<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 26, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AMERICAN COMMUNICATIONS SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 4813 52-1947746
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NO.)
</TABLE>
131 NATIONAL BUSINESS PARKWAY
ANNAPOLIS JUNCTION, MARYLAND 20701
(301) 617-4200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
RILEY M. MURPHY, ESQ.
AMERICAN COMMUNICATIONS SERVICES, INC.
131 NATIONAL BUSINESS PARKWAY
ANNAPOLIS JUNCTION, MARYLAND 20701
(301) 617-4215
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
------------------------
with copies to:
GEORGE W. BILICIC, JR., ESQ.
CRAVATH, SWAINE & MOORE
WORLDWIDE PLAZA
825 EIGHTH AVENUE
NEW YORK, NEW YORK 10019-7475
(212) 474-1000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED DISTRIBUTION OF THE SECURITIES
TO THE PUBLIC: As soon as practicable after the Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER NOTE(1)(2) PRICE(1)(2) FEE(3)
- --------------------------------------------------------------------------------------------------
13 3/4% Senior Discount Notes
due 2007................... $170,000,000 100% $170,000,000 $51,516
==================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Exclusive of accrued interest, if any.
(3) Calculated pursuant to Rule 457(o).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
Subject to Completion, Dated August 26, 1997
PROSPECTUS
$170,000,000
LOGO
OFFER TO EXCHANGE ITS 13 3/4% SENIOR NOTES DUE 2007,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
FOR UP TO $170,000,000 AGGREGATE PRINCIPAL AMOUNT OF ITS OUTSTANDING 13 3/4%
SENIOR NOTES DUE 2007
The Exchange Offer will expire at , New York City time, on
, unless extended.
------------------------
American Communications Services, Inc. (the "Company" or "ACSI") hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying letter of transmittal (the "Letter of
Transmittal" and, together with this Prospectus, the "Exchange Offer"), to
exchange its 13 3/4% Senior Notes due 2007 (the "New Notes") which have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to a Registration Statement of which this Prospectus is a part, for up
to $170,000,000 aggregate principal amount of its outstanding 13 3/4% Senior
Discount Notes due 2007 (the "Old Notes"), of which $220,000,000 aggregate
principal amount is outstanding as of the date hereof. The New Notes and the Old
Notes are collectively referred to herein as the "Notes."
The Company will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to 5:00 P.M., New York City time, on the
date the Exchange Offer expires (the "Expiration Date"), which will be
, 1997 (20 business days following the commencement of the Exchange
Offer), unless the Exchange Offer is extended. Tenders of Old Notes may be
withdrawn at any time prior to 5:00 P.M., New York City time, on the Expiration
Date. The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered for exchange. Old Notes may be tendered only in
integral multiples of $1,000. See "The Exchange Offer."
The New Notes will be obligations of the Company evidencing the same
indebtedness as the Old Notes and will be entitled to the benefits of the same
Indenture (as defined), which governs both the Old Notes and the New Notes. The
form and terms of the New Notes are generally the same as the form and terms of
the Old Notes, except that the New Notes do not contain terms with respect to
the interest rate step-up provisions and the New Notes have been registered
under the Securities Act and therefore will not bear legends restricting the
transfer thereof. See "Description of the New Notes."
The Company placed approximately $70 million of the net proceeds realized
from the sale of the Old Notes, representing funds sufficient to pay the first
five interest payments on the Notes, into an Escrow Account (as defined herein)
to be held by the Escrow Agent (as defined herein) for the benefit of the
holders of the Notes. The New Notes will bear interest at a rate of 13 3/4% per
annum, payable semi-annually in arrears on January 15 and July 15 commencing
January 15, 1998. The New Notes will be redeemable, in whole or in part, at the
option of the Company on or after January 15, 2002, at the redemption prices set
forth herein, plus accrued interest to the date of redemption. In addition, at
any time on or prior to July 15, 2000, the Company may, at its option, redeem up
to 35% of the aggregate principal amount at maturity of the New Notes with the
net cash proceeds of one or more Equity Offerings (as defined), at a redemption
price equal to 113.75% of the principal amount thereof; provided, however, that
after giving effect to any such redemption, at least $143 million aggregate
principal amount of the New Notes remains outstanding. Upon a Change of Control
(as defined), each holder of the New Notes will have the right to require the
Company to repurchase such holder's New Notes at a price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest to the date of
repurchase. In addition, the Company will be obligated to offer to repurchase
the New Notes in the event of certain Asset Sales (as defined). See "Description
of the New Notes."
The New Notes will be unsecured senior obligations of the Company and will
rank pari passu with any existing and future senior indebtedness of the Company
and will rank senior in right of payment to all subordinated obligations of the
Company. As of June 30, 1997, the Company had approximately $193.0 million of
senior indebtedness outstanding. In addition, the New Notes will be structurally
subordinated to liabilities (including trade payables) of the Company's
subsidiaries. As of June 30, 1997, liabilities of the Company's Subsidiaries
were approximately $62.7 million. See "Description of the Notes."
