<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 9, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
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 52-1947746
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NO.)
</TABLE>
131 NATIONAL BUSINESS PARKWAY
ANNAPOLIS JUNCTION, MARYLAND 20701
(301) 617-4200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
RILEY M. MURPHY, ESQ.
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:
KEVIN T. COLLINS, ESQ.
DORSEY & WHITNEY LLP
250 PARK AVENUE
NEW YORK, N. Y. 10177
(212) 415-9200
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
- ------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration number for the same
offering. [ ]
- ------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please 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
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED DECEMBER 9, 1997
PROSPECTUS
3,726,584 SHARES
LOGO
COMMON STOCK
------------------------
This Prospectus relates to the offer and sale by certain selling
stockholders (the "Selling Stockholders") of American Communications Services,
Inc., a Delaware corporation (the "Company" or "ACSI") of shares of Common
Stock, $.01 par value, (the "Common Stock") of the Company. Of the 3,726,584
shares of Common Stock offered hereby, 1,659,776 shares are issued and
outstanding and 500,000 shares are issuable under certain options (the
"Options") and 1,566,808 are issuable under certain warrants (the "Warrants").
The issued and outstanding shares of Common Stock and the Options and Warrants
were sold in various private placement transactions (collectively the "Private
Placements") which were exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act"). In connection with
the Private Placements, the Company and the Selling Stockholders entered into
certain registration rights agreements (the "Registration Rights Agreements"),
providing for the filing with the Securities and Exchange Commission (the "SEC")
of the Registration Statement of which this Prospectus forms a part. The shares
of Common Stock offered hereby may be offered and sold from time to time (the
"Offering") by the holders named herein or, if required, by holders named in an
accompanying supplement (a "Prospectus Supplement") or by their respective
transferees, pledgees, donees, or their successors (collectively, the "Selling
Stockholders") pursuant to this Prospectus and a Prospectus Supplement, if
required. The Common Stock is traded on the Nasdaq Stock Market under the symbol
"ACNS." On December 2, 1997 the last reported sales price of the Common Stock on
the Nasdaq National Market was $11 11/16 per share.
The shares of Common Stock offered hereby may be sold by the Selling
Stockholders from time to time directly to purchasers or through underwriters,
dealers or agents. See "Plan of Distribution." If required, the names of any
such underwriters, dealers or agents involved in the sale of such shares in
respect of which this Prospectus is being delivered and the applicable
underwriter's discount, dealer's purchaser price or agent's commission, if any,
will be set forth in a Prospectus Supplement.
The Selling Stockholders will receive all of the net proceeds from the sale
of the shares of Common Stock offered hereby and will pay all underwriting
discounts and selling commissions, if any, applicable to the sale of such
shares. The Company is responsible for payment of all other expenses incident to
the offer and sale of such shares.
The Selling Stockholders and any underwriters, dealers or agents which
participate in the distribution of the shares of Common Stock offered hereby may
be deemed to be "underwriters" within the meaning of the Securities Act, and any
commission received by them and any profit on the resale of such shares
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act. See "Plan of Distribution" for a description of
indemnification arrangements.
SEE "RISK FACTORS" COMMENCING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
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 December , 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-3
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the shares of
Common Stock 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 shares of Common Stock 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.
FORWARD LOOKING STATEMENTS
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 forward-looking statements contained herein to
reflect any change in the Company's expectations with regard thereto or any
change 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;
i
<PAGE> 4
(v) the Company's Quarterly Reports on Form 10-QSB for the quarterly
periods ended March 31, June 30 and September 30, 1997;
(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 termination of the Offering
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. The Company will provide without
charge to each person to whom a copy of the Prospectus has been delivered, and
who makes a written or oral request, a copy of any and all of the foregoing
documents incorporated by reference in the Prospectus (other than exhibits
unless such exhibits are specifically incorporated by reference into such
documents). Requests should be submitted in writing or by telephone to 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.
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 nine 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.
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<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 also recently began providing
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
September 30, 1997, the Company's sales force in this area was made up of
178 sales people, which represents an increase of 123 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.
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<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 the 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 compensation for a number of its key
executives away from being based upon new network development and growth to
being based upon revenue and EBITDA levels (as defined herein).
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<PAGE> 8
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 competitive access provider ("CAP")
networks 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 Debt Offering, each as defined
below, 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.
Debt Offering. On July 23, 1997, the Company consummated the sale of $220
million aggregate principal amount (the "Debt Offering") of its 13 3/4% Senior
Notes due 2007 (the "2007 Notes"). Of the total net proceeds of $208 million,
the Company placed approximately $70 million representing funds sufficient to
pay the first five semi-annual interest payments on the 2007 Notes, into an
escrow account for the benefit of the holders thereof.
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, together with the
12 3/4% Preferred Stock, the "Preferred Stock") and warrants (the "Unit
Warrants" and together with the 14 3/4% Preferred Stock, the "Units") to
purchase approximately 6,023,800 shares (subject to adjustment) of its Common
Stock). Total net proceeds to the Company from the Unit Offering were
approximately $67 million.
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<PAGE> 9
Common Stock 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
Access Transmission Services, Inc. ("MCI") 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 choice
provider in MCI's provisioning system for all new dedicated access circuits in
the designated markets. On June 19, 1997, the Company and MCI 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 warrants to MCI 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 issuable to MCI in connection with the MCI
Transaction. This Prospectus relates to the offer and sale by MCI of 397,582
shares of Common Stock underlying the warrants issued to it in connection with
the MCI Transaction. See "Selling Stockholders."
Cybergate Acquisition. On January 17, 1997, the Company acquired 100% of
the outstanding capital stock of Cybergate, Inc. in exchange for 1,048,000
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. The former Cybergate
shareholders have certain registration rights with respect to the shares of
Common Stock issued to them in connection with the Cybergate Acquisition. This
Prospectus relates to the offer and sale by three of the former Cybergate
shareholders of 1,048,000 shares of Common Stock. See "Selling Stockholders."
5
<PAGE> 10
THE OFFERING
THE PRIVATE PLACEMENTS..... The issued and outstanding shares of Common Stock
offered hereby and the Options and Warrants were
sold to the Selling Stockholders by the Company in
various transactions exempt from the registration
requirements of the Securities Act. In connection
therewith, the Company and the Selling Stockholders
entered into various Registration Rights
Agreements, providing for, among other things, the
filing of this Registration Statement.
SECURITIES OFFERED......... 3,726,584 shares of Common Stock, par value $.01
per share.
SHARES OUTSTANDING......... As of November 10, 1997, the Company had 36,959,978
shares of Common Stock outstanding. Assuming that
all of the Options and Warrants are exercised, the
Company will have 39,026,786 shares outstanding.
USE OF PROCEEDS
The Company will receive none of the proceeds from the offer and sale of
the shares of Common Stock by the Selling Stockholders. If all of the Warrants
and Options are exercised, the Company will receive approximately $8,263,828 in
net proceeds. The Selling Stockholders will receive all of the net proceeds from
the shares of Common Stock sold pursuant to this Prospectus. The Company plans
to use the net proceeds from the exercise of the Options and Warrants, if any,
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."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective investors in evaluating an investment in the shares of
Common Stock offered hereby.
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 forward-looking statements contained herein to
reflect any change in the Company's expectations, with regard thereto or any
change in events, conditions or circumstances on which any statement is based.
6
<PAGE> 11
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE, NETWORK AND STATISTICAL DATA)
<TABLE>
<CAPTION>
SIX MONTHS NINE MONTHS
ENDED FISCAL PERIOD ENDED ENDED NINE MONTHS
FISCAL YEAR ENDED JUNE 30, DECEMBER 31, DECEMBER 31,(1) SEPTEMBER 30, ENDED SEPTEMBER 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 $ 5,239 $ 35,847 $ 36,065
Operating expenses.... 14,797 24,543 29,027 7,966 34,434 37,548 28,535 94,044 94,290
Loss from
operations.......... (14,408) (21,128) (21,889) (6,977) (27,444) (27,922) (23,296) (58,197) (58,225)
Interest and other
income.............. 218 4,410 4,410 777 2,757 2,773 5,093 3,893 3,898
Interest and other
expense............. (170) (10,477) (10,824) (2,835) (10,390) (10,619) (13,653) (25,336) (25,338)
Loss before minority
interest............ (14,746) (27,195) (28,303) (9,035) (35,077) (35,768) (31,856) (79,640) (79,665)
Minority
interest(3)......... 48 413 413 156 160 160 353 -- --
Net loss.............. (14,698) (26,782) (27,890) (8,879) (34,917) (35,608) (31,503) (79,640) (79,665)
Net loss per common
share............... $ (3.30) $ (4.96) $ (4.40) $ (1.82) $ (5.48) $ (4.84) $ (5.22) $ (3.45) $ (3.44)
Weighted average
shares
outstanding......... 4,772 6,185 7,215 5,901 6,734 7,764 6,614 24,140 24,197
OTHER DATA:
EBITDA(4)............. $ (7,443) $(14,901) $(14,418) $ (4,855) $(21,822) $(21,620) $ (16,520) $(40,796) $(40,766)
Depreciation and
amortization........ 498 3,078 4,322 763 4,912 5,592 4,717 16,077 16,135
Capital
expenditures........ 15,303 60,856 61,667 17,657 64,574 64,832 64,933 103,851 103,851
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
---------------------------------------------- -----------------------------
PRO FORMA PRO FORMA
AS ADJUSTED FOR THE
FOR THE JUNIOR PREFERRED
PRO FORMA RECENT OFFERINGS STOCK OFFERING
ACTUAL (5) (5)(6) ACTUAL (7)
-------- ------------ ---------------- -------- ----------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents...................... $ 78,618 $114,854 $465,369 $149,874 $295,524
Total assets................................... 230,038 280,254 716,819 500,605 646,255
Long-term liabilities.......................... 216,484 210,637 430,637 449,774 449,774
Redeemable stock, options and warrants......... 2,000 2,000 196,739 53,793 199,443
Stockholders' equity (deficit)................. (27,038) 28,339 50,165 (27,583) (27,583)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1996 1996 1996 1996 1997 1997 1997
------------ --------- -------- ------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Network and Selected
Statistical Data(8):
Networks in
operation........... 9 10 15 19 21 28 32 32
Route miles........... 136 200 386 543 697 908 977 977
Fiber miles........... 5,957 9,466 28,476 32,774 48,792 75,867 85,976 85,976
Buildings connected... 100 133 216 532 595 858 1,239 1,239
VGE circuits in
service............. 82,055 125,208 137,431 267,894 384,134 554,883 989,285 989,285
Employees............. 111 142 199 272 322 502 669 669
</TABLE>
- ---------------
(1) Subsequent to June 30, 1996, the Company changed its fiscal year-end from
June 30 to December 31. All data for the fiscal period ended December 31,
1996 is for the six month period ended December 31, 1996.
(2) Pro forma to give effect to the Cybergate Acquisition as if consummated at
the beginning of the earliest period presented.
(3) Minority interest represents a 7.25% ownership of AT&T Credit Corporation in
the Company's subsidiaries that operate its networks in Louisville, Fort
Worth, Greenville, Columbia and El Paso. See "Description of Certain
Indebtedness."
(4) EBITDA consists of net income (loss) before net interest, income taxes,
depreciation and amortization, noncash stock compensation and, in fiscal
year ended June 30, 1995, debt conversion expense of $385,000. It is a
measure commonly used in the telecommunications industry and is presented to
assist in understanding the Company's operating results. However, it is not
intended to represent cash flow or results of operations in accordance with
generally accepted accounting principles ("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 $1.7 million and $1.3
million in the nine months ended September 30, 1996 and 1997, respectively.
See Note 6 of "Notes to Consolidated Financial Statements."
(5) 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.
(6) 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 Unit Warrants based upon
their relative fair values of $49.1 million for the 14 3/4% Preferred Stock
and $21.8 million for the Unit 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 United Offering of
$4.375 million, which includes a solicitation agent fee of $500,000). The
net proceeds of the Debt Offering 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 the 2007 Notes by W.R. Huff
Asset Management Co., LLC 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 Debt
Offering of $3.875 million). The net proceeds from the Junior Preferred
Stock Offering were approximately $145.7 million.
(7) As adjusted for the Junior Preferred Stock Offering, the net proceeds of
which were approximately $145.7 million.
(8) Network and Selected Statistical Data are derived from ACSI's records.
7
<PAGE> 12
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. The following risk factors, together with the other information
set forth in or incorporated by reference in this Prospectus, should be
carefully considered in evaluating the Company and its business before
purchasing the shares of Common Stock offered by this Prospectus.
