
an Assistant Secretary or an Assistant Treasurer. He shall keep, or cause the
Corporation's transfer agent and registrar to keep, in safe custody the
certificate books and stockholder records and such other books and records as
the Board may direct and shall perform all other duties incident to the office
of Secretary and such other duties as from time to time may be assigned to him
by the Chief Executive Officer, President, Chief Operating Officer of the Board.
SECTION 13. The Treasurer. The Treasurer shall have the care and
custody of the corporate funds and other valuable effects, including securities,
and shall keep full and accurate accounts of receipts and disbursements in books
belonging to the Corporation and shall deposit all moneys and other valuable
effects in the name and to the credit of the Corporation in such depositories as
may be designated by the Board. The Treasurer shall disburse the funds of the
Corporation as may be ordered by the Chief Executive Officer, President, Chief
Financial Officer, or the Board, taking proper vouchers for such disbursements,
and shall render to the Chief Executive Officer, President and Chief Financial
Officer, Chief Operating Officer and the Board, at the regular meetings of the
Board, or whenever they may require it, an account of all his transactions as
Treasurer and of the financial condition of the Corporation; and, in general
perform all the duties incident to the office of Treasurer and such other duties
as from time to time may be assigned to him by the Chief Executive Officer,
President, Chief Financial Officer, Chief Operating Officer, or the Board.
ARTICLE V
-10-
<PAGE> 11
SHARES AND THEIR TRANSFER; FIXING RECORD DATE
SECTION 1. Certificates for Shares. Every owner of stock of the
Corporation shall be entitled to have a certificate certifying the number and
class of shares owned by him in the Corporation, which shall otherwise be in
such form as shall be prescribed by the Board. Certificates shall be issued in
consecutive order and shall be numbered in the order of their issue, and shall
be signed by, or in the name of, the Corporation by the Chairman, if any, the
President or any Vice President and by the Treasurer (or an Assistant Treasurer,
if appointed) or the Secretary (or an Assistant Secretary, if appointed). In
case any officer or officers who shall have signed any such certificate or
certificates shall cease to be such officer or officers of the Corporation,
whether because of death, resignation or otherwise, before such certificate or
certificates shall have been delivered by the Corporation, such certificate or
certificates may nevertheless be adopted by the Corporation and be issued and
delivered as though the person or persons who signed such certificate had not
ceased to be such officer or officers of the Corporation.
SECTION 2. Record. A record (herein called the stock record) in one or
more counterparts shall be kept of the name of the person, firm or corporation
owning the shares represented by each certificate for stock of the Corporation
issued, the number of shares represented by each such certificate, the date
thereof and, in the case of cancellation, the date of cancellation. Except as
otherwise expressly required by law, the person in whose name shares of stock
stand on the stock record of the Corporation shall be deemed the owner thereof
for all purposes as regards the Corporation.
SECTION 3. Transfer and Registration of Stock.
(a) The transfer of stock and certificates of stock which represent the
stock of the Corporation shall be governed by Article 8 of Subtitle 1 of Title 6
of the Delaware Code (the Uniform Commercial Code), as amended from time to
time.
(b) Registration of transfers of shares of the Corporation shall be
made only on the books of the Corporation upon request of the registered holder
thereof, or of his attorney thereunto authorized by power of attorney duly
executed and filed with the Secretary of the Corporation, and upon the surrender
of the certificate or certificates for such shares properly endorsed or
accompanied by a stock power duly executed.
SECTION 4. Addresses of Stockholders. Each stockholder shall designate
to the Secretary an address at which notices of meetings and all other corporate
notices may be served or mailed to him, and, if any stockholder shall fail to
designate such address, corporate notices may be served upon him by mail
directed to him at his post office address, if any, as the same appears on the
share record books of the Corporation or at his last known post office address.
-11-
<PAGE> 12
SECTION 5. Lost, Destroyed and Mutilated Certificates. The holder of
any shares of the Corporation shall immediately notify the Corporation of any
loss, destruction or mutilation of the certificate therefor, and the Board may,
in its discretion, cause to be issued to him a new certificate or certificates
for shares, upon the surrender of the mutilated certificates or, in the case of
loss or destruction of the certificate, upon satisfactory proof of such loss or
destruction, and the Board may, in its discretion, require the owner of the lost
or destroyed certificate or his legal representative to give the Corporation a
bond in such sum and with such surety or sureties as it may direct to indemnify
the Corporation against any claim that may be made against it on account of the
alleged loss or destruction of any such certificate.
SECTION 6. Regulations. The Board may make such rules and regulations
as it may deem expedient, not inconsistent with these By-laws, concerning the
issue, transfer and registration of certificates for stock of the Corporation.
SECTION 7. Fixing Date for Determination of Stockholders of Record. In
order that the Corporation may determine the stockholders entitled to notice of
or to vote at any meeting of stockholders or any adjournment thereof, or to
express consent to corporate action in writing without a meeting, or entitled to
receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock or for the purpose of any other lawful action, the Board
may fix, in advance, a record date, which shall not be more than 60 nor less
than 10 days before the date of such meeting, nor more than 60 days prior to any
other action. A determination of stockholders entitled to notice of or to vote
at a meeting of the stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board may fix a new record date for the adjourned
meeting.
ARTICLE VI
SEAL
The Board may provide a Corporate seal, which shall be in the form of a
circle and shall bear the full name of the Corporation and the words "Corporate
Seal Delaware."
ARTICLE VII
FISCAL YEAR
The fiscal year of the Corporation shall end on the 31st of December in
each year unless changed by resolution of the Board.
ARTICLE VIII
INDEMNIFICATION AND INSURANCE
-12-
<PAGE> 13
Section 1. Power to Indemnify in Actions, Suits or Proceedings other
Than Those by or in the Right of the Corporation. Subject to Section 3 of this
Article VIII, the Corporation shall indemnify, to the fullest extent permitted
by applicable law, now or hereafter in effect, any person who was or is a party
or is threatened to be 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 or executive officer (or in the Board's
discretion, an employee or agent) of the Corporation, or is or was a director,
executive officer (or in the Board's discretion, an employee or agent) of the
Corporation serving at request of the Corporation in any other capacity for or
on behalf of the Corporation, 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;
provided, however, the Corporation shall be required to indemnify an officer or
director in connection with any actions, suit or proceeding initiated by such
person only if (i) such action, suit or proceeding was authorized by the Board
or (ii) the indemnification does not relate to any liability arising under
Section 16(b) of the Securities Exchange Act of 1934, as amended, or any of the
rules or regulations promulgated thereunder. The termination of any action, suit
or proceeding by judgment, order, settlement, or upon a plea of nolo contendere
or its equivalent, shall not, of itself, create a presumption that the person
did not act in good faith and in a manner which 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 reasonable cause to believe that his
conduct was unlawful.
Section 2. Power to Indemnify in Actions, Suits or Proceedings by or in
the Right of the Corporation. Subject to Section 3 of this Article VIII, the
Corporation shall 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 he is or was a director, executive officer, employee or agent of the
Corporation, or is or was a director, executive officer (or in the Board's
discretion, an employee or agent) of the Corporation serving at the request of
the Corporation as a director or executive officer of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
against expenses (including attorneys' fees) actually reasonably incurred by him
in connection with the defense or settlement of such action or suit 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; except that no indemnification shall 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 Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the
-13-
<PAGE> 14
Court of Chancery or such other court shall deem proper.
Section 3. Authorization of Indemnification. Any indemnification under
this Article VIII (unless ordered by a court) shall be made by the Corporation
only as authorized in the specific case upon a determination that
indemnification of the director or executive officer is proper in the
circumstances because he has met the applicable standard of conduct set forth in
Section 1 or Section 2 of this Article VIII, as the case may be. Such
determination shall be made (i) by the Board of Directors by a majority vote of
directors who were not parties to such action, suit or proceeding (even if such
majority vote constitutes less than a quorum), or (ii) if the majority vote of
disinterested directors so directs (even if such majority vote constitutes less
than a quorum), by independent legal counsel in a written opinion, or (iii) by
the stockholders. To the extent, however, that a director or executive officer
of the Corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding described above, or 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, without the necessity of authorization in the specific case.
Section 4. Good Faith Defined. For purposes of any determination under
Section 3 of this Article VIII, a person shall be deemed to have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation, or, with respect to any criminal action or
proceeding, to have had no reasonable cause to believe his conduct was unlawful,
if his action is based on the records or books of account of the Corporation or
another enterprise, or on information supplied to him by the officers of the
Corporation or another enterprise in the course of their duties, or on the
advice of legal counsel for the Corporation or another enterprise or on
information or records given or reports made to the Corporation or another
enterprise by an independent certified public accountant or by an appraiser or
other expert selected with reasonable care by the Corporation or another
enterprise. The term "another enterprise" as used in this Section 4 shall mean
any other corporation or any partnership, joint venture, trust, employee benefit
plan or other enterprise of which such person is or was serving at the request
of the Corporation as a director or executive officer. The provisions of this
Section 4 shall not be deemed to be exclusive or to limit in any way the
circumstances in which a person may be deemed to have met the applicable
standard of conduct set forth in Section 1 or 2 of this Article VIII, as the
case may be.
Section 5. Indemnification by a Court. Notwithstanding any contrary
determination in the specific case under Section 3 of this Article VIII, and
notwithstanding the absence of any determination thereunder, any director or
executive officer may apply to any court of competent jurisdiction in the State
of Delaware for indemnification to the extent otherwise permissible under
Sections 1 and 2 of this Article VIII. The basis of such indemnification by a
court shall be a determination by such court that indemnification of the
director or executive officer is proper in the circumstances because he has met
the applicable standards of conduct set forth in Section 1 or 2 of this Article
VIII, as the case may be. Neither a contrary determination in the specific case
under Section 3 of this Article VIII nor the absence of any determination
-14-
<PAGE> 15
hereunder shall be a defense to such application or create a presumption that
the director or executive officer seeking indemnification has not met any
applicable standard of conduct. Notice of any application for indemnification
pursuant to this Section 5 shall be given to the Corporation promptly upon the
filing of such application. If successful, in whole or in part, the director or
executive officer seeking indemnification shall also be entitled to be paid the
expense of prosecuting such application.
Section 6. Expenses Payable in Advance. Expenses (including attorneys'
fees) incurred by a director or executive officer in defending any civil,
criminal proceeding, administrative or investigative action, suit or proceeding
shall be paid by the Corporation in advance of the final disposition of such
action, suit or proceeding upon receipt of an undertaking by or on behalf of
such director or executive officer to repay such amount if it shall ultimately
be determined that he is not entitled to be indemnified by the Corporation as
authorized in this Article VIII, which undertaking may be accepted without
reference to the financial ability of such person to make such payment. Such
expenses incurred by other employees and agents may be so paid upon such terms
and conditions, if any, as the Board of Directors deems appropriate.
Section 7. Non-exclusivity of Indemnification and Advancement of
Expenses. The indemnification and advancement of expenses provided by or granted
pursuant to this Article VIII shall not be deemed exclusive of any other rights
to which those seeking indemnification or advancement of expenses may be
entitled under any By-law, agreement, contract, vote of stockholders or
disinterested directors or pursuant to the direction (howsoever embodied) of any
court of competent jurisdiction or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office, it
being the policy of the Corporation that indemnification of the persons
specified in Sections 1 and 2 of this Article VIII shall be made to the fullest
extent permitted by law.
Section 8. Insurance. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director or executive officer
of the Corporation, or is or was a director or executive officer of the
Corporation serving at the request of the Corporation as a director or executive
officer of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against him and incurred by him in any
such capacity, or arising out of his status as such, whether or not the
Corporation would have the power or the obligation to indemnify him against such
liability under the provisions of this Article VIII, the DGCL or otherwise.
Section 9. Certain Definitions. For purposes of this Article VIII,
references to "the Corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors or executive officers, so that any person who is or was a director or
executive officer of such constituent corporation, or is or was a director or
executive officer of such constituent corporation serving at the request of such
constituent corporation as a director or executive
-15-
<PAGE> 16
officer of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, shall stand in the same position under the
provisions of this Article VIII with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued. For purposes of this Article VIII, references
to "fines" shall include any excise taxes assessed on a person with respect to
an employee benefit plan; and references to "serving at the request of the
Corporation" shall include any service as a director or executive officer of the
Corporation which imposes duties on, or involves services by, such director or
executive officer with respect to an employee benefit plan, its participant or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this Article
VIII.
Section 10. Procedure for Indemnification of Directors and Officers.
Any indemnification of a director or officer of the Corporation under Sections 1
and 2 or advance of costs, charges and expenses to a director or officer under
Section 6 of this Article VIII, shall be made promptly, and in any event within
30 days, upon the written request of the director or officer. If a determination
by the Corporation that the director or officer is entitled to indemnification
pursuant to this Article VIII, and the Corporation fails to respond within 60
days to a written request for indemnity, the Corporation shall be deemed to have
approved such request. If the Corporation denies a written request for indemnity
or advancement of expenses, in whole or in part, or if payment in full pursuant
to such request is not made within 30 days, the right to indemnification or
advances as granted by this Article VIII shall be enforceable by the director or
officer in any court of competent jurisdiction.
Section 11. Survival; Preservation of Other Rights. The foregoing
indemnification provisions shall be deemed to be a contract between the
Corporation and each director, officer, employee and agent who serves in any
such capacity at any time while these provisions as well as the relevant
provisions of the Delaware General Corporation Law are not in effect and any
repeal or modification thereof shall not affect any right or obligation then
existing with respect to any state of facts then or previously existing or any
action, suit, or proceeding previously or thereafter brought or threatened
based, in whole or in part upon any such state of facts. Such a "contract right"
may not be modified retroactively without the consent of such director, officer,
employee or agent. The indemnification and advancement of expenses provided by,
or granted pursuant to, this Article VIII shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director
or executive officer and shall inure to the benefit of the heirs, executors and
administrators of such a person.
The indemnification provided by this Article VIII shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any other By-law, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in any
other capacity while holding such office, and shall continue as to a person who
has ceased to be a director, officer, employee or agent and shall inure
-16-
<PAGE> 17
to the benefit of the heirs, executors and administrators of such a person. The
Corporation may enter into a separate written agreement with any director,
officer, employee or agent of the Corporation that expressly provides for
indemnification and reimbursement of such person to the full extent permitted by
this Article VIII, on the same terms and conditions provided herein.
Section 12. Limitation on Indemnification. Notwithstanding anything
contained in this Article VIII to the contrary, except for proceedings to
enforce rights to indemnification (which shall be governed by Section 5 hereof),
the Corporation shall not be obligated to indemnify any director or executive
officer in connection with a proceeding (or part thereof) initiated by such
person unless such proceeding (or part thereof) was authorized or consented to
by the Board of Directors of the Corporation.
Section 13. Severability. If this Article VIII or any portion hereof
shall be invalidated on any ground by any court of competent jurisdiction, then
the Corporation shall nevertheless indemnify each director or officer and may
indemnify each employee or agent of the Corporation as to costs, charges and
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement with respect to any action, suit or proceeding, whether civil,
criminal, administrative or investigative, including an action by or in the
right of the Corporation, to the fullest extent permitted by any applicable
portion of this Article VIII that shall not have been invalidated and to the
fullest extent permitted by applicable law.
ARTICLE IX
AMENDMENTS
Subject to the provisions of the Certificate of Incorporation of the
Corporation, any provision contained in these By-laws may be amended, repealed
or adopted by the Board of Directors or by vote of the stockholders at the time
entitled to vote in the election of any directors.
-17-
<PAGE> 1
EXHIBIT 3.6
CERTIFICATE OF DESIGNATION OF THE POWERS, PREFERENCES
AND RELATIVE, PARTICIPATING, OPTIONAL AND
OTHER SPECIAL RIGHTS OF PREFERRED
STOCK AND QUALIFICATIONS, LIMITATIONS
AND RESTRICTIONS THEREOF
OF
12 3/4% SERIES A JUNIOR REDEEMABLE PREFERRED STOCK DUE 2009
AND
12 3/4% SERIES B JUNIOR REDEEMABLE PREFERRED STOCK DUE 2009
OF
AMERICAN COMMUNICATIONS SERVICES, INC.
-------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
-------------------------
American Communications Services, Inc. (the "Corporation"), a
corporation organized and existing under the General Corporation Law of the
State of Delaware, does hereby certify that, pursuant to the authority conferred
upon the Board of Directors of the Corporation by the Corporation's Second
Restated Certificate of Incorporation, as amended (the "Certificate of
Incorporation") and in accordance with the provisions of Section 151 of the
General Corporation Law of the State of Delaware, said Board of Directors,
acting by unanimous written consent dated October 15, 1997, duly approved and
adopted the following resolution (hereafter, this "Certificate of Designation"):
RESOLVED, that pursuant to the authority vested in the Board
of Directors by the Certificate of Incorporation, the Board of Directors does
hereby designate, create, authorize and provide for the issue by the
Corporation, out of the authorized but unissued shares of Preferred Stock, par
value $1.00 per share, of 12 3/4% Series A Junior Redeemable Preferred Stock due
2009 (the "Series A 12 3/4% Preferred Stock") and 12 3/4% Series B Junior
Redeemable Preferred Stock due 2009 (the "Series B 12 3/4% Preferred Stock" and,
together with the Series A 12 3/4% Preferred Stock, the "12 3/4% Preferred
Stock"), with a stated value (the "Liquidation Preference") of $1,000 per share,
consisting in the aggregate of 900,000 shares of 12 3/4% Preferred Stock, of
which 200,000 shares shall be Series A 12 3/4% Preferred Stock and 700,000
shares shall be Series B 12 3/4% Preferred Stock; provided that, so long as any
shares of
<PAGE> 2
2
the Series A 12 3/4% Preferred Stock remain outstanding, no shares of Series B
12 3/4% Preferred Stock may be issued, except upon the surrender and
cancellation of shares of Series A 12 3/4% Preferred Stock having an aggregate
Liquidation Preference equal to the aggregate Liquidation Preference of the
shares of Series B 12 3/4% Preferred Stock so issued. The 12 3/4% Preferred
Stock shall have the powers, preferences and relative, participating, optional
and other special rights, and the qualifications, limitations and restrictions
that are set forth in the Certificate of Incorporation and in this Resolution as
follows:
1. Certain Definitions
Unless the context otherwise requires, each of the terms
defined in this Section 1 shall have, for all purposes of this Certificate of
Designation, the meaning herein specified (with terms defined in the singular
having comparable meanings when used in the plural):
"Acquired Indebtedness" means, with respect to any specified Person,
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person,
but excluding Indebtedness which is extinguished, retired or repaid in
connection with such other Person merging with or into or becoming a Subsidiary
of such specified Person.
"Additional Dividends" has the meaning set forth in Section 3(f) below.
"Affiliate" means, as to any Person, any other Person which directly or
indirectly controls, or is under common control with, or is controlled by, such
Person; provided that each Unrestricted Subsidiary shall be deemed to be an
Affiliate of the Corporation and of each other Subsidiary of the Corporation;
provided, further, that neither the Corporation nor any of its Restricted
Subsidiaries shall be deemed to be Affiliates of each other; and provided,
further, that any lender under the Secured Credit Facility and its Affiliates
shall not be deemed to be Affiliates of the Corporation or any Restricted
Subsidiary solely as a result of the existence of the Secured Credit Facility or
their holdings of Capital Stock of the Corporation or any Restricted Subsidiary
acquired in connection with the Secured Credit Facility. For purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlling," "under common control with" and "controlled by"), and as used
with respect to any Person, shall mean the possession, directly or indirectly,
of the power to direct or cause the direction of the management or policies of
such Person, whether through the ownership of Voting Stock, by agreement or
otherwise; provided that beneficial ownership of 10% or more of the Voting Stock
of a Person shall be deemed to be control.
<PAGE> 3
3
"Annualized Pro Forma EBITDA" means with respect to any Person, such
Person's Pro Forma EBITDA for the latest fiscal quarter for which internal
financial statements are then available multiplied by four.
"Asset Sale" means, with respect to any Person, any transfer,
conveyance, sale, lease or other disposition (including, without limitation, by
way of consolidation or merger, but excluding by means of any Sale and Leaseback
Transaction or by the granting of a Lien permitted under the definition of
"Permitted Liens" herein) by such Person or any of its Restricted Subsidiaries
to any Person other than the Corporation or a Restricted Subsidiary of the
Corporation, in one transaction, or a series of related transactions (each
hereinafter referred to as a "Disposition"), of Property or assets of such
Person or any of its Restricted Subsidiaries, the Fair Market Value of which
exceeds $2.0 million, other than (i) a Disposition of Property in the ordinary
course of business consistent with industry practice and (ii) a Disposition by
the Corporation in connection with a transaction permitted under Section 8(b)
hereof.
"Attributable Indebtedness" means, with respect to any Sale and
Leaseback Transaction of any Person, as at the time of determination, the
greater of (i) the capitalized amount in respect of such transaction that would
appear on the balance sheet of such Person in accordance with GAAP and (ii) the
present value (discounted at a rate consistent with accounting guidelines, as
determined in good faith by such Person) of the payments during the remaining
term of the lease (including any period for which such lease has been extended
or may, at the option of the lessor, be extended) or until the earliest date on
which the lessee may terminate such lease without penalty or upon payment of a
penalty (in which case the rental payments shall include such penalty).
"Board of Directors" means the Board of Directors of the Corporation.
"Business Day" means any day other than a Saturday, a Sunday or any day
on which banking institutions in New York, New York, are required or authorized
by law or other governmental action to be closed.
"Capital Lease Obligation" of any Person means the obligation to pay
rent or other payment amounts under a lease of (or other Indebtedness
arrangement conveying the right to use) real or personal property of such Person
which is required to be classified and accounted for as a capital lease or a
liability on the face of a balance sheet of such Person
<PAGE> 4
4
in accordance with GAAP and the stated maturity thereof shall be the date of the
last payment of rent or any amount due under such lease prior to the first date
upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" in any Person means any and all shares, interests,
participations or other equivalents in the equity interest (however designated)
in such Person and any rights (other than Indebtedness convertible into an
equity interest), warrants or options to acquire an equity interest in such
Person.
"Cash Equivalents" means (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof), (ii) time deposits and
certificates of deposit of any commercial bank organized in the United States of
America having capital and surplus in excess of $500 million with a maturity
date not more than one year from the date of acquisition, (iii) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (ii) above, (iv) direct obligations issued by
any state of the United States of America or any political subdivision of any
such state or any public instrumentality thereof maturing, or subject to tender
at the option of the holder thereof within ninety days after the date of
acquisition thereof and, at the time of acquisition, having a rating of A or
better from Standard & Poor's Ratings Group ("Standard & Poor's") or A-2 or
better from Moody's Investors Service, Inc. ("Moody's"), (v) commercial paper
issued by the parent corporation of any commercial bank organized in the United
States of America having capital and surplus in excess of $500 million and
commercial paper issued by others having one of the two highest ratings
obtainable from either Standard & Poor's or Moody's and in each case maturing
within ninety days after the date of acquisition, (vi) overnight bank deposits
and bankers' acceptances at any commercial bank organized in the United States
of America having capital and surplus in excess of $500 million, (vii) deposits
available for withdrawal on demand with a commercial bank organized in the
United States of America having capital and surplus in excess of $500 million
and (viii) investments in money market funds substantially all of whose assets
comprise securities of the types described in clauses (i) through (vi).
"Certificated Securities" has the meaning set forth in Section 14(e)
below.
<PAGE> 5
5
"Change of Control" means the occurrence of any of the following: (i)
the sale, lease, transfer or conveyance of all or substantially all of the
assets of the Corporation to any "person" or "group" (as such term is used in
Section 13(d)(3) and 14(d)(2) of the Exchange Act or any successor provisions to
either of the foregoing, including any group acting for the purpose of
acquiring, holding or disposing of securities within the meaning of Rule
13d-5(b)(i) under the Exchange Act) (other than any Permitted Holder or any
Subsidiary of the Corporation), (ii) any "person" or "group" as aforesaid, other
than any Permitted Holder, becomes the "beneficial owner" (as such term is
defined in Rule 13d-3 under the Exchange Act) of more than 35% of the voting
power of common stock of the Corporation, including warrants and options to
acquire such common stock, calculated on a fully diluted basis, and such voting
power percentage is greater than or equal to the total voting power percentage
then beneficially owned by the Permitted Holders in the aggregate or (iii)
during any period of two consecutive years, individuals who at the beginning of
such period constituted the Board of Directors (together with any new directors
whose election or appointment by such Board of Directors or whose nomination for
election by the shareholders of the Corporation was approved by a vote of a
majority of the directors then still in office who were either directors at the
beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board of Directors then in office; provided, however, that no Change of Control
shall be deemed to occur if the "person" or "group", in the case of clause (i)
above, is a Strategic Investor or the "beneficial owner" of voting power in
excess of 50% of the voting power of the common stock of the Corporation, or, in
the case of clause (ii) above, is a Strategic Investor and such Strategic
Investor beneficially owns in excess of 50% of such voting power.
"Change of Control Offer" has the meaning set forth in Section 7(a)
below.
"Change of Control Payment" has the meaning set forth in Section 7(a)
below.