Based on interpretations by the staff of the Securities and Exchange
Commission (the "SEC"), as set forth in no-action letters issued to third
parties, the Company believes that the New Notes issued pursuant to the Exchange
Offer may be offered for resale, resold or otherwise transferred by holders
thereof (other than any holder that is an "affiliate" of the Company as defined
under Rule 405 of the Securities Act), provided that such New Notes are acquired
in the ordinary course of such holders' business and such holders are not
engaged in, and do not intend to engage in, a distribution of such New Notes and
have no arrangement with any person to participate in the distribution of such
New Notes. However, the staff of the SEC has not considered the Exchange Offer
in the context of a no-action letter and there can be no assurance that the
staff of the SEC would make a similar determination with respect to the Exchange
Offer as in such other circumstances. By tendering the Old Notes in exchange for
New Notes, each holder, other than a broker-dealer, will represent to the
Company that: (i) it is not an affiliate of the Company (as defined under Rule
405 of the Securities Act); (ii) any New Notes to be received by it were
acquired in its ordinary business; and (iii) it is not engaged in, and does not
intend to engage in, a distribution of such New Notes and has no arrangement or
understanding to participate in a distribution of the New Notes. Each
broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of New Notes received in
exchange for Notes where such Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities. The Company has
agreed that, starting on the Expiration Date and ending on the close of business
180 days after the Expiration Date, it will make this Prospectus available to
any broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
Prior to this Exchange Offer, there has been no public market for the Old
Notes or New Notes. If such a market were to develop, the New Notes could trade
at prices that may be higher or lower than their principal amount. The Company
does not intend to apply for listing or quotation of the New Notes on any
securities exchange or stock market. Therefore, there can be no assurance as to
the liquidity of any trading market for the New Notes or that an active public
market for the New Notes will develop. See "Risk Factors -- Lack of Public
Market; Exchange Offer."
BT Securities Corporation, Alex. Brown & Sons Incorporated, ING Baring
(U.S.) Securities, Inc. and Societe Generale Securities Corporation (the
"Initial Purchasers") have agreed that one or more of them will act as
market-makers for the New Notes. However, the Initial Purchasers are not
obligated to so act and they may discontinue any such market-making at any time
without notice. The Company will not receive any proceeds from this Exchange
Offer. The Company has agreed to pay the expenses of the Exchange Offer. No
underwriter is being used in connection with this Exchange Offer.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS OF
OLD NOTES WHO TENDER THEIR OLD NOTES IN THE EXCHANGE OFFER, SEE "RISK FACTORS"
BEGINNING ON PAGE 11 OF THIS PROSPECTUS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is , 1997.
<PAGE> 3
LOGO
<PAGE> 4
ADDITIONAL INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith files reports, proxy and information statements and other
information with the SEC. Such reports, proxy and information statements and
other information may be inspected and copied at the public reference facilities
of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, or at its regional offices located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of such material can be obtained
from the SEC by mail at prescribed rates, or in certain cases by accessing the
SEC's World Wide Web site at http://www.sec.gov. Requests should be directed to
the SEC's Public Reference Section, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. The Company's Common Stock is quoted on
the Nasdaq National Market and material filed by the Company can be inspected at
the offices of the National Association of Securities Dealers, Inc., 1735 K
Street N.W., Washington, D.C. 20006.
The Company has filed with the SEC a registration statement on Form S-4
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the New Notes
offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. For further
information with respect to the Company and the New Notes offered hereby,
reference is made to the Registration Statement. This Prospectus contains
summaries of the material terms and provisions of certain documents and, in each
instance, reference is made to the copy of such document filed as an exhibit to
the Registration Statement. Copies of the Registration Statement and the
exhibits thereto may be inspected, without charge, at the offices of the SEC at
the address set forth above.
Certain statements contained in "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business,"
including statements regarding the development of the Company's businesses, the
markets for the Company's services and products, the Company's anticipated
capital expenditures, regulatory reform and other statements contained herein
regarding matters that are not historical facts, are forward-looking statements
(as such term is defined in the Private Securities Litigation Reform Act of
1995). Because such statements include risks and uncertainties, actual results
may differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to, those discussed under "Risk Factors."
<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 in this Prospectus. Subsequent to June 30, 1996, the Company changed
its fiscal year-end from June 30 to December 31. Accordingly, all data for the
fiscal period ended December 31, 1996 is for the six-month period ended December
31, 1996.
THE COMPANY
American Communications Services, Inc. ("ACSI" or the "Company") 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 31 markets, is now evaluating in which additional
markets it will 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 August 22, 1997,
the Company offered such local switched services using its own facilities
in 9 markets and offered such services on a resale basis in a total of 31
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 fourth quarter of 1997.
- Data Services. During 1996, the Company deployed ACSINet and as of
August 15, 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
1
<PAGE> 6
and installation) to businesses, government, health care providers,
educational institutions and ISPs for local and wide area network
solutions.
STRATEGY
The Company's objective is to become a full-service alternative to the ILEC
primarily for business, government and institutional end-users in its markets by
offering superior products with excellent customer service at competitive
prices. In order to achieve this objective, the Company seeks to:
Leverage Existing Infrastructure.
The Company believes that its integrated telecommunications networks, both
its local fiber networks and ACSINet, are capable of providing a broad range of
voice and data communications services to its customers. The Company is focusing
its efforts on improving penetration in the markets it already serves by
continuing to offer additional services. The Company believes that providing
switched local voice services permits it to increase the traffic and revenue
associated with its networks. The Company plans to seek certification to offer
calling-card, teleconferencing and other long distance services. In markets in
which it does have operational networks, the Company's decision to pursue a
resale strategy would help position the Company as a full-service provider,
capable of providing its customers with a one-stop-shopping alternative to the
ILEC. In markets in which it does not currently have an operational network,
this resale strategy may position the Company to eventually construct networks
in those markets, which networks would benefit immediately from an existing
customer base.
Develop Direct and Indirect Sales Channels to Commercial End-Users.
The Company has divided its sales and marketing efforts into three
different channels: direct sales to end-users, sales to IXCs and ISPs and sales
of private-label services through alternative distribution channels.