NEGATIVE CASH FLOW; ANTICIPATED FUTURE LOSSES; SIGNIFICANT FUTURE CAPITAL
REQUIREMENTS; NEED FOR ADDITIONAL CASH.
The Company has never been profitable, has never generated positive cash
flow from consolidated operations and, since its inception, has incurred
significant net operating losses and negative cash flow. As of June 30, 1996,
December 31, 1996 and September 30, 1997, the Company had accumulated deficits
of $47.5 million, $82.4 million and $162.1 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 nine months ended September 30, 1997, the Company incurred a
net operating loss of $58.2 million and generated negative cash flow from
operations of $69.4 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. The
Company currently expects to begin to generate positive cash flow from
operations in the year 2000. However, there can be no assurance that the
Company's networks or any of its other services will ever provide a revenue base
adequate to achieve or sustain profitability or to generate positive cash flow
or that the Company will begin to generate positive cash flow by the year 2000.
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 (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"), 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, approximately $138 million of which had
been raised from the issuance of $220 million of the 2007 Notes (the 2007 Notes,
together with the 2006 Notes and the 2005 Notes, the "Existing Notes"). The 2005
Notes were issued under the indenture dated November 14, 1995 (the "2005
Indenture"), the 2006 Notes were issued under the indenture dated March 21, 1996
(the "2006 Indenture") and the 2007 Notes were issued under the indenture dated
July 23, 1997 (the "2007 Indenture" and together with the 2005 Indenture and
2006 Indenture, the "Existing Indentures"). The Company estimates that from
September 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 $149.9 million of cash and cash equivalents available for this
purpose. The Company continues to use the estimated net proceeds from the Debt
Offering, the Unit Offering 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.
8
<PAGE> 13
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 would have a material adverse effect on its business,
results of operations and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
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, commencing in 1998 the Company
will have substantial cash interest requirements with respect to the 2007 Notes.
The $220.0 million face value of the 2007 Notes will become due July 15, 2007.
As of September 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 September 30, 1997, the Company had approximately $449.8 million of
consolidated outstanding long-term indebtedness. As of September 30, 1997, the
total consolidated liabilities of the Company were approximately $474.4 million.
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
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 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 Existing Notes and its other debt. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of Certain
Indebtedness."
On June 11, 1997, the Company notified the trustee under each of the 2005
Indenture and 2006 Indenture 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 the 2005 Indenture and
2006 Indenture. The incurrence by the Company of such Indebtedness is not
permitted under the 2005 Indenture and 2006 Indenture and, therefore,
constituted an Event of Default (as defined in the 2005 Indenture and 2006
Indenture) under the 2005 Indenture and 2006 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 and Junior Preferred
Stock Offering, the Company issued the 14 3/4% Preferred Stock and the 12 3/4%
Preferred Stock, respectively, dividends on which may be paid, at the Company's
option, either in cash or by the issuance of additional shares of Preferred
Stock;
9
<PAGE> 14
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 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 such Preferred Stock in cash.
The level of the Company's indebtedness and its other obligations could
have important consequences to holders of the Common Stock, 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 Existing Notes and the Preferred Stock; (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.
CERTAIN FINANCIAL AND OPERATING RESTRICTIONS
The Existing Indentures, the AT&T Credit Facility and the Certificates of
Designation relating to the 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 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.
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 managers 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
10
<PAGE> 15
offerings. The Company is taking steps to improve marketing support of its
expanded operations and plans to increase its existing sales force during 1997
and 1998. 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 respond to 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 nine months ended September 30, 1997, approximately
60%, 40% and 24% 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 unbundled network elements and/or resell the local
services of ACSI's competitors, which may materially adversely affect the
Company's business, results of operations and financial condition. Additionally,
in the nine months ended September 30, 1997, approximately 33% 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
11
<PAGE> 16
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 and telecommunications 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. In addition, there can be no assurance that
the Company will be able to expand its 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. Similarly, there can be no assurance that if any of these agreements
are renewed that they may be renewed on terms favorable to the Company.
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 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 September 30, 1997, the Company had posted approximately $8.3
million in performance bonds and letters of credit and expects to post
additional bonds or letters of credit in the future. As of September 30, 1997,
the Company had been required to pledge approximately $4.9 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."
12
<PAGE> 17
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. In the event that negotiations with the ILECs do not
succeed, the Company has a right to seek state PSC arbitration of any unresolved
issues.
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's business, results of operations and financial condition.
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 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.
13
<PAGE> 18
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 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
14
<PAGE> 19
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. See "Business -- Competition."
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 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
15
<PAGE> 20
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 Existing
Notes tendered or at a time when the Company is prohibited from purchasing the
Existing Notes, an Event of Default (as defined in the Indentures) 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 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 September 30, 1997, the Company's directors and executive officers
beneficially owned approximately 5.8% of the outstanding Common Stock. As of
September 30, 1997, the principal stockholders of the Company beneficially owned
approximately 64.5% of the outstanding Common Stock, including 38.2%, 21.8% and
8.4% of the outstanding Common Stock which is beneficially owned by The Huff
Alternative Income Fund, L.P. ("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
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<PAGE> 21
(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 which shares have voting
rights in certain circumstances. 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 Existing Notes to require the Company to repurchase 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
Existing Indentures) for all Existing Notes tendered, or at a time when the
Company is prohibited from purchasing the Existing Notes, an Event of Default
(as defined in the Existing Indentures) could occur. See "Management,"
"Principal Stockholders," and "Description of Certain Indebtedness -- The
Existing Notes."
LIMITED TRADING MARKET AND POSSIBLE VOLATILITY OF PRICE OF THE COMMON STOCK.
The Company's Common Stock has been listed on the Nasdaq Stock Market since
May 22, 1996, is thinly traded and has experienced significant price volatility.
There can be no assurance that, after the completion of this offering, the
Company's Common Stock will be traded more actively or that its price
fluctuations will be less volatile. From March 3, 1995 through May 21, 1996, the
Company's Common Stock was quoted on the Nasdaq SmallCap Market. The market
price of the Common Stock could be subject to wide fluctuations in response to
quarterly variations in the Company's results of operations, changes in earnings
estimates by analysts, conditions in the telecommunications industry
(particularly among CAPs or CLECs) or general market or economic conditions. In
addition, in recent years, the stock market has experienced price and volume
fluctuations. These fluctuations often have had a particularly substantial
effect on the market prices for many emerging growth companies, often unrelated
to their specific operating performances. Such market fluctuations could
adversely affect the market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS.
The Company currently has outstanding 36,959,978 shares of Common Stock.
The 3,726,584 shares of Common Stock offered hereby when sold pursuant to this
Registration Statement will be freely transferable without restriction under the
Securities Act. Of the remaining shares outstanding, 6,092,390 shares are
"restricted securities" as that term is defined in Rule 144 under the Securities
Act. As of October 31, 1997, 713,126 of the restricted shares are freely
transferable under Rule 144(k) and 3,957,354 of the restricted shares are
saleable subject to certain volume and manner of sale restrictions under Rule
144.
Of the 19,088,349 shares reserved for issuance upon exercise of options and
warrants outstanding on October 31, 1997 and in connection with the Company's
Employee Stock Purchase Plan, 2,352,640 shares and 8,594,035 shares have been
registered under the Securities Act on Form S-3 and Form S-8 registration
statements, respectively. Accordingly, the shares issued upon exercise of such
options or warrants or in connection with the Employee Stock Purchase Plan, will
be freely transferable unless held by affiliates of the Company.
The future sale pursuant to Rule 144 or pursuant to a registration
statement for the outstanding restricted shares of Common Stock or the Common
Stock underlying the options and warrants, the future sale of Common Stock for
the Company's own account, or the exercise of registration rights by any
security holder or the perception that such sales or exercise could occur, could
have an adverse effect on the market price of the Common Stock and could impair
the Company's ability to raise capital through an offering of Common Stock.
REGISTRATION RIGHTS
Holders of substantially all of the shares of Common Stock (i) outstanding
(other than shares issued in the Common Stock Offering) and (ii) issuable upon
exercise of outstanding options and warrants have either piggyback or demand
registration rights relating to those shares. In connection with the Common
Stock Offering, holders of a significant number of outstanding shares of Common
Stock and a significant number of shares issued or issuable upon exercise of
options and warrants waived their rights to "piggyback" on prior Company
offerings and/or to demand registration of their shares until 180 days after
April 15, 1997. In
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<PAGE> 22
exchange for the waivers of piggyback registration rights, the Company agreed to
use its commercially reasonable efforts to register all shares as to which
piggyback and demand rights were waived on or before the 210th day following
April 15, 1997 (in which registration all security holders with piggyback
registration rights may have the right to include their shares). Additionally,
the Company has an obligation to register under the Securities Act 1,000,000 of
the 1,048,000 shares of Common Stock issued in the Cybergate Acquisition no
later than 210 days after April 15, 1997, but in no event later than December
31, 1997, and is required to register up to 150,000 additional shares which may
be issued in connection with the Cybergate Acquisition no later than 60 days
after such issuance. These shares will be freely transferable upon such
registration. The Company also has an obligation to register under the
Securities Act any shares issued to MCI in the MCI Transaction (see
"Summary -- Recent Developments"), on the later of (i) April 15, 1998 and (ii)
the 121st day following the effective date of a demand registration statement
filed for MCI (which the Company may be obligated to file as early as seven
months after April 15, 1997). MCI also has piggyback rights in respect of such
shares. Such shares will be freely transferable upon any such registration. The
Company has contacted all persons with registration rights to determine their
interest in having the outstanding shares of Common Stock or shares of Common
Stock issuable upon exercise of outstanding options or warrants held by such
persons included in the Registration Statement of which this Prospectus forms a
part. Those shareholders who responded affirmatively have been included as
Selling Stockholders herein. See "Selling Stockholders."
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<PAGE> 23
USE OF PROCEEDS
The Selling Stockholders will receive all of the net proceeds from the
shares of Common Stock sold pursuant to this Prospectus and the Company will not
receive any such proceeds. If all of the Options and the Warrants are exercised,
the Company will receive estimated net proceeds of approximately $8,263,828. The
Company intends to utilize any proceeds received from the exercise of the
Options and the Warrants primarily 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. There
can be no assurance that any of the Options or the Warrants will be exercised.
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<PAGE> 24
CAPITALIZATION
The following table sets forth the total cash and cash equivalents and
capitalization of the Company (i) as of September 30, 1997, and (ii) as adjusted
to give pro forma effect to the Junior Preferred Stock Offering and application
of the estimated net proceeds therefrom. The net proceeds of the Junior
Preferred Stock Offering were approximately $145.7 million. This table should be
read in conjunction with the Consolidated Financial Statements and related notes
thereto included in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------------------
AS ADJUSTED PRO FORMA
FOR THE JUNIOR PREFERRED
ACTUAL STOCK OFFERING(1)
-------------- -------------------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................. $ 149,874 $ 295,524
Restricted assets invested in Marketable Securities(2).... 74,945 74,945
--------- ---------
Total cash and restricted assets.......................... $ 224,819 $ 370,469
========= =========
Long term debt
12 3/4% Senior Discount Notes due 2006.................. $ 121,805 $ 121,805
13% Senior Discount Notes due 2005...................... 77,690 77,690
13 3/4% Senior Notes due 2007........................... 220,000 220,000
Notes payable(3)........................................ 30,012 30,012
Other long-term liabilities............................. 267 267
--------- ---------
Total long-term debt............................ 449,774 449,774
Redeemable stock and options.............................. 53,793 199,443
Stockholders' equity (deficit):
Common Stock, par value $0.01 per share, 75,000,000
shares authorized, 36,386,323 shares issued and
outstanding at September 30, 1997(4)(5).............. 364 364
Additional paid-in capital.............................. 134,133 134,133
Accumulated deficit..................................... (162,080) (162,080)
--------- ---------
Total stockholders' equity (deficit)............ (27,583) (27,583)
--------- ---------
Total capitalization............................ $ 475,984 $ 621,634
========= =========
</TABLE>
- ---------------
(1) As adjusted to give pro forma effect to the Junior Preferred Stock Offering
as if it had occurred on September 30, 1997. 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 2007 Notes. The Company placed approximately
$70 million of the net proceeds realized from the Debt Offering,
representing funds sufficient to pay the first five interest payments on the
2007 Notes, into an 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 September 30, 1997.
(4) Excludes 8,060,344 and 11,028,005 shares reserved for issuance upon exercise
of options and warrants, respectively, outstanding at September 30, 1997, at
a weighted average exercise price of $5.23 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 September 30, 1997, would be approximately $99.9 million.