"Change of Control Payment Date" has the meaning set forth in Section
7(d)(ii) below.
"Commission" means the Securities and Exchange Commission.
"Consolidated Interest Expense" means, with respect to any Person for
any period, without duplication, (A) the sum of (i) the aggregate amount of cash
and non-cash interest expense
<PAGE> 6
6
(including capitalized interest) of such Person and its Restricted Subsidiaries
for such period as determined on a consolidated basis in accordance with GAAP in
respect of Indebtedness (including, without limitation, (v) any amortization of
debt discount, (w) net costs associated with Interest Hedging Obligations
(including any amortization of discounts), (x) the interest portion of any
deferred payment obligation, (y) all accrued interest and (z) all commissions,
discounts and other fees and charges owed with respect to letters of credit,
bankers' acceptances or similar facilities) paid or accrued, or scheduled to be
paid or accrued, during such period; (ii) dividends or distributions with
respect to preferred stock or Disqualified Stock of such Person (and of its
Restricted Subsidiaries if paid to a Person other than such Person or its
Restricted Subsidiaries) declared and payable in cash; (iii) the portion of any
rental obligation of such Person or its Restricted Subsidiaries in respect of
any Capital Lease Obligation allocable to interest expense in accordance with
GAAP; (iv) the portion of any rental obligation of such Person or its Restricted
Subsidiaries in respect of any Sale and Leaseback Transaction allocable to
interest expense (determined as if such were treated as a Capital Lease
Obligation); and (v) to the extent any Indebtedness of any other Person is
Guaranteed by such Person or any of its Restricted Subsidiaries, the aggregate
amount of interest paid, accrued or scheduled to be paid or accrued, by such
other Person during such period attributable to any such Indebtedness, less (B)
to the extent included in (A) above, amortization or write-off of deferred
financing costs of such Person and its Restricted Subsidiaries during such
period and any charge related to any premium or penalty paid in connection with
redeeming or retiring any Indebtedness of such Person and its Restricted
Subsidiaries prior to its stated maturity; in the case of both (A) and (B)
above, after elimination of intercompany accounts among such Person and its
Restricted Subsidiaries and as determined in accordance with GAAP.
"Consolidated Leverage Ratio" means, for any Person, as of any date,
the ratio of (i) the sum of the aggregate outstanding amount of all Indebtedness
of such Person and its Subsidiaries determined on a consolidated basis in
accordance with GAAP to (ii) the Annualized Pro Forma EBITDA of such Person.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate net income (or net loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis determined in accordance
with GAAP, provided that there shall be excluded therefrom, without duplication,
(i) all items classified as extraordinary, (ii)
<PAGE> 7
7
any net income of any Person other than such Person and its Restricted
Subsidiaries, except to the extent of the amount of dividends or other
distributions actually paid to such Person or its Restricted Subsidiaries by
such other Person during such period; (iii) the net income of any Person
acquired by such Person or any of its Restricted Subsidiaries in a
pooling-of-interests transaction for any period prior to the date of the related
acquisition; (iv) any gain or loss, net of taxes, realized on the termination of
any employee pension benefit plan; (v) net gains (but not net losses) in respect
of Asset Sales by such Person or its Restricted Subsidiaries; (vi) the net
income (but not net loss) of any Restricted Subsidiary of such Person to the
extent that the payment of dividends or other distributions to such Person is
restricted by the terms of its charter or any agreement, instrument, contract,
judgment, order, decree, statute, rule, governmental regulation or otherwise,
except for any dividends or distributions actually paid by such Restricted
Subsidiary to such Person; (vii) with regard to a non-wholly owned Restricted
Subsidiary, any aggregate net income (or loss) in excess of such Person's or
such Restricted Subsidiary's pro rata share of such non-wholly owned Restricted
Subsidiary's net income (or loss); and (viii) the cumulative effect of changes
in accounting principles.
"Consolidated Net Worth" means, with respect to any Person as of any
date, the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date with
respect to any series of preferred stock (other than Disqualified Stock) that by
its terms is not entitled to the payment of dividends unless such dividends may
be declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the Issue Date in the book value of any asset
owned by such Person or a consolidated Subsidiary of such Person, (y) all
investments as of such date in unconsolidated Subsidiaries and in Persons that
are not Subsidiaries (except, in each case, Permitted Investments) and (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"Credit Agreement" means, with respect to any Person, any agreement
entered into by and among such Person and one or more commercial banks or
financial institutions, providing for
<PAGE> 8
8
senior term or revolving credit borrowings of a type similar to credit
agreements typically entered into by commercial banks and financial
institutions, including any related notes, Guarantees, collateral documents,
instruments and agreements executed in connection therewith, as such credit
agreement and related agreements may be amended, extended, refinanced, renewed,
restated, replaced or refunded from time to time.
"DGCL" shall mean the Delaware General Corporation Law, as amended.
"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
"Depositary" has the meaning set forth in Section 14(a) below.
"Disqualified Stock" means any Capital Stock (other than the 14 3/4%
Preferred Stock) which, by its terms (or by the terms of any security into which
it is convertible or for which it is exchangeable), or upon the happening of any
event, or otherwise, matures or is mandatorily redeemable, pursuant to a sinking
fund obligation or otherwise, or is redeemable at the option of the holder
thereof, or is exchangeable for Indebtedness at any time, in whole or in part,
on or prior to the mandatory redemption date of the 12 3/4% Preferred Stock.
"Dividend Default" has the meaning set forth in Section 6(c) below.
"Dividend Payment Date" has the meaning set forth in Section 3(a)
below.
"Dividend Period" has the meaning set forth in Section 3(a) below.
"EBIT" means the amount calculated in the same manner as EBITDA, but
not including clauses (iii) and (iv) of the definition thereof.
"EBITDA" means, with respect to any Person for any period, the sum for
such Person for such period of Consolidated Net Income plus, to the extent
reflected in the income statement of such Person for such period from which
Consolidated Net Income is determined, without duplication, (i) Consolidated
Interest Expense, (ii) income tax expense, (iii) depreciation expense, (iv)
amortization expense, (v) any non-cash expense related to the issuance to
employees of such Person of options to purchase Capital Stock of such Person and
(vi) any charge related to any premium or penalty paid in
<PAGE> 9
9
connection with redeeming or retiring any Indebtedness prior to its stated
maturity and minus, to the extent reflected in such income statement, any
non-cash credits that had the effect of increasing Consolidated Net Income of
such Person for such period.
"Effectiveness Target Date" means 120 days after the Issue Date.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
"Exchange Offer" means the offer by the Corporation, pursuant to the
Registration Rights Agreement, to the Holders of the outstanding Series A 12
3/4% Preferred Stock the opportunity to exchange all such outstanding shares
held by such Holders for shares of Series B 12 3/4% Preferred Stock that have
been registered under the Securities Act.
"Exchange Offer Registration Statement" means the Registration
Statement filed by the Corporation relating to the Exchange Offer.
"Exchange Rate Obligation" means, with respect to any Person, any
currency swap agreements, forward exchange rate agreements, foreign currency
futures or options, exchange rate collar agreements, exchange rate insurance and
other agreements or arrangements, or combination thereof, designed to provide
protection against fluctuations in currency exchange rates.
"Existing Indebtedness" means Indebtedness of the Corporation and its
Subsidiaries outstanding on the Issue Date.
"Existing Notes" means, collectively, the Corporation's 13% Senior
Discount Notes due 2005 (the "2005 Notes"), the Corporation's 12 3/4% Senior
Discount Notes due 2006 (the "2006 Notes") and the Corporation's 13 3/4% Senior
Notes due 2007 (the "2007 Notes").
"Fair Market Value" means, with respect to any asset or Property, the
sale value that would be obtained in an arm's-length transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy, as determined in good faith by the
Board of Directors.
<PAGE> 10
10
"Fiber Network" means a digital fiber optic telecommunications network
wholly owned by the Corporation that serves a Metropolitan Area.
"14 3/4% Preferred Stock" means the Corporation's 14 3/4% Redeemable
Preferred Stock due 2008.
"GAAP" means United States generally accepted accounting principles,
consistently applied, as set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board, or in such other statements by such other entity as may be
approved by a significant segment of the accounting profession of the United
States, that are applicable to the circumstances as of the date of
determination; provided that, except as otherwise specifically provided, all
calculations made for purposes of determining compliance with the terms of the
provisions of this Certificate of Designation shall utilize GAAP as in effect on
the Issue Date.
"Global Securities" has the meaning set forth in Section 14(a) below.
"Global Security Holder" has the meaning set forth in Section 14(a)
below.
"Guarantee" means any direct or indirect obligation, contingent or
otherwise, of a Person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other Person in any manner (and
"Guaranteed," "Guaranteeing" and "Guarantor" shall have meanings correlative to
the foregoing).
"Holder" means the record holder of one or more shares of 12 3/4%
Preferred Stock, as shown on the books and records of the Transfer Agent.
"Indebtedness" means at any time (without duplication), with respect to
any Person, whether recourse is to all or a portion of the assets of such
Person, and whether or not contingent, (i) any obligations of such Person for
money borrowed, (ii) any obligation of such Person evidenced by bonds,
debentures, notes, Guarantees or other similar instruments, including, without
limitation, any such obligations incurred in connection with acquisition of
Property, assets or businesses, excluding trade accounts payable made in the
ordinary course of business, (iii) any reimbursement obligation of such Person
with respect to letters of credit, bankers' acceptances or similar facilities
<PAGE> 11
11
issued for the account of such Person, (iv) any obligation of such Person issued
or assumed as the deferred purchase price of Property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business, which in either case are not more than 60 days overdue or which are
being contested in good faith), (v) any Capital Lease Obligation of such Person,
(vi) the maximum fixed redemption or repurchase price of Disqualified Stock of
such Person and, to the extent held by other Persons, the maximum fixed
redemption or repurchase price of Disqualified Stock of such Person's Restricted
Subsidiaries, at the time of determination, (vii) the notional amount of any
Interest Hedging Obligations or Exchange Rate Obligations of such Person at the
time of determination, (viii) any Attributable Indebtedness with respect to any
Sale and Leaseback Transaction to which such Person is a party and (ix) any
obligation of the type referred to in clauses (i) through (viii) of this
definition of another Person and all dividends and distributions of another
Person the payment of which, in either case, such Person has Guaranteed or is
responsible or liable for, directly or indirectly, as obligor, Guarantor or
otherwise. For purposes of the preceding sentence, the maximum fixed repurchase
price of any Disqualified Stock that does not have a fixed repurchase price
shall be calculated in accordance with the terms of such Disqualified Stock as
if such Disqualified Stock were repurchased on any date on which Indebtedness
shall be required to be determined pursuant to this Certificate of Designation;
provided that if such Disqualified Stock is not then permitted to be
repurchased, the repurchase price shall be the book value of such Disqualified
Stock. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability of any Guarantees at such date; provided that
for purposes of calculating the amount of the 2005 Notes or 2006 Notes
outstanding at any date, the amount of such 2005 Notes or 2006 Notes shall be
the Accreted Value (as defined in the relevant indenture) thereof as of such
date unless cash interest has commenced to accrue pursuant to the relevant
indenture, in which case the amount of the 2005 Notes or 2006 Notes outstanding
will be determined pursuant to the relevant indenture and will not include any
accrued and unpaid cash interest which would otherwise be included in Accreted
Value because of clause (iii) of the definition thereof in the relevant
indenture.
"Independent Financial Advisor" means a United States investment
banking firm of national standing in the United States of America which does
not, and whose directors, officers and employees or affiliates do not, have a
direct or indirect financial interest in the Corporation.
<PAGE> 12
12
"Interest Hedging Obligation" means, with respect to any Person, an
obligation of such Person pursuant to any interest rate swap agreement, interest
rate cap, collar or floor agreement or other similar agreement or arrangement
designed to protect against or manage such Person's or any of its Subsidiaries'
exposure to fluctuations in interest rates.
"Investment" in any Person means any direct, indirect or contingent (i)
advance or loan to, Guarantee of any Indebtedness of, extension of credit or
capital contribution to such Person, (ii) the acquisition of any shares of
Capital Stock, bonds, notes, debentures or other securities of such Person, or
(iii) the acquisition, by purchase or otherwise, of all or substantially all of
the business, assets or stock or other evidence of beneficial ownership of such
Person; provided that Investments shall exclude commercially reasonable
extensions of trade credit. The amount of any Investment shall be the original
cost of such Investment, plus the cost of all additions thereto and minus the
amount of any portion of such investment repaid to such person in cash as a
repayment of principal or a return of capital, as the case may be, but without
any other adjustments for increases or decreases in value, or write-ups,
write-downs or write-offs with respect to such Investment. In determining the
amount of any Investment involving a transfer of any Property other than cash,
such Property shall be valued at its Fair Market Value at the time of such
transfer.
"Issue Date" means the date of initial issuance of the Series A 12 3/4%
Preferred Stock.
"Junior Stock" has the meaning set forth in Section 2 below.
"Lien" means, with respect to any Property or other asset, any mortgage
or deed or trust, pledge, hypothecation, assignment, deposit arrangement,
security interest, lien (statutory or other), charge, easement, encumbrance,
preference, priority or other security or similar agreement or preferential
arrangement of any kind or nature whatsoever on or with respect to such Property
or other asset (including, without limitation, any conditional sale or title
retention agreement having substantially the same economic effect as any of the
foregoing).
"Liquidation Preference" means $1,000 per share of 12 3/4% Preferred
Stock.
"Metropolitan Area" means the 31 metropolitan areas in which the
Corporation, as of June 30, 1997, has a Fiber Network and other metropolitan
areas deemed in the reasonable
<PAGE> 13
13
business judgment of the management of the Corporation to provide an opportunity
for the building and operation of such a Fiber Network with the reasonable
potential to produce financial results for the Corporation at least
substantially comparable to the metropolitan areas in which the Corporation has
such operational Fiber Networks.
"Net Income" means, with respect to any Person, the net income (loss)
of such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain or loss,
together with any related provision for taxes on such gain or loss, realized in
connection with (a) any Asset Sale (including, without limitation, dispositions
pursuant to Sale and Leaseback Transactions) or (b) the disposition of any
securities by such Person or any of its Subsidiaries or the extinguishment of
any Indebtedness of such Person or any of its Subsidiaries and (ii) any
extraordinary or nonrecurring gain or loss, together with any related provision
for taxes on such extraordinary or nonrecurring gain or loss.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Officer" means, with respect to any Person, the Chairman of the Board,
the Chief Executive Officer, the President, the Chief Operating Officer, the
Chief Financial Officer, the Treasurer, any Assistant Treasurer, the Controller,
the Secretary, any Assistant Secretary or any Vice-President of such Person.
"Officers' Certificate" means a certificate signed by the Chairman of
the Board, a Vice Chairman of the Board, the President or a Vice President, and
by the Chief Financial Officer, the Chief Accounting Officer, the Treasurer, an
Assistant Treasurer, the Secretary or an Assistant Secretary of the Corporation
and delivered to the Transfer Agent, which shall comply with this Certificate of
Designation.
"Parent" means, with respect to any corporation or other entity, an
entity that, directly or indirectly, owns, at the time, a majority of the voting
interest of such corporation or other entity.
"Parity Stock" has the meaning set forth in Section 2 below.
"Payment Default" has the meaning set forth in Section 6(b)(v).
<PAGE> 14
14
"Permitted Holders" means The Huff Alternative Income Fund, L.P., ING
Equity Partners, L.P.I., Apex Investment Fund I, L.P., Apex Investment Fund II,
L.P., The Productivity Fund II, L.P. and Anthony J. Pompliano and the respective
affiliates (other than the Corporation and its Subsidiaries) of each of the
foregoing.
"Permitted Liens" means (i) Liens on Property or assets of a Person
existing at the time such Person is merged into or consolidated with the
Corporation or any Subsidiary of the Corporation, provided that such Liens were
in existence prior to the contemplation of such merger or consolidation and do
not secure any Property or assets of the Corporation or any of its Subsidiaries
other than the Property or assets subject to such Liens prior to such merger or
consolidation; (ii) Liens on Telecommunications Related Assets existing during
the time of the construction thereof; (iii) Liens incurred or deposits made to
secure the performance of tenders, bids, leases, statutory or regulatory
obligations, surety or appeal bonds, performance bonds or other obligations of a
like nature incurred in the ordinary course of business consistent with industry
practice; (iv) Liens existing as of the Issue Date; (v) Liens to secure
borrowings permitted under Section 8(a)(ii)(A) hereof (including any such liens
arising in connection with a Secured Credit Facility); (vi) any Lien on Property
of the Corporation in favor of the United States of America or any state
thereof, or any instrumentality of either, to secure certain payments pursuant
to any contract or statute; (vii) any Lien for taxes or assessments or other
governmental charges or levies not then due and payable (or which, if due and
payable, are being contested in good faith and for which adequate reserves are
being maintained, to the extent required by GAAP); (viii) easements,
rights-of-way, licenses and other similar restrictions on the use of Properties
or minor imperfections of title that, in the aggregate, are not material in
amount and do not in any case materially detract from the Properties subject
thereto or interfere with the ordinary conduct of the business of the
Corporation or its Subsidiaries; (ix) any Lien to secure obligations under
workmen's compensation laws or similar legislation, including any Lien with
respect to judgments that are not currently dischargeable; (x) any statutory
warehousemen's, materialmen's or other similar Liens for sums not then due and
payable (or which, if due and payable, are being contested in good faith and
with respect to which adequate reserves are being maintained, to the extent
required by GAAP); (xi) any interest or title of a lessor in Property subject to
a Capital Lease Obligation; (xii) Liens to secure any Vendor Debt; provided that
such Liens do not extend to any Property or assets other than the Property or
assets the acquisition of which was financed by such Indebtedness; (xiii)
<PAGE> 15
15
Liens in favor of the Corporation or any Restricted Subsidiary; (xiv) Liens on
Property or assets of a Person existing prior to the time such Person is
acquired by the Corporation as a result of (a) Investments by the Corporation or
a Restricted Subsidiary in or in respect of a Person to the extent the
consideration for such Investment consists of shares of Qualified Stock of the
Corporation or (b) Investments in certain joint venture entities, provided that
such Liens were in existence prior to the contemplation of such Investment and
do not secure any Property or assets of the Corporation or any of its
Subsidiaries other than the Property or assets subject to such Liens prior to
such Investment; (xv) Liens securing reimbursement obligations with respect to
letters of credit that encumber documents and other Property relating to such
letters of credit and the products and proceeds thereof; (xvi) Liens on the
escrow account for the 2007 Notes and all funds and securities therein securing
only the 2007 Notes equally and ratably and (xvii) Liens to secure any permitted
extension, renewal, refinancing or refunding (or successive extensions,
renewals, refinancings or refundings), in whole or in part, of any Indebtedness
secured by Liens referred to in the foregoing clauses (i) through (v) and (xii),
provided that such Liens do not extend to any other Property or assets and the
principal amount of the Indebtedness secured by such Liens is not increased.
"Person" means any individual, corporation, partnership, joint venture,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Stock" means, with respect to any person, Capital Stock of
such Person of any class or classes (however designated) that ranks prior, as to
the payment of dividends or as to the distribution of assets upon any voluntary
or involuntary liquidation, dissolution or winding up of such Person, to shares
of Capital Stock of any other class of such Person.
"Pro Forma EBITDA" means, for any Person, for any period, the EBITDA of
such Person as determined on a consolidated basis in accordance with GAAP
consistently applied, after giving effect to the following: (i) if, during or
after such period, such Person or any of its Subsidiaries shall have made any
Asset Sale, Pro Forma EBITDA for such Person and its Subsidiaries for such
period shall be reduced by an amount equal to the Pro Forma EBIDTA (if positive)
directly attributable to the assets which are the subject of such Asset Sale for
the period or increased by an amount equal to the Pro Forma EBITDA (if negative)
directly attributable thereto for such period and (ii) if, during or after such
period, such Person or any of its Subsidiaries completes an acquisition of
<PAGE> 16
16
any Person or business which immediately after such acquisition is a Subsidiary
of such Person, Pro Forma EBITDA shall be computed so as to give pro forma
effect to such Asset Sale or the acquisition of such Person or business, as the
case may be, as if such acquisition had been completed as of the beginning of
such period, and (iii) if, during or after such period, such Person or any of
its Subsidiaries incurs any Indebtedness (including without limitation, any
Acquired Indebtedness) or issues any Disqualified Stock, Pro Forma EBITDA shall
be computed so as to give pro forma effect (including pro forma application of
the proceeds therefrom) thereto as if such Indebtedness or Disqualified Stock
had been incurred as of the beginning of such period.
"Property" means, with respect to any Person, any interest of such
Person in any kind of property or asset, whether real, personal or mixed, or
tangible or intangible, excluding Capital Stock in any other Person.
"Prospectus" means the prospectus included in any Registration
Statement at the time such Registration Statement becomes effective, as the same
may be amended or supplemented by any prospectus supplement or by any other
amendment thereto, including post-effective amendments, and all material
incorporated by reference or deemed to be incorporated by reference in such
Prospectus.
"Public Equity Offering" means an underwritten public offering of
Capital Stock (other than Disqualified Capital Stock) of the Corporation.
"Qualified Stock" of any Person means a class of Capital Stock other
than Disqualified Stock.
"Record Date" has the meaning set forth in Section 3(a) below.
"Redemption Date" means, with respect to any shares of 12 3/4%
Preferred Stock, the date on which such shares of 12 3/4% Preferred Stock are
redeemed by the Corporation.
"Redemption Notice" has the meaning set forth in Section 5(c)(i) below.
"Refinancing Indebtedness" means Indebtedness issued in exchange for,
or the proceeds of which are used to refinance, repurchase, replace, refund or
defease other Indebtedness.
"Registration Default" has the meaning set forth in Section 3(f) below.
<PAGE> 17
17
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of the Issue Date between the Corporation and Bear, Stearns & Co., Inc.
"Registration Statement" means a registration statement under the
Securities Act filed by the Corporation with the Commission pursuant to the
provisions of the Registration Rights Agreement.
"Restricted Subsidiary" means any Subsidiary of the Corporation that
has not been classified as an "Unrestricted Subsidiary."
"Rule 144" means Rule 144 promulgated under the Securities Act, as such
Rule may be amended from time to time, or any similar rule (other than Rule
144A) or regulation hereafter adopted by the Commission providing for offers and
sales of securities made in compliance therewith resulting in offers and sales
by subsequent holders that are not affiliates of an issuer of such securities
being free of the registration and prospectus delivery requirements of the
Securities Act.
"Rule 144A" means Rule 144A promulgated under the Securities Act, as
such Rule may be amended from time to time, or any similar rule (other than Rule
144) or regulation hereafter adopted by the Commission.
"Sale and Leaseback Transaction" means, with respect to any Person, any
direct or indirect arrangement pursuant to which Property is sold or transferred
by such Person or a Restricted Subsidiary of such Person and is thereafter
leased back from the purchaser or transferee thereof by such Person or one of
its Restricted Subsidiaries.
"Secured Credit Facility" means the AT&T Credit Facility as in effect
on the Issue Date and additional secured credit agreements to which the
Corporation is or becomes a party, in an aggregate amount not to exceed $35.0
million, and all related amendments, notes, collateral documents, guarantees,
instruments and other agreements executed in connection therewith, as the same
may be amended, modified, supplemented, restated, renewed, extended, refinanced,
substituted or replaced from time to time.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Senior Stock" has the meaning set forth in Section 2 below.
<PAGE> 18
18
"Shelf Registration Statement" means a Registration Statement with
respect to the offer and sale of shares of Series A 12 3/4% Preferred Stock by
the holders thereof.
"Significant Restricted Subsidiary" means a Restricted Subsidiary that
is a "significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X under
the Securities Act and the Exchange Act.
"Strategic Investor" means a publicly traded company (i) whose
principal business is operating a public utility company and/or a cable and/or
telephone and/or telecommunications system in the United States or which, after
the consummation of the relevant transaction, is or will be delivering its own
services over the networks or systems of the Corporation and any business
reasonably related to the foregoing, or creating, developing or marketing
communications related network equipment, software or other devices for use in
transmitting voice, video or data, (ii) which has, or the Parent of which has, a
Total Equity Market Capitalization in excess of $1.0 billion and (iii) whose
senior unsecured debt securities are rated (or carry an implied rating) by
Moody's Investors Service, Inc. (or any successor to the rating agency business
thereof) or Standard & Poor's Corporation (or any successor to the rating agency
business thereof) as Baa- or BBB-, respectively, or better, on a pro forma basis
assuming the consummation of any transaction with the Corporation, provided that
if such securities are rated by both such rating agencies, the lowest rating of
the two shall govern for purposes of this definition.
"Subsidiary" means, with respect to any Person, (i) any corporation
more than 50% of the outstanding shares of Voting Stock of which is owned,
directly or indirectly, by such Person, or by one or more other Subsidiaries of
such Person, or by such Person and one or more other Subsidiaries of such
Person, (ii) any general partnership, joint venture or similar entity, more than
50% of the outstanding partnership or similar interests in which are owned,
directly or indirectly, by such Person, or by one or more other Subsidiaries of
such Person, or by such Person and one or more other Subsidiaries of such Person
and (iii) any limited partnership of which such Person or any Subsidiary of such
Person is a general partner.