- Direct Sales. The Company's local sales force continues to focus on the
commercial end-users in each of the markets it serves. The Company
believes that its local, customer-oriented, single point-of-service sales
structure facilitates greater customer care in both the sales and
customer service processes and helps the Company differentiate itself as
a customer-focused telecommunications services provider. The Company's
major account sales force targets large national accounts. As of June 30,
1997, the Company's sales force in this area was made up of 153 sales
people, which represents an increase of 98 sales people since December
31, 1996, and is expected to increase to 210 sales people by the end of
1997.
- Sales to IXCs and ISPs. The Company sells dedicated services to long
distance carriers and ISPs who use the Company's products and services to
provide local access for their own products. For example, the Company
recently entered into an agreement with MCImetro in which, subject to
certain conditions, MCI has agreed to name ACSI as its preferred local
provider for dedicated and transport services in 21 ACSI markets for at
least a five-year period. See "Recent Developments."
- Sales Through Alternative Distribution Channels. As of August 22, 1997,
the Company had executed 66 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.
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
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<PAGE> 7
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 in which additional markets it
will construct local networks and is establishing a presence in additional
markets through resale of switched services and data POPs. The Company plans to
redeploy into customer applications in existing markets the capital that was
scheduled to be used to develop those additional networks. While management
continues to believe in the long-term return on capital afforded by the
constructed networks, it believes that the investment in customer applications
will have a more immediate return. As part of this strategy, the Company has
also implemented a shift in its incentive-based compensation for a number of its
key executives away from new network development and growth to revenue and
EBITDA (as defined herein).
MANAGEMENT TEAM
The Company's senior management is among the most experienced in the
emerging competitive local telecommunications industry. Members of ACSI's
executive team developed and/or operated CAP networks in 25 major metropolitan
markets for companies such as MFS Communications and Teleport Communications
Group. Key executives include:
ANTHONY J. POMPLIANO, EXECUTIVE 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.
3
<PAGE> 8
JACK E. REICH, PRESIDENT AND CHIEF EXECUTIVE OFFICER -- COMMUNICATIONS
SERVICES, had 22 years of telecommunications industry and management experience
before joining ACSI in December 1996. For two and one-half years prior to
joining ACSI, Mr. Reich was employed by Ameritech, Inc. as President of its
Custom Business Service Organization, where 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.
GEORGE M. TRONSRUE, III, PRESIDENT AND CHIEF OPERATING OFFICER -- STRATEGY
AND TECHNOLOGY DEVELOPMENT, had 17 years of telecommunications industry and
management experience before joining ACSI in February 1994. From 1993 until he
joined ACSI in February 1994, Mr. Tronsrue was the Regional Vice President for
the Central Region for Teleport Communications Group and the Vice President of
Emerging Markets, responsible for start-up and profit and loss management of
joint ventures with major cable television providers in eight major markets.
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
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 "Preferred Stock") and warrants (the "Warrants")
to purchase shares of common stock (the "Common Stock"). Total net proceeds to
the Company from the Unit Offering were approximately $67 million.
Common Equity Offering. On April 15, 1997, the Company consummated (i) the
issuance and sale of 5,060,000 shares of Common Stock (inclusive of the May 14,
1997 exercise by the underwriters of their over-allotment option) at a price per
share of $5.00 in an underwritten public offering and (ii) the issuance and sale
directly to certain of its principal stockholders of 3,600,000 shares of Common
Stock at a purchase price of $4.70 per share (together, the "April Offering").
Total net proceeds to the Company from the April Offering were approximately $40
million.
MCImetro Agreement. Effective March 6, 1997, the Company and MCImetro
entered into an agreement in which MCI named ACSI as its preferred local
provider for dedicated and transport services in 21 ACSI markets for at least a
five year period. Pursuant to this preferred provider agreement, MCI will
migrate current dedicated transport circuits in these markets to ACSI and ACSI
will be listed as the first choice provider in MCI's provisioning system for all
new dedicated access circuits in the designated markets and on June 19, 1997,
executed an agreement giving MCI the option to purchase loop transport services
from ACSI where ACSI has collocations with the ILEC and MCI has deployed its own
local switch. The parties also have agreed to use their best efforts to execute
an agreement pursuant to which MCI will resell local switched services in at
least 10 of the 21 identified markets on a wholesale basis. In connection with
these agreements (collectively, the "MCI Transaction"), ACSI issued MCI warrants
to purchase up to 620,000 shares of ACSI's Common Stock at $9.86 per share,
subject to number and price adjustment in certain circumstances. ACSI has also
agreed to issue warrants to purchase up to an aggregate of approximately 1.7
million additional shares of ACSI's Common Stock at fair market value on the
date of grant in tranches every six months after execution of the preferred
provider agreement, subject to, and based upon, certain increases in revenues to
ACSI generated under that agreement. Of the 620,000 warrants issued to MCI on
March 6, 1997,
4
<PAGE> 9
360,000 warrants have vested and the remaining 260,000 warrants will vest only
upon execution of the switched services resale agreement. MCI has certain
registration rights with respect to any shares of Common Stock issued to MCI in
connection with the MCI Transaction.
Cybergate Acquisition. On January 17, 1997, the Company acquired 100% of
the outstanding capital stock of Cybergate, Inc. in exchange for 1,030,000
shares of Common Stock plus up to an additional 150,000 shares if certain
performance goals are achieved (the "Cybergate Acquisition"). Cybergate, a
Florida-based ISP, delivers high-speed data communications services, including
computer network connections and related infrastructure services, that provide
both commercial and residential customers access to the Internet through their
personal computers and the use of a modem. Cybergate had over 200 commercial
dedicated line accounts and 13,000 consumer accounts at December 31, 1996
compared to 25 commercial accounts and 7,500 consumer accounts at December 31,
1995. Cybergate had revenues of approximately $4.9 million and EBITDA of
approximately $750,000 for the year ended December 31, 1996. The Company
believes the Cybergate Acquisition will help ACSI achieve its goal of becoming a
major provider of high-speed data communications services in the southern United
States. The Cybergate Acquisition provides ACSI with the ability to offer direct
Internet access to end-user commercial and consumer customers as well as to
provide private label Internet services for the Company's strategic distribution
partners throughout all of the Company's markets.