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<PAGE> 25
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL DATA
The following Unaudited Pro Forma Condensed Consolidated Financial Data
consist of Unaudited Pro Forma Condensed Consolidated Statements of Operations
for the fiscal year ended June 30, 1996, for the fiscal period ended December
31, 1996 and for the nine months ended September 30, 1997 and an Unaudited Pro
Forma Condensed Consolidated Balance Sheet as of December 31, 1996
(collectively, the "Pro Forma Statements"). The Unaudited Pro Forma Condensed
Consolidated Statements of Operations give effect to the Cybergate Acquisition
as if it occurred on July 1, 1995 and the Unaudited Pro Forma Condensed
Consolidated Balance Sheet gives effect to the Cybergate Acquisition as if it
occurred on December 31, 1996.
Management believes that, on the basis set forth herein, the Pro Forma
Statements reflect a reasonable estimate of the Cybergate Acquisition based on
currently available information. The pro forma financial data are presented for
informational purposes only and do not purport to represent what the Company's
financial position or results of operations would have been had the Cybergate
Acquisition in fact occurred on the dates assumed or that may result from future
operations. The pro forma data should be read in conjunction with the Company's
Consolidated Financial Statements and related notes thereto which are included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1996 FISCAL PERIOD ENDED DECEMBER 31, 1996(1)
---------------------------------------------- ----------------------------------------------
THE THE
THE COMPANY THE COMPANY
COMPANY CYBERGATE ADJUSTMENTS PRO FORMA COMPANY CYBERGATE ADJUSTMENTS PRO FORMA
-------- --------- ----------- --------- -------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
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>
- ---------------
Notes appear on following page.
21
<PAGE> 26
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED SEPTEMBER 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................................................... $ 35,847 $218 $ 36,065
Operating expenses:
Network development and operations......................... 28,668 94 28,762
Selling, general and administrative........................ 47,975 94 48,069
Noncash stock and compensation............................. 1,324 -- 1,324
Depreciation and amortization.............................. 16,077 58 16,135
-------- ---- --------
Total operating expenses................................... 94,044 246 94,290
-------- ---- --------
Operating income (loss).................................... (58,197) (28) (58,225)
Non-operating income (expense)............................. (21,443) 3 (21,440)
-------- ---- --------
Income (loss) before minority interest..................... (79,640) (25) (79,665)
Minority interest.......................................... -- -- --
-------- ---- --------
Net income (loss).......................................... (79,640) (25) (79,665)
Preferred stock dividends and accretion.................... (3,584) -- (3,584)
-------- ---- --------
Net income (loss) to common stockholders................... $(83,224) $(25) $(83,249)
======== ==== ========
Net loss per common stockholder............................ $ (3.45) $ (3.44)
======== ========
Weighted average number of common shares outstanding....... 24,140 24,197
</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 2005 Notes and the 2006 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).
22
<PAGE> 27
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.
23
<PAGE> 28
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 nine months ended September 30, 1996 and September 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 nine months ended September 30, 1997 are not necessarily
indicative of results for a twelve-month fiscal year.
<TABLE>
<CAPTION>
FISCAL
FISCAL YEAR SIX MONTHS PERIOD NINE MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, DECEMBER 31, DECEMBER 31, SEPTEMBER 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 $ 5,239 $ 35,847
Operating expenses.............................. 14,797 24,543 7,966 34,434 28,535 94,044
-------- -------- -------- -------- -------- --------
Income (loss) from operations................... (14,408) (21,128) (6,977) (27,444) (23,296) (58,197)
Interest and other income....................... 218 4,410 777 2,757 5,093 3,893
Interest and other expense...................... (170) (10,477) (2,835) (10,390) (13,653) (25,336)
Debt conversion expense......................... (385) -- -- -- -- --
-------- -------- -------- -------- -------- --------
Net income (loss) before minority interest...... (14,746) (27,195) (9,035) (35,077) (31,856) (79,640)
Minority interest(1)............................ 48 413 156 160 353 --
-------- -------- -------- -------- -------- --------
Net income (loss)............................... (14,698) (26,782) (8,879) (34,917) (31,503) (79,640)
Preferred stock dividends and accretion......... (1,071) (3,871) (1,854) (2,003) (3,024) (3,584)
-------- -------- -------- -------- -------- --------
Net income (loss) to common stockholders........ $(15,769) $(30,653) $(10,734) $(36,920) $(34,527) $(83,224)
======== ======== ======== ======== ======== ========
Net income (loss) per common share.............. $ (3.30) $ (4.96) $ (1.82) $ (5.48) $ (5.22) $ (3.45)
======== ======== ======== ======== ======== ========
Weighted average shares outstanding............. 4,772 6,185 5,901 6,734 6,614 24,140
OTHER DATA:
EBITDA(2)....................................... $ (7,443) $(14,901) $ (4,855) $(21,822) $(16,520) $(40,796)
Depreciation and amortization................... 498 3,078 763 4,911 4,717 16,077
Capital expenditures............................ 15,303 60,856 17,657 64,574 64,933 103,851
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents....................... $ 20,351 $134,116 $ 57,348 $ 78,618 $102,819 $149,874
Total assets.................................... 37,627 223,600 147,935 230,038 214,540 500,605
Long-term liabilities........................... 4,723 189,072 110,176 216,484 204,721 449,774
Redeemable stock, options and warrants.......... 2,931 2,155 2,660 2,000 2,155 53,793
Stockholders' equity (deficit).................. 22,141 8,982 26,308 (27,038) (5,680) (27,583)
</TABLE>
- ---------------
(1) Minority interest represents a 7.25% ownership of AT&T Credit Corporation in
the Company's subsidiaries that operate its networks in Louisville, Fort
Worth, Greenville, Columbia and El Paso. See "Description of Certain
Indebtedness."
(2) EBITDA consists of net income (loss) before net interest, income taxes,
depreciation and amortization and noncash stock compensation and, in fiscal
year ended June 30, 1995, debt conversion expense of $385,000. It is a
measure commonly used in the telecommunications industry and is presented to
assist in understanding the Company's operating results. However, it is not
intended to represent cash flow or results of operations in accordance with
Generally Accepted Accounting Principles. Noncash compensation expense
associated with employee stock options was $6.4 million and $2.7 million in
fiscal years ended June 30, 1995 and 1996, respectively, $1.2 million and
$550,000 in the six months ended December 31, 1995 and fiscal period ended
December 31, 1996, respectively and $1.7 million and $1.3 million in the
nine months ended September 30, 1996 and 1997, respectively. See Note 6 of
"Notes to Consolidated Financial Statements."
24
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Prospective investors are cautioned that such
statements are only predictions and that actual events or results may differ
materially. In evaluating such statements, prospective investors should
specifically consider the various factors identified in this Prospectus,
including the matters set forth under the caption "Risk Factors," which could
cause actual results to differ materially from those indicated by such
forward-looking statements. The following discussion should be read in
conjunction with the consolidated financial statements and the related notes
thereto included elsewhere 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 September 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 September 30, 1997, the Company had 32 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 September 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 nine voice and 40 data switches totaling $20.8 million at interest rates
ranging from 7% to 11% over terms ranging from three to seven years, with annual
payments increasing over the term of each lease. The Company has successfully
negotiated approximately $19 million in additional long term operating leases
for an estimated eight voice and 20 data switches 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
25
<PAGE> 30
local switched voice services will be generated from fixed and usage-based
charges billed directly to the end user at rates below those charged by ILECs
for similar services. The Company 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 September 30, 1997, the Company was operating 32 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
26
<PAGE> 31
management to be between approximately $0.5 million and $1.0 million per
network, are amortized over the anticipated life of the network. These costs
vary depending on the size of the market, the length of time required to
build-out the network and the rate of growth of the customer base.
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 September 30, 1997, the Company was generating revenues from
32 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 current cash
resources during the first quarter of 2000. The Company currently expects to
begin generating positive cash flow from operations in the year 2000. However,
there can be no assurance that the Company's networks or any of its other
services will ever provide a revenue base adequate to sustain profitability or
generate positive cash flow.
RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE AND NINE
MONTH PERIODS ENDED SEPTEMBER 30, 1996.
Revenues
The Company reported an increase in revenues to $16.1 million for the three
months ended September 30, 1997 compared with revenues of $2.8 million for the
three months ended September 30, 1996. For the nine months ended September 30,
1997, revenues increased to $35.8 million compared with $5.2 million for the
same period of 1996. The increase in revenues is due to an increase in the
networks in operation and expanded service offerings in each market. The 1997
revenues continue to be derived from significant growth in dedicated services,
data services, Internet services and local switched voice services. For 1996,
substantially all of the revenues were derived from the provision of dedicated
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
September 30, 1996.............. 543 32,774 532 267,874 269
March 31, 1997.................. 908 75,867 858 554,883 502
June 30, 1997................... 957 82,693 1,083 886,375 559
September 30, 1997.............. 977 85,976 1,239 989,285 669
</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 months ended
September 30, 1997 increased to $10.6 million from $3.7 million for the same
period of 1996. The increase is due to significant increases in personnel,
network development and non-payroll operating expenses. Related personnel costs
increased to $4.0 million in the quarter ended September 30, 1997, from
approximately $2.8 million in the quarter ended September 30, 1996. Other
operating expenses, which include expenses such as contract labor and legal
27
<PAGE> 32
expenses, travel expenses, rent, utilities, charges and taxes increased to $6.6
million for the quarter ended September 30, 1997 from approximately $0.9 million
for the quarter ended September 30, 1996.
For the nine months ended September 30, 1997, network development and
operating expenses increased to $28.7 million from $6.1 million for the nine
months ended September 30, 1996. This increase is due to significant increases
in personnel, network development and non-payroll operating expenses. Related
personnel costs increased to $10.5 million for the nine months ended September
30, 1997, from approximately $5.8 million for the same period of 1996. Other
operating expenses, increased to $18.2 million for the nine months ended
September 30, 1997 from approximately $0.3 million for the nine months ended
September 30, 1996.
For the three months ended September 30, 1997, selling, general and
administrative expenses increased to $18.2 million from $5.7 million for the
same period of 1996. Related personnel costs increased to $7.6 million for the
quarter ended September 30, 1997 from $1.5 million for the quarter ended
September 30, 1996. Corresponding operating costs increased to $10.6 million for
the quarter ended September 30, 1997 from $4.2 million for the quarter ended
September 30, 1996. This increase reflected costs associated with the Company's
efforts to significantly expand 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 nine months ended September 30, 1997, selling, general and
administrative expenses increased to $48.0 million from $16.1 million for the
nine months ended September 30, 1996. Related personnel costs increased to $19.7
million for the nine months ended September 30, 1997 from $3.2 million for the
nine months ended September 30, 1996. Corresponding operating costs increased to
$28.3 million for the nine months ended September 30, 1997 from $12.9 million
for the same period of 1996.
Depreciation and amortization expenses increased to $6.6 million for the
three months ended September 30, 1997 from $2.4 million for the three months
ended September 30, 1996. For the nine months ended September 30, 1997,
depreciation and amortization increased to $16.1 million from $4.7 million for
the same period of 1996. As of September 30, 1997, the Company increased its
capital assets to $250.4 million compared to $144.4 million at December 31, 1996
and $101.9 million as of September 30, 1996. Non-cash stock compensation expense
increased to $0.5 million for the quarter ended September 30, 1997 from $0.2
million for the quarter ended September 30, 1996. For the nine months ended
September 30, 1997, non-cash compensation expense decreased to $1.3 million from
$1.7 million for the same period of 1996.
Interest and Other Expenses
Interest and other income increased to $2.8 million for the three months
ended September 30, 1997 compared with $1.5 million for the same period of 1996.
For the nine months ended September 30, 1997 interest and other income decreased
to $3.9 million from $5.1 million for the same period ended 1996. Interest and
other expense increased to $12.9 million from $6.0 million for the quarters
ended September 30, 1997 and 1996, respectively. For the nine months ended
September 30, 1997 and 1996, interest and other expense increased to $25.3
million from $13.7 million respectively. The increase in interest and other
income for the quarter reflects the increase in earnings from the proceeds
received from the 2007 Notes and the 14 3/4% Preferred Stock which have been
invested. The increase in interest and other expenses reflected the accrual of
interest related to the 2005, 2006 and 2007 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 of 1997. Payments of
interest on the 2005 Notes, 2006 Notes and the 2007 Notes will not begin until
May 2001, October 2001 and January 1998, respectively.