"Subsidiary Preferred Stock" means Capital Stock of a Subsidiary of any
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Subsidiary, to shares of Capital
Stock of any other class of such Subsidiary.
<PAGE> 19
19
"Telecommunications Business" means the business of (i) transmitting,
or providing services relating to the transmission of, voice, video or data
through owned or leased transmission facilities, (ii) creating, developing or
marketing communications-related network equipment, software and other devices
for use in (i) above or (iii) evaluating, participating or pursuing any other
activity or opportunity that is related to those specified in (i) or (ii) above.
"Telecommunications Corporation" means any Person substantially all of
the assets of which consist of Telecommunications Related Assets.
"Telecommunications Related Assets" means all assets, rights
(contractual or otherwise) and properties, whether tangible or intangible, used
or intended for use in connection with a Telecommunications Business.
"Telecommunications Service Market" means a network built by the
Corporation to service a market.
"Total Equity Market Capitalization" of any person means, as of any day
of determination, the sum of (1) the product of (A) the aggregate number of
outstanding primary shares of common stock of such person on such day (which
shall not include any options or warrants on, or securities convertible or
exchangeable into or exercisable for, shares of common stock of such person)
multiplied by (B) the average closing price of such common stock over the 20
consecutive trading days immediately preceding such day, plus (ii) the
liquidation value of any outstanding shares of Preferred Stock of such person on
such day.
"Total Market Capitalization" of any person means, as of any day of
determination, the sum of (1) the consolidated Indebtedness of such Person and
its Subsidiaries on such day, plus (2) the product of (i) the aggregate number
of outstanding primary shares of common stock of such Person on such day (which
shall not include any options or warrants on, or securities convertible or
exchangeable into, shares of common stock of such Person) and (ii) the average
closing price of such common stock over the 20 consecutive trading days
immediately preceding such day, plus (3) the liquidation value of any
outstanding shares of Preferred Stock of such Person on such day, less (4) cash
and cash equivalents as presented on such Person's consolidated balance sheet on
such date. If no such closing price exists with respect to shares of such common
stock, the value of such shares for purposes of clause (2) of the preceding
sentence shall be determined by the Corporation's Board of Directors in good
faith and evidenced by a resolution of the Board of Directors.
<PAGE> 20
20
"Transfer Agent" means the entity designated from time to time by the
Corporation to act as the registrar and transfer agent for the 12 3/4% Preferred
Stock.
"Transfer Restricted Securities" means each share of Series A Preferred
Stock until the earliest to occur of (i) the date on which such share of Series
A Preferred Stock has been exchanged by a person other than a broker-dealer
registered as such under the Exchange Act (herein, a "Broker-Dealer") for Series
B Preferred Stock in the Exchange Offer, (ii) following the exchange by a
Broker-Dealer in the Exchange offer of Series A Preferred Stock for Series B
Preferred Stock, the date on which such Series B Preferred Stock is sold to a
purchaser who receives from such Broker-Dealer on or prior to the date of such
sale a copy of the Prospectus contained in the Exchange Offer Registration
Statement, (iii) the date on which such share of Series B Preferred Stock has
been effectively registered under the Act and disposed of in accordance with the
Shelf Registration Statement or (iv) the date on which such share of Series B
Preferred Stock is distributed to the public pursuant to Rule 144 or may be
distributed to the public pursuant to paragraph (k) of Rule 144.
"Unrestricted Subsidiary" means any Subsidiary of the Corporation that
the Corporation has classified as an "Unrestricted Subsidiary" and that has not
been reclassified as a Restricted Subsidiary, pursuant to the terms of each of
the indentures governing the Existing Notes.
"Vendor Debt" means any purchase money Indebtedness of the Corporation
or any Subsidiary incurred in connection with the acquisition of
Telecommunications Related Assets.
"Voting Rights Triggering Event" has the meaning set forth in Section
6(b).
"Voting Stock" means, with respect to any Person, securities of any
class or classes of Capital Stock in such Person entitling the holders thereof
(whether at all times or at the times that such class of Capital Stock has
voting power by reason of the happening of any contingency) to vote in the
election of members of the board of directors or comparable body of such Person.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the sum
of the products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect
<PAGE> 21
21
thereof, by (b) the number of years (calculated to the nearest one-twelfth) that
will elapse between such date and the making of such payment, by (ii) the then
outstanding principal amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such
Person all of the outstanding Capital Stock or other ownership interests (other
than directors' qualifying shares) of which shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person or a
combination thereof.
2. Ranking
The 12 3/4% Preferred Stock shall, with respect to dividend
rights and rights on the liquidation, winding-up and dissolution of the
Corporation (as provided in Sections 3 and 4 below), rank (i) senior to all
classes of common stock and to each other class of Capital Stock or series of
Preferred Stock established hereafter by the Board of Directors, the terms of
which expressly provide that it ranks junior to the 12 3/4% Preferred Stock as
to dividend rights and rights on the liquidation, winding-up and dissolution of
the Corporation (collectively referred to, together with the common stock of the
Corporation, as "Junior Stock"), (ii) subject to certain conditions, on a parity
with each other class of Capital Stock or series of Preferred Stock established
hereafter by the Board of Directors, the terms of which expressly provide that
such class or series ranks on a parity with the 12 3/4% Preferred Stock as to
dividend rights and rights on the liquidation, winding-up and dissolution of the
Corporation (collectively referred to as "Parity Stock") and (iii) junior to the
14 3/4% Preferred Stock and any future class of preferred stock established
hereafter by the Board of Directors with the affirmative vote or consent of the
Holders of at least two-thirds of the outstanding shares of the 12 3/4%
Preferred Stock, voting or consenting as a single class, the terms of which
expressly provide that such class ranks senior to the 12 3/4% Preferred Stock as
to dividend rights and rights on liquidation, winding-up and dissolution of the
Corporation (collectively referred to as the "Senior Stock").
3. Dividends
(a) Beginning on the Issue Date, the Holders of the
outstanding shares of the 12 3/4% Preferred Stock shall be entitled to receive,
when, as and if declared by the Board of Directors of the Corporation out of
funds legally available therefor, cumulative dividends thereon accruing at the
rate per annum of 12 3/4% (subject to adjustment as provided in Section 7(h),
below) of the Liquidation Preference thereof,
<PAGE> 22
22
payable quarterly (each such quarterly period being herein called a "Dividend
Period") in arrears on each January 15, April 15, July 15 and October 15 or, if
any such date is not a Business Day, on the next succeeding Business Day (each,
a "Dividend Payment Date"), to the Holders of record as of the next preceding
January 1, April 1, July 1 and October 1 immediately preceding the relevant
Dividend Payment Date (each, a "Record Date"). The first Dividend Payment Date
shall be January 15, 1998.
(b) Dividends may be paid, at the Corporation's option, on any
Dividend Payment Date either in cash or by the issuance of additional shares of
12 3/4% Preferred Stock (and, at the Corporation's option, payment of cash in
lieu of fractional shares) having an aggregate Liquidation Preference (including
any fractional shares) equal to the amount of such dividends; provided, however,
that after October 15, 2002, to the extent and for so long as the Corporation is
not precluded from paying cash dividends on the 12 3/4% Preferred Stock by the
terms of any agreement or instrument governing any of its then outstanding
indebtedness, the Corporation shall pay dividends in cash. The issuance of such
additional shares of 12 3/4% Preferred Stock shall constitute "payment" of the
related dividend for all purposes of this Certificate of Designation.
(c) Dividends on the 12 3/4% Preferred Stock shall accrue
whether or not the Corporation has earnings or profits, whether or not there are
funds legally available for the payment of such dividends and whether or not
dividends are declared. To the extent that dividends are not paid on the
Dividend Payment Date for the period to which they relate, dividends shall
accrue and cumulate thereon from and after such Dividend Payment Date. In the
event that (i) dividends on the 12 3/4% Preferred Stock are in arrears and
unpaid for six or more Dividend Periods (whether or not consecutive), whether
before or after October 15, 2002, or (ii) the Corporation shall fail to pay
dividends in cash for six or more Dividend Periods (whether or not consecutive)
beginning after October 15, 2002, Holders of the 12 3/4% Preferred Stock shall
be entitled to certain voting rights as provided in Section 6(b) below. The
Corporation shall take all actions required or permitted under the DGCL to
permit the payment of dividends on the 12 3/4% Preferred Stock, including,
without limitation, through the revaluation of its assets in accordance with the
DGCL, to make or keep funds legally available for the payment of dividends.
Dividends payable on the 12 3/4% Preferred Stock shall be computed on the basis
of a 360-day year consisting of twelve 30-day months and shall be deemed to
accumulate on a daily basis. Additional Dividends, to the extent payable as
provided in Section 3(g) below, shall be computed on the same basis.
<PAGE> 23
23
(d) Nothing herein contained shall in any way or under any
circumstances be construed or deemed to require the Board of Directors to
declare, or the Corporation to pay or set apart for payment, any dividends on
shares of the 12 3/4% Preferred Stock at any time.
(e) Dividends on account of arrears for any past Dividend
Period and dividends in connection with any optional redemption pursuant to
Section 5(a) may be declared and paid at any time, without reference to any
regular Dividend Payment Date, to Holders of record on such date, not more than
forty-five (45) days prior to the payment thereof, as may be fixed by the Board
of Directors.
(f) No dividend whatsoever shall be declared or paid upon, or
any sum set apart for the payment of dividends upon, any outstanding share of
the 12 3/4% Preferred Stock with respect to any Dividend Period unless all
dividends on all outstanding shares of Senior Stock for all preceding dividend
periods in respect of such Senior Stock have been declared and paid, or declared
and a sufficient sum set apart for the payment thereof. No full dividends (other
than a dividend payable solely in shares of additional Parity Stock) may be
declared or paid or funds set apart for the payment of dividends on any Parity
Stock for any period unless full cumulative dividends shall have been or
contemporaneously are declared and paid (or are deemed declared and paid) in
full or declared and, if payable in cash, a sum in cash sufficient for such
payment set apart for such payment on the 12 3/4% Preferred Stock. If full
cumulative dividends are not so declared and paid, the 12 3/4% Preferred Stock
shall share dividends pro rata with the Parity Stock so long as any 12 3/4%
Preferred Stock is outstanding. So long as any 12 3/4% Preferred Stock is
outstanding and unless and until full cumulative dividends have been declared
and paid (or deemed paid) in full on the 12 3/4% Preferred Stock, (i) no
dividend (other than a dividend payable solely in shares of additional Junior
Stock) shall be declared or paid upon, or any sum set apart for the payment of
dividends upon, any shares of Junior Stock, (ii) no other distribution shall be
declared or made upon, or any sum set apart for the payment of any distribution
upon, any shares of Junior Stock, other than a distribution consisting solely of
Junior Stock, (iii) no shares of Parity Stock or Junior Stock or warrants,
rights, calls or options to purchase such Parity Stock or Junior Stock shall be
purchased, redeemed or otherwise acquired or retired for value (excluding an
exchange for shares of Junior Stock) by the Corporation or any of its
Subsidiaries, other than certain repurchase obligations with respect to such
warrants, rights, calls or options in existence on the Issue Date; and (iv) no
monies shall be paid into or set apart or made available for a sinking or other
<PAGE> 24
24
like fund for the purchase, redemption or other acquisition or retirement for
value of any shares of Parity Stock or Junior Stock by the Corporation or any of
its Subsidiaries. Holders of the 12 3/4% Preferred Stock shall not be entitled
to any dividends, whether payable in cash, property or stock, in excess of the
full cumulative dividends as herein described.
(g) If (i) the Corporation fails to file an Exchange Offer
Registration Statement within 45 days after the Issue Date, or the Corporation
fails to file a Shelf Registration Statement on or prior to 90 days after the
Issue Date, (ii) any Shelf Registration Statement is not declared effective by
the Commission on or prior to the Effectiveness Target Date, (iii) the
Corporation fails to consummate the Exchange Offer within 30 Business Days
following the Effectiveness Target Date with respect to the Exchange Offer
Registration Statement or (iv) the Shelf Registration Statement or the Exchange
Offer Registration Statement is declared effective on or prior to the applicable
Effectiveness Target Date, but thereafter shall cease to be effective or usable
in connection with resales of Transfer Restricted Securities (each such event
referred to in clauses (i), (ii), (iii) and (iv) above, a "Registration
Default"), then additional dividends (the "Additional Dividends") shall accrue
and cumulate on the 12 3/4% Preferred Stock from and including the date on which
any Registration Default shall occur to but excluding the date on which all
Registration Defaults have been cured (as provided below) at a rate per annum of
0.25% of the Liquidation Preference thereof for each 90-day period that such
Registration Default continues, provided that said rate shall in no event exceed
1.0% per annum. Additional Dividends shall be paid, either in cash or, at the
Corporation's option, by the issuance of additional shares of 12 3/4% Preferred
Stock, on each regular quarterly Dividend Payment Date following the occurrence
of such Registration Default through the Dividend Payment Date next following
the date when such Registration Default shall have been cured. Following the
cure of all Registration Defaults, the accrual of Additional Dividends on the
12 3/4% Preferred Stock shall cease.
4. Liquidation Preference
Upon any voluntary or involuntary liquidation, dissolution or
winding-up of the Corporation, each Holder of shares of the 12 3/4% Preferred
Stock then outstanding shall be entitled to be paid out of the assets of the
Corporation available for distribution to its stockholders, after payment to the
holders of any then outstanding Senior Stock (including, without limitation, the
14 3/4% Preferred Stock) an amount equal to the Liquidation Preference per share
of 12 3/4% Preferred Stock held by such Holder plus, without duplication, an
amount in cash equal to all accrued and unpaid dividends
<PAGE> 25
25
thereon to the date fixed for liquidation, dissolution or winding-up (including
an amount equal to a prorated dividend for the period from the last Dividend
Payment Date to the date fixed for liquidation, dissolution or winding-up and
including an amount equal to the redemption premium that would have been payable
had the 12 3/4% Preferred Stock been the subject of an optional redemption on
such date), and Additional Dividends, if any, to the date fixed for liquidation,
dissolution or winding-up of the Corporation before any distribution is made on
any Junior Stock (including, without limitation, common stock of the
Corporation). If, upon any voluntary or involuntary liquidation, dissolution or
winding-up of the Corporation, the assets of the Corporation available for
distribution to its stockholders, after payment of all amounts required to be
paid to the holders of any then outstanding Senior Stock, are not sufficient to
pay in full all amounts payable to the holders of outstanding shares of 12 3/4%
Preferred Stock and all other Parity Stock, the Holders of the 12 3/4% Preferred
Stock and the Parity Stock shall share equally and ratably in any distribution
of assets of the Corporation in proportion to the full liquidation preference
and accrued and unpaid dividends (including, in the case of the Holders of the
12 3/4% Preferred Stock, Additional Dividends, if any) to which each is
entitled. After payment of the full amount of the Liquidation Preference and
accrued and unpaid dividends (including Additional Dividends, if any) to which
they are entitled, the Holders of the 12 3/4% Preferred Stock will not be
entitled to any further participation in any distribution of assets of the
Corporation. However, neither the voluntary sale, conveyance, exchange or
transfer (for cash, shares of stock, securities or other consideration) of all
or substantially all of the Property or assets of the Corporation nor the
consolidation or merger of the Corporation with or into one or more other
entities, shall be deemed to be a voluntary or involuntary liquidation,
dissolution or winding-up of the Corporation or reduction or decrease in capital
stock, unless such sale, conveyance, exchange or transfer shall be in connection
with a liquidation, dissolution or winding up of the business of the Corporation
or reduction or decrease in its capital stock.
5. Redemption.
(a) Optional Redemption. (i) The Corporation may, at the
option of the Board of Directors, at any time on or after October 15, 2003,
subject to the legal availability of funds therefor, redeem, in whole or in
part, in the manner provided for in Section (5)(c) below, shares of the 12 3/4%
Preferred Stock, at the redemption prices (expressed as percentages of the
Liquidation Preference thereof) plus, without duplication, an amount in cash
equal to all accrued
<PAGE> 26
26
and unpaid dividends thereon to the Redemption Date (including an amount in cash
equal to a prorated dividend for the period from the Dividend Payment Date
immediately prior to the Redemption Date to the Redemption Date), if redeemed
during the 12-month period beginning October 15 of each of the years set forth
below:
<TABLE>
<S> <C>
2003.................................................................. 106.375%
2004.................................................................. 104.781%
2005.................................................................. 103.188%
2006.................................................................. 101.594%
2007 and thereafter................................................... 100.000%
</TABLE>
(ii) Notwithstanding the foregoing paragraph (i) of this
Section (5)(a), the Corporation will have the option, on or prior to October 15,
2000, to redeem, in the manner provided for in Section 5(c) below, up to 35% of
the outstanding shares of 12 3/4% Preferred Stock at a redemption price of
112.750% of the Liquidation Preference thereof, plus, without duplication, an
amount in cash equal to all accrued and unpaid dividends thereon to the
Redemption Date, with the proceeds of (1) one or more Public Equity Offerings
generating cash proceeds to the Corporation of at least $25 million or (2) the
sale of Qualified Stock generating cash proceeds to the Corporation of at least
$25 million to a corporation which has, or whose Parent has, a Total Equity
Market Capitalization at the time of such sale of at least $1.0 billion on a
consolidated basis; provided that shares of 12 3/4% Preferred Stock equal to at
least 65% of the number of shares of the 12 3/4% Preferred Stock initially
issued on the Issue Date remain outstanding after any such redemption.
(b) Mandatory Redemption. On October 15, 2009, the Corporation
shall redeem (subject to the legal availability of funds therefor) in the manner
provided for in Section (5)(c) below, all of the shares of the 12 3/4% Preferred
Stock then outstanding at a redemption price equal to 100% of the Liquidation
Preference thereof, plus, without duplication, an amount in cash equal to all
accumulated and unpaid dividends thereon to the Redemption Date (including the
dividend payable on the Redemption Date).
(c) Procedures for Redemption. (i) At least 30 days and not
more than 60 days prior to any Redemption Date, the Corporation shall send
written notice (the "Redemption Notice") by first class mail, postage prepaid,
to each Holder of record of the 12 3/4% Preferred Stock on the record date fixed
for such redemption at such Holder's address as it appears on the stock books of
the Corporation, provided that no failure to give such notice nor any deficiency
therein shall affect the validity of the procedure for the redemption of any
shares
<PAGE> 27
27
of 12 3/4% Preferred Stock to be redeemed except as to the Holder or Holders to
whom the Corporation has failed to give said notice or except as to the Holder
or Holders whose notice was finally judicially determined by a court of
competent jurisdiction to be defective. The Redemption Notice shall state:
(A) whether the redemption is pursuant to Section
(5)(a)(i), (5)(a)(ii), or (5)(b) hereof;
(B) the redemption price;
(C) whether all or (in the case of a redemption
pursuant to Section (5)(a)(i) or (5)(a)(ii) hereof) less than
all the outstanding shares of the 12 3/4% Preferred Stock are
to be redeemed and the total number of shares of the 12 3/4%
Preferred Stock to be redeemed;
(D) the Redemption Date;
(E) that the Holder is to surrender to the
Corporation, at the offices of the Transfer Agent and in the
manner and at the price designated, his certificate or
certificates representing the shares of 12 3/4% Preferred
Stock to be redeemed; and
(F) that dividends on the shares of the 12 3/4%
Preferred Stock redeemed shall cease to accumulate on such
Redemption Date unless the Corporation defaults in the payment
of the redemption price therefor.
(ii) Each Holder of 12 3/4% Preferred Stock called for
redemption shall surrender the certificate or certificates representing
such shares of 12 3/4% Preferred Stock to the Corporation, duly
endorsed (or otherwise in proper form for transfer, as determined by
the Corporation), at the office of the Transfer Agent and in the manner
designated in the Redemption Notice, and on the Redemption Date the
full redemption price for such shares shall be payable in cash to the
Person whose name appears on such certificate or certificates as the
owner thereof, and each surrendered certificate shall be canceled and
retired. In the event that less than all of the shares represented by
any such certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares.
(iii) On and after the Redemption Date, unless the Corporation
defaults in the payment in full of the
<PAGE> 28
28
applicable redemption price, dividends on the 12 3/4% Preferred Stock
called for redemption shall cease to accumulate, and all rights of the
Holders of such shares shall terminate with respect thereto on the
Redemption Date, other than the right to receive the redemption price
therefor, without interest; provided, however, that if a Redemption
Notice shall have been given as provided in Section (5)(c)(i) above and
the funds necessary for redemption (including an amount in respect of
all dividends on the shares to be redeemed that will accumulate to the
Redemption Date) shall have been delivered to the Transfer Agent, in
trust for the equal and ratable benefit of the Holders of the shares to
be redeemed, then dividends shall cease to accrue and cumulate on the
Redemption Date of the shares to be redeemed and, at the close of
business on the day on which such funds are delivered to the Transfer
Agent, the Holders of the shares to be redeemed shall cease to be
stockholders of the Corporation and shall be entitled only to receive
the redemption price for such shares, without interest.
(iv) In the event of a redemption of only a portion of the
then outstanding shares of the 12 3/4% Preferred Stock pursuant to
Section 5(a)(i) or 5(a)(ii) hereof, the Corporation shall effect such
redemption on a pro rata basis according to the number of shares held
by each Holder of the 12 3/4% Preferred Stock, except that the
Corporation may redeem such shares held by Holders of fewer than 10
shares (or shares held by Holders who would hold less than 10 shares as
a result of such redemption) on such basis as may be determined by the
Corporation.
6. Voting Rights; Amendment; Waiver
(a) The Holders of record of shares of the 12 3/4% Preferred
Stock, except as otherwise required under Delaware law or as set forth in
Sections 6(b), (c) and (d) below, shall not be entitled or permitted to vote on
any matter required or permitted to be voted on by the stockholders of the
Corporation.
(b) If (i) the Corporation fails to pay cash dividends on the
outstanding 12 3/4% Preferred Stock for six or more Dividend Periods (whether or
not consecutive) beginning after October 15, 2002, or (ii) the Corporation fails
to pay dividends, either in cash or by the issuance of additional shares of
12 3/4% Preferred Stock, for six or more Dividend Periods (whether or not
consecutive), whether before or after October 15, 2002, or (iii) the Corporation
fails to comply
<PAGE> 29
29
with its obligations set forth in Section 7 hereof, or (iv) the Corporation
fails to comply with any of its other covenants set forth in this Certificate of
Designation and such failure continues for at least 30 consecutive days after
receipt by the Corporation of notice of such failure from the holders of at
least 25% of the shares of 12 3/4% Preferred Stock then outstanding, or (v)
there occurs a default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Corporation or any of its Subsidiaries
(or the payment of which is guaranteed by the Corporation or any of its
Subsidiaries) whether such Indebtedness or Guarantee now exists, or is created
after the Issue Date, which default (A) is caused by a failure to pay principal
of or premium, if any, or interest on such Indebtedness prior to the expiration
of the grace period provided in such Indebtedness on the date of such default (a
"Payment Default") or (B) results in the acceleration of such Indebtedness prior
to its express maturity, and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such Indebtedness
under which there has been a Payment Default or the maturity of which has been
so accelerated, aggregates $10.0 million or more, at any time, in each case,
after a 60-day period during which such Payment Default shall not have been
cured or such acceleration rescinded, or (vi) the Corporation fails to redeem
all of the outstanding 12 3/4% Preferred Stock on October 15, 2009 (each of the
events described in clauses (i), (ii), (iii), (iv), (v) and (vi) being referred
to herein as a "Voting Rights Triggering Event"), then (x) the Holders of a
majority of the then outstanding shares of 12 3/4% Preferred Stock, voting as a
single class, shall be entitled to elect the lesser of (i) two members of the
Board of Directors and (ii) such number of directors as will constitute and 25%
of the total number of members of the Board of Directors and (y) the Corporation
shall take such action as may be necessary to cause the total number of
directors of the Corporation to be increased by such number.