THE EXCHANGE OFFER
REGISTRATION RIGHTS
AGREEMENT...............The Old Notes were sold by the Company on July 23, 1997,
to the Initial Purchasers, which placed the Old Notes
with institutional investors (the "Private Placement").
In connection therewith, the Company executed and
delivered for the benefit of the holders of the Old
Notes the Registration Rights Agreement (as defined)
providing, among other things, for the Exchange Offer.
THE EXCHANGE OFFER......New Notes are being offered in exchange for up to
$170,000,000 aggregate principal amount of Old Notes. As
of the date hereof, $220,000,000 aggregate principal
amount of Old Notes are outstanding. Since the New Notes
will be recorded in the Company's accounting records at
the same carrying value as the Old Notes, no gain or
loss will be recognized by the Company upon the
consummation of the Exchange Offer. See "The Exchange
Offer -- Accounting Treatment." Holders of the Old Notes
do not have appraisal or dissenter's rights in
connection with the Exchange Offer under the Delaware
General Corporation Law, the governing law of the state
of incorporation of the Company.
Based on interpretations by the staff of the SEC, as set
forth in no-action letters issued to third parties, the
Company believes that holders of Old Notes (other than
any holder who is an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act) who
exchange their Old Notes for New Notes pursuant to the
Exchange Offer may offer such New Notes for resale,
resell such New Notes and otherwise transfer such New
Notes without compliance with the registration and
prospectus delivery provisions of the Securities Act;
provided such New Notes are acquired in the ordinary
course of the holder's business and such holders are not
engaged in, and do not intend to engage in, a
distribution of such New Notes and have no arrangement
or understanding with any person to participate in a
distribution of such New Notes. The staff of the SEC has
not considered the Exchange Offer in the context of a
no-action letter and there can be no assurance that the
staff of the SEC would make a similar determination with
respect to the Exchange Offer. Each broker-dealer that
receives New Notes for its own account in exchange for
Old Notes, where such Old Notes were acquired by such
broker-dealer as a
5
<PAGE> 10
result of market-making activities or other trading
activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such New
Notes. See "Plan of Distribution." To comply with the
securities laws of certain jurisdictions, it may be
necessary to qualify for sale or register the New Notes
prior to offering or selling such New Notes. The Company
has agreed, pursuant to the Registration Rights
Agreement and subject to certain specified limitations
therein, to register or qualify the New Notes for offer
or sale under the securities or "blue sky" laws of such
jurisdictions as may be necessary to permit the holders
of New Notes to trade the New Notes without any
restrictions or limitations under the securities laws of
the several states of the United States. If a holder of
Old Notes does not exchange such Old Notes for New Notes
pursuant to the Exchange Offer, such Old Notes will
continue to be subject to the restrictions on transfer
contained in the legend thereon. In general, the Old
Notes may not be offered or sold, unless registered
under the Securities Act, except pursuant to an
exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. See
"Risk Factors -- Consequences of Failure to Exchange"
and "Description of the New Notes -- Exchange Offer;
Registration Rights."
EXPIRATION DATE.........5:00 p.m., New York City time, on ,
1997 (20 days following the commencement of the Exchange
Offer), unless the Exchange Offer is extended, in which
case the term "Expiration Date" means the latest date
and time to which the Exchange Offer is extended.
CONDITIONS TO THE
EXCHANGE OFFER..........The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See "The
Exchange Offer -- Conditions." Except for the
requirements of applicable Federal and state securities
laws, there are no Federal or state regulatory
requirements to be complied with or obtained by the
Company in connection with the Exchange Offer. NO VOTE
OF THE COMPANY'S SECURITYHOLDERS IS REQUIRED TO EFFECT
THE EXCHANGE OFFER AND NO SUCH VOTE (OR PROXY THEREFOR)
IS BEING SOUGHT HEREBY.
PROCEDURES FOR TENDERING
OLD NOTES...............Each holder of Old Notes wishing to accept the Exchange
Offer must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in accordance with
the instructions contained herein and therein, and mail
or otherwise deliver such Letter of Transmittal, or such
facsimile, together with the Old Notes to be exchanged
and any other required documentation to the Exchange
Agent (as defined) at the address set forth herein and
therein. See "The Exchange Offer -- Procedures for
Tendering."
WITHDRAWAL RIGHTS.......Tenders of Old Notes may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the Expiration
Date. To withdraw a tender of Old Notes, a written or
facsimile transmission notice of withdrawal must be
received by the Exchange Agent at its address set forth
below under "Exchange Agent" prior to 5:00 p.m., New
York City time, on the Expiration Date.
ACCEPTANCE OF OLD NOTES
AND DELIVERY OF
NEW NOTES...............Subject to certain conditions, the Company will accept
for exchange any and all Old Notes which are properly
tendered in the Exchange Offer prior to 5:00 p.m., New
York City time, on the Expiration Date. The New Notes
6
<PAGE> 11
issued pursuant to the Exchange Offer will be delivered
promptly following the Expiration Date. See "The
Exchange Offer -- Terms of the Exchange Offer."