28
<PAGE> 33
FISCAL PERIOD ENDED DECEMBER 31, 1996 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1995
Revenues
During the fiscal period ended December 31, 1996, the Company recorded
revenues of $7.0 million as compared to revenues of $988,877 during the six
months ended December 31, 1995. Four of the largest IXCs accounted for
approximately $2.8 million, or 40%, of revenues for the fiscal period ended
December 31, 1996.
Other network information is as follows:
<TABLE>
<CAPTION>
NETWORKS VOICE
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
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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 began in the first quarter of
1997, payments of interest on the 2005 Notes will not begin until November 2000,
payments of interest on the 2006 Notes will not begin until October 2001 and
payments of interest on the 2007 Notes will begin in January, 1998.
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.
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Interest and Other Expenses
Interest and other income increased to $4.4 million for fiscal 1996 from
$217,525 in fiscal 1995. Interest expense and other costs increased to $10.5
million in fiscal 1996 from $170,095 in fiscal 1995. These increases in interest
income and expenses reflected the significant increase in available funds from
the Company's sale of its 9% Series B Preferred Stock in June and November 1995
and the 2005 Notes in November 1995. The increase in interest and other expenses
reflected the accrual of interest related to the 2005 Notes and the Company's
increased borrowings under the AT&T Credit Facility. Payments of principal and
interest on the AT&T Credit Facility began 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 the indentures governing the 2005 Notes and the 2006 Notes,
respectively. On July 23, 1997, the Company completed the sale of the 2007
Notes. Of the total net proceeds of $208.0 million, the Company placed $70.0
million representing funds sufficient to pay the first five semi-annual interest
payments on the 2007 Notes into an escrow account for the benefit of the holders
thereof. The Company intends to use the remaining proceeds from the sale of the
Existing Notes, the 14 3/4% Preferred Stock and the 12 3/4% Preferred Stock
towards 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
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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
remaining 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 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.
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 14 3/4% 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.
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
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security for the loan. During fiscal 1995, the Company's subsidiaries in
Louisville, Fort Worth, Greenville and Columbia entered into loan agreements
under the AT&T Credit Facility providing for AT&T Credit Corporation funding of
up to $19.8 million in the aggregate, and, in September 1995, the Company's
subsidiary in El Paso entered into a loan agreement under the AT&T Credit
Facility providing for up to $5.5 million of AT&T Credit Corporation funding. As
of September 30, 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
million, which is the maximum amount of credit the Company is allowed to borrow
in its Secured Credit Facility (as defined in the Indentures relating to the
Existing 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
December 31, 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 purchasers of the 14 3/4%
Preferred Stock 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 the offering of the 2007 Notes, 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 the 2005 Indenture
and 2006 Indenture 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 the 2005 Indenture or 2006 Indenture. The
incurrence by the Company of such Indebtedness was not permitted under the 2005
Indenture or 2006 Indenture and therefore, constituted an Event of Default (as
defined in the 2005 Indenture and 2006 Indenture) under each of the 2005
Indenture or 2006 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.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 129 (FAS 129), "Disclosure of Information
about Capital Structure." The Company is required to adopt the provisions of
this Statement for fiscal years ending after December 15, 1997. This Statement
continues the previous requirement to disclose certain information about an
entity's capital structure found in APB Opinions No. 10, "Omnibus
Opinion -- 1966," No. 15, "Earnings per Share," and FASB Statement No. 47,
"Disclosure of Long-Term Obligations," for entities that were subject to the
requirements of those standards. As the Company has been subject to the
requirements of each of those standards, adoption of FAS No. 129 will have no
impact on the Company's financial statements.
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In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (FAS No. 130), "Reporting Comprehensive
Income." FAS No. 130 established standards for the reporting and display of
comprehensive income and its components in the financial statements. The Company
is required to adopt the provisions of this Statement for fiscal years beginning
after December 15, 1997. Earlier application is permitted; however, upon
adoption the Company will be required to reclassify previously reported annual
and interim financial statements. The Company believes that the disclosure of
comprehensive income in accordance with the provisions of FAS No. 130 will not
impact the manner of presentation of its financial statements as currently and
previously reported.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (FAS No. 131), "Disclosure about Segments
of an Enterprise and Related Information." FAS No. 131 requires the Company to
present certain information about operating segments and related information,
including geographic and major customer data, in its annual financial statements
and in condensed financial statements for interim periods. The Company is
required to adopt the provisions of this Statement for fiscal years beginning
after December 15, 1997. Earlier application is permitted; however, upon
adoption the Company will be required to restate previously reported annual
segment and related information in accordance with the provisions of FAS No.
131. The Company has not completed its analysis of the impact on the financial
statements that will be caused by the adoption of this Statement.
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BUSINESS
INDUSTRY OVERVIEW
The continuing deregulation of the telecommunications industry and
technological change have resulted in an increasingly information-intensive
business environment. Regulatory, technological, marketing and competitive
trends have expanded substantially the Company's opportunities in the converging
voice and data communications services markets. Regulatory initiatives, such as
the Federal Telecommunications Act, are expected to expand opportunities in the
local telecommunications services market, the size of which is estimated to be
approximately $100 billion in 1997. Technological advances, including rapid
growth of the Internet, the increased use of packet switching technology for
voice communications and the growth of multimedia applications, are expected to
result in substantial growth in the high-speed data services market to
approximately $10 billion by 2000 compared to $1 billion in 1995.
Dedicated Services. Competition in the local exchange services market
began in the mid-1980s. In New York City, Chicago and Washington, D.C., newly
formed companies provided dedicated non-switched services by installing fiber
optic facilities connecting POPs of IXCs within a metropolitan area and, in some
cases, connecting business and government end-users with IXCs. Most of the early
CAPs operated limited networks in the central business districts of major cities
in the U.S. where the highest concentration of voice and data traffic, including
IXC traffic, is typically found. CAPs used the substantial capacity and
economies of scale inherent in fiber optic cable to offer customers service that
was generally less expensive and of higher quality than could be obtained from
the ILECs due, in part, to antiquated copper-based facilities used in many ILEC
networks.
Local Switched Voice Services. Initially, CAPs could compete effectively
only for special access and private line services to customers in buildings
directly connected to their separate networks, but the FCC Interconnection
Decisions in 1992 and 1993 allowed CAPs to increase the number of customers and
markets serviced significantly without physically expanding their networks.
Those Interconnection Decisions also enabled CAPs to provide interstate switched
access services in competition with ILECs, which has encouraged the development
of the competitive interstate switched access market. The Company believes that
competition in this market will be further enhanced because the Federal
Telecommunications Act requires (i) removal of state and local entry barriers,
(ii) ILECs to provide interconnections to their facilities, and (iii) access to
rights-of-way. In addition, to the extent that ILECs begin to compete with IXCs
for long distance services, IXCs may have a competitive incentive to move access
business away from ILECs to CLECs, and CLEC market share may increase.
Data Communications Services. The Company believes that high-speed data
communications services represent one of the fastest growing segments of the
telecommunications services market, due in part to the continuing proliferation
of computers and the increasing need to interconnect these computers via local
and wide area networks, the dramatic growth of the Internet and the emergence of
multimedia applications. Together, these applications have spawned numerous
network technologies and communications protocols to support legacy, current and
emerging needs. The domestic network infrastructure currently supporting both
voice and data transport requirements, which focuses on IP switching and framed
relay services, is being strained by the increasing demand for high-bandwidth
transport at both the local and national levels. The Company believes that the
increasing volume and complexity of high-speed applications will further strain
the domestic network infrastructure and create an opportunity for ACSI to
provide a single high-quality ATM-based network capable of consistently
supporting diverse data communications needs.
- Internet Access Services. Businesses are increasingly using the Internet
to transmit e-mail, engage in commercial transactions (e.g., electronic
commerce) and develop internal communications networks, or "intranets."
Increasing business utilization of the Internet has added to the demand
for higher-speed access (i.e., services connecting users to the
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.
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- 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. The Company also
recently began providing 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
September 30, 1997, the Company's sales force in this area was made up of
178 sales people, which represents an increase of 123 sales people since
December 31, 1996, and is expected to increase to 210 sales people by the
end of 1997 or during 1998.
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 MCI 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 "Summary -- Recent Developments".
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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 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 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 compensation
for a number of its key executives away from being based upon new network
development and growth to being based upon revenue and EBITDA (as defined
herein).
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
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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.
- 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, 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 end of 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 premises 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.
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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-
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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),
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
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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 the end of December 1997. Toward this end, the Company
had long-term lease commitments for nine initial switches as of September 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
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at competitive prices, will allow it to compete effectively with the ILECs,
which may have not yet fully deployed fiber optic networks in many of the
Company's target markets. The Company currently prices its services at a modest
discount compared to the prices of the ILEC while providing what the Company
believes is a higher level of customer service. The Company's fiber optic
networks will provide both diverse access routing and redundant electronics,
design features not widely deployed by the ILEC's networks (which were
originally designed in tree and branch or star configurations).
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 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
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frame relay service. ATM offerings are only beginning to emerge. ATM service is
currently being offered by most of the original RBOCs, WorldCom, Inc., AT&T,
MCI, Sprint and WilTel, Inc. A number of other data communications providers,
CLECs and facilities-based CATVs have announced their intentions to offer ATM
services in the future.
A number of equipment vendors, systems integrators and Internet access and
service providers offer components of managed services. The Company believes
that it will have a competitive advantage over those managed services providers
that do not have local loop facilities.
Local Switched Voice Services. In all of the markets where the Company is
currently operating or plans to operate, the ILEC currently is a de facto
monopoly provider of local switched voice services, including enhanced voice
services. The Company expects that the Federal Telecommunications Act will
enable CLECs, CATVs, electric utilities, cellular and wireless providers, and
others to offer local switched voice services in competition with the ILECs in
the Company's target markets. The Company believes that its strategy to leverage
its basic network infrastructure into higher margin service offerings, migrating
to local switched voice services, will allow it to procure a profitable share of
the market. The Company's ability to cross-market services will create
opportunities to increase margins by migrating customers from off-network to
on-network status. As the number of end-users in a given off-network building
increases for all service offerings, the economics improve to the point where
the capital costs of connecting the building to ACSI's network are more than
covered by the increased margins represented by retaining the portion of
customer revenue paid out to the ILEC.
Competition for enhanced voice services primarily consists of basic voice
mail services offered by ILECs and cellular providers in connection with their
core offerings and customer premise-based voice mail platforms. The voice mail
offerings of the ILECs typically have limited features and flexibility compared
to the services contemplated by the Company; thus, the Company believes its
enhanced voice messaging services and focused sales efforts should be able to
penetrate effectively those segments of the small and mid-sized business market
that require more features and/or flexibility than services offered by the
ILECs. Customer premise-based platform voice mail offerings typically require a
relatively large up front capital investment and recurring maintenance costs and
are generally marketed to large companies rather than the small and mid-sized
end-users targeted by the Company.
Internet Services. The market for Internet access services is extremely
competitive. There are no substantial barriers to entry, and the Company expects
that competition will intensify in the future. The Company has entered this
market principally through the Cybergate Acquisition and believes that its
ability to compete successfully will depend upon a number of factors, including
market presence; the capacity, reliability and security of its network
infrastructure; ease of access to and navigation of the Internet; the pricing
policies of its competitors and suppliers; the timing of introductions of new
products and services by the Company and its competitors; the Company's ability
to support existing and emerging industry standards; and industry and general
economic trends.
The Company's current and prospective competitors include many large
companies that have substantially greater market presence and financial,
technical, marketing and other resources than the Company. The Company expects
to compete directly or indirectly with the following categories of companies:
(1) other international, national and regional commercial Internet service
providers; (2) established on-line services companies that currently offer or
are expected to offer Internet access; (3) computer hardware and software and
other technology companies; (4) IXCs; (5) RBOCs; (6) CATVs; and (7) nonprofit or
educational Internet service providers. The ability of these competitors or
others to bundle services and products with Internet connectivity services could
place the Company at a significant competitive disadvantage in this services
market.
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
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retain jurisdiction over the Company's facilities and services to the extent
they are used to originate or terminate intrastate communications. Local
governments may require the Company to obtain licenses or franchises regulating
use of public rights-of-way necessary to install and operate its networks.
Federal Regulation
The Federal Telecommunications Act. On February 1, 1996, the U.S. Congress
enacted comprehensive telecommunications reform legislation, which the President
signed into law as the Federal Telecommunications Act on February 8, 1996. The
Company believes that this legislation is likely to enhance competition in the
local telecommunications marketplace because it (i) removes state and local
entry barriers, (ii) requires ILECs to provide interconnections to their
facilities, (iii) facilitates the end-users' choice to switch service providers
from ILECs to CLECs such as the Company and (iv) requires access to
rights-of-way. The legislation also will tend to enhance the competitive
position of the ILECs and increase local competition by IXCs, CATVs and public
utility companies.