(c) The right of the Holders of 12 3/4% Preferred Stock,
voting as a single class, to elect members of the Board of Directors as set
forth in Section 6(b) above shall continue until such time as (x) in the event
such Voting Rights Triggering Event arises under either clause (i) or clause
(ii) of Section 6(b) above (hereafter, a "Dividend Default"), such Dividend
Default is fully cured, and (y) in the event such Voting Rights Triggering Event
arises under either clause (iii) or (iv) of Section 6(b) above, the failure
giving rise to such Voting Rights Triggering Event is remedied by the
Corporation or waived by the Holders of a majority of the shares of 12 3/4%
Preferred Stock then outstanding and entitled
<PAGE> 30
30
to vote thereon, and (z) in all other cases, the failure, breach or default
giving rise to such Voting Rights Triggering Event is remedied by the
Corporation or waived by the Holders of at least two-thirds of the shares of
12 3/4% Preferred Stock then outstanding and entitled to vote thereon, at which
time (1) the special right of the Holders of 12 3/4% Preferred Stock so to vote
as a class for the election of directors and (2) the term of office of the
directors elected by the Holders of the 12 3/4% Preferred Stock shall each
terminate. At any time after voting power to elect directors shall have become
vested and be continuing in the Holders of 12 3/4% Preferred Stock pursuant to
Section 6(b) above, or if vacancies shall exist in the offices of directors
elected by the Holders of 12 3/4% Preferred Stock, a proper officer of the
Corporation may, and upon the written request of the Holders of record of at
least 25% of the shares of 12 3/4% Preferred Stock then outstanding addressed to
the Secretary of the Corporation at its principal executive offices shall, call
a special meeting of the Holders of 12 3/4% Preferred Stock, for the purpose of
electing the directors that such Holders are entitled to elect. If such meeting
shall not be called by a proper officer of the Corporation within 20 days after
personal service of said written request upon the Secretary of the Corporation
at its principal executive offices, or within 20 days after mailing the same
within the United States by certified mail, return receipt requested, addressed
to the Secretary of the Corporation at its principal executive offices, then the
Holders of record of at least 25% of the outstanding shares of 12 3/4% Preferred
Stock may designate in writing one of their number to call such meeting at the
expense of the Corporation, and such meeting may be called by the Person so
designated upon the same period of notice as is required for the annual meetings
of stockholders of the Corporation and shall be held at the place designated in
such notice. Any Holder of 12 3/4% Preferred Stock so designated shall have, and
the Corporation shall provide, access to the list of Holders of the 12 3/4%
Preferred Stock for the purposes of calling a meeting of such Holders pursuant
to the provisions hereof. The voting rights provided for in this Section 7 shall
be the exclusive remedy at law or in equity of the holders of the 12 3/4%
Preferred Stock for any violation by the Corporation of its obligations under
this Certificate of Designation.
(d) At any meeting held for the purpose of electing directors
at which the Holders of the 12 3/4% Preferred Stock shall have the right, voting
together as a separate class, to elect directors as aforesaid, the presence in
person or by proxy of the Holders of at least a majority of the outstanding
shares of 12 3/4% Preferred Stock shall be required to constitute a quorum of
such 12 3/4% Preferred Stock.
<PAGE> 31
31
(e) Any vacancy occurring in the office of a director elected
by the Holders of 12 3/4% Preferred Stock may be filled by the remaining
directors elected by the Holders of 12 3/4% Preferred Stock unless and until
such vacancy shall be filled by the Holders of 12 3/4% Preferred Stock. Holders
of a majority of the 12 3/4% Preferred Stock, voting separately as a class, may
remove, with or without cause, any director elected by the Holders of 12 3/4%
Preferred Stock or appointed to fill a vacancy pursuant to the next preceding
sentence. Any director to be elected by the Holders of 12 3/4% Preferred Stock
shall agree, prior to his election to office, to resign upon any termination of
the right of the Holders of 12 3/4% Preferred Stock to vote as a class for a
director as herein provided, and upon any such termination any director then in
office elected by the Holders of 12 3/4% Preferred Stock shall forthwith resign.
(f) The Corporation may, with the affirmative vote or consent
of the Holders of a majority of the shares of 12 3/4% Preferred Stock then
outstanding, voting or consenting as a single class, modify or amend the
provisions of Section 7 or 8 hereof; provided that following the mailing of any
Change of Control Offer and during the pendancy of that Change of Control Offer,
no such modification or amendment may, without the consent of the holder of each
outstanding share of 12 3/4% Preferred Stock affected thereby, modify any Change
of Control Offer for the 12 3/4% Preferred Stock required under Section 7 hereof
in a manner materially adverse to the Holders of the outstanding 12 3/4%
Preferred Stock.
(g) The Corporation shall not, without the affirmative vote or
consent of the Holders of at least two-thirds of the shares of 12 3/4% Preferred
Stock, then outstanding, voting or consenting as a single class, (i) authorize,
create (by reclassification or otherwise) or issue any Senior Stock (other than
any shares of 14 3/4% Preferred Stock issued as dividends thereon, including as
Additional Dividends (as defined in the Certificate of Designation relating to
the 14 3/4% Preferred Stock)) or any security convertible into, exchangeable for
or evidencing the right to purchase any Senior Stock, or (ii) except as
described in Section 6(f) above amend or otherwise alter or modify its by-laws
or its Certificate of Incorporation (including this Certificate of Designation)
so as to affect adversely the powers, preferences, rights or privileges of the
Holders of the 12 3/4% Preferred Stock or reduce the time for any notice to
which such Holders may be entitled. For the purposes of this Section 6(g), an
amendment of the provisions of Section 7 or 8 hereof made in accordance with the
provisions of Section 6(d) hereof shall not be deemed to affect adversely the
<PAGE> 32
32
powers, preferences, rights or privileges of the Holders of the 12 3/4%
Preferred Stock.
(h) Holders of a majority of the outstanding shares of the 12
3/4% Preferred Stock may waive compliance by the Corporation with the provisions
of Section 8 hereof and may waive any past default by the Corporation of its
obligations under Sections 7 and 8 hereof, except a default arising from failure
to purchase any 12 3/4% Preferred Stock tendered pursuant to a Change of Control
Offer.
(i) In any case in which the Holders of 12 3/4% Preferred
Stock shall be entitled to vote pursuant to this Section 6 or pursuant to
Delaware law, each Holder of 12 3/4% Preferred Stock entitled to vote with
respect to each such matter shall be entitled to one vote for each share of 12
3/4% Preferred Stock held. For the purposes of this Section 6, shares of 12 3/4%
Preferred Stock held by the Corporation or any of its Affiliates shall not be
deemed outstanding or entitled to vote.
(j) The Corporation in its sole discretion may, without the
vote or consent of any Holders of the 12 3/4% Preferred Stock, amend or
supplement this Certificate of Designation:
(i) to cure any ambiguity, defect or inconsistency;
(ii) to provide for uncertificated 12 3/4% Preferred Stock in
addition to or in place of certificated 12 3/4% Preferred Stock; or
(iii) to make any change that would provide any additional
rights or benefits to the Holders of the 12 3/4% Preferred Stock or that does
not adversely affect the legal rights of any such Holder under this Certificate
of Designation.
(k) Except as set forth in Section 6(g) above, (i) the
creation, authorization or issuance of any shares of Junior Stock, Parity Stock
or Senior Stock or (ii) the increase or decrease in the amount of authorized
Capital Stock of any class, including any Preferred Stock, shall not require the
consent of the Holders of the 12 3/4% Preferred Stock and shall not be deemed to
affect adversely the rights, preferences, privileges or voting rights of shares
of 12 3/4% Preferred Stock.
<PAGE> 33
33
7. Change of Control
(a) Within 30 days following the occurrence of a Change of
Control, the Corporation shall make an offer (the "Change of Control Offer") to
each Holder of shares of 12 3/4% Preferred Stock to purchase all or any part of
the shares of 12 3/4% Preferred Stock held by such Holder at a purchase price in
cash equal to 101% of the aggregate Liquidation Preference thereof plus, without
duplication, an amount in cash equal to all accumulated and unpaid dividends
(including an amount in cash equal to a prorated dividend for any partial
Dividend Period) and Additional Dividends, if any, thereon to the date of
purchase (the "Change of Control Payment").
(b) The Change of Control Offer shall include all instructions
and materials necessary to enable Holders to tender their shares of 12 3/4%
Preferred Stock.
(c) The Corporation shall comply with the requirements of Rule
14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the repurchase of the 12 3/4% Preferred Stock as a result of a Change of
Control.
(d) Within 30 days following any Change of Control, the
Corporation shall mail a notice to each Holder stating:
(i) that the Change of Control Offer is being made
pursuant to this Section 7 and that all shares of 12 3/4% Preferred
Stock tendered will be accepted for payment;
(ii) the purchase price and the purchase date, which
shall be no earlier than 30 days nor later than 40 days from the date
such notice is mailed (the "Change of Control Payment Date");
(iii) that any shares of 12 3/4% Preferred Stock not
tendered for purchase will continue to accrue dividends;
(iv) that, unless the Corporation fails to pay the
Change of Control Payment, all shares of 12 3/4% Preferred Stock
accepted for payment pursuant to the Change of Control Offer shall
cease to accumulate dividends after the Change of Control Payment Date;
(v) that Holders electing to have any shares of
12 3/4% Preferred Stock purchased pursuant to a Change of Control
Offer will be required to surrender such shares
<PAGE> 34
34
of 12 3/4% Preferred Stock, with the form entitled "Option of Holder to
Elect Purchase" which shall be included with the notice of such Change
of Control Offer completed, to the Paying Agent named in such notice at
its address specified in such notice prior to the close of business on
the third Business Day preceding the Change of Control Payment Date;
(vi) that a Holder will be entitled to withdraw his
or its election to have shares of 12 3/4% Preferred Stock purchased
pursuant to a Change of Control Offer if the Paying Agent receives, not
later than the close of business on the second Business Day preceding
the Change of Control Payment Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the Holder, the number
of shares of 12 3/4% Preferred Stock delivered for purchase, and a
statement that such Holder is withdrawing his or its election to have
such shares purchased; and
(vii) the circumstances and relevant facts regarding
such Change of Control (including, but not limited to, pro forma
historical financial information of the Corporation after giving effect
to such Change of Control and information regarding the Person or
Persons acquiring control).
(e) On the Change of Control Payment Date, the Corporation
shall, to the extent lawful, (i) accept for payment all shares of 12 3/4%
Preferred Stock or portions thereof properly tendered and not withdrawn pursuant
to the Change of Control Offer, (ii) deposit with the Paying Agent an amount
equal to the Change of Control Payment in respect of all shares of 12 3/4%
Preferred Stock or portions thereof so tendered and (iii) deliver or cause to be
delivered to the Transfer Agent the shares of 12 3/4% Preferred Stock so
accepted together with an Officers' Certificate stating the aggregate
Liquidation Preference of the shares of 12 3/4% Preferred Stock or portions
thereof being purchased by the Corporation. The Paying Agent shall promptly mail
to each Holder of 12 3/4% Preferred Stock so tendered the Change of Control
Payment for such 12 3/4% Preferred Stock, and the Transfer Agent shall promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new certificate representing the shares of 12 3/4% Preferred Stock equal in
Liquidation Preference to any unpurchased portion of the shares of 12 3/4%
Preferred Stock surrendered, if any. The Corporation shall publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
<PAGE> 35
35
(f) The Corporation shall not be required to make a Change of
Control Offer upon a Change of Control if (i) a third party makes the Change of
Control Offer in the manner, at the times and otherwise in compliance with the
requirements set forth in this Section 8 applicable to a Change of Control Offer
made by the Corporation and purchases all shares of 12 3/4% Preferred Stock
validly tendered and not withdrawn under such Change of Control Offer or (ii)
the date at which such Change of Control Offer would otherwise be required to be
made is prior to the later of (x) the Stated Maturity (as defined in the
indentures relating to the Existing Notes) of the last to mature of the Existing
Notes and (y) the retirement of all of the outstanding 14 3/4% Preferred Stock.
(g) If the date at which a Change of Control Offer otherwise
would be required to be made is prior to the later of (i) the Stated Maturity
(as defined in the indentures relating to the Existing Notes) of the last to
mature of the Existing Notes and (ii) the retirement of all of the outstanding
14 3/4% Preferred Stock, then, in lieu of any such Change of Control Offer,
Holders of two-thirds of the 12 3/4% Preferred Stock shall be entitled to
designate an Independent Financial Advisor to determine, within 20 days of such
designation, in the opinion of such firm, the appropriate dividend rate that the
12 3/4% Preferred Stock should bear so that, after such reset, the 12 3/4%
Preferred Stock would have a market value of 101% of the Liquidation Preference.
If, for any reason and within five days of the designation of an Independent
Financial Advisor by the Holders, such Independent Financial Advisor is
unacceptable to the Corporation, the Corporation shall designate a second
Independent Financial Advisor to determine, within 15 days of such designation,
in its opinion, such an appropriate reset dividend rate for the 12 3/4%
Preferred Stock. In the event that the two Independent Financial Advisors cannot
agree, within 25 days of the designation of an Independent Financial Advisor by
the Holders of two-thirds of the 12 3/4% Preferred Stock, on the appropriate
reset dividend rate, the two Independent Financial Advisors shall, within 10
days of such 25th day, designate a third Independent Financial Advisor, which,
within 15 days of designation, will determine, in its opinion, such an
appropriate reset rate which is between the two rates selected by the first two
Independent Financial Advisors; provided, however, that the reset rate shall in
no event be less than 12 3/4% per annum or greater than 15 1/4% per annum. The
reasonable fees and expenses, including reasonable fees and expenses of legal
counsel, if any, and customary indemnification, of each of the three
above-referenced Independent Financial Advisors shall be borne by the
Corporation. Upon the determination of the reset rate, the 12 3/4% Preferred
Stock shall accrue and
<PAGE> 36
36
cumulate dividends at the reset rate retroactive to and as of the date of
occurrence of the Change of Control.
8. Certain Covenants
(a) Incurrence of Indebtedness and Issuance of Disqualified
Stock or Preferred Stock. (i) The Corporation shall not, and shall not permit
any of its Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, for the payment of (collectively, "incur" and
correlatively, "incurred" and "incurrence") any Indebtedness (including, without
limitation, Acquired Indebtedness) and shall not issue any Disqualified Stock
and shall not permit any of its Subsidiaries to issue any shares of Subsidiary
Preferred Stock; provided that the Corporation may incur Indebtedness
(including, without limitation, Acquired Indebtedness) or issue shares of
Disqualified Stock or Subsidiary Preferred Stock if the Corporation's
Consolidated Leverage Ratio as of the last day of the Corporation's most
recently ended fiscal quarter for which internal financial statements are
available immediately preceding the date on which such Indebtedness is incurred,
or such Disqualified Stock or Subsidiary Preferred Stock is issued, as the case
may be, would have been (a) greater than zero and less than 5.5 to 1.0, if such
incurrence or issuance is on or prior to December 31, 1999, and (b) greater than
zero and less than 5.0 to 1.0, if such incurrence or issuance is after December
31, 1999, in each case determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the additional Indebtedness
had been incurred, or the Disqualified Stock or Subsidiary Preferred Stock had
been issued, as the case may be, at the beginning of such fiscal quarter.
(ii) The provisions of Section 8(a)(i) shall not apply to:
(A) the incurrence of Indebtedness by the Corporation
or any Subsidiary pursuant to Credit Agreement(s); provided
that the aggregate principal amount of Indebtedness under such
Credit Agreement(s) at any one time outstanding under this
clause (A) does not exceed $100.0 million for the Corporation
and all of its Subsidiaries combined;
(B) Existing Indebtedness (including all amounts that
accrue thereon);
(C) the incurrence of Vendor Debt by the Corporation
or any Subsidiary; provided that the
<PAGE> 37
37
aggregate principal amount of such Vendor Debt does not exceed
80% of the purchase price or cost of the construction,
acquisition or improvement of the applicable
Telecommunications Related Assets financed therewith (or 100%
of the total cost of the Telecommunications Related Assets
financed therewith if such Vendor Debt was extended for the
purchase of tangible physical assets and was so financed by
the vendor thereof or an affiliate of such vendor);
(D) the incurrence by the Corporation or any of its
Restricted Subsidiaries of Refinancing Indebtedness with
respect to Indebtedness permitted pursuant to clause (B) of
this paragraph;
(E) the incurrence of Indebtedness by the Corporation
not to exceed, at any one time outstanding, 2.0 times the sum
of (1) the net cash proceeds received by the Corporation from
the issuance and sale of the 12 3/4% Preferred Stock and the
issuance and sale of any other class or series of its Capital
Stock (other than Disqualified Stock) from and after September
30, 1997 plus (2) the fair market value at the time of
issuance of Capital Stock (other than Disqualified Stock)
issued in connection with any acquisition of a
Telecommunications Corporation, in each case to a Person other
than a Subsidiary of the Corporation; and
(F) the incurrence by the Corporation of Indebtedness
(in addition to Indebtedness permitted by any other clause of
this paragraph) in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding not to exceed
$100.0 million;
(iii) If an item of Indebtedness is permitted to be
incurred or an item of Disqualified Stock or Subsidiary Preferred Stock
is permitted to be issued on the basis of one or more of clauses (A)
through (F) of Section 8(a)(ii) above, or is permitted to be incurred
on the basis of Section 8(a)(i) above, then the Corporation shall, in
its sole discretion, classify such item in any manner that complies
with Section 8(a) and such item shall be treated as having been
incurred pursuant to only one of such clauses of Section 8(a)(ii) or
pursuant to Section 8(a)(i). Accrual of interest or dividends, the
accretion of accreted value or liquidation preference and the payment
of interest or dividends in the form of
<PAGE> 38
38
additional Indebtedness or shares of Capital Stock shall not be deemed
to be an incurrence of Indebtedness for purposes of this Section 8(a).
(iv) For purposes of this Section 8(a), in the event
that the Corporation proposes to incur Indebtedness pursuant to Section
8(a)(ii)(E) hereof, the Corporation shall, simultaneously with the
incurrence of such Indebtedness, deliver to the Transfer Agent a
resolution of the Board of Directors set forth in an Officer's
Certificate stating that the sale or sales of Capital Stock forming the
basis for the incurrence of such Indebtedness (i) constitutes an
investment in the Corporation and (ii) has not been made for the
purpose of circumventing Section 8(a) hereof. In the event that the
Corporation rescinds, reverses or unwinds such sale of Capital Stock or
otherwise returns or refunds all or any portion of the net cash
proceeds of such sale of Capital Stock (whether by dividend,
distribution or otherwise) within 270 days of the date of the
incurrence of such Indebtedness, such Indebtedness shall be deemed to
be incurred on the date of, and immediately after giving effect to,
such recession, reversal, unwinding, return or refund.
(b) Merger, Consolidation or Sale of Assets. The Corporation
shall not in any transaction or series of transactions consolidate with, or
merge with or into any other Person (other than a merger of a Restricted
Subsidiary into the Corporation in which the Corporation is the continuing
corporation), or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of the Property or assets of the Corporation and the
Restricted Subsidiaries taken as a whole, to any other Person unless:
(i) either (A) the Corporation is the continuing
corporation or (B) the corporation (if other than the Corporation)
formed by such consolidation or into which the Corporation is merged,
or the Person which acquires, by sale, assignment, transfer, lease,
conveyance or other disposition, all or substantially all of the
Property and assets of the Corporation and the Restricted Subsidiaries
taken as a whole (such corporation or Person, the "Surviving Entity"),
shall be a corporation organized and validly existing under the laws of
the United States of America, any political subdivision thereof, any
state thereof or the District of Columbia and the 12 3/4% Preferred
Stock shall be converted into or exchanged for, and shall become shares
of, such Surviving Entity successor, transferee or resulting Person,
having in respect of such Surviving Entity the
<PAGE> 39
39
same powers, preferences and relative participating, optional or other
special rights and qualifications, limitations or restrictions thereon,
that the 12 3/4% Preferred Stock had with respect to the Corporation
immediately prior to such transaction;
(ii) immediately after giving effect to such
transaction or series of related transactions on a pro forma basis
(including without limitation, any Indebtedness incurred or anticipated
to be incurred in connection with or in respect of such transaction or
series of related transactions) no Voting Rights Triggering Event shall
have occurred or result therefrom; and
(iii) immediately after giving effect to such
transaction or series of related transactions on a pro forma basis
(including, without limitation, any Indebtedness incurred or
anticipated to be incurred in connection with or in respect of such
transaction or series of related transactions), the Corporation (or the
Surviving Entity, if the Corporation is not continuing) would (A) be
permitted to incur at least $1.00 of additional Indebtedness pursuant
to Section 8(a)(i) hereof or (B) have a Total Equity Market
Capitalization of at least $1.0 billion and total Indebtedness, net of
cash and Cash Equivalents (as presented on the Corporation's
consolidated balance sheet), in an amount less than 40% of its Total
Market Capitalization.
(c) Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Corporation shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to:
(i) (x) pay dividends or make any other distributions
to the Corporation or any of its Restricted Subsidiaries on its Capital
Stock or (y) pay any Indebtedness owed to the Corporation or any of its
Restricted Subsidiaries;
(ii) make loans or advances to the Corporation or any
of its Restricted Subsidiaries;
(iii) transfer any of its properties or assets to the
Corporation or any of its Restricted Subsidiaries,
except for such encumbrances or restrictions existing under or by reason of:
<PAGE> 40
40
(1) Existing Indebtedness as in effect on the Issue Date;
(2) any Credit Agreement creating or evidencing Indebtedness
permitted by Section 8(a)(ii)(A) and any amendments,
modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings thereof;
(3) any encumbrance or restriction pursuant to an agreement
relating to an acquisition of assets or Property, so long as
the encumbrances or restrictions in any agreement relate
solely to the assets or Property so acquired;
(4) this Certificate of Designation, the Series A 12 3/4%
Preferred Stock, or the Series B 12 3/4% Preferred Stock;
(5) applicable law;
(6) customary provisions restricting subletting or assignment of
any lease of the Corporation or any Restricted Subsidiary or
customary provisions in certain agreements that restrict the
assignment of such agreement or any rights thereunder;
(7) purchase money obligations or Vendor Debt for property
acquired in the ordinary course of business that impose
restrictions of the nature described in Section 8(c)(iii) on
the property so acquired;
(8) any encumbrance or restriction relating to any Indebtedness of
any Restricted Subsidiary existing on the date on which such
Restricted Subsidiary is acquired by the Corporation or any
Restricted Subsidiary (other than Indebtedness issued by such
Restricted Subsidiary in connection with or in anticipation of
its acquisition);
(9) any temporary encumbrance or restriction with respect to a
Restricted Subsidiary pursuant to an agreement that has been
entered into for the sale or disposition of all or
substantially all of the Capital Stock of, or Property and
assets of, such Restricted Subsidiary;
(10) any restriction on the sale or other disposition of assets or
Property securing Indebtedness as a
<PAGE> 41
41
result of a Permitted Lien on such assets or Property; and
(11) Refinancing Indebtedness; provided that such encumbrances or
restrictions are not materially more restrictive than those
contained in the documentation governing the Indebtedness
being extended, refinanced, renewed, replaced, defeased or
refunded.
(d) Reports. Whether or not the Corporation is subject to
Section 13(a) or 15(d) of the Exchange Act, or any successor provision thereto,
the Corporation shall file with the Commission the annual reports, quarterly
reports and other documents which the Corporation would have been required to
file with the Commission pursuant to such Section 13(a) or 15(d) or any
successor provision thereto if the Corporation were subject thereto, such
documents to be filed with the Commission on or prior to the respective dates
(the "Required Filing Dates") by which the Corporation would have been required
to file them. The Corporation shall also (whether or not it is required to file
reports with the Commission), within 30 days of each Required Filing Date, (i)
transmit by mail to all holders of the 12 3/4% Preferred Stock, as their names
and addresses appear on the records of the Transfer Agent and to any Persons
that request such reports in writing, without cost to such holders or Persons,
and (ii) file with the Transfer Agent copies of the annual reports, quarterly
reports and other documents (without exhibits) which the Corporation has filed
or would have filed with the Commission pursuant to Section 13(a) or 15(d) of
the Exchange Act, any successor provisions thereto or this covenant. In addition
to the foregoing, commencing with the unaudited information for the fiscal
quarter ended September 30, 1997, the Corporation will transmit by mail to
Holders of the 12 3/4% Preferred Stock and file with the Transfer Agent within
the same time periods as set forth in the second next preceding sentence,
unaudited information, on an aggregate Fiber Network basis (before headquarter
allocations) segmented by the calendar year in which each such Fiber Network
became operational, setting forth the investment in plant, property and
equipment to date, revenue, EBITDA, EBIT, access lines, fiber miles, route
miles, buildings connected and voice grade equivalents; provided, however, that
the Corporation shall provide such unaudited information with respect to (i) all
Fiber Networks that were initially operational at any time prior to December 31,
1995 (all such Fiber Networks shall be deemed to have become operational in
calendar year 1995) and (ii) all Fiber Networks that were initially operational
in each succeeding calendar year (including all or any portion of the then
current year); and provided, further, that the Corporation need no longer
<PAGE> 42
42
comply with the information requirements of this sentence after four consecutive
fiscal quarters for which the ratio of EBITDA of the Corporation to Consolidated
Interest Expense (other than dividends or distributions with respect to
preferred stock or Disqualified Stock of the Corporation) of the Corporation is
greater than 1.0 or after the occurrence of a Change of Control. The Corporation
shall not be required to file any report or other information with the
Commission if the Commission does not permit such filing.
(e) Remedy for Non-Compliance. The sole remedy to Holders of
12 3/4% Preferred Stock in the event of the Corporation's failure to comply with
any of the covenants described in this Section 8 and the continuation of such
failure to, for 30 consecutive days after receipt of written notice thereof from
the holders of 25% of the 12 3/4% Preferred Stock then outstanding, will be the
voting rights described in Section 6 and such breach by the Corporation will not
cause any action taken by the Corporation to be invalid or unauthorized under
its charter documents.