CERTAIN TAX
CONSIDERATIONS..........The exchange of New Notes for Old Notes should not be a
sale or exchange or otherwise a taxable event for
Federal income tax purposes. See "Certain Federal Income
Tax Considerations."
EXCHANGE AGENT..........The Chase Manhattan Bank is serving as exchange agent
(the "Exchange Agent") in connection with the Exchange
Offer.
USE OF PROCEEDS.........There will be no proceeds to the Company from the
Exchange Offer. The net proceeds to the Company from the
Private Placement were approximately $208 million, after
deducting discounts and other offering expenses payable
by the Company. Approximately $70 million of the net
proceeds from the Private Placement were placed into the
Escrow Account. The Company plans to use the balance of
the net proceeds (approximately $138 million) to fund
sales, marketing and product development costs incurred
in connection with the Company's growth, to expand voice
and data networks and to fund negative operating cash
flow. See "Use of Proceeds" and "Management's Discussion
and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
SUMMARY OF TERMS OF NEW NOTES
The Exchange Offer relates to the exchange of up to $170,000,000 aggregate
principal amount of Old Notes for up to an equal aggregate principal amount of
New Notes. The New Notes will be obligations of the Company evidencing the same
indebtedness as the Old Notes, and will be entitled to the benefits of the same
Indenture. The form and terms of the New Notes are generally the same as the
form and terms of the Old Notes, except that the New Notes do not contain terms
with respect to the interest rate step-up provisions and the New Notes have been
registered under the Securities Act and therefore will not bear legends
restricting the transfer thereof. See "Description of the New Notes."
COMPARISON WITH OLD NOTES
FREELY TRANSFERABLE.....Generally, the New Notes will be freely transferable
under the Securities Act by holders who are not
affiliates of the Company. The New Notes otherwise will
be substantially identical in all material respects
(including interest rate and maturity) to the Old Notes
(except with respect to the interest rate step-up
provisions). See "The Exchange Offer -- Terms of the
Exchange Offer."
REGISTRATION RIGHTS.....The holders of Old Notes currently are entitled to
certain registration rights pursuant to a registration
rights agreement (the "Registration Rights Agreement")
dated as of July 23, 1997, between the Company and the
Initial Purchasers. However, upon consummation of the
Exchange Offer, subject to certain exceptions, holders
of Old Notes who do not exchange their Old Notes for New
Notes in the Exchange Offer will no longer be entitled
to registration rights and will not be able to offer or
sell their Old Notes, unless such old Notes are
subsequently registered under the Securities Act (which,
subject to certain limited exceptions, the Company will
have no obligation to do), except pursuant to an
exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. See
"Risk Factors -- Consequences of Failure to Exchange."
7
<PAGE> 12
THE NEW NOTES
MATURITY DATE...........July 15, 2007.
INTEREST PAYMENT
DATES...................The New Notes will bear interest at a rate of 13 3/4%
per annum. Interest on the New Notes will accrue from
July 23, 1997 (the "Issue Date"), and will be payable
semi-annually on each January 15 and July 15, commencing
January 15, 1998.
ESCROW AND DISBURSEMENT
AGREEMENT...............The Company placed approximately $70 million of the net
proceeds realized from the sale of the Old Notes,
representing funds sufficient to pay the first five
interest payments on the Notes, into an Escrow Account
(as defined herein) to be held by the Escrow Agent (as
defined herein) for the benefit of the holders of the
Notes. Until disbursed in accordance with the Escrow and
Disbursement Agreement (as defined herein), the Escrow
Account is designed to secure a portion of the Company's
obligations under the Notes. Funds will be disbursed
from the Escrow Account only to pay interest on the
Notes and, upon certain repurchases or redemptions of
the Notes, to pay principal of and premium, if any,
thereon. Pending such disbursement, all funds contained
in the Escrow Account will be invested in Marketable
Securities (as defined herein). Pursuant to the Escrow
and Disbursement Agreement, if the Company makes the
first five interest payments on the Notes in a timely
manner, immediately after the fifth interest payment any
remaining Marketable Securities will be released from
the Escrow Account to the Company and thereafter the
Notes will be unsecured. See "Description of the New
Notes -- Disbursement of Funds -- Escrow Account" and
"Description of the New Notes -- Security."
OPTIONAL REDEMPTION.....The New Notes are redeemable, in whole or in part, at
the option of the Company, on or after July 15, 2002, at
the redemption prices set forth herein, plus accrued and
unpaid interest, if any, to the date of redemption. In
addition, on or prior to July 15, 2000, the Company, at
its option, may redeem up to 35% of the aggregate
principal amount of the Notes in the Private Placement
with the net cash proceeds of one or more Equity
Offerings (as defined), at the redemption prices set
forth herein plus accrued interest to the date of
redemption, provided that after any such redemption at
least $143 million aggregate principal amount of Notes
remains outstanding.
CHANGE OF CONTROL.......If a Change of Control (as defined) occurs, each holder
will have the right to require the Company to offer to
repurchase such holder's New Notes at a redemption price
of 101% of the principal amount thereof plus accrued and
unpaid interest, if any, to the date of repurchase.
There can be no assurance that ACSI will have the
financial resources necessary to repurchase the New
Notes upon a Change of Control.
RANKING.................The New Notes will be general unsecured senior
obligations of the Company and will rank pari passu with
all existing and future senior indebtedness of the
Company and will rank senior to all subordinated
indebtedness of the Company. As of June 30, 1997, there
was $193.0 million of senior indebtedness of the Company
outstanding. In addition, the New Notes will be
structurally subordinated to liabilities (including
trade payables) of the Company's subsidiaries. As of
June 30, 1997, liabilities of the Company's subsidiaries
were $62.7 million.