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 applications for authority to provide long distance services to
consumers in South Carolina and Louisiana are 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.
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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. The FCC and several parties have
petitioned the Supreme Court for review of this decision as discussed
below.
- 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.
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<PAGE> 50
- 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.
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<PAGE> 51
- 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 Orders, 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.
On reconsideration, the Eighth Circuit upheld its prior decision as to
recombination of network elements. Various parties have sought reconsideration
and filed petitions for certiorari to the U.S. Supreme Court seeking reversal of
the Eighth Circuit decisions on recombination rules, "pick and choose" rules and
the FCC's jurisdiction to set prices for local communications facilities and
services. 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 the
District of Columbia. 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 obtained
authority from the FCC 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
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<PAGE> 52
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 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
Intercon-
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nection 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 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
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required to preempt any such state or local requirements to the extent necessary
to enforce the Federal Telecommunications Act's open market entry requirements.
States and localities may, however, continue to regulate the provision of
intrastate telecommunications services, and, presumably, require carriers to
obtain certificates or licenses before providing service.
Some states in which the Company operates are considering legislation which
could impede efforts by new entrants in the local services market to compete
effectively with ILECs. The Arkansas legislature, for example, recently enacted
legislation which curtails the ability of the state PSC to make available
additional network elements to CLECs or authorize CLECs to receive universal
service funding. On March 25, 1997, the Company filed a petition for Declaratory
Ruling with the FCC asking it to preempt portions of the Arkansas statute.
As of September 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, Kansas, Kentucky, Louisiana, Maryland, Mississippi, Missouri, Nevada,
New Mexico, Oklahoma, South Carolina, Tennessee, Texas and Virginia. In
addition, the Company has obtained PSC certification to provide interLATA
services in a majority of these states and is seeking such certification in
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 Federal 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
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neutral and nondiscriminatory basis" and be "publicly disclosed" by such
government entity. Termination of the existing franchise or license agreements
prior to their expiration dates could have a materially adverse effect on the
Company.
EMPLOYEES
As of September 30, 1997, the Company employed a total of 669 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.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as of the date of this
Prospectus regarding the directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
- ---------------------------------------- --- -------------------------------------------------
<S> <C> <C>
Anthony J. Pompliano.................... 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
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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
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<PAGE> 58
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 Delaware
General Corporation Law (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
54
<PAGE> 59
claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith; that indemnification provided for by Section 145 shall not
be deemed exclusive of any other rights to which the indemnified party may be
entitled; and that the corporation is empowered to purchase and maintain
insurance on behalf of any person who is a or was a director, officer, employee
or agent of the corporation against any liability asserted against him in any
such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liabilities under
Section 145.
There has not been in the past and there is not presently pending any
litigation or proceeding involving a director, officer, employee or agent of the
Company which could give rise to an indemnification obligation on the part of
the Company. In addition, except as described herein, the Board of Directors is
not aware of any threatened litigation or proceeding which may result in a claim
for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
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 Second
Restated Certificate of Incorporation and By-laws is qualified in its entirety
by reference to the complete text of those documents.
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<PAGE> 60
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)
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 of preferred stock.
(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 1996 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.
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<PAGE> 61
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(5) 2.2 3.40 3.875 2/22/03
25,000(5) 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 vesting date.
(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.
(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."
(5) Due to Mr. Tronsrue's resignation effective as of September 3, 1997, these
options were cancelled.
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.
57
<PAGE> 62
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.
58
<PAGE> 63
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, November
15, 1996 and June 25, 1997 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.
Generally, 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, 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
59
<PAGE> 64
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.
60
<PAGE> 65
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 14 3/4% Preferred Stock and 10,000 Unit 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 14 3/4% Preferred Stock
and 7,500 Unit Warrants. The Company has in place policies and procedures that
enable it to comply with the covenants in the Existing Indentures regarding
transactions with affiliates.
The initial purchasers of the 2007 Notes have informed the Company that
W.R. Huff Asset Management Co. LLC ("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 Notes in the private placement of the 2007 Notes, 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 has also agreed to certain non-compete, non-solicitation and
confidentiality provisions expiring on December 31, 1997. Under his employment
agreement, Mr. Kozak had been granted stock options to purchase an aggregate of
1,383,265 shares of the Company's Common Stock at exercise prices ranging from
$0.875 per share to $15.00 per share, of which options to purchase 1,133,265
shares had vested as of his termination. In January 1997, Mr. Kozak exercised
options to purchase 100,000 of these shares.
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<PAGE> 66
PRINCIPAL STOCKHOLDERS
The following table sets forth as of September 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 4.6
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).......................................... 649,932 1.8
Robert H. Ottman(9).......................................... 175,000 *
George M. Tronsrue, III(10).................................. 300,000 *
The Huff Alternative Income Fund, L.P.(11)................... 15,090,140 38.2
ING Equity Partners, L.P. I(12).............................. 7,946,828 21.8
First Analysis Corporation(13).)............................. 3,156,420 8.4
All executive officers and directors as a group (10
persons)................................................... 2,220,800 5.8
</TABLE>
- ---------------
* 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 September 30, 1997 by (ii) the sum of (A)
the number of shares of Common Stock outstanding as of September 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
September 30, 1997 or will become exercisable within 60 days after
September 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, 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").
First Analysis Corporation ("FAC") is an ultimate general partner of Apex
I, Apex II, Productivity and EPEF and may be deemed to be the beneficial
owner of the shares owned by them. FAC disclaims beneficial ownership of
these shares. F. Oliver Niklan, Jr. is the president of FAC and therefore
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 FAC is 233 South Wacker Drive, Suite 9600,
Chicago, IL 60093.
62
<PAGE> 67
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 September 30,
1997, outstanding borrowings under the AT&T Credit Facility totaled
approximately $31.2 million. Interest rates applicable to the loans range from
11.93% to 14.47%.
The loans under the AT&T Credit Facility are secured by all of the assets
of the respective borrowing subsidiary, including its installed fiber optic
system and other equipment. The principal of borrowed amounts is payable in 28
consecutive quarterly installments, beginning with the ninth quarter after the
date of the loan. The principal of borrowed amounts may be prepaid in certain
circumstances, and must be prepaid along with a premium in other circumstances.
Interest is due quarterly. At the borrowing subsidiary's option, the interest
rate may be fixed or variable. The borrowing subsidiary has a one-time option to
convert all variable rate loans to fixed rate loans. Upon certain events of
default, additional interest ranging from 2% to 4% will become payable. Interest
may generally be deferred so long as it would not cause the outstanding
principal balance to exceed the commitment amounts for Capital Loans and for
Equipment Loans (as defined in the loan documents). 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 Existing Notes.
Pursuant to the AT&T Credit Facility, the Company had contributed
approximately $26.4 million in capital to its subsidiaries through September 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 indentures
relating to the Existing 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 December 31, 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
Debt Offering 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
63
<PAGE> 68
Company will repay the AT&T Credit Facility in full and, upon consummation of
the offering of the 2007 Notes, 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.
THE EXISTING NOTES
The terms of the Existing Notes include those stated in the applicable
indenture and those made a part of the applicable indenture by reference to the
Trust Indenture Act of 1939, as in effect on the date of such indenture. The
terms of the Existing Notes are substantially similar. The following summaries
of certain provisions of those 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 indentures.
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 Existing Notes
and do not guarantee the Existing Notes. Therefore, the rights of the holders of
the Existing notes are 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 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 indentures) thereof, or, in the case of any such repurchase on or
after November 1, 2000 in the case of the 2005 Notes, on or after April 1, 2001
in the case of the 2006 Notes and on or after January 15, 2002 in the case of
the 2007 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, certain affiliates of FAC, ING or Huff and, in the case of the 2005
Indenture and 2006 Indenture, Mr. Kozak, acquires more than 35% of the total
voting power of the Company.
Each of the indentures contains certain covenants which, among other
things, restrict the ability of ACSI and certain of its subsidiaries to incur
additional indebtedness, pay dividends or make distributions in respect of
ACSI's capital stock or make certain other restricted payments, create
restrictions on the ability of certain subsidiaries to make distributions on
their capital stock, create liens, enter into transactions with affiliates or
related persons, sell assets, or consolidate, merge or sell all or substantially
all of their assets.
On June 11, 1997, the Company notified the trustee under each of the
indentures governing the 2005 Notes and 2006 Notes 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
such indenture governing the 2005 Notes and 2006 Notes. The incurrence by the
Company of such Indebtedness was not permitted under the 2005 Indenture and 2006
Indenture and, therefore, constituted an Event of Default (as defined under each
of those indentures). 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,
64
<PAGE> 69
interest on the 2005 Notes will accrue at the rate of 13% per annum and will be
payable in cash semi-annually on May 1 and November 1, commencing May 1, 2001.
The 2005 Notes will be redeemable, at the option of ACSI at any time, in whole
or in part, on or after November 1, 2000, at 110%, 106 2/3% and 103 1/3% of the
principal amount for the twelve months following November 1, 2000, 2001 and
2002, respectively, plus accrued and unpaid interest, if any, to the date of
redemption.
The 2006 Notes
The 2006 Notes mature on April 1, 2006. The yield on the 2006 Notes equals
12 3/4% per annum, computed on a semi-annual bond equivalent basis and
calculated from March 21, 1996. The 2006 Notes will accrete at a rate of
12 3/4%, compounded semi-annually, to an aggregate principal amount of
$120,000,000 by April 1, 2001. Cash interest will not accrue on the 2006 Notes
prior to April 1, 2001. Thereafter, interest on the 2006 Notes will accrue at
the rate of 12 3/4% per annum and will be payable in cash semi-annually on April
1 and October 1, commencing October 1, 2001. The 2006 Notes will be redeemable,
at the option of ACSI at any time, in whole or in part, on or after April 1,
2001 at 106 3/8%, 104 1/4% and 102 1/8% of the principal amount for the twelve
months following April 1, 2001, 2002 and 2003, respectively, plus accrued and
unpaid interest, if any, thereon, to the date of repurchase.
The 2007 Notes
The 2007 Notes mature on July 15, 2007. The 2007 Notes bear interest at a
rate of 13 3/4% per annum from July 23, 1997 payable semi-annually in cash on
January 15, and July 15, commencing January 15, 1998. The Company placed
approximately $70.0 million of the proceeds from the sale of the 2007 Notes,
representing funds sufficient to pay the first five semi-annual interest
payments on the 2007 Notes, into an escrow account to held by the escrow agent
for the benefit of the holders of the 2007 Notes. The 2007 Notes are redeemable,
at the option of the ACSI, in whole or in part, on or after July 15, 2002 at
106.875%, 105.156%, 103.438%, 101.719% and 100% of their principal amount for
the twelve months following July 15, 2002, 2003, 2004, 2005 and 2006,
respectively, plus accrued and unpaid interest, if any, thereon, to the date of
repurchase. 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 2007 Notes with the net cash proceeds of one or more Equity
Offerings (as defined in the 2007 Indenture), 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 $143.0 million aggregate principal
amount of the 2007 Notes remains outstanding.
65
<PAGE> 70
SELLING STOCKHOLDERS
GENERAL
The Selling Stockholders purchased the outstanding Common Shares, the
Warrants and the Options in various private placement transactions.
In certain instances the Company has agreed to indemnify the Selling
Stockholders against any liabilities, under the Securities Act or otherwise,
arising out of or based upon any untrue or alleged untrue statement of a
material fact in the Registration Statement or this Prospectus or by any
omission of a material fact required to be stated therein, except to the extent
that such liabilities arise out of or are based upon any untrue or alleged
untrue statement or omission in any information furnished in writing to the
Company by the Selling Stockholders expressly for use in the Registration
Statement. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to its certificate of incorporation and by-laws, the
Company has been informed that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
In connection with the registration of the shares of Common Stock offered
hereby, the Company will supply prospectuses to the Selling Stockholders.
STOCK OWNERSHIP
The table below sets forth (i) the number of shares of Common Stock owned
beneficially by each Selling Stockholder prior to the Offering and (ii) the
number of shares of Common Stock being offered by each Selling Stockholder
pursuant to this Prospectus. Other than the transactions described herein, none
of the Selling Stockholders has had any material relationship with the Company
during the past three years.