9. Officers' Certificate
Each Officers' Certificate provided for in this Certificate of
Designation shall include:
(a) a statement that the Officers making such certificate or
opinion have read such covenant or condition;
(b) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(c) a statement that, in the opinion of each such Officer, he
or she has made such examination or investigation as is necessary to
enable him or her to express an informed opinion as to whether or not
such covenant or condition has been satisfied; and
(d) a statement as to whether or not, in the opinion of each
such Officer, such condition or covenant has been satisfied.
10. Payment
(a) All amounts payable in cash with respect to the 12 3/4%
Preferred Stock shall be payable in United States dollars at the office or
agency of the Corporation maintained for such purpose within the City and State
of New York or, at the
<PAGE> 43
43
option of the Corporation, payment of dividends (if any) may be made by check
mailed to the Holders of the 12 3/4% Preferred Stock at their respective
addresses set forth in the register of Holders of 12 3/4% Preferred Stock
maintained by the Transfer Agent; provided that all cash payments with respect
to the Global Securities (as defined below) and shares of 12 3/4% Preferred
Stock the Holders of which have given wire transfer instructions to the
Corporation shall be required to be made by wire transfer of immediately
available funds to the accounts specified by the Holders thereof.
(b) Any payment on the 12 3/4% Preferred Stock due on any day
that is not a Business Day need not be made on such day, but may be made on the
next succeeding Business Day with the same force and effect as if made on such
due date.
(c) The Corporation has initially appointed the Transfer Agent
to act as the "Paying Agent." The Corporation may at any time terminate the
appointment of any Paying Agent and appoint additional or other Paying Agents;
provided that until the 12 3/4% Preferred Stock has been delivered to the
Corporation for cancellation, or moneys sufficient to pay the Liquidation
Preference of the 12 3/4% Preferred Stock plus, without duplication, accumulated
and unpaid dividends (including an amount in cash equal to a prorated dividend
for any partial Dividend Period) and Additional Dividends, if any, thereon shall
have been made available for payment and either paid or returned to the
Corporation as provided in this Certificate of Designation, the Corporation
shall maintain an office or agency in the Borough of Manhattan, The City of New
York for surrender of shares of 12 3/4% Preferred Stock for payment and
exchange.
(d) Dividends payable on the 12 3/4% Preferred Stock on any
redemption date or repurchase date that is a Dividend Payment Date shall be paid
to the Holders of record as of the immediately preceding Record Date.
(e) All moneys and shares of 12 3/4% Preferred Stock deposited
by the Corporation with any Paying Agent or held by the Corporation in trust for
the payment of the Liquidation Preference and accumulated and unpaid dividends
and Additional Dividends, if any, on the 12 3/4% Preferred Stock, which moneys
and shares remain unclaimed at the end of two years after such payment has
become due and payable shall be repaid to the Corporation, and the Holder of the
shares of 12 3/4% Preferred Stock in respect of which such moneys and shares
were so deposited or held in trust shall thereafter look only to Corporation for
payment thereof.
<PAGE> 44
44
11. Exclusion of Other Rights
Except as may otherwise be required by law, the shares of
12 3/4% Preferred Stock shall not have any powers, preferences and relative,
participating, optional or other special rights, other than those specifically
set forth in this Certificate of Designation (as this Certificate of Designation
may be amended from time to time) and in the Certificate of Incorporation. The
shares of 12 3/4% Preferred Stock shall have no preemptive or subscription
rights.
12. Conversion or Exchange
The Holders of shares of 12 3/4% Preferred Stock shall not
have any rights hereunder to convert such shares into or exchange such shares
for shares of any other class or classes of Capital Stock of the Corporation.
13. Reissuance of 12 3/4% Preferred Stock
Shares of 12 3/4% Preferred Stock that have been issued and
reacquired in any manner, including shares purchased or redeemed or exchanged,
shall (upon compliance with any applicable provisions of the laws of Delaware)
have the status of authorized but unissued shares of Preferred Stock of the
Corporation undesignated as to series and may be redesignated and reissued as
part of any series of Preferred Stock of the Corporation, including the 12 3/4%
Preferred Stock, provided that any issuance or reissuance of such shares as
12 3/4% Preferred Stock must be in compliance with the terms hereof.
14. Headings of Subdivisions
The headings of the various subdivisions hereof are for
convenience of reference only and shall not affect the interpretation of any of
the provisions hereof.
15. Severability of Provisions
If any powers, preferences and relative, participating,
optional and other special rights of the 12 3/4% Preferred Stock and the
qualifications, limitations and restrictions thereof set forth in this
Certificate of Designation (as it may be amended from time to time) is invalid,
unlawful or incapable of being enforced by reason of any rule of law or public
policy, all other powers, preferences and relative, participating, optional and
other special rights of the 12 3/4% Preferred Stock and the qualifications,
limitations and restrictions thereof set forth in this Certificate of
Designation (as so amended) which can be given effect without the invalid,
unlawful or unenforceable powers, preferences and relative, participating,
optional and other special rights of the 12 3/4% Preferred Stock and the
<PAGE> 45
45
qualifications, limitations and restrictions thereof shall, nevertheless, remain
in full force and effect, and no powers, preferences and relative,
participating, optional or other special rights of the 12 3/4% Preferred Stock
and the qualifications, limitations and restrictions thereof herein set forth
shall be deemed dependent upon any other such powers, preferences and relative,
participating, optional or other special rights of 12 3/4% Preferred Stock and
qualifications, limitations and restrictions thereof unless so expressed herein.
16. Form of 12 3/4% Preferred Stock
(a) The 12 3/4% Preferred Stock shall initially be issued in
the form of one or more Global Securities ("Global Securities"). The Global
Securities shall be deposited on the Issue Date with, or on behalf of, The
Depository Trust Corporation (the "Depositary") and registered in the name of
Cede & Co., as nominee of the Depositary (such nominee being referred to as the
"Global Security Holder").
(b) Shares of the Series A 12 3/4% Preferred Stock offered and
sold in reliance on Rule 144A shall be issued initially in the form of a Rule
144A Global Security (the "Rule 144A Global Security"). Shares of the Series A
12 3/4% Preferred Stock offered and sold in reliance on Regulation S shall be
issued initially in the form of a Regulation S Temporary Global Security (the
"Regulation S Temporary Global Security"), which shall be deposited on behalf of
the purchasers with the Transfer Agent, at its New York office, as custodian for
the Depositary, and registered in the name of the Depositary or the nominee of
the Depositary. Following the termination of the 40-day Restricted Period (as
defined in Rule 144A), beneficial interests in the Regulation S Temporary Global
Security shall be exchanged for beneficial interests in a Regulation S Permanent
Global Security pursuant to the applicable procedures of the Depositary.
(c) So long as the Global Security Holder is the registered
owner of any 12 3/4% Preferred Stock, the Global Security Holder shall be
considered the sole Holder under this Certificate of Designation of the shares
of 12 3/4% Preferred Stock evidenced by the Global Security. Beneficial owners
of shares of 12 3/4% Preferred Stock evidenced by the Global Security shall not
be considered the owners or Holders thereof under this Certificate of
Designation for any purpose.
(d) Payments in respect of the Liquidation Preference of and
accumulated and unpaid dividends and Additional Dividends, if any, on any
12 3/4% Preferred Stock registered in the name of the Global Security Holder on
the
<PAGE> 46
46
applicable record date shall be payable by the Corporation to or at the
direction of the Global Security Holder in its capacity as the registered holder
under this Certificate of Designation. The Corporation may treat the persons in
whose names 12 3/4% Preferred Stock, including, without limitation, the Global
Security, are registered as the owners thereof for the purpose of receiving such
payments.
(e) Any person having a beneficial interest in a Global
Security may, upon request to the Corporation, exchange such beneficial interest
for 12 3/4% Preferred Stock in the form of registered definitive certificates
(the "Certificated Securities"). Upon any such issuance, the Corporation shall
register such Certificated Securities in the name of, and cause the same to be
delivered to, such person or persons (or the nominee of any thereof). If (i) the
Corporation notifies the holders in writing that the Depositary is no longer
willing or able to act as a depositary and the Corporation is unable to locate a
qualified successor within 90 days or (ii) the Corporation, at its option,
notifies the holders in writing that it elects to cause the issuance of 12 3/4%
Preferred Stock in the form of Certificated Securities under this Certificate of
Designation, then, upon surrender by the Global Security Holder of its Global
Security, 12 3/4% Preferred Stock in such form will be issued to each person
that the Global Security Holder and the Depositary identify as being the
beneficial owner of the related 12 3/4% Preferred Stock.
(f) (i) Each Global Security shall bear a legend in
substantially the following form:
"UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART
FOR A SECURITY IN DEFINITIVE FORM, THIS SECURITY MAY
NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE
DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A
NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR
ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE
DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR
DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY.
THE DEPOSITARY TRUST CORPORATION SHALL ACT AS THE
DEPOSITARY UNTIL A SUCCESSOR SHALL BE APPOINTED BY
THE CORPORATION AND THE TRANSFER AGENT. UNLESS THIS
CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITARY TRUST CORPORATION
(55 WATER STREET, NEW YORK, NEW YORK) ("DTC"), TO THE
ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER
NAME AS MAY BE REQUESTED BY AN AUTHORIZED
<PAGE> 47
47
REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR SUCH OTHER ENTITY AS MAY BE REQUESTED
BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY
TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS
THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN
INTEREST HEREIN."
(ii) In addition, the Regulation S Temporary Global
Security shall bear a legend in substantially the following
form:
"THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY
GLOBAL SECURITY, AND THE CONDITIONS AND PROCEDURES
GOVERNING ITS EXCHANGE FOR CERTIFICATED SECURITIES
ARE AS SPECIFIED IN THE CERTIFICATE OF DESIGNATION OF
THE POWERS, PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL AND OTHER SPECIAL RIGHTS OF PREFERRED STOCK
AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS
THEREOF OF THE 12 3/4% JUNIOR REDEEMABLE PREFERRED
STOCK OF AMERICAN COMMUNICATIONS SERVICES, INC. DATED
AS OF OCTOBER __, 1997. NEITHER THE HOLDER NOR THE
BENEFICIAL OWNERS OF THIS REGULATION S TEMPORARY
GLOBAL SECURITY SHALL BE ENTITLED TO RECEIVE CASH
DIVIDEND PAYMENTS HEREON. NOTHING IN THIS LEGEND
SHALL BE DEEMED TO PREVENT DIVIDENDS FROM ACCRUING
AND ACCUMULATING ON THIS SECURITY."
(g) All shares of Series A 12 3/4% Preferred Stock (and any
Global Securities evidencing the same) will bear a legend to the following
effect, unless the Corporation determines otherwise in compliance with
applicable law:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS
SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY
BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED,
ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF
SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS
EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION."
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF
AGREES TO (A) OFFER, SELL, PLEDGE OR OTHERWISE
TRANSFER THIS SECURITY ONLY (1) TO THE CORPORATION,
(2) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS
BEEN DECLARED
<PAGE> 48
48
EFFECTIVE UNDER THE SECURITIES ACT, (3) TO A PERSON
IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL
BUYER" AS DEFINED IN RULE 144A, (4) PURSUANT TO
OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR
OUTSIDE THE UNITED STATES IN A TRANSACTION MEETING
THE REQUIREMENTS OF RULE 904 OF REGULATION S UNDER
THE SECURITIES ACT, (5) TO AN INSTITUTIONAL
"ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A)(1),
(2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES
ACT) (AN "IAI") THAT, PRIOR TO SUCH TRANSFER,
FURNISHES TO THE TRANSFER AGENT A SIGNED LETTER
CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS
RELATING TO THE TRANSFER OF THIS SECURITY (THE FORM
OF WHICH LETTER CAN BE OBTAINED FROM THE TRANSFER
AGENT) OR (6) PURSUANT TO ANY OTHER AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER
THE SECURITIES ACT (AND BASED ON AN OPINION OF
COUNSEL IF THE CORPORATION SO REQUESTS), SUBJECT IN
EACH OF THE FOREGOING CASES TO APPLICABLE SECURITIES
LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER
APPLICABLE JURISDICTIONS AND (B) THAT IT WILL, AND
EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY
PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF
THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE."
<PAGE> 49
49
IN WITNESS WHEREOF, the Corporation has caused this
certificate to be duly executed by Riley M. Murphy, its Executive Vice President
- - Legal and Regulatory Affairs, General Counsel and Secretary, this 15th day of
October, 1997.
AMERICAN COMMUNICATIONS SERVICES, INC.
By: /s/ RILEY M. MURPHY
---------------------------------------
Name: Riley M. Murphy
Title:Executive Vice President
Legal and Regulatory Affairs,
General Counsel and Secretary
<PAGE> 1
Exhibit 4.17
THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS SET FORTH
ON THE REVERSE SIDE HEREOF
CERTIFICATE NO.________ _____________ SHARES
CUSIP NO. ____________
AMERICAN COMMUNICATIONS SERVICES, INC.
Incorporated under the Laws of the State of Delaware
12-3/4% SERIES A JUNIOR REDEEMABLE PREFERRED STOCK DUE 2009
(par value $1.00 per share)
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE 12 3/4% SERIES A JUNIOR REDEEMABLE
PREFERRED STOCK DUE 2009, OF AMERICAN COMMUNICATIONS SERVICES, INC. (the
"Company") transferable on the books of the Company by the holder hereof in
person or by duly authorized attorney upon surrender of this certificate
properly endorsed.
The rights of the holder of the shares evidenced by this certificate are subject
to all of the provisions of the Certificate of Designation of the Powers,
Preferences and Relative, Participating, Optional and Other Special Rights and
Qualifications, Limitations and Restrictions, of the 12-3/4% Series A Junior
Redeemable Preferred Stock due 2009 of the Company, as filed in the office of
the Secretary of State of the State of Delaware, a copy of which is available
from the Company without notice. This Certificate is not valid unless
countersigned and registered by the Transfer Agent.
WITNESS the signatures of the duly authorized officers of the Company.
DATED: __________, 1997 Countersigned and Registered
THE BANK OF NEW YORK
Transfer Agent
_____________________ _____________________ ________________________
Name: Name:
Title: Title:
<PAGE> 2
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS
SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT
SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO (A) OFFER, SELL,
PLEDGE OR OTHERWISE TRANSFER THIS SECURITY ONLY (1) TO THE COMPANY, (2) PURSUANT
TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE
SECURITIES ACT, (3) TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED
INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 144A, (4) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS
THAT OCCUR OUTSIDE THE UNITED STATES IN A TRANSACTION MEETING THE REQUIREMENTS
OF RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, (5) TO AN INSTITUTIONAL
"ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) OF
REGULATION D UNDER THE SECURITIES ACT (AN "IAI")) THAT, PRIOR TO SUCH TRANSFER,
FURNISHES TO THE TRANSFER AGENT A SIGNED LETTER CONTAINING CERTAIN
REPRESENTATIONS AND AGREEMENTS RELATING TO THE TRANSFER OF THIS SECURITY (THE
FORM OF WHICH LETTER CAN BE OBTAINED FROM THE TRANSFER AGENT) OR (6) PURSUANT TO
ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE
SECURITIES ACT (AND BASED ON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS),
SUBJECT IN EACH OF THE FOREGOING CASES TO APPLICABLE SECURITIES LAWS OF ANY
STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THAT IT
WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF
THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE.
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR A SECURITY IN
DEFINITIVE FORM, THIS SECURITY MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE
DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO
THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY
SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR
DEPOSITARY. THE DEPOSITARY TRUST COMPANY SHALL ACT AS THE DEPOSITARY UNTIL A
SUCCESSOR SHALL BE APPOINTED BY THE COMPANY AND THE TRANSFER AGENT. UNLESS THIS
CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY TRUST
COMPANY (55 WATER STREET, NEW YORK, NEW YORK) ("DTC"), TO THE ISSUER OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS MAY BE
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR SUCH OTHER ENTITY AS MAY BE REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
<PAGE> 1
EXHIBIT 5
Riley M. Murphy
American Communications Services, Inc.
131 National Business Parkway, Suite 100
Annapolis Junction, MD 20701
November 14, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-1004
Re: AMERICAN COMMUNICATIONS SERVICES, INC. FORM S-4
Gentlemen:
The undersigned has acted as legal counsel to American Communications Services,
Inc., a Delaware corporation (the "Company"), in connection with the
Registration Statement on Form S-4 (the "Registration Statement") filed by
Comverse with the Securities and Exchange Commission on the date hereof and
relating to $170,000,000 aggregate principal amount of the Company's 13-3/4%
Senior Notes due 2007 (the "New Notes"), to be offered in exchange for an equal
principal amount of the Company's outstanding 13-3/4% Senior Notes due 2007 (the
"Old Notes"; the exchange of the Old Notes for the New Notes is hereinafter
referred to as the "Exchange Offer") pursuant to a Prospectus (the "Prospectus")
contained in the Registration Statement.
In the capacity of legal counsel to the Company, the undersigned has examined
originals or copies, certified or otherwise identified to the satisfaction of
the undersigned, of such documents, corporate records and other instruments as
the undersigned has deemed necessary for the purpose of rendering this opinion,
including (a) the Indenture dated as of July 23, 1997 (the "Indenture"), between
the Company and The Chase Manhattan Bank, as trustee (the "Trustee) and (b) the
Registration Rights Agreement dated as of July 23, 1997 between the Company and
BT Securities Corporation as representative of the Initial Purchasers named
therein (the "Registration Rights Agreement"). In the course of such
examinations, the undersigned has assumed the genuineness of all documents
submitted as originals and the conformity to originals and certified documents
of all copies submitted as conformed copies.
Based upon and subject to the foregoing, and assuming that the Registration
Statement becomes and remains effective and that applicable state securities
laws are complied with, the undersigned is of the opinion that the New Notes,
when duly executed by the Company and authenticated by the Trustee in accordance
with the terms of the Indenture and duly issued and delivered by the Company in
exchange for an equal principal amount of Old Notes pursuant to the terms of the
Registration Rights Agreement, will be duly issued and will constitute valid and
binding obligations of the Company enforceable against the Company in accordance
with their terms (subject to applicable bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer and other similar laws affecting creditors'
rights generally from time to time in effect and to general principles of
equity, including, without limitation, concepts of materiality, reasonableness,
good faith and fair dealing, regardless of whether considered in a proceeding in
equity or at law).
The undersigned hereby consents to the filing of this opinion as Exhibit 5 to
the Registration Statement and the reference to the undersigned under the
caption "Legal Matters" in the Prospectus contained therein.
Very truly yours,
/s/ Riley M. Murphy
<PAGE> 1
EXHIBIT 10.55
REGISTRATION RIGHTS AGREEMENT
Dated as of October 16, 1997
between
AMERICAN COMMUNICATIONS SERVICES, INC.
and
BEAR, STEARNS & CO. INC.
<PAGE> 2
TABLE OF CONTENTS
1. Definitions........................................................ 1
2. Securities Subject to this Agreement............................... 5
3. Registered Exchange Offer.......................................... 5
4. Shelf Registration................................................. 7
5. Liquidated Damages................................................. 9
6. Registration Procedures............................................ 11
7. Registration Expenses.............................................. 21
8. Indemnification.................................................... 22
9. Rules 144 and 144A................................................. 26
10. Miscellaneous...................................................... 26
(a) No Inconsistent Agreements................................ 26
(b) Adjustments Affecting Preferred Stock..................... 26
(c) Amendments and Waivers.................................... 26
(d) Notices................................................... 27
(e) Successors and Assigns.................................... 28
(f) Counterparts.............................................. 28
(g) Headings.................................................. 28
(h) Governing Law............................................. 28
(i) Severability.............................................. 28
(j) Securities Held by the Company............................ 29
(k) Third Party Beneficiaries................................. 29
<PAGE> 3
(l) Entire Agreement.......................................... 29
<PAGE> 4
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is made
and entered into as of October 16, 1997, by and between American Communications
Services, Inc., a Delaware corporation (the "Company"), and Bear, Stearns & Co.
Inc. (the "Initial Purchaser"), in connection with the consummation of the
transactions contemplated by the Purchase Agreement, dated October 6, 1997,
between the Company and the Initial Purchaser (the "Purchase Agreement"), which
provides for the issuance and sale by the Company to the Initial Purchaser of
150,000 shares of the Company's 12-3/4% Junior Redeemable Preferred Stock due
2009 (the "Preferred Stock"). In order to induce the Initial Purchaser to
consummate the purchase of the Preferred Stock, the Company has agreed to
provide the registration rights set forth in this Agreement for the benefit of
the Initial Purchaser and its direct and indirect transferees and assigns. The
execution and delivery of this Agreement is a condition to the Initial
Purchaser's obligation to purchase the Preferred Stock pursuant to the Purchase
Agreement.
The parties hereby agree as follows:
1. Definitions.
As used in this Agreement, the following terms shall have the
following meanings:
Act: The Securities Act of 1933, as amended.
Additional Dividends: See Section 4 hereof.
Agreement: See the introductory paragraph hereof.
Broker-Dealer: Any broker or dealer registered as
such under the Exchange Act.
Broker-Dealer Transfer Restricted Securities: Shares of New
Preferred Stock that are acquired by a Broker-Dealer in the Exchange Offer in
exchange for shares of
<PAGE> 5
2
Preferred Stock that such Broker-Dealer acquired for its own account as a result
of market making activities or other trading activities (other than shares of
Preferred Stock acquired directly from the Company or any of its affiliates).
Business Day: Any day except a Saturday, Sunday or other day
in the City of New York on which banks are authorized to close.
Certificate of Designation: The Certificate of Designation
governing the Preferred Stock, as filed with the Secretary of State of the State
of Delaware, as amended from time to time.
Closing Date: The Closing Date as defined in the Purchase
Agreement.
Commission: The Securities and Exchange Commission.
Company: See the introductory paragraph hereof.
Consummated and Consummation: A Registered Exchange Offer
shall be deemed "Consummated" for purposes of this Agreement upon the occurrence
of (i) the effectiveness under the Act of the Exchange Offer Registration
Statement relating to the New Preferred Stock to be issued in the Exchange
Offer, (ii) the maintenance of such Registration Statement continuously
effective and the keeping of the Exchange Offer open for a period not less than
the minimum period required pursuant to Section 3(b), and (iii) the delivery by
the Company to the Transfer Agent of shares of New Preferred Stock having the
same aggregate Liquidation Preference as the aggregate Liquidation Preference of
the shares of Preferred Stock that were tendered by Holders thereof pursuant to
the Exchange Offer.
Exchange Act: The Securities Exchange Act of 1934, as amended,
and the rules and regulations of the SEC promulgated thereunder.
<PAGE> 6
3
Exchange Offer: The registration by the Company under the Act
of shares of New Preferred Stock pursuant to a Registration Statement under
cover of which the Company offers the Holders of all outstanding Transfer
Restricted Securities the opportunity to exchange all such outstanding Transfer
Restricted Securities held by such Holders for shares of New Preferred Stock
having an aggregate Liquidation Preference equal to the aggregate Liquidation
Preference of the Transfer Restricted Securities tendered in such exchange offer
by such Holder.
Exchange Offer Registration Statement: The Registration
Statement relating to the Exchange Offer, including the related Prospectus.
Exempt Resales: The transactions in which the Initial
Purchaser proposes to sell the Preferred Stock (i) to "qualified institutional
buyers" as such term is defined in Rule 144A under the Act, and (ii) to persons
that are not "U.S. persons" in offshore transactions meeting the requirements of
Regulation S under the Act.
Holder: Any holder of Preferred Stock, Transfer Restricted
Securities or New Preferred Stock, as the case may be.
Indemnified Person: See Section 8(c) hereof.
Indemnifying Person: See Section 8(c) hereof.
Initial Purchaser: See the introductory paragraph hereof.
Issue Date: The date on which the Preferred Stock was issued
and sold to the Initial Purchaser pursuant to the Purchase Agreement.
NASD: The National Association of Securities Dealers, Inc.
New Preferred Stock: The Company's 12-3/4% Junior Redeemable
Preferred Stock due 2009 to be issued pursuant to
<PAGE> 7
4
the Certificate of Designation (i) in the Exchange Offer or (ii) upon the
request of any Holder of Preferred Stock covered by a Shelf Registration
Statement in exchange for such Preferred Stock.
Participant: See Section 8(a) hereof.
Person: An individual, partnership, corporation, limited
liability company, unincorporated association, trust or joint venture, or a
governmental agency or political subdivision thereof.
Preferred Stock: See the introductory paragraph hereof.
Prospectus: The prospectus included in any Registration
Statement at the time such Registration Statement becomes effective, as the same
may be amended or supplemented by any prospectus supplement or by any other
amendment thereto, including post-effective amendments, and all material
incorporated by reference or deemed to be incorporated by reference in such
Prospectus.
Purchase Agreement: See the introductory paragraph hereof.
Registrable Preferred Stock: Shares of Preferred Stock
constituting Transfer Restricted Securities.
Registration Default: See Section 5 hereof.
Registration Statement: Any registration statement of the
Company filed with the SEC pursuant to the provisions of this Agreement,
including the Prospectus, amendments and supplements to such registration
statement, including post-effective amendments, all exhibits, and all material
incorporated by reference or deemed to be incorporated by reference in such
registration statement.
Restricted Broker-Dealer: Any Broker-Dealer holding
Broker-Dealer Transfer Restricted Securities.