CERTAIN COVENANTS.......The indenture which will govern the New Notes (the
"Indenture") contains certain covenants that limit the
ability of the Company and its subsidiaries to, among
other things, incur additional indebtedness, pay
dividends or make
8
<PAGE> 13
certain other restricted payments, consummate certain
asset sales, enter into certain transactions with
affiliates, incur liens, impose restrictions on the
ability of a subsidiary to pay dividends or make certain
payments to the Company and its subsidiaries, merge or
consolidate with any other person or sell, assign,
transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of the Company or its
subsidiaries. In addition, the Indenture requires that
the Company apply certain Excess Proceeds (as defined)
of Asset Sales (as defined) to make an offer to purchase
on a pro rata basis, from all holders, outstanding Notes
and Existing Notes (as defined).
For additional information regarding the New Notes, see "Description of the New
Notes."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by holders of Old Notes before tendering their Old Notes in the
Exchange Offer.
The Company is a Delaware corporation. The Company's principal executive
offices are located at 131 National Business Parkway, Suite 100, Annapolis
Junction, Maryland 20701, and its telephone number is (301) 617-4200.
Please refer to the "Glossary" for the definitions of certain capitalized
terms used herein and elsewhere in this Prospectus.
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."
9
<PAGE> 14
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE, NETWORK AND STATISTICAL DATA)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED FISCAL PERIOD ENDED ENDED SIX MONTHS
FISCAL YEAR ENDED JUNE 30, DECEMBER 31, DECEMBER 31,(1) JUNE 30, ENDED JUNE 30,
------------------------------ ------------ ------------------- ------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 1996 1995 1996 1996 1997
-------- ------------------- ------------ ------------------- ------------- -------------------
<CAPTION>
PRO PRO PRO
ACTUAL FORMA(2) ACTUAL FORMA(2) ACTUAL FORMA(2)
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Revenues.............. $ 389 $ 3,415 $ 7,138 $ 989 $ 6,990 $ 9,626 $ 2,426 $ 19,793 $ 20,011
Operating expenses.... 14,797 24,543 29,027 7,966 34,434 37,548 16,576 58,125 58,371
Loss from
operations.......... (14,408) (21,128) (21,889) (6,977) (27,444) (27,922) (14,150) (38,333) (38,361)
Interest and other
income.............. 218 4,410 4,410 777 2,757 2,773 3,632 1,078 1,083
Interest and other
expense............. (170) (10,477) (10,824) (2,835) (10,390) (10,619) (7,642) (12,421) (12,423)
Loss before minority
interest............ (14,746) (27,195) (28,303) (9,035) (35,077) (35,768) (18,160) (49,676) (49,701)
Minority
interest(3)......... 48 413 413 156 160 160 257 -- --
Net loss.............. (14,698) (26,782) (27,890) (8,879) (34,917) (35,608) (17,903) (49,676) (49,701)
Net loss per common
share............... $ (3.30) $ (4.96) $ (4.40) $ (1.82) $ (5.48) $ (4.84) $ (3.03) $ (2.82) $ (2.81)
Weighted average
shares
outstanding......... 4,772 6,185 7,215 5,901 6,734 7,764 6,572 17,994 18,080
Other Data:
Deficiency in earnings
to cover fixed
charges(4).......... (14,746) (27,195) (28,303) (9,035) (35,077) (35,768) (18,160) (49,676) (49,701)
EBITDA(5)............. $ (7,443) $(14,901) $(14,418) $ (4,855) $(21,822) $(21,620) $(10,046) $(28,052) $(28,022)
Depreciation and
amortization........ 498 3,078 4,322 763 4,912 5,592 2,316 9,456 9,514
Capital
expenditures........ 15,303 60,856 61,667 17,657 64,574 64,832 43,199 73,213 73,213
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1997
----------------------------------------------- ------------------------------
PRO FORMA AS PRO FORMA AS
ADJUSTED FOR ADJUSTED FOR
UNIT OFFERING UNIT OFFERING
AND THE AND THE
PRO FORMA PRIVATE PLACEMENT PRIVATE PLACEMENT
ACTUAL (6) (6)(7)(8) ACTUAL (7)(8)
-------- ------------ ----------------- -------- -----------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................... $ 78,618 $114,854 $ 319,719 $ 8,499 $ 213,364
Total assets................................. 230,038 280,254 571,169 243,381 534,296
Long-term liabilities........................ 216,484 210,637 430,637 224,562 444,562
Redeemable stock, options and warrants....... 2,000 2,000 51,089 2,000 51,089
Stockholders' equity (deficit)............... (27,038) 28,339 50,185 (18,226) 3,600
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1996 1996 1996 1996 1997 1997
------------ --------- -------- ------------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Network and Selected Statistical
Data(9):
Networks in operation................. 9 10 15 19 21 28 31
Route miles........................... 136 200 386 543 697 908 957
Fiber miles........................... 5,957 9,466 28,476 32,774 48,792 75,867 82,693
Buildings connected................... 100 133 216 532 595 858 1,083
VGE circuits in service............... 82,055 125,208 137,431 267,894 384,134 554,883 886,375
Employees............................. 111 142 199 272 322 502 559
</TABLE>
- ---------------
(1) Subsequent to June 30, 1996, the Company changed its fiscal year-end from
June 30 to December 31. All data for the fiscal period ended December 31,
1996 is for the six month period ended December 31, 1996.
(2) Pro forma to give effect to the Cybergate Acquisition as if consummated at
the beginning of the earliest period presented.
(3) Minority interest represents a 7.25% ownership of AT&T Credit Corporation in
the Company's subsidiaries that operate its networks in Louisville, Fort
Worth, Greenville, Columbia and El Paso. See "Description of Certain
Indebtedness."