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING
SHARES OF COMMON
NUMBER OF NUMBER OF SHARES STOCK TO BE
SHARES TO BE OWNED OWNED
BENEFICIALLY NUMBER OF BENEFICIALLY BENEFICIALLY
OWNED PRIOR SHARES AFTER COMPLETION AFTER COMPLETION
SELLING STOCKHOLDER TO OFFERING OFFERED OF OFFERING OF OFFERING(1)
- ------------------------------------------ ----------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C>
ATIC Management Corp. .................... 778 778 0 0
Thomas R. Benham, Jr.(2).................. 18,000 18,000 0 0
Thomas R. Benham, Sr.(2).................. 489,000 464,000 25,000 0
Brad Peery Capital International, L.P..... 5,756 5,756 0 0
Brad Peery Capital L.P. .................. 49,800 49,800 0 0
Mark Cole(3).............................. 9,798 9,798 0 0
Steven Chrust and Sharon Chrust........... 50,000 50,000 0 0
Mercedes Davila........................... 327 327 0 0
Hare & Co., Oscar Gross Account Barry
Yampol Trust............................ 29,999 29,999 0 0
Peter O. Headley.......................... 13,000 13,000
Gerald Kirschenberg....................... 478 478 0 0
Gerard Klauer Mattison & Co.(4) .......... 730,209 730,209 0 0
Mark T. Koulegeorge....................... 12,500 12,500 0 0
Walter J. Lake............................ 12,500 12,500 0 0
Commonwealth Life Insurance Company --
(Teamsters -- Camden Non-Enhanced)(5)... 500,000 500,000 0 0
MCI MetroAccess Transmission Services,
Inc.(6)................................. 397,582 397,582 0 0
</TABLE>
- ---------------
<TABLE>
<S> <C> <C> <C> <C>
(notes appear on the following page)
</TABLE>
66
<PAGE> 71
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING
SHARES OF COMMON
NUMBER OF NUMBER OF SHARES STOCK TO BE
SHARES TO BE OWNED OWNED
BENEFICIALLY NUMBER OF BENEFICIALLY BENEFICIALLY
OWNED PRIOR SHARES AFTER COMPLETION AFTER COMPLETION
SELLING STOCKHOLDER TO OFFERING OFFERED OF OFFERING OF OFFERING(1)
- ------------------------------------------ ----------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C>
Marvin Saffian & Co....................... 126,000 126,000 0 0
Melco Developments Ltd. .................. 100,000 100,000 0 0
NetRunner, Inc.(7)........................ 172,073 172,073 0 0
Prime II Management, L.P. ................ 111,111 111,111 0 0
Sarah Saffian............................. 2,000 2,000 0 0
E. Maxwell Saffian........................ 2,000 2,000 0 0
Marvin M. Saffian cust. for
Rachel Anne Saffian..................... 2,000 2,000 0 0
Kathleen W. Saffian....................... 5,000 5,000 0 0
William Salatich.......................... 79,322 50,000 29,322 0
Henry Schneider........................... 162,062 115,000 47,062 0
Lawrence Schneider........................ 115,000 115,000 0 0
Robert F. Steinhoff....................... 386 386 0 0
Suite 1025 Limited Partnership............ 22,500 22,500 0 0
The Littlefield Group, Inc................ 28,110 28,110 0 0
The Thurston Group, Inc. ................. 39,677 39,677 0 0
Harold Van Arnem(8)....................... 541,000 541,000 0 0
Totals.................................... 3,827,968 3,726,584 101,384
</TABLE>
- ---------------
(1) Based upon shares of Common Stock outstanding as of October 31, 1997.
(2) Thomas R. Benham, Sr. ("Benham") is the President of the Company's Cybergate
subsidiary and was a shareholder of Cybergate prior to its acquisition by
the Company. Thomas R. Benham, Jr. is Benham's son. See "Summary -- Recent
Developments" for information concerning the Cybergate Acquisition.
(3) Includes 9,798 shares held in escrow until certain performance criteria are
met.
(4) Gerard Klauer Mattison & Co. ("GKM") provided the Company with certain
investment banking and financial advisory services in connection with a
bridge financing transaction in July, 1994, the private placement of Series
A Preferred Stock and the private placement of Series B Preferred Stock.
Subsequent to these financings, GKM filed suit against the Company alleging
that the Company was obligated to use GKM as its investment banker in all
financing transactions through September 20, 1996. The parties entered a
settlement of all claims, pursuant to which GKM received 62,569 Warrants.
The Common Stock issuable upon exercise of these Warrants is included
herein.
(5) Shares issuable to Commonwealth Life Insurance Company (Teamsters -- Camden
Non-Enhanced) ("Commonwealth") upon the exercise of an option originally
granted by the Company in connection with a license agreement dated as of
June 28, 1994, as amended on July 3, 1996 and February 13, 1997, by and
among the Company, American Communications Services of Louisville, Inc. (an
indirect wholly-owned subsidiary of the Company) and Louisville Gas and
Electric Company ("LG&E"). These options were transferred from LG&E to
Commonwealth on December 1, 1997.
(6) See "Summary -- Recent Developments" for information concerning the MCI
Transaction.
(7) These shares were received in connection with a customer referral agreement
between the Company and NetRunner, Inc. Includes 123,083 shares held in
escrow until certain performance criteria are met.
(8) Mr. Van Arnem was the former President and a shareholder of Cybergate and
received 541,000 shares in connection with the Cybergate Acquisition. See
"Summary -- Recent Developments" for information concerning the Cybergate
Acquisition.
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<PAGE> 72
PLAN OF DISTRIBUTION
Shares of Common Stock currently outstanding and shares of Common Stock
issuable upon exercise of the Warrants and the Options may be sold pursuant to
this Prospectus by the Selling Stockholders. These sales may occur in privately
negotiated transactions or in the over-the-counter market through brokers and
dealers as agents or to brokers and dealers as principals, who may receive
compensation in the form of discounts, concessions or commissions from the
Selling Stockholders or from the purchasers of the Common Stock for whom the
broker-dealers may act as agent or to whom they may sell as principal, or both.
Certain of the Selling Stockholders may also sell certain of their shares of
Common Stock pursuant to Rule 144 under the Securities Act. The Company has been
advised by the Selling Stockholders that they have not made any arrangements
relating to the distribution of the shares of Common Stock covered by this
Prospectus. In effecting sales, broker-dealers engaged by the Selling
Stockholders may arrange for other broker-dealers to participate. Broker-dealers
will receive commissions or discounts from the Selling Stockholders in amounts
to be negotiated immediately prior to the sale.
Upon being notified by a Selling Stockholder that any material arrangement
(other than a customary brokerage account agreement) has been entered into with
a broker or dealer for the sale of shares through a block trade, purchase by a
broker or dealer, or similar transaction, the Company will file a supplemented
Prospectus pursuant to Rule 424(c) under the Securities Act disclosing (a) the
name of each such broker-dealer, (b) the number of shares involved, (c) the
price at which such shares were sold, (d) the commissions paid or discounts or
concessions allowed to such broker-dealer(s), (e) if applicable, that such
broker-dealer(s) did not conduct any investigation to verify the information set
out or incorporated by reference in the Prospectus, as supplemented, and (f) any
other facts material to the transaction.
Certain of the Selling Stockholders and any broker-dealers who execute
sales for the Selling Stockholders may be deemed to be "underwriters" within the
meaning of the Securities Act by virtue of the number of shares of Common Stock
to be sold or resold by such persons or entities or the manner of sale thereof,
or both. If any of the Selling Stockholders, broker-dealers or other holders
were determined to be underwriters, any discounts, concessions or commissions
received by them or by brokers or dealers acting on their behalf and any profits
received by them on the resale of their shares of Common Stock might be deemed
underwriting discounts and commissions under the Securities Act. To comply with
the securities laws of certain jurisdictions, if applicable, the shares of
Common Stock offered hereby will be offered or sold in such jurisdictions only
through registered or licensed brokers or dealers. In addition, in certain
jurisdictions such shares of Common Stock 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.
The Selling Stockholders have represented to the Company that any purchase
or sale of the Common Stock by them will be in compliance with the Exchange Act
and any rules promulgated thereunder and they will not engage in any
stabilization activity in connection with the distribution. In general, Rule 102
under Regulation M prohibits any person connected with a distribution of the
Company's Common Stock (the "Distribution") from directly or indirectly bidding
for, or purchasing for any account in which he has a beneficial interest, any
Common Stock or any right to purchase Common Stock, or attempting to induce any
person to purchase Common Stock or rights to purchase Common Stock, for a period
of one business day prior to and subsequent to completion of his participation
in the Distribution (the "Distribution Period").
During the Distribution Period, Rule 104 ("Rule 104") under Regulation M
prohibits the Selling Stockholders and any other person engaged in the
Distribution from engaging in any stabilizing bid or purchasing the Common Stock
except for the purpose of preventing or retarding a decline in the open market
price of the Common Stock. No such person may effect any stabilizing transaction
to facilitate any offering at the market. Inasmuch as the Selling Stockholders
will be reoffering and reselling the Common Stock at the market, Rule 104
prohibits them from effecting any stabilizing transaction in contravention of
Rule 104 with respect to the Common Stock.
Generally, all expenses of the registration of the Shares will be paid by
the Company, including, without limitation, Commission filing fees and expenses
of compliance with state securities or "blue sky" laws;
68
<PAGE> 73
provided, however, that the Selling Stockholder will pay all underwriting
discounts and selling commissions, if any.
In certain instances, the Selling Stockholders will be indemnified by the
Company against certain civil liabilities, including certain liabilities under
the Securities Act, or will be entitled to contribution in connection therewith.
In certain instances, the Company will be indemnified by the Selling
Stockholders against certain liabilities, including certain liabilities under
the Securities Act, or will be entitled to contribution in connection therewith.
LEGAL MATTERS
Certain legal matters with respect to the shares of Common Stock offered
hereby will be passed upon for the Company by Dorsey & Whitney LLP, New York,
New York.
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.
69
<PAGE> 74
GLOSSARY
ACCESS CHARGES -- The fees paid by IXCs to LECs for originating and
terminating long distance calls on their local networks.
ATM (ASYNCHRONOUS TRANSFER MODE) -- A recently commercialized switching and
transmission technology that is one of a general class of packet technologies
that relay traffic by way of an address contained within the first five bits of
a standard fifty-three bit-long packet or cell. ATM switching was specifically
developed to allow switching and transmission of mixed voice, data and video
(sometimes referred to as "multi-media" information) at varying rates. The ATM
format can be used by many different information systems, including LANs.
BROADBAND -- Broadband communications systems can transmit large quantities
of voice, data and video by way of digital or analog signals. Examples of
broadband communication systems include DS-3 fiber optic systems, which can
transmit 672 simultaneous voice conversations, or a broadcast television station
that transmits high resolution audio and video signals into the home. Broadband
connectivity is also an essential element for interactive multimedia
applications.
CAP (COMPETITIVE ACCESS PROVIDER) -- A company that provides its customers
with an alternative to the local telephone company for local transport of
private line, special access and interstate transport of switched access
telecommunications services. CAPs are also referred to in the industry as
alternative local telecommunications service providers (ALTs) and metropolitan
area network providers (MANs) and were formerly referred to as alternative
access vendors (AAVs).
CATVS -- Cable television service providers.
CENTRAL OFFICES -- The switching centers or central switching facilities of
the LECs.
CENTREX -- Centrex is a service that offers features similar to those of a
Private Branch Exchange (PBX), except the equipment is located at the carrier's
premises and not at the premises of the customer. These features include direct
dialing within a given phone system, direct dialing of incoming calls, and
automatic identification of outbound calls. This is a value-added service that
carriers can provide to a wide range of customers who do not have the size or
the funds to support their own on-site PBX.
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
70
<PAGE> 75
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
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<PAGE> 76
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.
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<PAGE> 77
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> 78
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> 79
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> 80
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> 81
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> 82
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
ADDITIONAL ON SALE OF STOCKHOLDERS'
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> 83
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> 84
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> 85
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> 86
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> 87
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> 88
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> 89
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> 90
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> 91
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> 92
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> 93
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> 94
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> 95
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
F-19
<PAGE> 96
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1996 and the years ended June 30, 1996 and 1995, the Company paid
$22,500, $90,000 and $67,500 under this arrangement, respectively.
Effective July 1, 1994, the Company engaged SGC Advisory Services, Inc.
("SGC") as a financial and business consultant for three years. SGC is an
affiliate of a former director of the Company. Pursuant to the agreement, the
Company will compensate SGC as follows: (1) a monthly fee of $5,000; and (2)
options to purchase up to 50,000 shares of the Company's Common Stock which vest
on July 1, 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 $2.50 per
share. Accordingly, this
F-20
<PAGE> 97
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
obligation was recorded as redeemable stock until November 1996 at which time it
was reclassed to additional paid in capital.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following notes summarize the major methods and assumptions used in
estimating the fair value of financial instruments:
Cash and Cash Equivalents
The carrying amount approximates fair value due to the relatively short
period to maturity of these instruments.