<PAGE> 8
5
Rule 144: Rule 144 promulgated under the Act, as such Rule may
be amended from time to time, or any similar rule (other than Rule 144A) or
regulation hereafter adopted by the Commission providing for offers and sales of
securities made in compliance therewith resulting in offers and sales by
subsequent holders that are not affiliates of an issuer of such securities being
free of the registration and prospectus delivery requirements of the Securities
Act.
Rule 144A: Rule 144A promulgated under the Securities Act, as
such Rule may be amended from time to time, or any similar rule (other than Rule
144) or regulation hereafter adopted by the Commission.
Rule 415: Rule 415 promulgated under the Securities Act, as
such Rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the Commission.
Shelf Registration: See Section 4 hereof.
Subsequent Shelf Registration: See Section 4(a) hereof.
Transfer Agent: The Transfer Agent for the Preferred Stock or
the New Exchange Preferred Stock, as the context may require.
Transfer Restricted Securities: Each share of Preferred Stock
until the earliest to occur of (i) the date on which such share of Preferred
Stock has been exchanged by a person other than a Broker-Dealer for New
Preferred Stock in Exchange Offer, (ii) following the exchange by a
Broker-Dealer in the Exchange Offer of Preferred Stock for New Preferred Stock,
the date on which such New Preferred Stock is sold to a purchaser who receives
from such Broker-Dealer on or prior to the date of such sale a copy of the
Prospectus contained in the Exchange Offer Registration Statement, (iii) the
date on which such share of Preferred Stock has been effectively registered
under the Act and disposed of in accordance with the Shelf Registration
Statement or (iv) the date on which such share of Preferred
<PAGE> 9
6
Stock is distributed to the public pursuant to Rule 144 or may be distributed to
the public pursuant to paragraph (k) of Rule 144.
Underwritten registration or underwritten offering: A
registration in which securities of the Company are sold to an underwriter for
reoffering to the public.
2. Securities Subject to this Agreement. The securities entitled
to the benefits of this Agreement are the Transfer Restricted Securities. A
Person is deemed to be a Holder of Transfer Restricted Securities whenever such
Person owns Transfer Restricted Securities.
3. Registered Exchange Offer. (a) Unless the Exchange Offer shall
not be permissible under applicable law or Commission policy, the Company shall
(i) cause to be filed with the Commission as soon as practicable after the
Closing Date, but in no event later than 45 days after the Closing Date, the
Exchange Offer Registration Statement, (ii) use its best efforts to cause such
Exchange Offer Registration Statement to become effective at the earliest
possible time, but in no event later than 120 days after the Closing Date, (iii)
in connection with the foregoing, file (A) all pre-effective amendments to such
Exchange Offer Registration Statement as may be necessary in order to cause such
Exchange Offer Registration Statement to become effective, (B) if applicable, a
post-effective amendment to such Exchange Offer Registration Statement pursuant
to Rule 430A under the Act and (C) cause all necessary filings in connection
with the registration and qualification of the New Preferred Stock to be made
under the Blue Sky laws of such jurisdictions as are necessary to permit
Consummation of the Exchange Offer, and (iv) upon the effectiveness of such
Exchange Offer Registration Statement, commence the Exchange Offer. The Exchange
Offer Registration Statement shall be on the appropriate form permitting
registration of the New Preferred Stock to be offered in exchange for the
Transfer Restricted Securities and to permit resales of Broker-Dealer Transfer
Restricted Securities held by Restricted Broker-Dealers as contemplated by
Section 3(c) below.
<PAGE> 10
7
(b) The Company shall cause the Exchange Offer Registration Statement
to be effective continuously and shall keep the Exchange Offer open for a period
of not less than the minimum period required under applicable federal and state
securities laws to Consummate the Exchange Offer; provided, however, that in no
event shall such period be less than 20 Business Days. The Company shall cause
the Exchange Offer to comply with all applicable federal and state securities
laws. No securities other than the New Preferred Stock shall be included in the
Exchange Offer Registration Statement. The Company shall use its best efforts to
cause the Exchange Offer to be Consummated on the earliest practicable date
after the Exchange Offer Registration Statement has become effective but in no
event later than 30 Business Days thereafter.
(c) The Company shall include a "Plan of Distribution" section in the
Prospectus contained in the Exchange Offer Registration Statement and shall
indicate therein that any Broker-Dealer that holds shares of Preferred Stock
that are Transfer Restricted Securities and that were acquired by such
Broker-Dealer for its own account as a result of market-making activities or
other trading activities (other than shares of Preferred Stock acquired directly
from the Company) may exchange such shares of Preferred Stock pursuant to the
Exchange Offer; however, such Broker-Dealer may be deemed to be an "underwriter"
within the meaning of the Act and must, therefore, deliver a prospectus meeting
the requirements of the Act in connection with any resales of shares of New
Preferred Stock received by such Broker-Dealer in the Exchange Offer, which
prospectus delivery requirement may be satisfied by the delivery by such
Broker-Dealer of the Prospectus contained in the Exchange Offer Registration
Statement. Such "Plan of Distribution" section also shall contain all other
material information with respect to such resales by Broker-Dealers that the
Commission may require in order to permit such resales pursuant thereto, but
such "Plan of Distribution" shall not name any such Broker-Dealer or disclose
the amount of Preferred Stock or New Preferred Stock held by any such
Broker-Dealer except to the extent required by the
<PAGE> 11
8
Commission as a result of a change in policy after the date of this Agreement.
(d) The Company shall use its commercially reasonable efforts to keep
the Exchange Offer Registration Statement continuously effective, supplemented
and amended as required by the provisions of Section 6(c) below to the extent
necessary to ensure that it is available for resales of Broker-Dealer Transfer
Restricted Securities by Restricted Broker-Dealers, and to ensure that it
conforms with the requirements of this Agreement, the Act and the policies,
rules and regulations of the Commission as announced from time to time, for a
period of expiring upon the earlier of (i) 180 days following the date that the
Exchange Offer is Consummated (exclusive of any days during which the Company
has advised the Restricted Broker-Dealers that the Prospectus contained in the
Exchange Offer Registration Statement may not be used in connection with offers
and sales of the securities covered thereby or (ii) the date that all Restricted
Broker-Dealers that acquired Broker-Dealer Transfer Restricted Securities in the
Exchange Offer have sold or otherwise disposed of the same.
(e) The Company shall provide sufficient copies of the latest version
of such Prospectus to Restricted Broker-Dealers holding Broker-Dealer Transfer
Restricted Securities promptly upon request at any time during such one-year
period in order to facilitate such resales.
4. Shelf Registration. (a) If (i) the Company is not required to file
an Exchange Offer Registration Statement or to Consummate the Exchange Offer
because the Exchange Offer is not permitted by applicable law or Commission
policy, or (ii) any Holder of Transfer Restricted Securities shall notify the
Company prior to the 20th day following the Consummation of the Exchange Offer
(A) that such Holder is prohibited by applicable law or Commission policy from
participating in the Exchange Offer, or (B) that such Holder may not resell the
New Preferred Stock acquired by it in the Exchange Offer to the public without
delivering a prospectus and that the Prospectus contained in the Exchange Offer
Registration Statement is not appropriate or available for
<PAGE> 12
9
such resales by such Holder (each of the events described in Section 4(a)(i) and
(ii) being a "Shelf Registration Event"), then the Company shall use its
commercially reasonable efforts to:
(x) cause to be filed on or prior to (1) in the case of a
Registration Statement filed pursuant to clause (i) above, 30 days
after the date on which the Company determines that it is not required
to file the Exchange Offer Registration Statement and (2) in the case
of a Registration Statement filed pursuant to clause (ii) above, 30
days after the date on which the Company receives the notice specified
in clause (ii) above (and in any event, within 90 days after the
Closing Date), a Registration Statement on an appropriate form under
the Act (which may be an amendment to the Exchange Offer Registration
Statement), which Registration Statement shall indicate that it is
being filed pursuant to Rule 415 under the Act and shall cover all
Transfer Restricted Securities the Holders of which shall have provided
the information required pursuant to Section 4(b) hereof (such
Registration Statement being hereafter referred to as a "Shelf
Registration Statement"); and
(y) use its commercially reasonable efforts to cause such
Shelf Registration Statement to become effective on or prior to (1) in
the case of a Shelf Registration Statement filed pursuant to clause (i)
above, 120 days after the date on which the Company becomes obligated
to file such Shelf Registration Statement and (2) in the case of a
Shelf Registration Statement filed pursuant to clause (ii) above, 150
days after the date on which the Company receives the notice specified
in clause (ii) above.
Subject to the provisions of Section 4(c) below, the Company shall use its
commercially reasonable efforts to keep such Shelf Registration Statement
continuously effective, supplemented and amended as required by the provisions
of Section 6 hereof to the extent necessary to ensure that it is available for
resales of Notes by the Holders of Transfer
<PAGE> 13
10
Restricted Securities entitled to the benefit of this Section 4(a), and to
ensure that it conforms with the requirements of this Agreement, the Act and the
policies, rules and regulations of the Commission as announced from time to
time, for a period expiring on the earlier of (i) two years following the
Closing Date or (ii) the date that all Holders of Transfer Restricted Securities
have sold such securities pursuant thereto.
(b) No Holder of Transfer Restricted Securities may include any of its
Transfer Restricted Securities in any Shelf Registration Statement pursuant to
this Agreement unless and until such Holder furnishes to the Company in writing,
within 20 Business Days after receipt of a request therefor, such information as
the Company may reasonably request for use in connection with any Shelf
Registration Statement or Prospectus or preliminary prospectus included therein.
No Holder of Transfer Restricted Securities shall be entitled to Additional
Dividends pursuant to Section 5 unless and until such Holder shall have used its
best efforts to provide all such reasonably requested information. Each Holder
as to which any Shelf Registration Statement is being effected agrees to furnish
promptly to the Company all information required to be disclosed in order to
make the information previously furnished to the Company by such Holder not
materially misleading.
(c) The Company's obligation to keep the Shelf Registration Statement
effective and usable for offers and sales of the Preferred Stock may be
suspended by the Company in good faith for valid business reasons, including,
without limitation, a pending acquisition or divestiture of assets. Any such
period during which the Company fails to keep the Shelf Registration Statement
effective and usable for offers and sales of Transfer Restricted Securities is
referred to as a "Suspension Period." A Suspension Period shall commence on and
include the date that the Company gives notice that the Shelf Registration
Statement is no longer effective or that Prospectus included therein is no
longer usable for offers and sales of Transfer Restricted Securities and shall
end on the date when each Holder of Transfer Restricted Securities covered by
such Shelf
<PAGE> 14
11
Registration Statement either receives the copies of a supplemented or amended
Prospectus or is advised in writing by the Company that use of the Prospectus
may be resumed. During the pendency of any Suspension Period, the Company may
not issue any securities, whether or not in a public offering, except for
issuances of Common Stock pursuant to an acquisition or other business
combination transaction or upon exercise of options or warrants outstanding
prior to such Suspension Period.
5. Liquidated Damages. The Company and the Initial Purchaser agree that
the Holders of the Preferred Stock will suffer damages if the Company fails for
any reason to fulfill its obligations under Sections 3 and 4 hereof and that it
would not be feasible to ascertain the amount of such damages with provision.
Accordingly, if (i) any of the Registration Statements required by this
Agreement is not filed with the Commission on or prior to the date specified for
such filing in this Agreement, (ii) any of such Registration Statements have not
been declared effective by the Commission on or prior to the date specified for
such effectiveness in this Agreement (the "Effectiveness Target Date"), (iii)
the Exchange Offer has not been Consummated within 30 business days after the
Effectiveness Target Date with respect to the Exchange Offer Registration
Statement or (iv) any Registration Statement required by this Agreement is filed
and declared effective but shall thereafter cease to be effective or fail to be
usable for its intended purpose without being succeeded immediately by a
post-effective amendment to such Registration Statement that causes such failure
and that is itself immediately declared effective (each such event referred to
in clauses (i) through (iv), a "Registration Default"), the Company hereby
agrees to pay, as liquidated damages, additional dividends on the Preferred
Stock ("Additional Dividends") to each Holder of Transfer Restricted Securities
affected by such Registration Default on each Dividend Payment Date occurring
from and after the date of each Registration Default until the Dividend Payment
Date next succeeding the date on which such Registration Default shall have been
cured. Such Additional Dividends shall accrue from and including the date on
which such Registration Default shall occur to but
<PAGE> 15
12
excluding the date on which such Registration Default (and all other then
existing Registration Defaults, if any) shall have been cured, at a rate per
annum of 0.25% for each 90-day period that such Registration Default continues;
provided, that such rate shall in no event exceed 1.0% per annum. Additional
Dividends shall be paid, either in cash or, at the Company's option, by the
issuance of additional shares of Preferred Stock. Following the cure of all
Registration Defaults relating to any particular Transfer Restricted Securities,
the accrual of Additional Dividends with respect to such Transfer Restricted
Securities will cease.
All obligations of the Company set forth in the preceding paragraph
that are outstanding with respect to any Transfer Restricted Security at the
time such security ceases to be a Transfer Restricted Security shall survive
until such time as all such obligations with respect to such Transfer Restricted
Security shall have been satisfied in full.
6. Registration Procedures.
(a) Exchange Offer Registration Statement. In connection with the
Exchange Offer, the Company shall comply with all of the provisions of Section
6(b) below to the extent appropriately applicable to the Exchange Offer
Registration Statement, shall use its best efforts to effect the Exchange Offer
and to permit the sale of Broker-Dealer Transfer Restricted Securities being
sold in accordance with the intended method or methods of distribution thereof,
and shall comply with the following provisions:
(i) As a condition to its participation in the Exchange Offer
pursuant to the terms of this Agreement, each Holder of Transfer
Restricted Securities shall furnish, upon the request of the Company,
prior to the Consummation thereof, a written representation to the
Company (which may be contained in the letter of transmittal
contemplated by the Exchange Offer Registration Statement) to the
effect that (A) it is not an affiliate of the Company, (B) it is not
engaged
<PAGE> 16
13
in, and does not intend to engage in, and has no arrangement or
understanding with any person to participate in, a distribution of the
New Preferred Stock to be issued in the Exchange Offer and (C) it is
acquiring the New Preferred Stock in its ordinary course of business.
Each Holder will be required to acknowledge and agree (as shall be set
forth in the letter of transmittal contemplated by the Exchange Offer
Registration Statement) that, if it is a Broker-Dealer or if such
Holder intends to use the Exchange Offer to participate in a
distribution of the securities to be acquired in the Exchange Offer,
it: (1) could not under Commission policy as in effect on the date of
this Agreement rely on the position of the Commission enunciated in
Morgan Stanley and Co., Inc. (available June 5, 1991) and Exxon Capital
Holdings Corporation (available May 13, 1988), as interpreted in the
Commission's letter to Shearman & Sterling dated July 2, 1993, and
similar no-action letters (including any no-action letter obtained
pursuant to clause (i) above), and (2) must comply with the
registration and prospectus delivery requirements of the Act in
connection with a secondary resale transaction and that such a
secondary resale transaction should be covered by an effective
registration statement containing the selling security holder
information required by Item 507 or 508, as applicable, of Regulation
S-K, if the resales are of shares of New Preferred Stock obtained by
such Holder in exchange for shares of Preferred Stock acquired by such
Holder directly from the Company.
(ii) Prior to effectiveness of the Exchange Offer
Registration Statement, the Company shall provide a supplemental letter
to the Commission (A) stating that the Company and the Guarantors are
registering the Exchange Offer in reliance on the position of the
Commission enunciated in Exxon Capital Holdings Corporation (available
May 13, 1988), Morgan Stanley and Co., Inc. (available June 5, 1991)
and, if applicable, any no-action letter obtained pursuant to clause
(i) above and (B) including a representation
<PAGE> 17
14
that the Company and the Guarantors have not entered into any
arrangement or understanding with any Person to distribute the New
Preferred Stock to be received in the Exchange Offer and that, to the
best of the Company's information and belief, each Holder participating
in the Exchange Offer is acquiring the New Preferred Stock in its
ordinary course of business and has no arrangement or understanding
with any Person to participate in the distribution of the New Preferred
Stock received in the Exchange Offer.
(b) General Provisions. In connection with any Registration
Statement and any Prospectus required by this Agreement to permit the sale or
resale of Transfer Restricted Securities (including, without limitation, any
Registration Statement and the related Prospectus required to permit resales of
Broker Dealer Transfer Restricted Securities by Broker-Dealers) the Company
agrees as follows:
(i) To use its commercially reasonable efforts to keep
such Registration Statement continuously effective (subject to the
provisions of Section 4(c) hereof) and provide all requisite financial
statements for the period specified in Section 3 or 4, as applicable;
upon the occurrence of any event that would cause any such Registration
Statement or the Prospectus contained therein (A) to contain a material
misstatement or omission or (B) not to be effective and usable for
resale of Transfer Restricted Securities during the period required by
this Agreement, to file promptly an appropriate amendment to such
Registration Statement, in the case of clause (A), correcting any such
misstatement or omission, and, in the case of either clause (A) or (B),
use its commercially reasonable efforts to cause such amendment to be
declared effective and such Registration Statement and the related
Prospectus to become usable for their intended purpose(s) as soon as
practicable thereafter.
(ii) To prepare and file with the Commission such
amendments and post-effective amendments to the Registration Statement
as may be necessary to keep the
<PAGE> 18
15
Registration Statement effective for the applicable period set forth in
Section 3 or 4, as applicable, or such shorter period as will terminate
when all Transfer Restricted Securities covered by such Registration
Statement have been sold; cause the Prospectus to be supplemented by
any required Prospectus supplement, and as so supplemented to be filed
pursuant to Rule 424 under the Act, and to comply fully with the
applicable provisions of Rules 424 and 430A under the Act in a timely
manner; and comply with the provisions of the Act with respect to the
disposition of all securities covered by such Registration Statement
during the applicable period in accordance with the intended method or
methods of distribution by the sellers thereof set forth in such
Registration Statement or supplement to the Prospectus.
(iii) To advise the underwriter(s), if any, of the
securities covered by such Registration Statement and the selling
Holders promptly and, if requested by any of such Persons, to confirm
such advice in writing, (A) when the Prospectus or any Prospectus
supplement or post-effective amendment has been filed, and, with
respect to any Registration Statement or any post-effective amendment
thereto, when the same has become effective, (B) of any request by the
Commission for amendments to the Registration Statement or amendments
or supplements to the Prospectus or for additional information relating
thereto, (C) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement under the
Act or of the suspension by any state securities commission of the
qualification of the Transfer Restricted Securities for offering or
sale in any jurisdiction, or the initiation of any proceeding for any
of the preceding purposes, (D) of the existence of any fact or the
happening of any event that makes any statement of a material fact made
in the Registration Statement, the Prospectus, any amendment or
supplement thereto, or any document incorporated by reference therein
untrue, or that requires the making of any additions to or changes in
the Registration Statement
<PAGE> 19
16
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, or any
state securities commission or other regulatory authority shall issue
an order suspending the qualification or exemption from qualification
of the Transfer Restricted Securities under state securities or Blue
Sky laws, to use its commercially reasonable efforts to obtain the
withdrawal or lifting of such order at the earliest possible time.
(iv) To furnish to each of the selling Holders and each of
the underwriter(s), if any, of securities to be sold by such Holders,
before filing with the Commission, copies of the Shelf Registration
Statement or any Prospectus included therein or any amendments or
supplements to such Shelf Registration Statement or Prospectus
(including, if requested in writing, all documents, if any,
incorporated by reference after the initial filing of such Shelf
Registration Statement), which documents will be subject to the review
of such Holders and underwriter(s), if any, for a period of at least
five business days, and not to file any such Shelf Registration
Statement or Prospectus or any amendment or supplement to such Shelf
Registration Statement or Prospectus (including all such documents
incorporated by reference) to which a selling Holder of Transfer
Restricted Securities covered by such Shelf Registration Statement or
the underwriter(s), if any, shall reasonably object within three
business days after the receipt thereof. A selling Holder or
underwriter, if any, shall be deemed to have reasonably objected to
such filing if such Shelf Registration Statement, amendment, Prospectus
or supplement, as applicable, as proposed to be filed, contains a
material misstatement or omission or fails in any material respect to
comply with the applicable requirements of the Act.
(v) To make available at reasonable times for inspection
by the selling Holders, any underwriter
<PAGE> 20
17
participating in any disposition pursuant to such Registration
Statement, and any attorney or accountant retained by such selling
Holders or any of the underwriter(s) (collectively, the "Inspectors"),
all financial and other records, pertinent corporate documents and
properties of the Company (collectively, the "Records") and cause the
officers, directors and employees of the Company to supply all
information reasonably requested by any such Holder, underwriter,
attorney or accountant in connection with such Shelf Registration
Statement subsequent to the filing thereof and prior to its
effectiveness. Records that the Company determines, in good faith, to
be confidential shall not be disclosed by the Inspectors unless upon
five business days' prior written notice and (i) the disclosure of such
Records is necessary to avoid or correct a misstatement or omission in
such Registration Statement, (ii) the release of such Records is
ordered pursuant to a subpoena or other order from a court of competent
jurisdiction, (iii) disclosure of such information is, in the
reasonable opinion of counsel for any Inspector, necessary or advisable
in connection with any action, claim, suit or proceeding, directly or
indirectly, involving or potentially involving such Inspector and
arising out of, based upon, relating to, or involving this Agreement or
any transactions contemplated hereby or arising hereunder or (iv) the
information in such Records has been made generally available to the
public (other than as a result of an impermissible disclosure or
failure to safeguard by the Inspectors). Each selling Holder of such
Transfer Restricted Securities will be required to agree that
information obtained by it as a result of such inspections shall be
deemed confidential and shall not be used by it as the basis for any
market transactions in the securities of the Company unless and until
such information is generally available to the public (other than as a
result of an impermissible disclosure or failure to safeguard by such
person). Each selling Holder of such Transfer Restricted Securities
will be required to further agree that it will, upon learning that
disclosure of such Records is sought in a court of
<PAGE> 21
18
competent jurisdiction, give notice to the Company and allow the
Company to undertake appropriate action to prevent disclosure of the
Records deemed confidential at the Company's sole expense.
(vi) If requested by any selling Holders or the
underwriter(s), if any, of the securities to be sold by such Holders,
to promptly incorporate in any Shelf Registration Statement or
Prospectus, pursuant to a supplement or post-effective amendment if
necessary, such information as such selling Holders and underwriter(s),
if any, may reasonable request to have included therein, including,
without limitation, information relating to the "Plan of Distribution"
of the Transfer Restricted Securities, information with respect to the
amount of Transfer Restricted Securities being sold to such
underwriter(s), the purchase price being paid therefor and any other
terms of the offering of the Transfer Restricted Securities to be sold
in such offering; and make all required filings of such Prospectus
supplement or post-effective amendment as soon as practicable after the
Company is notified of the matters to be incorporated in such
Prospectus supplement or post-effective amendment.
(vii) To furnish to each selling Holder and each of the
underwriter(s), if any, of securities to be sold by such Holders,
without charge, at least one copy of the Shelf Registration Statement,
as first filed with the Commission, and of each amendment thereto,
including all documents incorporated by reference therein and, if
requested in writing, all exhibits (including exhibits incorporated
therein by reference).
(viii) To deliver to each selling Holder and each of the
underwriter(s), if any, of securities to be sold by such Holders,
without charge, as many copies of the Prospectus (including each
preliminary prospectus) and any amendment or supplement thereto as such
Persons reasonably may request. The Company hereby consents to the use
of the Prospectus and any amendment or supplement thereto by each of
the selling Holders and
<PAGE> 22
19
each of the underwriter(s), if any, in connection with the offering and
the sale of the Transfer Restricted Securities covered by the
Prospectus or any amendment or supplement thereto.
(ix) In connection with any Underwritten Registration, to
enter into such agreements (including an underwriting agreement (in
such form as is customary in underwritten offerings for the account of
selling securityholders of securities similar to the Preferred Stock)
with the underwriters of securities to be sold by the Holders), and
make such representations and warranties as are customarily made by
issuers to underwriters of securities similar to the Preferred Stock,
and take all such other actions in connection therewith in order to
expedite or facilitate the disposition of the Transfer Restricted
Securities pursuant to any Registration Statement contemplated by this
Agreement, all to such extent as reasonably may be requested by the
Initial Purchaser or by any Holder of Transfer Restricted Securities or
any such underwriter in connection with any sale or resale pursuant to
any Registration Statement contemplated by this Agreement; and --
(A) to furnish to the Initial Purchaser, each
selling Holder and each such underwriter, in such substance
and scope as they reasonably may request and as are
customarily furnished by issuers to underwriters in primary
underwritten offerings, upon the closing of the Underwritten
Registration:
(1) a certificate, dated the date of
closing of the Underwritten Registration, signed by
(x) the Executive Chairman of the Board of Directors
or the President of the Company and (y) Chief
Financial Officer of the Company, confirming, as of
the date thereof, the matters set forth in paragraph
(g) of Section 7 of the Purchase Agreement
<PAGE> 23
20
and such other matters as such parties may reasonably
request;
(2) opinions, dated the date of closing of
the Underwritten Registration, of counsel for the
Company covering the matters set forth in Exhibits
A-1(a), A-2 and A-3(a) of the Purchase Agreement and
such other matters as such parties may reasonably
request, together with letters from such counsel
substantially to the effect of Exhibits A-1(b) and
A-3(b); and
(3) a comfort letter, dated the date of
closing of the Underwritten Registration, from the
Company's independent accountants, in the customary
form and covering matters of the type customarily
covered in comfort letters furnished to underwriters
in connection with primary underwritten offerings,
and affirming the matters set forth in the comfort
letters delivered pursuant to Section 7(c) of the
Purchase Agreement, without exception;
(B) to set forth in full or incorporate by
reference in the underwriting agreement, if any, between the
Company and underwriters of any Transfer Restricted Securities
within the coverage of the Registration Statement the
indemnification and contribution provisions and procedures set
forth in Section 8 hereof; and
(C) to deliver such other documents and
certificates as may be reasonably requested by such parties to
evidence compliance with clause (A) above and with any
customary conditions contained in the underwriting agreement
or other agreement entered into by the Company pursuant to
this clause (xi), if any.