(4) For purposes of computing this amount earnings (loss) consists of earnings
(loss) before minority interest and fixed charges. Fixed charges consists of
interest expense (including amortization of debt issuance costs) and
one-third of rent expense which is deemed to be representative of interest
expense.
(5) EBITDA consists of net income (loss) before net interest, income taxes,
depreciation and amortization, noncash stock compensation and, in fiscal
year ended June 30, 1995, debt conversion expense of $385,000. It is a
measure commonly used in the telecommunications industry and is presented to
assist in understanding the Company's operating results. However, it is not
intended to represent cash flow or results of operations in accordance with
generally accepted accounting principles ("GAAP"). Noncash compensation
expense associated with employee stock options was $6.4 million and $2.7
million in fiscal years ended June 30, 1995 and 1996, respectively, $1.2
million and $550,000 in the six months ended December 31, 1995 and fiscal
period ended December 31, 1996, respectively and $1.5 million and $820,000
in the six months ended June 30, 1996 and 1997, respectively. See Note 6 of
"Notes to Consolidated Financial Statements."
(6) Pro forma to give effect to (i) the Cybergate Acquisition as if consummated
on December 31, 1996, (ii) sale of 5,060,000 shares of Common Stock in the
April 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 April Offering and application of the net proceeds
therefrom and (iii) conversion upon consummation of the April 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 April Offering.
(7) Adjusted to give effect to the sale of 75,000 shares of Preferred Stock and
75,000 Warrants to purchase shares of Common Stock in the Unit Offering with
net proceeds of approximately $67 million. The net proceeds from the sale of
the Units have been allocated to the Preferred Stock and the Warrants based
upon their relative fair values of $49.1 million for the Preferred Stock and
$21.8 million for the Warrants. Also reflects a consulting fee of
approximately $310,000 with respect to the purchase of Units by certain
principal stockholders and certain other parties in the Unit Offering and
consent solicitation fees paid out of the proceeds of the Unit Offering of
$4.375 million, which includes a solicitation agent fee of $500,000.
(8) Adjusted to give effect to the Private Placement with net proceeds of
approximately $138 million, excluding restricted cash of $70 million. Also
reflects a consulting fee of $500,000 with respect to the purchase of $50
million of Notes by W.R. Huff on behalf of investment management accounts
for which it acts as investment advisor and consent solicitation fees paid
out of the proceeds of the Private Placement of $3.875 million.
(9) Network and Selected Statistical Data are derived from ACSI's records.
10
<PAGE> 15
RISK FACTORS
Holders of Old Notes should carefully consider the following risk factors,
as well as other information set forth in this Prospectus, before tendering
their Old Notes in the Exchange Offer. The risk factors set forth below (other
than "Consequences of Failure to Exchange") are generally applicable to the Old
Notes as well as the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register the Old Notes under the Securities Act. Based on
interpretations by the staff of the SEC, as set forth in no-action letters to
third parties, the Company believes that the New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold or
otherwise transferred by holders thereof (other than any such holder that is an
"affiliate" of the issuer within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act provided that such New Notes are acquired in the ordinary
course of such holders' business and such holders are not engaged in, and do not
intend to engage in, a distribution of such New Notes and have no arrangement or
understanding with any person to participate in the distribution of such New
Notes. The staff of the SEC has not considered the Exchange Offer in the context
of a no-action letter and there can be no assurance that the staff of the SEC
would make a similar determination with respect to the Exchange Offer. Each
broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities. The Company
has agreed that, for a period of 180 days after the Expiration Date, it will
make this Prospectus available to any broker-dealer for use in connection with
any such resale. See "Plan of Distribution." However, to comply with the
securities laws of certain jurisdictions, if applicable, the New Notes may not
be offered or sold unless they have been registered or qualified for sale in
such jurisdictions or an exemption from registration or qualification is
available and is complied with. To the extent that Old Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Old Notes could be adversely affected.
NEGATIVE CASH FLOW; ANTICIPATED FUTURE LOSSES; SIGNIFICANT FUTURE CAPITAL
REQUIREMENTS; NEED FOR ADDITIONAL CASH.
The Company has never been profitable, has never generated positive cash
flow from consolidated operations and, since its inception, has incurred
significant net operating losses and negative cash flow. As of June 30, 1996,
December 31, 1996 and June 30, 1997, the Company had accumulated deficits of
$47.5 million, $82.4 million and $132.1 million, respectively. During the fiscal
period ended December 31, 1996, the Company incurred a net operating loss of
$27.4 million and generated negative cash flow from operations of $6.7 million.
During the six months ended June 30, 1997, the Company incurred a net operating
loss of $38.3 million and generated negative cash flow from operations of $36.8
million. The Company expects to continue to incur operating losses and negative
cash flow from operations for at least the next several years in connection with
implementing and marketing its local switched voice and high-speed data services
and establishing and expanding its local networks. Although the Company had
begun to generate revenues from its operational local networks as of March 31,
1997, it had not yet generated revenues from any of its other
11
<PAGE> 16
networks. There can be no assurance that the Company's networks or any of its
other services will ever provide a revenue base adequate to achieve or sustain
profitability or to generate positive cash flow.