Letters of Credit
The fair value of the Letters of credit is based on fees currently charged
for similar agreements.
Short-Term and Long-Term Debt
The fair value of the Company's long-term debt is estimated based on the
quoted market prices for the same or similar issues if available or based on the
present value of expected cash flows at rates currently available to the Company
for borrowings with similar terms.
The carrying amounts and fair values of the Company's financial instruments
at December 31, 1996 were:
<TABLE>
<CAPTION>
1996
----------------------------
CARRYING FAIR
VALUE VALUE
------------ ------------
<S> <C> <C>
Cash and cash equivalents (including restricted cash)... 80,960,696 80,960,696
Letters of credit....................................... -- 25,000
Long-term debt.......................................... 210,410,259 208,583,264
</TABLE>
(13) SUBSEQUENT EVENT
On January 17, 1997, the Company acquired 100% of the outstanding capital
stock of Cybergate, Inc. in exchange for 1,030,000 shares of common stock plus
up to an additional 150,000 shares if certain performance goals are achieved.
Cybergate, a Florida based Internet services provider, delivers high-speed data
communications services. The acquisition will be recorded using the purchase
method of accounting.
F-21
<PAGE> 98
AMERICAN COMMUNICATIONS SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1997
1996 (UNAUDITED)
------------ ------------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents.................................... $ 78,619 $149,874
Restricted cash.............................................. 2,342 29,570
Accounts receivable, net..................................... 2,429 10,703
Other current assets......................................... 1,203 3,742
------------- -------------
Total current assets...................................... 84,592 193,889
------------- -------------
Networks, furniture and equipment, gross....................... 144,403 250,363
(less: Accumulated depreciation).......................... (8,320) (23,358)
------------- -------------
136,083 227,005
Deferred financing fees........................................ 8,380 26,034
Restricted cash, less current portion.......................... -- 45,375
Goodwill (net of accumulated amortization)..................... -- 7,546
Other assets................................................... 982 756
------------- -------------
Total assets.............................................. $ 230,038 $500,605
------------- -------------
Liabilities, Redeemable Stock, Options and Warrants and
Stockholders' Equity
Current Liabilities
Accounts payable............................................. $ 33,587 $ 8,589
Accrued liabilities.......................................... 4,132 14,586
Notes payable -- current portion............................. 872 1,446
------------- -------------
Total current liabilities................................. 38,591 24,621
------------- -------------
Long Term Liabilities
Notes payable................................................ 209,538 449,507
Other Long Term Liabilities.................................. -- 267
Dividends payable............................................ 6,946 --
------------- -------------
Total liabilities......................................... 255,075 474,395
------------- -------------
Redeemable stock, options and warrants......................... 2,000 53,793
------------- -------------
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............................................... 187 0
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....... 278 0
Common Stock, $0.01 par value, 75,000,000 shares authorized,
6,784,996 and 35,926,902 shares, respectively, issued and
outstanding............................................... 68 364
Additional paid-in-capital................................... 54,870 134,133
Accumulated deficit.......................................... (82,440) (162,080)
------------- -------------
Total stockholders' equity/(deficit)........................... (27,037) (27,583)
------------- -------------
Total Liabilities, Redeemable Stock, Options and Warrants and
Stockholders' Equity/(deficit)............................... $ 230,038 $500,605
------------- -------------
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements
F-22
<PAGE> 99
AMERICAN COMMUNICATIONS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
------------------------------- -------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1996 1997
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.............................. $ 2,812 $ 16,055 $ 5,239 $ 35,847
Operating Expenses
Network, development and
operations....................... 3,709 10,642 6,052 28,668
Selling, general and
administrative................... 5,674 18,156 16,060 47,975
Non-cash compensation expense....... 174 500 1,706 1,324
Depreciation and amortization....... 2,401 6,621 4,717 16,077
----------- ---------- ----------- ----------
Total Operating Expenses.............. 11,958 35,919 28,535 94,044
Loss from operations.................. (9,146) (19,864) (23,296) (58,197)
Non-operating income/expenses
Interest and other income........... (1,460) (2,815) (5,093) (3,893)
Interest and other expense.......... 6,011 12,915 13,653 25,336
----------- ---------- ----------- ----------
Net loss before minority interest..... (13,697) (29,964) (31,856) (79,640)
Minority interest..................... 96 0 353 0
----------- ---------- ----------- ----------
Net loss.............................. (13,601) (29,964) (31,503) (79,640)
Preferred stock
dividends/accretion................. 1,007 2,489 3,024 3,584
----------- ---------- ----------- ----------
Net loss to common stockholders....... $ (14,608) $ (32,453) $ (34,527) $ (83,224)
----------- ---------- ----------- ----------
Net loss per common/common equivalent
share............................... $ (2.18) $ (0.90) $ (5.22) $ (3.45)
----------- ---------- ----------- ----------
Average number of common/common
equivalent shares outstanding....... 6,703,579 36,228,568 6,613,543 24,139,630
----------- ---------- ----------- ----------
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements.
F-23
<PAGE> 100
AMERICAN COMMUNICATIONS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
------------- -------------
(UNAUDITED)
<S> <C> <C>
Cash Flow from Operating Activities
Net Loss............................................................ $ (31,503) $ (79,640)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization..................................... 4,311 15,610
Interest deferral and accretion................................... 13,182 19,268
Amortization of deferred financing fees........................... 1,074 1,767
Provision for doubtful accounts................................... 177 1,236
Loss attributable to minority interest............................ (353) --
Noncash compensation.............................................. 1,706 1,324
Changes in operating assets and liabilities:
Restricted cash related to operating activities................ 1,360 (2,603)
Trade accounts receivable...................................... (1,491) (9,509)
Other current assets........................................... (1,651) (2,540)
Other assets................................................... 246 226
Accounts payable............................................... 5,657 (24,998)
Accrued financing fees......................................... (1,542) --
Other accrued liabilities...................................... 1,337 10,455
--------- --------
Net cash used in operating activities............................... (7,490) (69,404)
--------- --------
Cash flows from investing activities
Restricted cash related to network activities..................... (2,300) --
Purchase of furniture and equipment............................... -- (8,216)
Investment in marketable securities and other..................... 63,422 --
Network development costs......................................... (78,528) (95,635)
--------- --------
Net cash used in investing activities............................... (17,406) (103,851)
--------- --------
Cash flows from financing activities
Issuance of notes payable......................................... 73,913 1,492
Issuance of common stock.......................................... -- 40,702
Issuance of Redeemable Preferred Stock and warrants............... -- 70,855
Issuance of Senior Notes.......................................... -- 220,000
Issuance of Series B Preferred Stock.............................. 275 --
Payment of notes payable.......................................... -- (1,134)
Payment of deferred financing fees................................ (4,211) (19,421)
Restricted cash related to financing activities................... -- (70,000)
Warrant and stock option exercises................................ 390 2,016
--------- --------
Net cash flow provided by financing activities...................... 70,367 244,510
--------- --------
Net increase in cash and cash equivalents........................... 45,471 71,255
Cash and cash equivalents -- beginning of period.................... 57,348 78,619
--------- --------
Cash and cash equivalents -- end of period.......................... $ 102,819 $ 149,874
========= ========
Supplemental disclosure of cash flow information
Dividends declared with preferred stock........................... $ 3,024 $ 3,584
========= ========
Decrease in accrued redeemable warrant cost....................... $ 505 $ --
========= ========
Increase in goodwill.............................................. $ -- $ 8,119
========= ========
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements.
F-24
<PAGE> 101
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
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 American
Communications Services, Inc. ("ACSI" or the "Company") 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.
The consolidated balance sheet as of September 30, 1997, the consolidated
statements of earnings for the three and nine months ended September 30, 1997
and 1996, and the consolidated statements of cash flows for the nine months
ended September 30, 1997 and 1996 have been prepared by the Company, without
audit. In the opinion of management, all adjustments, which include normal
recurring adjustments necessary to present fairly the financial position,
results of operations and cash flows at September 30, 1997, and for all periods
presented, have been made. Certain amounts in the consolidated statements have
been reclassified to conform to the 1997 presentation. Operating results for the
three and nine months ended September 30, 1997 are not necessarily indicative of
the operating results for the full year.
Certain information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The Company believes that the disclosures
provided are adequate to make the information presented not misleading. These
financial statements should be read in conjunction with the audited financial
statements and the related notes included in the Company's 1996 annual report to
shareholders.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents and Restricted Cash
Pursuant to Statement of Financial Accounting Standard No. 115 (FAS 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. Commercial paper has maturities of 90
days or less. The fair market value of such securities approximates amortized
cost. At December 31, 1996 and September 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 $2.3 million and $4.9 million at December 31, 1996 and September
30, 1997, respectively. In addition, at September 30, 1997, the Company has
approximately $70 million of cash restricted to fund the first five interest
payments of its 13 3/4% Senior Notes due 2007 issued in July 1997 (the "2007
Notes") resulting in total restricted cash of $74.9 million, of which $29.6
million has been classified as current. The face amount of all bonds and letters
of credits was approximately $6.2 million as of December 31, 1996, and $8.3
million as of September 30, 1997.
Networks, Equipment and Furniture
Networks, equipment and furniture are stated at cost less accumulated
depreciation and amortization. Costs capitalized include expenses associated
with network engineering, design and construction, negotiation
F-25
<PAGE> 102
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
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>
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.
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.
F-26
<PAGE> 103
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3: 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 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. 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.
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.
F-27
<PAGE> 104
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-28
<PAGE> 105
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
12 3/4% JUNIOR REDEEMABLE PREFERRED STOCK
On October 16, 1997, the Company completed the private placement of $150
million of 12 3/4% Junior Redeemable Preferred Stock due 2009 ("Junior
Redeemable Preferred Stock"). The Company received net proceeds of approximately
$145.6 million. Dividends on the Junior Redeemable Preferred Stock will accrue
from the date of issuance, are cumulative and will be payable quarterly, in
arrears, on January 15, April 15, July 15 and October 15 of each year commencing
January 15, 1998. 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
Junior Redeemable Preferred Stock with an aggregate liquidation preference equal
to the amount of such dividends; 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 Junior Redeemable Preferred Stock by the terms of any agreement
or instrument governing any of its then outstanding indebtedness, the Company
shall pay dividends in cash. The Company is required to redeem all the Junior
Redeemable Preferred Stock outstanding on October 15, 2009 at a redemption price
equal to 100% of the liquidation preference thereof, plus, without duplication,
accrued and unpaid dividends to the date of redemption.
NOTE 4: NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128 (FAS 128), "Earnings Per Share," which
is required to be adopted for annual financial statement periods ending after
December 15, 1997. Earlier application is not permitted. FAS 128 requires
companies to change the method currently used to compute earnings per share and
to restate all prior periods. While the Company does not know precisely the
impact of adopting FAS No. 128, the Company does not expect that the adoption
will have a material effect on the Company's consolidated financial statements.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 129 (FAS 129), "Disclosure of Information
about Capital Structure." The Company is required to adopt the provisions of
this Statement for fiscal years ending after December 15, 1997. This Statement
continues the previous requirement to disclose certain information about an
entity's capital structure found in APB Opinions No. 10, "Omnibus
Opinion -- 1966," No. 15, "Earnings per Share," and FASB Statement No. 47,
"Disclosure of Long-Term Obligations," for entities that were subject to the
requirements of those
F-29
<PAGE> 106
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
standards. As the Company has been subject to the requirements of each of those
standards, adoption of FAS No. 129 will have no impact on the Company's
financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (FAS No. 130), "Reporting Comprehensive
Income." FAS No. 130 established standards for the reporting and display of
comprehensive income and its components in the financial statements. The Company
is required to adopt the provisions of the Statement for fiscal years beginning
after December 15, 1997. Earlier application is permitted; however, upon
adoption the Company will be required to reclassify previously reported annual
and interim financial statements. The Company believes that the disclosure of
comprehensive income in accordance with the provisions of FAS No. 130 will not
impact the manner of presentation of its financial statements as currently and
previously reported.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (FAS No. 131), "Disclosure about Segments
of an Enterprise and Related Information." FAS No. 131 requires the Company to
present certain information about operating segments and related information,
including geographic and major customer data, in its annual financial statements
and in condensed financial statements for interim periods. The Company is
required to adopt the provisions of the Statement for fiscal years beginning
after December 15, 1997. Earlier application is permitted; however, upon
adoption the Company will be required to restate previously reported annual
segment and related information in accordance with the provisions of FAS No.