<PAGE> 24
21
If at any time when a prospectus is required by the Act to be
delivered in connection with resales of Transfer Restricted Securities
the representations and warranties of the Company contemplated in
clause (A)(1) above cease to be true and correct, the Company shall so
advise the Initial Purchaser and the underwriter(s), if any, and each
selling Holder promptly and, if requested by any such Person, shall
confirm such advice in writing.
(x) Prior to any public offering of Transfer Restricted
Securities, to cooperate with the selling Holders, the underwriter(s),
if any, and their respective counsel in connection with the
registration and qualification of the Transfer Restricted Securities
under the securities or Blue Sky laws of such jurisdictions as the
selling Holders or underwriter(s) reasonably may request and do any and
all other reasonable acts or things necessary or advisable to enable
the disposition in such jurisdictions of the Transfer Restricted
Securities covered by the Shelf Registration Statement; provided,
however, that the Company shall not be required to register or qualify
as a foreign corporation where they are not now so qualified or to take
any action that would subject it to service of process in suits or to
taxation in any jurisdiction where it is not now so subject.
(xi) To cooperate with the selling Holders and the
underwriter(s), if any, to facilitate the timely preparation and
delivery of certificates representing Transfer Restricted Securities to
be sold and not bearing any restrictive legends; and to enable such
Transfer Restricted Securities to be in such denominations and
registered in such names as the Holders or underwriter(s), if any,
reasonably may request at least two business days prior to any sale of
Transfer Restricted Securities made by such underwriter(s).
(xii) To use its commercially reasonable efforts to cause
the Transfer Restricted Securities covered by the
<PAGE> 25
22
Registration Statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable the
seller or sellers thereof or the underwriter(s), if any, to consummate
the disposition of such Transfer Restricted Securities, subject to the
proviso contained in clause (x) above, except insofar as the same may
be required solely as a consequence of the nature of the seller's
business.
(xiii) If any fact or event contemplated by clause
(b)(iii)(D) above shall exist or have occurred, to prepare a supplement
or post-effective amendment to the Registration Statement or related
Prospectus or any document incorporated therein by reference or file
any other required document so that, as thereafter delivered to the
purchasers of Transfer Restricted Securities, the Prospectus will not
contain an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein not misleading.
(xiv) To provide a CUSIP number for all Transfer Restricted
Securities not later than the effective date of the Registration
Statement and provide Transfer Agent with printed certificates for the
Transfer Restricted Securities that are in a form eligible for deposit
with The Depository Trust Company.
(xv) To cooperate and assist in any filings required to be
made with the NASD and in the performance of any due diligence
investigation by any underwriter (including any "qualified independent
underwriter") that is required in accordance with the rules and
regulations of the NASD, and to use their reasonable best efforts to
cause such Registration Statement to become effective and approved by
such governmental agencies or authorities as may be necessary to enable
the Holders selling Transfer Restricted Securities to consummate the
disposition of such Transfer Restricted Securities.
<PAGE> 26
23
(xvi) To otherwise use its reasonable commercial efforts to
comply with all applicable rules and regulations of the Commission, and
make generally available to its security holders, as soon as
practicable, a consolidated earnings statement meeting the requirements
of Rule 158 under the Act (which need not be audited) for the
twelve-month period (A) commencing at the end of any fiscal quarter in
which Transfer Restricted Securities are sold to underwriters in a firm
or best efforts Underwritten Offering or (B) if not sold to
underwriters in such an offering, beginning with the first month of the
Company's first fiscal quarter commencing after the effective date of
the Registration Statement.
(xvii) To cause all Preferred Stock covered by the
Registration Statement to be listed on each securities exchange (which
term shall be deemed to include the NASDAQ National Market) on which
any other series of preferred stock issued by the Company is then
listed if so requested by the Holders of a majority in aggregate
Liquidation Preference of the Preferred Stock or the managing
underwriter(s), if any.
(xviii) To provide promptly to each Holder upon request each
document filed with the Commission pursuant to the requirements of
Section 13 and Section 15 of the Exchange Act.
(c) Restrictions on Holders. Each Holder, by acquisition of a
Transfer Restricted Security agrees that, upon receipt of any notice from the
Company of the existence of any fact of the kind described in Section
6(b)(iii)(D) hereof, such Holder will forthwith discontinue disposition of
Transfer Restricted Securities pursuant to the applicable Registration Statement
until such Holder's receipt of the copies of the supplemented or amended
Prospectus contemplated by Section 6(b)(xvi) hereof, or until it is advised in
writing (the "Advice") by the Company that the use of the Prospectus may be
resumed, and has received copies of any additional or supplemental filings that
are incorporated by reference in the Prospectus. If so desired
<PAGE> 27
24
by the Company, each Holder will deliver to the Company (at the Company's
expense) all copies, other than permanent file copies then in such Holder's
possession, of the Prospectus covering such Transfer Restricted Securities that
was current at the time of receipt of such notice. In the event the Company
shall give any such notice, the time period regarding the effectiveness of such
Registration Statement set forth in Section 3 or 4, as applicable, shall be
extended by the number of days during the period from the date when each selling
Holder covered by such Registration Statement shall have received the copies of
the supplemented or amended Prospectus contemplated by Section (6)(b)(xvi)
hereof or shall have received the Advice.
7. Registration Expenses. (a) All expenses incident to the performance
by the Company of or compliance by the Company with this Agreement will be borne
by the Company, regardless of whether a Registration Statement becomes
effective, including without limitation: (i) all registration and filing fees
and expenses (including filing made by the Initial Purchaser or any Holder with
the NASD (and, if applicable, the fees and expenses of any "qualified
independent underwriter" and its counsel that may be required by the rules and
regulations of the NASD)); (ii) all fees and expenses of compliance with federal
securities and state Blue Sky or securities law; (iii) all expenses of printing
(including printing certificates for the New Preferred Stock to be issued in the
Exchange Offer and printing of Prospectuses), messenger and delivery services
and telephone; (iv) all fees and disbursements of counsel for the Company and,
subject to Section 7(b) below, the Holders of Transfer Restricted Securities,
(v) all application and filing fees in connection with listing the New Preferred
Stock on any national securities exchange or automated quotation system if
required hereunder; and (vi) all fees and disbursements of the Company's
independent public accountants (including the expenses of any special audit and
comfort letters required by or incident to such performance). The Company will,
in any event, bear its internal expenses (including, without limitation, all
salaries and expenses of its officers and employees performing legal or
accounting duties), the expenses of any
<PAGE> 28
25
annual audit and the fees and expenses of any Person, including special experts,
retained by the Company.
(b) In connection with any Registration Statement required by this
Agreement (including, without limitation, the Exchange Offer Registration
Statement and the Shelf Registration Statement), the Company will reimburse the
Initial Purchasers and the Holders of Transfer Restricted Securities being
tendered in the Exchange Offer and/or resold pursuant to the "Plan of
Distribution" contained in the Exchange Offer Registration Statement or
registered pursuant to the Shelf Registration Statement, as applicable, for the
reasonable fees and disbursements (not to exceed $30,000 in the aggregate) of
not more than one counsel, which shall be Weil, Gotshal & Manges LLP or such
other counsel as may be chosen by the Holders of a majority in principal amount
of the Transfer Restricted Securities for whose benefit such Registration
Statement is being prepared.
8. Indemnification. (a) The Company agrees to indemnify and hold
harmless each Holder of Transfer Restricted Securities, the officers and
directors of each such Person, and each Person, if any, who controls any such
Person within the meaning of either Section 15 of the Act or Section 20 of the
Exchange Act (each, a "Participant"), from and against any and all losses,
claims, damages and liabilities (including, without limitation, the reasonable
legal fees and other expenses actually incurred in connection with any suit,
action or proceeding or any claim asserted) caused by, arising out of
or based upon any untrue statement or alleged untrue statement of a material
fact contained in any Registration Statement (or any amendment thereto) or
Prospectus (as amended or supplemented if the Company shall have furnished any
amendments or supplements thereto) or any preliminary prospectus, or caused by,
arising out of or based upon any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, except insofar as such losses, claims, damages or liabilities are
caused by any untrue statement or omission or alleged untrue statement or
<PAGE> 29
26
omission made in reliance upon and in conformity with information relating to
any Participant furnished to the Company in writing by such Participant
expressly for use therein; provided, however, that the Company will not be
required to indemnify a Participant if such untrue statement or omission or
alleged untrue statement or omission was contained or made in any preliminary
prospectus and corrected in the Prospectus or any amendment or supplement
thereto and it is established in the related proceeding that such Participant
failed to deliver or provide a copy of the Prospectus (as amended or
supplemented) to such Person with or prior to the confirmation of the sale to
such Person of shares of Preferred Stock included within the coverage of the
Registration Statement if required by applicable law, unless such failure to
deliver or provide a copy of the Prospectus (as amended or supplemented) shall
have been determined by a court of competent jurisdiction by final and
non-appealable judgment (or stipulated in a settlement agreement reached by all
parties involved in any action or proceeding related to such claim) to have been
the result of noncompliance by the Company with one or more of the provisions of
Section 6 of this Agreement.
(b) Each Participant agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors and officers who sign the
Registration Statement and each Person who controls 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 Participant, but only
(i) with reference to information relating to such Participant furnished to the
Company in writing by such Participant expressly for use in any Registration
Statement or Prospectus, any amendment or supplement thereto, or any preliminary
prospectus or (ii) with respect to any untrue statement or representation made
by such Participant in writing to the Company. The liability of any Participant
under this paragraph shall in no event exceed the proceeds received by such
Participant from sales of Transfer Restricted Securities giving rise to such
obligations.
<PAGE> 30
27
(c) If any suit, action, proceeding (including any
governmental or regulatory investigation), claim or demand shall be brought or
asserted against any Person in respect of which indemnity may be sought pursuant
to either of the two preceding paragraphs, such Person (the "Indemnified
Person") shall promptly notify the Person against whom such indemnity may be
sought (the "Indemnifying Person") in writing, and the Indemnifying Person, upon
request of the Indemnified Person, shall retain counsel reasonably satisfactory
to the Indemnified Person to represent the Indemnified Person and any others the
Indemnifying Person may reasonably designate in such proceeding and shall pay
the reasonable fees and expenses actually incurred by such counsel related to
such proceeding; provided, however, that the failure to so notify the
Indemnifying Person shall not relieve it of any obligation or liability which it
may have hereunder or otherwise (unless and to the extent such Indemnifying
Person has been materially prejudiced by such failure, including, without
limitation, that such failure results in the forfeiture by the Indemnifying
Person of substantial rights and defenses). In any such proceeding, any
Indemnified Person shall have the right to retain its own counsel, but the fees
and expenses of such counsel shall be at the expense of such Indemnified Person
unless (i) the Indemnifying Person and the Indemnified Person shall have
mutually agreed in writing to the contrary, (ii) the Indemnifying Person has
failed to retain counsel reasonably satisfactory to the Indemnified Person or
(iii) the named parties in any such proceeding (including any impleaded parties)
include both the Indemnifying Person and the Indemnified Person and the
Indemnified Person shall have been advised by counsel that representation of
both parties by the same counsel would be inappropriate under applicable
standards of professional conduct due to differing interests between them. It is
understood that, unless there exists a conflict among Indemnified Persons, the
Indemnifying Person shall not, in connection with any one such proceeding or
separate but substantially similar related proceeding 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 (in addition to any
<PAGE> 31
28
local counsel) for all Indemnified Persons, and that all such fees and expenses
shall be reimbursed promptly as they are incurred. Any such separate firm for
the Participants and such control Persons of Participants shall be designated in
writing by Participants who sold a majority of shares of Registrable Preferred
Stock sold by all such Participants and any such separate firm for the Company,
its directors, its officers and such control Persons of the Company shall be
designated in writing by the Company. The Indemnifying Person shall not be
liable for any settlement of any proceeding effected without its prior written
consent (which consent shall not be unreasonably withheld or delayed), but if
settled with such consent or if there be a final non-appealable judgment for the
plaintiff for which the Indemnified Person is entitled to indemnification
pursuant to this Agreement, the Indemnifying Person agrees to indemnify and hold
harmless each Indemnified Person from and against any loss or liability by
reason of such settlement or judgment. No Indemnifying Person shall, without the
prior written consent of the Indemnified Person, effect any settlement or
compromise of any pending or threatened proceeding in respect of which any
Indemnified Person is or could have been a party, or indemnity could have been
sought hereunder by such Indemnified Person, unless such settlement (A) includes
an unconditional written release of such Indemnified Person, in form and
substance reasonably satisfactory to such Indemnified Person, from all liability
on claims that are the subject matter of such proceeding and (B) does not
include any statement as to an admission of fault, culpability or failure to act
by or on behalf of any Indemnified Person.
(d) If the indemnification provided for in the paragraphs (a)
and (b) of this Section 8 is for any reason unavailable to, or insufficient to
hold harmless, an Indemnified Person in respect of any losses, claims, damages
or liabilities referred to therein, then each Indemnifying Person under such
paragraphs, in lieu of indemnifying such Indemnified Person thereunder and in
order to provide for just and equitable contribution, shall contribute to the
amount paid or payable by such Indemnified Person as a result of such losses,
claims, damages or liabilities in
<PAGE> 32
29
such proportion as is appropriate to reflect (i) the relative benefits received
by the Indemnifying Person or Persons on the one hand and the Indemnified Person
or Persons on the other from the offering of the Preferred Stock or (ii) if the
allocation provided by the foregoing clause (i) is not permitted by applicable
law, not only such relative benefits but also the relative fault of the
Indemnifying Person or Persons on the one hand and the Indemnified Person or
Persons on the other in connection with the statements or omissions or alleged
statements or omissions that resulted in such losses, claims, damages or
liabilities (or actions in respect thereof) as well as any other relevant
equitable considerations. The relative fault of the parties shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company on the one hand or
such Participant or such other Indemnified Person, as the case may be, on the
other, the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission, and any other
equitable considerations appropriate in the circumstances.
(e) The parties agree that it would not be just and equitable
if contribution pursuant to this Section 8 were determined by pro rata
allocation (even if the Participants were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an Indemnified Person as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any reasonable legal or other expenses actually incurred by such
Indemnified Person in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Section 8, in no event shall a
Participant be required to contribute any amount in excess of the amount by
which proceeds received by such Participant from sales of Transfer Restricted
Securities Pursuant to the Registration Statement
<PAGE> 33
30
exceeds the amount of any damages that such Participant has otherwise been
required to pay or has paid 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 Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation.
(f) The indemnity and contribution agreements contained
in this Section 8 will be in addition to any liability that the Indemnifying
Persons may otherwise have to the Indemnified Persons referred to above.
9. Rules 144 and 144A. So long as any Transfer Restricted
Securities are outstanding, the Company will provide to the Holders and file
with the Commission copies of the annual and quarterly reports and any of the
information, documents and other reports that the Company would have been
required to file with the Commission pursuant to Sections 13 or 15(d) of the
Exchange Act regardless of whether the Company is obligated to file such
reports. The Company further covenants that, for so long as any Transfer
Restricted Securities remain outstanding, to make available to any Holder or
beneficial owner of Transfer Restricted Securities in connection with any sale
thereof and any prospective purchaser of such Transfer Restricted Securities
from such Holder or beneficial owner, the information required by Rule
144A(d)(4) under the Securities Act in order to permit resales of such Transfer
Restricted Securities pursuant to Rule 144A.
10. Miscellaneous.
(a) No Inconsistent Agreements. The Company shall not,
after the date of this Agreement, enter into any agreement with respect to any
of its securities that conflicts with the provisions hereof.
(b) Adjustments Affecting Preferred Stock. The Company shall
not, directly or indirectly, take any action with respect to the Preferred Stock
as a class that would adversely affect the ability of the Holders of Transfer
<PAGE> 34
31
Restricted Securities to include such Transfer Restricted Securities in a Shelf
Registration undertaken pursuant to this Agreement.
(c) Amendments and Waivers. The provisions of this
Agreement may not be amended, modified or supplemented, and waivers or consents
to departures from the provisions hereof may not be given, otherwise than with
the prior written consent of the Holders of not less than a majority of the then
outstanding shares of Registrable Preferred Stock; provided, however, that
Section 8 and this Section 10(c) may not be amended, modified or supplemented
without the prior written consent of each Holder (including any person who was a
Holder of Transfer Restricted Securities sold pursuant to any Registration
Statement). Notwithstanding the foregoing, a waiver or consent to depart from
the provisions hereof with respect to a matter that relates exclusively to the
rights of Holders of Transfer Restricted Securities sold whose Transfer
Restricted Securities sold are being sold pursuant to a Registration Statement
and that does not directly or indirectly affect, impair, limit or compromise the
rights of other Holders of Transfer Restricted Securities sold may be given by
Holders of at least a majority in aggregate Liquidation Preference of the
Transfer Restricted Securities sold being sold by such Holders pursuant to such
Registration Statement; provided, however, that the provisions of this sentence
may not be amended, modified or supplemented except in accordance with the
provisions of the immediately preceding sentence.
(d) Notices. All notices and other communications
provided for or permitted hereunder shall be made in writing by hand-delivery,
registered first-class mail, next-day air courier or facsimile:
1. if to a Holder of Transfer Restricted Securities,
at the most current address of such Holder on the stock books of the
Company with a copy in like manner to the Initial Purchaser at its
address set forth in the Purchase Agreement for the giving of notices
thereunder.
<PAGE> 35
32
2. if to the Initial Purchaser, at the
address specified in Section 10(d)(1) above;
3. if to the Company to:
American Communications Services, Inc.
131 National Business Parkway
Suite 100
Annapolis Junction, MD 20701
Facsimile No: (301) 617-4279
Attention: Riley M. Murphy, Esq.
with a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019-7475
Facsimile No: (212) 474-3700
Attention: George W. Bilicic, Jr., Esq.
All such notices and communications shall be deemed to have
been duly given: when delivered by hand, if personally delivered; five business
days after being deposited in the mail, postage prepaid, if mailed; one business
day after being timely delivered to a next-day air courier; and when receipt
acknowledged by the addressee, if sent by facsimile.
(e) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the parties
hereto, including the Holders; provided, however, that this Agreement shall not
inure to the benefit of or be binding upon a successor or assign of a Holder
unless and to the extent such successor or assign holds Registrable Preferred
Stock.
(f) Counterparts. This Agreement may be executed in any number
of counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
<PAGE> 36
33
(g) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(h) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO
CONTRACTS MADE AND PERFORMED WHOLLY WITHIN THE STATE OF NEW YORK, WITHOUT REGARD
TO PRINCIPLES OF CONFLICTS OF LAW. EACH OF THE PARTIES HERETO AGREES TO SUBMIT
TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK IN ANY ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT.
(i) Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, illegal, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions set forth herein shall remain in full
force and effect and shall in no way be affected, impaired or invalidated, and
the parties hereto shall use their reasonable best efforts to find and employ an
alternative means to achieve the same or substantially the same result as that
contemplated by such term, provision, covenant or restriction. It is hereby
stipulated and declared to be the intention of the parties that they would have
executed the remaining terms, provisions, covenants and restrictions without
including any of such that may be hereafter declared invalid, illegal, void or
unenforceable.
(j) Securities Held by the Company. Whenever the consent or
approval of Holders of a specified percentage in aggregate Liquidation
Preference of Transfer Restricted Securities is required hereunder, Transfer
Restricted Securities held by the Company or its subsidiaries shall not be
counted in determining whether such consent or approval was given by the Holders
of such required percentage.
(k) Third Party Beneficiaries. Holders of Transfer Restricted
Securities and Participants are intended third party beneficiaries of this
Agreement and this Agreement may be enforced by such Persons.
<PAGE> 37
34
(l) Entire Agreement. This Agreement, together with the
Purchase Agreement, is intended by the parties as a final and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein and therein and any and all prior oral or
written agreements, representations, or warranties, contracts, understandings,
correspondence, conversations and memoranda between the Purchasers on the one
hand and the Company on the other, or between or among any agents,
representatives, parents, subsidiaries, affiliates, predecessors in interest or
successors in interest with respect to the subject matter hereof and thereof are
merged herein and replaced hereby.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
AMERICAN COMMUNICATIONS SERVICES, INC.
By: /s/ Riley M. Murphy
----------------------------
Name: Riley M. Murphy
Title: Executive Vice President -
Legal & Regulatory Affairs
BEAR, STEARNS & CO. INC.
By: /s/ John Andrew Bugas
----------------------------
Name: John Andrew Bugas
Title: Senior Managing Director
<PAGE> 1
EXHIBIT 10.56
SECOND AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
This Agreement is dated as of the day of [OCTOBER] 1997 and is
entered into by and among American Communications Services, Inc., a Delaware
corporation (the "COMPANY"), Anthony J. Pompliano ("POMPLIANO"), Riley M. Murphy
("MURPHY"), Jack E. Reich ("REICH") and Douglas R. Hudson ("HUDSON") (each a
"MANAGER" and collectively, the "MANAGERS").
WHEREAS, each of the Managers is an executive officer of the Company;
and
WHEREAS, each of the Managers is a party to an Employment Agreement
between such Manager and the Company (each the "MANAGER'S EMPLOYMENT AGREEMENT"
and collectively, the "MANAGERS' EMPLOYMENT AGREEMENTS"); and
WHEREAS, pursuant to each Manager's Employment Agreement, each Manager
has been granted Initial Stock Options (as defined in the Managers' Employment
Agreements) to purchase shares of the Company's Common Stock; and
WHEREAS, pursuant to each Manager's Employment Agreement, each Manager
has been granted, and certain Managers may be granted contingent upon achieving
certain performance objectives set forth in the Manager's Employment Agreement,
Performance Stock Options (as defined in their respective Manager's Employment
Agreement); and
WHEREAS, Murphy, George M. Tronsrue III ("Tronsrue") and Hudson had
previously entered into a Registration Rights Agreement dated as of June 26,
1995 pursuant to which such Managers received certain registration rights with
respect to Stock Options (the "ORIGINAL REGISTRATION RIGHTS AGREEMENT"); and
WHEREAS, the Original Registration Rights Agreement was terminated and
superseded by an Amended and Restated Registration Rights Agreement dated as of
June 30, 1995 by and among the Company, Pompliano, Richard A. Kozak ("KOZAK"),
Murphy, TRONSRUE and Hudson (the "FIRST AMENDED AND RESTATED REGISTRATION RIGHTS
AGREEMENT"); and
WHEREAS, the First Amended and Restated Registration Rights Agreement
was amended to eliminate Kozak as a party to such agreement pursuant to a
Settlement Agreement and Release dated March 11, 1997 by and between the Company
and Kozak; and
WHEREAS, the First Amended and Restated Registration Rights Agreement
was amended to add Reich as party to such agreement pursuant to a First
Amendment to the First Amended and Restated Registration Rights Agreement dated
as of July 22, 1997 by and among the Company, Pompliano and Reich; and
<PAGE> 2
WHEREAS, the First Amended and Restated Registration Rights Agreement
was amended to eliminate Tronsrue as a party to such agreement pursuant to a
[SETTLEMENT AGREEMENT AND RELEASE DATED 1997 BY AND BETWEEN THE COMPANY
AND TRONSRUE;] and
WHEREAS, the First Amended and Restated Registration Rights Agreement
as amended by the First Amendment to the Amended and Restated Registration
Rights Agreement is hereby terminated and superseded by this Second Amended and
Restated Registration Rights Agreement; and
WHEREAS, the Company desires to grant to the Managers certain
registration rights pursuant to this Second Amended and Restated Registration
Rights Agreement with respect to the aggregate of the Initial Stock Options and
the Performance Stock Options currently held or which may be acquired in the
future by the respective Managers pursuant to the Manager's Employment Agreement
(hereinafter collectively referred to as the "MANAGER STOCK OPTIONS") on the
terms and conditions hereinafter set forth; and
WHEREAS, the Managers desire to accept such registration rights with
respect to the Manager Stock Options as hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual agreements and
understandings set forth herein, the parties hereto do hereby agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
As used in this Agreement, the following terms shall have the following
respective meanings:
AGREEMENT shall mean this Agreement as in effect on the date hereof and
as hereafter from time to time amended, modified or supplemented in accordance
with the terms hereof.