131. The Company has not completed its analysis of the impact on the financial
statements that will be caused by the adoption of this Statement.
F-30
<PAGE> 107
======================================================
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 OR ANY SELLING
STOCKHOLDER OR THEIR RESPECTIVE AGENTS. 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.......................... 8
Use of Proceeds....................... 19
Capitalization........................ 20
Unaudited Pro Forma Condensed
Consolidated Financial Data......... 21
Selected Consolidated Financial
Data................................ 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 25
Business.............................. 35
Management............................ 52
Certain Transactions.................. 61
Principal Stockholders................ 62
Description of Certain Indebtedness... 63
Selling Stockholders.................. 66
Plan of Distribution.................. 68
Legal Matters......................... 69
Experts............................... 69
Change in Independent Public
Accountants......................... 69
Glossary.............................. 70
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
---------------------------------------------
PROSPECTUS
---------------------------------------------
LOGO
3,726,584
------------------------
SHARES OF COMMON STOCK,
PAR VALUE $.01
DECEMBER , 1997
======================================================
<PAGE> 108
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses to be paid by the
Registrant in connection with the sale and distribution of the securities being
registered, other than underwriting discounts and commissions. All of the
amounts shown are estimated except the Securities and Exchange Commission
registration fee.
<TABLE>
<S> <C>
SEC registration fee.................................................. $ 12,877
Legal fees and expenses............................................... 30,000
Accounting fees and expenses.......................................... 10,000
Printing fees and expenses............................................ 100,000
Miscellaneous expenses................................................ 5,000
--------
Total....................................................... $157,877
========
</TABLE>
- ---------------
* To be provided by amendment.
ITEM 15. 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
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<PAGE> 109
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 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 16. 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 Designations of the Company's 14.75% Redeemable
Preferred Stock due 2008. ........................................... --
3.3 Certificate of Amendment of the Certificate of Designations 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 Correction dated March 11, 1996....................... -
3.7 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. ............................................ --
</TABLE>
II-2
<PAGE> 110
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- --------------------------------------------------------------------- --------------
<C> <S> <C>
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 12.75% Junior Redeemable
Preferred Stock due 2009. ...........................................
---
5.1 Opinion of Dorsey & Whitney LLP. .................................... 0000
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. ......................................... *
</TABLE>
II-3
<PAGE> 111
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- --------------------------------------------------------------------- --------------
<C> <S> <C>
10.21 Agreement, dated March 20, 1995, between the Company and Gerard
Klauer Mattison & Co., as amended. .................................. ****
10.22 Agreement, dated October 19, 1994, between the Company and Marvin
Saffian & Company. .................................................. *
10.23 Lease Agreement for the Company's executive offices at 131 National
Business Parkway, Suite 100, Annapolis Junction, Maryland, as
amended. ............................................................ ****
10.24 Loan and Security Agreement, dated October 17, 1994, between AT&T
Credit Corporation and American Communication Services of Louisville,
Inc. ................................................................ *
10.25 Loan and Security Agreement, dated February 28, 1995, between AT&T
Credit Corporation and American Communication Services of Fort Worth,
Inc. ................................................................ ****
10.26 Loan and Security Agreement, dated June 30, 1995, between AT&T Credit
Corporation and American Communication Services of Greenville, Inc.
and American Communication Services of Columbia, Inc. ............... ****
10.27 Amendment No. 1 to Parent Support and Pledge Agreement (Louisville)
between the Company and AT&T Credit Corporation. .................... ****
10.28 Amendment No. 1 to Parent Support and Pledge Agreement (Fort Worth)
between the Company and AT&T Credit Corporation. .................... ****
10.29 Amendment No. 1 to Loan and Security Agreement between American
Communications Services of Louisville, Inc. and AT&T Credit
Corporation. ........................................................ ****
10.30 Consulting Agreement, dated October 25, 1993, between the Company and
Thurston Partners, Inc.. ............................................ *
10.31 Consulting Agreement, effective July 1, 1994, between the Company and
SGC Advisory Services, Inc. ......................................... *
10.32 Consulting Agreement, dated June 16, 1994, between the Company and
Thurston Partners, Inc. and Global Capital, Inc. .................... *
10.33 Note Purchase Agreement, dated June 28, 1994. ....................... *
10.34 Investment Agreement dated October 21, 1994, between the Company and
the Purchasers named therein. ....................................... *
10.35 Stock Purchase Agreement, dated October 17, 1994, between the Company
and AT&T Credit Corporation. ........................................ *
10.36 American Communication Services of Louisville, Inc. Common Stock
Purchase Agreement, dated October 17, 1994 .......................... *
10.37 Stock Purchase Agreement, dated November 28, 1994, by and among the
Company, CitiLink Corp., and the former directors and shareholders of
CitiLink Corp., as amended August 3, 1995. .......................... ****
10.38 Stock Purchase Agreement dated December 17, 1996 by and between the
Company and Cybergate, Inc. ......................................... ++++
10.39 Stock Purchase Agreement, dated May 12, 1995, by and among the
Company, Piedmont Teleport, Inc., Randal Holcombe and Karen Holcombe,
as amended. ......................................................... ****
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. ................................................................ ++
</TABLE>
II-4
<PAGE> 112
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- --------------------------------------------------------------------- --------------
<C> <S> <C>
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 and Co. Inc. ..........................
---
10.56 Second Amended and Restated Registration Rights Agreement. ..........
---
11.1 Statement re: computation of per share earnings (loss). ............. +
16.1 Letter re: change in certifying accountant. ......................... ***
21.1 Subsidiaries of the Registrant. ..................................... ++++
23.1 Consent of KPMG Peat Marwick LLP. ................................... (ooo)
23.2 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1) ........... (ooo)
24.1 Power of Attorney. .................................................. (ooo)
25.1 Statement of Eligibility and Qualification on Form T-1 of The Chase
Manhattan Bank under the Indenture dated July 23, 1997. .............
---
</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
II-5
<PAGE> 113
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 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 herein by reference thereto.
--- Previously filed as an exhibit to the Company's Registration Statement
on Form S-4 (File No. 333-34395) and incorporated herein by reference
thereto.
---- 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) and incorporated herein
by reference thereto.
(ooo) Filed herewith.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made
hereunder, a post-effective amendment to this registration statement:
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of this registration statement (or the most recent
post-effective amendment hereto) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate
offering price set forth in the "Calculation of Registration Fee" table
in the effective registration statement;
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in this registration statement
or any material change to such information in this registration
statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) will
not apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed by
the registrant pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-6
<PAGE> 114
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(h) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions set forth in response to the foregoing
provisions, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(i) The undersigned registrant hereby undertakes that:
(1) for purposes of determining any liability under the Securities Act
of 1933, 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 pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective; and
(2) for purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(l) 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.
(j) 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-7
<PAGE> 115
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 9TH DAY OF DECEMBER, 1997.
AMERICAN COMMUNICATIONS SERVICES,
INC.,
Registrant
By: /s/ JACK E. REICH
------------------------------------
President, Chief Executive Officer
and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jack E. Reich and David L. Piazza and each of
them, his or her true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments (including
pre-effective and post-effective amendments) to this Registration Statement, and
to file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done, in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact, and each of them, and agents or their substitutes may
lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ---------------------------------- -----------------
<S> <C> <C>
* Chairman of the December 9, 1997
- ---------------------------------------- Board of Directors
Anthony J. Pompliano
/s/ President, Chief Executive Officer December 9, 1997
JACK E. REICH and Director
- ---------------------------------------- (Principal Executive Officer)
Jack E. Reich
/s/ Chief Financial Officer December 9, 1997
DAVID L. PIAZZA (Principal Financial and
- ---------------------------------------- Accounting Officer)
David L. Piazza
* Director December 9, 1997
- ----------------------------------------
George M. Middlemas
* Director December 9, 1997
- ----------------------------------------
Edwin M. Banks
* Director December 9, 1997
- ----------------------------------------
Christopher L. Rafferty
</TABLE>
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<PAGE> 116
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ---------------------------------- -----------------
<S> <C> <C>
* Director December 9, 1997
- ----------------------------------------
Benjamin P. Giess
* Director December 9, 1997
- ----------------------------------------
Olivier L. Trouveroy
- ---------------------------------------- Director
Peter C. Bentz
</TABLE>
* The undersigned, by signing this 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
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<PAGE> 117
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 Designations of the Company's 14.75%
Redeemable Preferred Stock due 2008. --
3.3 Certificate of Amendment of the Certificate of Designations
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 Correction dated March 11, 1996. -
3.7 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. --
</TABLE>
<PAGE> 118
<TABLE>
<CAPTION>
SEQUENTIALLY
INCORPORATION NUMBERED
EXHIBIT NO. DESCRIPTION BY REFERENCE PAGE
- ----------- ------------------------------------------------------------ ------------- ------------
<C> <S> <C> <C>
4.17 Specimen Certificate of the Company's 12.75% Junior
Redeemable Preferred Stock due 2009. ---
5.1 Opinion of Dorsey & Whitney LLP (oooo)
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. ****
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INCORPORATION NUMBERED
EXHIBIT NO. DESCRIPTION BY REFERENCE PAGE
- ----------- ------------------------------------------------------------ ------------- ------------
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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. ++
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INCORPORATION NUMBERED
EXHIBIT NO. DESCRIPTION BY REFERENCE PAGE
- ----------- ------------------------------------------------------------ ------------- ------------
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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). +
16.1 Letter re: change in certifying accountant. ***
21.1 Subsidiaries of the Registrant. ++++
23.1 Consent of KPMG Peat Marwick LLP. (ooo)
23.2 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1). (ooo)
24.1 Power of Attorney (included on page II-7). (ooo)
25.1 Statement of Eligibility and Qualification on Form T-1 of
The Chase Manhattan Bank under the Indenture dated July 23,
1997.
---
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* 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.
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+ 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 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.
---
Previously filed as an exhibit to the Company's Registration Statement on Form S-4
(File No. 333-34395) and incorporated herein by reference thereto.
(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) and incorporated herein by reference thereto.
(ooo)
Filed herewith.
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<PAGE> 1
EXHIBIT 5.1
December 8, 1997
American Communications Services, Inc.
131 National Business Parkway
Annapolis Junction, MD 20701
Re: Registration Statement on Form S-3
Ladies and Gentlemen:
You have requested our opinion with respect to the public offering and sale
by certain selling stockholders (the "Selling Stockholders") of American
Communications Services, Inc., a Delaware corporation (the "Company"), pursuant
to a Registration Statement on Form S-3 (the "Registration Statement") of up to
3,726,584 shares of the Company's common stock, $.01 par value per share (the
"Common Stock") of which (i) 1,659,776 shares (the "Outstanding Common Shares")
are outstanding and held by the Selling Stockholders; (ii) 500,000 shares (the
"Warrant Shares") are issuable upon exercise of warrants (the "Warrants") held
by the Selling Stockholders; and (iii) 1,566,808 shares (the "Option Shares")
are issuable upon exercise of certain options (the "Options") of the Company
held by the Selling Stockholders.
In this connection we have prepared and examined the Registration
Statement, the Company's Second Restated Certificate of Incorporation, as
amended; the Company's By-Laws, as amended; records of applicable corporate
proceedings of the Company; and such other documents as we have deemed necessary
as a basis for the opinions herein expressed. With respect to such examination
we have assumed the legal capacity to sign and the genuineness of all signatures
appearing on all documents presented to us as originals, and the conformity to
the originals of all documents presented to us as conformed or reproduced
copies. With respect to factual matters relevant to such opinion, we have
relied, without independent certification thereof, upon certificates of
appropriate state and local officials and executive officers and responsible
employees and agents of the Company.
Based upon the foregoing, and in reliance thereon, and subject to the
limitations and qualifications set forth herein, we are of the opinion that:
1. The Outstanding Common Shares are legally and validly issued, fully
paid and non-assessable.
2. When issued and paid for in accordance with the Warrants, the
Warrant Shares will be legally and validly issued, fully paid and
non-assessable.
3. When issued and paid for in accordance with the Options, the Option
Shares will be legally and validly issued, fully paid and non-assessable.
We consent to the use of our name in the Registration Statement and the
related Prospectus under the caption "Legal Matters", and we consent to the
filing of this opinion as an Exhibit to the Registration Statement.
Very truly yours,
/s/ DORSEY & WHITNEY LLP
--------------------------------------
DORSEY & WHITNEY LLP
<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
December 8, 1997