ALI AGREEMENT shall mean the Registration Rights Agreement, dated July
1, 1992, among American Lightwave, Inc. and Apex Investment Fund II, L.P., The
Productivity Fund II, L.P., Telephotonics Limited Partnership I, Brian D. Boyer,
Russell T. Stern, Jr., Willard McNitt and Patrick J. Haynes III.
ALI INVESTORS shall mean Telephotonics Limited Partnership I, Brian D.
Boyer, Russell T. Stern, Jr., Willard McNitt and Patrick J. Haynes III and their
2
<PAGE> 3
successors and assigns. The term "ALI Investors" specifically excludes Apex
Investment Fund I, L.P., Apex Investment Fund II, L.P., The Productivity Fund
II, L.P., and their successors and assigns.
CERTIFICATE OF DESIGNATIONS shall mean the Certificate of Designations
relating to the Company's preferred stock filed on June 26, 1995 with the
Delaware Secretary of State.
COMMISSION shall mean the Securities and Exchange Commission and any
successor commission or agency having similar powers.
COMMON STOCK shall mean the Common Stock, par value $.01 per share, of
the Company.
DEMAND SHARES shall mean securities which are Registrable Securities
pursuant to the terms of Section 2.1.
EXCHANGE ACT shall mean the Securities Exchange Act of 1934, as
amended, or any similar Federal statute then in effect, and a reference to a
particular section thereof shall include a reference to the comparable section,
if any, of such similar Federal statute.
MANAGER AND MANAGERS shall have the meanings set forth in the preamble;
and in the event of a Manager's death shall include such Manager's estate.
MANAGER DEMAND shall mean a demand made by a Qualifying Manager
pursuant to Section 2.1.
MANAGER NOTICE shall have the meaning set forth in Section 2.6.
MANAGER'S EMPLOYMENT AGREEMENT OR MANAGERS' EMPLOYMENT AGREEMENTS shall
have the meanings set forth in the preamble.
MANAGING UNDERWRITER shall mean the underwriter used in connection with
the offering of the Registrable Securities.
PIGGY-BACK SHARES shall mean Securities which are Registrable
Securities pursuant to the terms of Section 2.2.
PREFERRED STOCK shall have the meaning set forth in the Certificate of
Designations.
QUALIFYING MANAGER shall mean Anthony J. Pompliano commencing six
months after the Termination Date. In the event of the death of Pompliano the
foregoing shall apply to his estate.
3
<PAGE> 4
REGISTRABLE SECURITIES shall mean all shares of Common Stock issued or
issuable to the Managers upon exercise of the Manager Stock Options and for
purposes of Section 2.2 shall include such shares of Common Stock as may be
transferred by any Manager in a private transaction; provided that the Company
receives prior written notice of such transfer. As to any particular Registrable
Securities that have been issued, such securities shall cease to be Registrable
Securities when (a) a registration statement with respect to the sale of such
securities shall have become effective under the Securities Act, (b) they shall
have been distributed to the public pursuant to Rule 144, (c) they shall have
been otherwise transferred or disposed of, (d) they shall have ceased to be
outstanding, or (e) they have been sold by the Managers pursuant to the terms of
the Form S-8 Registration Statement required to be filed by the Company pursuant
to Section 2.3.
REGISTRATION EXPENSES shall mean any and all out-of-pocket expenses
incident to the Company's performance of or compliance with Article II hereof,
including, without limitation, all Commission, stock exchange or National
Association of Securities Dealers, Inc. ("NASD") registration and filing fees,
all fees and expenses of complying with securities and blue sky laws (including
the reasonable fees and disbursements of underwriters' counsel in connection
with the blue sky qualifications and NASD filings), all fees and expenses of the
transfer agent and registrar for the Registrable Securities, all printing
expenses, the fees and disbursements of counsel for the Company and of its
independent public accountants, including the expenses of any special audits
and/or "cold comfort" letters required by or incident to such performance and
compliance, and one firm of counsel (other than house counsel) retained by the
Managers for the holders of Registrable Stock being registered, but excluding
underwriting discounts and commissions and applicable transfer and documentary
stamp taxes, if any, which shall be borne by the seller of the securities in all
cases.
SECURITIES ACT shall mean, as of any date, the Securities Act of 1933,
as amended, or any similar federal statute then in effect, and in reference to a
particular section thereof shall include a reference to the comparable section,
if any, of any such similar federal statute and the rules and regulations
thereunder.
TERMINATION DATE shall mean with respect to Pompliano, the earlier of
(i) August 23, 1998; or (ii) the date Pompliano's employment with the Company is
terminated pursuant to Pompliano's Manager's Employment Agreement either (A)
without Cause (as defined in Pompliano's Manager's Employment Agreement); or (B)
pursuant to Section 11(e) of Pompliano's Manager's Employment Agreement;
provided, however, that for purposes of this (ii), no sooner than the date the
Company has filed a registration statement with the Commission pursuant to the
demand registration rights of the holders of the Preferred Stock.
4
<PAGE> 5
ARTICLE II
REGISTRATION RIGHTS
2.1 DEMAND REGISTRATION RIGHTS.
(a) The Qualifying Manager prior to the termination of this Agreement
may demand in writing (the "MANAGER DEMAND") that the Company file under the
Securities Act a registration statement to register the Registrable Securities,
or any portion thereof, (the "DEMAND SHARES"); provided, that the Qualifying
Manager may make a total of only one Manager Demand. The Manager Demand shall
specify the number of Demand Shares to be registered by each Manager and the
intended method of distribution.
(b) Notwithstanding the foregoing, the Company may postpone the filing
or effectiveness of a registration statement under this Section 2.1 if the
Company determines that such registration might reasonably be expected to have
an adverse effect on any proposal or plan by the Company to engage in any
acquisition of assets (other than in the ordinary course of business) or any
merger, consolidation, tender offer or other significant transaction; provided,
that in such event, the Qualifying Manager making the Manager Demand will be
entitled to withdraw such demand, and if such demand is withdrawn such
registration will not count as the single Manager Demand permitted under this
Agreement.
(c) Notwithstanding the foregoing, a Manager Demand may not be made (i)
with respect to fewer than an aggregate of 300,000 shares of Registrable
Securities; or (ii) by the Qualifying Manager if his employment has terminated
under paragraph 11(a) or 11(c) of his Manager's Employment Agreement.
(d) Notwithstanding the foregoing, upon receiving a Manager Demand the
Company at its sole option may choose not to file a registration statement as
required under this Section 2.1, and in lieu thereof, purchase from the Managers
the aggregate number of the Demand Shares at a price equal to 95% of the
publicly-traded price (as defined in the Manager's Employment Agreement of
Pompliano) on the date the Manager Demand is made and the Company shall purchase
such Demand Shares and pay the aggregate purchase price therefor no later than
thirty (30) days after the date on which such Manager Demand is made. In the
event the Company exercises its option under this Section 2.1(d) the Qualifying
Manager will have no further right to make a Manager Demand.
2.2 PIGGY-BACK REGISTRATION RIGHTS. In the event the Company prior to
the sixth anniversary hereof proposes to file a registration statement under the
Securities Act (other than in connection with any exchange offer, a "rights"
offering to shareholders or a registration statement on Form S-8 or S-4 or any
successor
5
<PAGE> 6
forms relating to employee benefit plans or an acquisition of another entity AND
OTHER THAN THE REGISTRATION STATEMENT THE COMPANY IS OBLIGATED TO FILE IN
NOVEMBER 1997 FOR THE BENEFIT OF CERTAIN STOCKHOLDERS WHO SIGNED REGISTRATION
RIGHTS WAIVERS AND OTHER REGISTRATION RIGHTS AGREEMENTS), with respect to any
class of equity security, then the Company shall in each case give written
notice of such proposed filing to each holder of Registrable Securities at least
30 days before the anticipated filing date of such registration statement. Such
notice shall offer to each holder of Registrable Securities the opportunity to
include in such registration statement such number of Registrable Securities
(the "PIGGY-BACK SHARES") as such holder may request and the Company shall use
its best efforts to include the number of Piggy-back Shares so requested in
writing by each holder of Registrable Securities; provided, however, that:
(i) If, at any time after giving such written notice of its
intention to register any securities and prior to the
effective date of the registration statement filed in
connection with such registration, the Company shall determine
for any reason not to register such securities, the Company
may, at its election, give written notice of such
determination to each holder of Registrable Securities and
securities convertible or exercisable into Registrable
Securities who made a request as hereinabove provided and
thereupon the Company shall be relieved of its obligation to
register any Registrable Securities in connection with such
registration (but not from its obligation to pay the
Registration Expenses in connection therewith), without
prejudice, however, to the rights of the Qualifying Manager to
request that such registration be effected as the single
Manager Demand registration under Section 2.1.
(ii) If such registration involves an underwritten offering,
all holders of Registrable Securities and securities
convertible or exercisable into Registrable Securities
requesting to be included in the Company's registration must
sell their Registrable Securities to the underwriters selected
by the Company on the same terms and conditions as apply to
the holders of Preferred Stock selling thereunder.
2.3 REGISTRATION STATEMENT ON FORM S-8. As of the date of this
Agreement, the Company shall have filed with the Commission a Registration
Statement on Form S-8 (the "FORM S-8"), or other appropriate registration form
covering the Registrable Securities. To the extent the registration rights
contained in Sections 2.1 and 2.2 are exercised as to any Registrable
Securities, or to the extent any Registrable Securities are transferred by a
Manager in a private transaction to a transferee who does not qualify to have
his shares included on a Form S-8 Registration Statement pursuant to the rules
and regulations of the Commission, such Registrable Securities shall be delisted
from the Form S-8. The Company will maintain the
6
<PAGE> 7
effectiveness of the Form S-8 for so long as the any Registrable Securities
remain outstanding. If the Company or a Manager determines that the Securities
Act requires a Manager to deliver a reoffer prospectus in connection with the
sale by a Manager of any Registrable Securities pursuant to the Form S-8, then
no later than thirty (30) days after receipt from a Manager of notice that such
Manager intends to sell the Registrable Securities pursuant to the Form S-8 the
Company shall file a post-effective amendment to the Form S-8 to include in the
Form S-8 a reoffer prospectus meeting the requirements of the Securities Act.
Such 50,000 share number set forth above shall be adjusted for any stock split
or subdivision or any reverse stock split or combination of the Company's
outstanding Common Stock.
2.4 LIMITS OF REGISTRATION RIGHTS.
(a) The Company shall select any underwriter (the "MANAGING
UNDERWRITER") utilized in connection with the offering of the Registrable
Securities, subject to the reasonable approval of the Qualifying Manager making
the Manager Demand in the case of the offering of Demand Shares. Such Manager
approval shall not be required in the case of the Piggy-back Shares.
Notwithstanding anything to the contrary contained herein, if any such Managing
Underwriter shall advise the Company in writing that, in its opinion, the number
of Demand Shares or Piggy-back Shares requested to be included in such
registration should be limited due to market conditions, the Company will
include: (i) in the case of the Demand Shares, securities in the following order
of priority: (A) first, the number of equity securities of the Company requested
to be included in such registration by all holders of equity securities,
including the Managers pursuant to Section 2.6(b) hereof, pursuant to a
registration rights agreement with the Company, such amount to be allocated pro
rata on the basis of the respective number of such securities each such holder
has requested be included in such registration, subject to the ALI Agreement
with respect to the ALI Investors only; and (B) second, the securities the
Company proposes to sell, if any; and (ii) in the case of the Piggy-back Shares,
securities in the following order of priority: (A) first, the securities the
Company proposes to sell, if any; (B) second, the number of equity securities of
the Company requested to be included in such registration by all holders of
equity securities, including the Managers pursuant to Section 2.6(b) hereof,
pursuant to a registration rights agreement with the Company, such amount to be
allocated pro rata on the basis of the respective number of such securities each
such holder has requested be included in such registration, subject to the ALI
Agreement with respect to the ALI Investors only. Notwithstanding the foregoing,
if the Managing Underwriter shall advise the Company in writing, that, in its
opinion, the Piggy-back Shares requested to be included in a registration by the
Managers should be either eliminated from such registration in their entirety,
or reduced in number on a basis other than as hereinabove provided, based not on
the Managing Underwriter's inability to sell the equity securities being limited
due to the number of equity securities requested to be included in a
registration, but based on the relationship of the Managers to the
7
<PAGE> 8
Company as executive officers of the Company, then the Managers agree that the
Piggy-back Shares to be included in a registration shall be such number, if any,
as determined by the Managing Underwriter. In the event any Piggy-back Shares
are eliminated from a registration pursuant to the immediately preceding
sentence, then on the next demand registration of holders of the Preferred
Stock, Pompliano shall have the right to require such registration to include
that number of Piggy-back Shares equal to the greater of (i) 200,000 Piggy-back
Shares, or (ii) that number of Piggy-back Shares that they would otherwise be
entitled to include pursuant to paragraph 2.4 (a)(ii), above; provided, however,
that the 200,000 Piggy-back Shares provided in (i) shall be reduced by the
number of shares of Common Stock sold by Pompliano pursuant to the Form S-8 or
otherwise, during the period commencing when such Piggy-back Shares are
eliminated from such registration pursuant to the immediately preceding sentence
and ending when such next demand registration of holders of Preferred Stock is
filed. In the case of a Manager Demand, if any Managing Underwriter limits the
aggregate number of Demand Shares to be included in a registration by 50% or
more than the aggregate number of Demand Shares requested to be included in such
registration, then such registration shall not count as the single Manager
Demand permitted by Section 2.1(a) hereof. If any Registrable Securities
requested to be included pursuant to Sections 2.1 or 2.2 shall not be
outstanding but shall be issuable upon exercise of Manager Stock Options then
the holders of such Manager Stock Options shall take all actions necessary in
order to exercise such Manager Stock Options into shares of Common Stock in
order to effect such registration; provided, however, that notwithstanding the
foregoing, the Managers shall not be required to exercise such Manager Stock
Options until such time as the Managers shall sell the shares of Common Stock
underlying such Manager Stock Options pursuant to a registration hereunder.
(b) By executing this Agreement, the Managers hereby waive and
relinquish any and all other demand or piggy-back registration rights held by
them relating to the securities of the Company.
2.5 OTHER ARRANGEMENTS.
(a) In connection with the registration of the Registrable Securities
the Managers shall furnish the Company with such appropriate information
(relating to the manner in which such Registrable Securities are to be sold) in
connection therewith as the Company shall reasonably request in writing. In
connection with any such registration, the Company agrees to:
(i) Promptly prepare and file with the Commission a registration
statement with respect to such Registrable Securities and use its best
efforts to cause such registration statement to become and remain
effective for not less than 180 days; prepare and file with the
Commission such amendments (including post-effective amendments) and
supplements to such registration
8
<PAGE> 9
statement and the prospectus used in connection therewith as may be
necessary to keep such registration statement effective for a period of
not less than 180 days; and furnish to each holder of Registrable
Securities covered by the registration statement and to each
underwriter, if any, of such Registrable Securities such number of
copies of a prospectus and preliminary prospectus for delivery in
conformity with the requirements of the Securities Act, and such other
documents, as such person may reasonably request, in order to
facilitate the public sale or other disposition of the Registrable
Securities.
(ii) Use its best efforts to register or qualify the Registrable
Securities for offer or sale under state securities or Blue Sky laws of
such jurisdictions in which the Managers shall reasonably designate,
provided, that in no event shall the Company be obligated to qualify to
do business in any jurisdiction where it is not now so qualified or to
take any action which would subject it to general service of process in
any jurisdiction where it is not now so subject, and use its best
efforts to do any and all other acts and things which may be necessary
or advisable to enable the holders to consummate the sale, transfer or
other disposition of such securities in any jurisdiction;
(iii) Enter into a cross-indemnity agreement and a contribution
agreement, each in customary form, with each underwriter, if any, of
securities included in such registration statement; and, if requested,
enter into an underwriting agreement containing conventional
representations, warranties, allocation of expenses, and customary
closing conditions including, but not limited to, opinions of counsel
and accountants' cold comfort letters, with any underwriter who
acquires the Registrable Securities;
(iv) Furnish to the Managers such number of copies of such registration
statement and all amendments thereto and of such prospectuses
(including each preliminary, amended, or supplemental prospectus) as
the Managers may reasonably request in order to facilitate the sale or
transfer of the Registrable Securities;
(v) Make available to the Company's security holders, not more than 16
months after the first day of the month following the effective date of
the registration statement, an earnings statement covering a period of
at least twelve months, which earnings statement shall satisfy the
provisions of Section 11(a) of the Act and Rule 18 promulgated under
the Act;
(vi) Use its best efforts to list the Registrable Securities on any
securities exchange on which other shares of Common Stock are listed;
(vii) Afford to the Managers an opportunity to make such examination
and inquiry into the financial position, business and affairs of the
Company and
9
<PAGE> 10
its subsidiaries the Managers or their counsel may reasonably deem
necessary so as to satisfy them as to the accuracy and completeness of
the registration statement; and
(viii) Pay all Registration Expenses in connection with the
registration of the Registrable Securities pursuant to the terms
hereof, including but not limited to those Registration Expenses in
connection with a withdrawn Manager Demand pursuant to Section 2.1(b).
2.6 MANAGERS AGREEMENT REGARDING REGISTRABLE SECURITIES.
(a) The Qualifying Manager proposing to make a Manager Demand pursuant
to Section 2.1(a) shall give no less than 30 days prior written notice to each
other Manager of such Manager's intention (the "MANAGER NOTICE"). The Manager
Notice shall specify the number of Registrable Securities the Qualifying Manager
sending the Manager Notice intends to request be included in a registration. The
Managers receiving a Manager Notice shall notify the Qualifying Manager sending
the Manager Notice in writing of the number of Registrable Securities such
Manager is requesting be included in the Manager Demand. The Qualifying Manager
making the Manager Demand shall include in the Manager Demand the aggregate of
the Registrable Securities the Managers are requesting be registered.
(b) In the event any Managing Underwriter advises the Company pursuant
to Section 2.4(a) that the Registrable Securities requested to be included by
the Managers in a registration (whether pursuant to Section 2.1 or Section 2.2)
should be limited, then the Managers shall agree in writing upon the number of
Registrable Securities held by each Manager to be included so that the total
number of Registrable Securities agreed to by the Managers to be included is no
greater than the total number of Registrable Securities which the Managing
Underwriter has advised the Managers may be included by them as determined under
Section 2.4(a). The Managers shall then advise the Company as to such amounts
agreed to by the Managers. In the event the Managers are unable to agree on the
number of Registrable Securities held by each Manager to be so included, then
the Registrable Securities requested to be included shall be included in the
registration pro rata in accordance with the number of shares so requested to be
included. Any Manager who transfers such Manager's Registrable Securities in a
private transaction shall require that such transferee agree to be bound by the
terms of this Section 2.6(b).
10
<PAGE> 11
ARTICLE III
TERMINATION
This Agreement shall terminate as to each Manager upon the earlier of
(i) November 1, 2003; and (ii) the date such Manager no longer owns Registrable
Securities.
ARTICLE IV
MISCELLANEOUS
4.1 AMENDMENT AND MODIFICATION; WAIVER OF COMPLIANCE; CONFLICTS.
(a) This Agreement may be amended only by a written instrument duly
executed by Pompliano and the Company, pursuant to approval of its board of
directors.
(b) Except as otherwise provided in this Agreement, any failure of any
of the parties to comply with any obligation, covenant, agreement or condition
herein may be waived by the party entitled to the benefits hereof only by a
written instrument signed by the party granting such waiver, but such waiver or
failure to insist upon strict compliance with such a waiver of, or estoppel with
respect to, any subsequent or other failure.
(c) In the event of any conflict between the provisions of this
Agreement and the provisions of any other agreement, the provisions of this
Agreement shall govern and prevail.
4.2 NOTICES. Any notice, request, claim, demand, document and other
communication hereunder to any party shall be effective upon receipt (or refusal
of receipt) and shall be in writing and delivered personally or sent by telex or
telecopy (with such telex or telecopy confirmed promptly in writing sent by
first class mail) or other similar means of communications, as follows.
(i) If to the Company, addressed to American Communications
Services, Inc., 131 National Business Parkway, Suite 100,
Annapolis Junction, Maryland 20701, Attention: Board of
Directors; or
(ii) If to a Manager in care of the Company at the address in (i),
unless the Manager is no longer employed by the Company, then
to such Manager at his residence address as reflected in the
records of the Company.
or, in each case, to such other address or telex or telecopy number as such
party may
11
<PAGE> 12
designate in writing to each the Managers or the Company, as the case may be, by
written notice given in the manner specified herein.
All such communications shall be deemed to have been given, delivered
or made when so delivered personally or sent by telex or telecopy (confirmation
received), or five business days after being so mailed.
4.3 ENTIRE AGREEMENT. This Second Amended and Restated Registration
Rights Agreement and the other writings referred to herein or delivered pursuant
hereto which form a part hereof contain the entire agreement among the parties
hereto with respect to the subject transactions contemplated hereby and
supersede all prior oral and written agreements and memoranda and undertakings
among the parties hereto with regard to this subject matter. This Second Amended
and Restated Registration Rights Agreement supersedes the First Amended and
Restated Registration Rights Agreement which is hereby terminated.
4.4 INJUNCTIVE RELIEF. The Managers and the Company acknowledge and
agree that a violation of any of the terms of this Agreement will cause the
Managers irreparable injury for which an adequate remedy at law is not
available. Therefore, the Managers and the Company agree that each Manager shall
be entitled to an injunction, restraining order or other equitable relief from
any court of competent jurisdiction, restraining any Manager or the Company from
committing any violations of the provisions of this Agreement.
4.5 HEADINGS. The section and paragraph headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
4.6 GOVERNING LAW. This Agreement shall be governed by, construed,
applied and enforced in accordance with the laws of the state of Maryland
applicable to contracts made and to be performed entirely in that state without
regard to conflicts of laws principles.
4.7 NO STRICT CONSTRUCTION. The language used in this Agreement will be
deemed to be the language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction will be applied against any person.
4.8 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
12
<PAGE> 13
AMERICAN COMMUNICATIONS SERVICES, INC.
BY: /s/ Anthony J. Pompliano
------------------------------
NAME: ANTHONY J. POMPLIANO
TITLE: CHAIRMAN
/s/ Riley M. Murphy
------------------------------
RILEY M. MURPHY
/s/ Douglas R. Hudson
------------------------------
DOUGLAS R. HUDSON
/s/ Jack E. Reich
------------------------------
JACK E. REICH
AMERICAN COMMUNICATIONS SERVICES, INC.
BY: /s/ Jack E. Reich
-----------------------------------------
NAME: JACK E. REICH
TITLE: PRESIDENT AND CHIEF EXECUTIVE OFFICER
MANAGER:
/s/ Anthony J. Pompliano
-----------------------------------
ANTHONY J. POMPLIANO
13
<PAGE> 1
EXHIBIT 12.1
AMERICAN COMMUNICATIONS SERVICES, INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
($ IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS FISCAL YEAR ENDED SIX MONTHS SIX MONTHS
ENDED DECEMBER 31, ENDED ENDED JUNE 30,
FISCAL YEAR ENDED JUNE 30, DECEMBER 31, ------------------- JUNE 30, -------------------
------------------------------ ------------ ----------
1996 1996 1997
1995 ------------------- 1995 ------------------- 1996 -------------------
-------- PRO ------------ PRO ---------- PRO
ACTUAL ACTUAL FORMA ACTUAL ACTUAL FORMA ACTUAL ACTUAL FORMA
-------- -------- -------- ------------ -------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Charges:
Interest expense
including amortization
of debt issuance
costs................. $ 170 $ 10,477 $ 10,824 $ 2,835 $ 10,390 $ 10,619 $ 7,642 $ 12,421 $ 12,423
Portion of rent expenses
representative of
interest(1)........... 66 385 425 124 561 581 261 917 957
-------- -------- -------- ------- -------- -------- -------- -------- --------
Total fixed
charges......... 236 10,862 11,249 2,959 10,951 11,200 7,903 13,358 13,380
Earnings (loss):
Earnings (loss) before
minority interest..... (14,746) (27,195) (28,303) (9,035) (35,077) (35,768) (18,160) (49,676) (49,701)
Fixed charges........... 236 10,862 11,249 2,959 10,951 11,200 7,903 13,336 13,380
-------- -------- -------- ------- -------- -------- -------- -------- --------
Earnings (loss)
adjusted for
fixed charges... $(14,982) $(38,057) $(39,552) $(11,994) $(46,028) $(46,968) $(26,063) $(63,014) $(63,081)
Ratio of earnings (loss)
to fixed charges........ -- -- -- -- -- -- -- -- --
Deficiency in earnings to
cover fixed charges..... $(15,282) $(30,246) $(31,354) $ (9,798) $(37,345) $(38,036) $(20,448) $(51,207) $(51,232)
</TABLE>
- ---------------
(1) One-third of rent expense is deemed to be representative of interest.
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
American Communications Services, Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the headings "Experts" and "Selected Consolidated Financial Data"
in the prospectus.
KPMG Peat Marwick LLP
Washington, DC
November 13, 1997