The Company's 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 August 15, 1997, the Company had
raised approximately $475 million from debt and equity financings, $31.2 million
of which had been advanced under a $31.2 million secured credit facility with
AT&T Credit Corporation, a subsidiary of AT&T Corporation (the "AT&T Credit
Facility"), $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"), $61.8 million of which had been raised
from the issuance of $120.0 million principal amount of the Company's 12 3/4%
Senior Discount Notes due 2006 (the "2006 Notes" and, with the 2005 Notes, the
"Existing Notes"), $40.0 million of which had been raised in the April Offering,
approximately $67 million of which had been raised in the Unit Offering and $138
million of which had been raised in the Private Placement. The 2005 Notes were
issued under the indenture dated November 14, 1995 and the 2006 Notes were
issued under the indenture dated March 21, 1996 (collectively, the "Existing
Indentures"). The Company estimates that from June 30, 1997 through December 31,
1997 and December 31, 1998, remaining capital required for implementation of its
integrated networks and its other services and to fund negative cash flow will
be approximately $91.6 million and $237 million, respectively. At August 15,
1997, the Company had approximately $250 million of cash and cash equivalents
available for this purpose. The Company continues to use the estimated net
proceeds from the Private Placement principally to fund sales, marketing and
product development costs incurred in connection with the Company's growth, to
expand voice and data networks and to fund negative operating cash flow. The
Company continues to consider potential acquisitions or other strategic
arrangements that may fit the Company's strategic plan. Any such acquisitions or
strategic arrangements that the Company might consider are likely to require
additional equity or debt financing, which the Company will seek to obtain as
required.
Management anticipates that the Company's current cash resources from the
Unit Offering and the Private Placement will be sufficient to fund the Company's
continuing negative cash flow and the capital expenditures required through the
fourth quarter of 1998. Without an infusion of additional cash, the Company will
exhaust its cash resources at the end of the fourth quarter of 1998. To meet its
additional remaining capital requirements and to successfully implement its
strategy, ACSI will be required to sell additional equity securities, increase
its existing credit facility, acquire additional credit facilities or sell
additional debt securities, certain of which would require the consent of the
Company's debtholders. The Company has incurred significant net operating losses
and negative cash flow to date in connection with establishing its fiber optic
networks. Losses and negative cash flow will continue while the Company
concentrates on the development and construction of additional fiber optic
networks and until its networks Accordingly, there can be no assurance that the
Company will be able to obtain the additional financing necessary to satisfy its
cash requirements or to implement its strategy successfully, in which event the
Company will be unable to fund its ongoing operations, which have a material
adverse effect on its business, results of operations and financial condition.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
SUBSTANTIAL LEVERAGE; RECENT DEFAULT; FUTURE CASH OBLIGATIONS
Since inception, the Company's consolidated cash flow from operations has
been negative. As a result, the Company has been required to pay its fixed
charges (including interest on existing indebtedness) and operating expenses
with the proceeds from sales of its debt and equity securities. As a result of
the issuance of the Existing Notes, the Company will be required to satisfy
substantially higher periodic cash debt service obligations in the future.
Commencing in the year 2001, cash interest on the 2005 Notes and 2006 Notes will
be payable semi-annually at the rate of 13% per annum (approximately $24.7
million per year) and 12 3/4% per annum (approximately $15.3 million per year),
respectively. The full accreted value of the 2005 Notes and
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2006 Notes of $190.0 million and $120.0 million, respectively, will become due
on November 1, 2005 and April 1, 2006, respectively. In addition, the Company
will have substantial cash interest requirements with respect to the Notes
issued in the Private Placement. As of June 30, 1997, the Company (through five
of its subsidiaries) had approximately $31.2 million in debt outstanding under
the AT&T Credit Facility. The credit provided under the AT&T Credit Facility
must be used, if at all, by the five subsidiaries (operating local networks in
Louisville, Fort Worth, Greenville, Columbia and El Paso) to which funds have
already been advanced. As of June 30, 1997, the Company had approximately $224.6
million of consolidated outstanding long-term indebtedness. As of June 30, 1997,
the total consolidated liabilities of the Company were approximately $259.6
million. As of June 30, 1997, after giving pro forma effect on a consolidated
basis to the completion of the Private Placement, the Company would have had
approximately $444.6 million of outstanding long term indebtedness. It is
expected that the Company and its subsidiaries will incur additional
indebtedness, including increasing the borrowing capacity under the AT&T Credit
Facility to $35 million the maximum amount permitted to be incurred under the
Indenture (as defined herein) and the Existing Indentures. Many factors, some of
which are beyond the Company's control, will affect its performance and,
therefore, its ability to meet its ongoing obligations to repay the Notes, the
Existing Notes and its other debt. There can be no assurance that the Company
will be able to generate sufficient cash flow or otherwise obtain funds in the
future to cover interest and principal payments associated with the Notes, the
Existing Notes and its other debt. See "Description of Certain Indebtedness."
On June 11, 1997, the Company notified the trustee under each of the
Existing Indentures that, as of June 10, 1997, it had approximately $13.0
million in the aggregate of ordinary course trade accounts payable that were
more than 60 days overdue. As of June 30, 1997, the Company had approximately
$17.4 million in the aggregate of ordinary course trade accounts payable that
were more than 60 days overdue. These overdue amounts constituted Indebtedness
of the Company, as that term is defined in each of the Existing Indentures. The
incurrence by the Company of such Indebtedness is not permitted under each of
the Existing Indentures and, therefore, constituted an Event of Default (as
defined in the Existing Indentures) under each Existing Indenture. The Company
used a portion of the proceeds of the Unit Offering to pay in full all ordinary
course trade accounts payable that were more than 60 days overdue to cure such
Event of Default.
In addition, in connection with the Unit Offering the Company issued its
Preferred Stock, dividends on which may be paid, at the Company's option, either
in cash or by the issuance of additional shares of Preferred Stock; provided,
however, that after June 30, 2002, to the extent and so long as the Company is
not precluded from paying cash dividends on the 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 Preferred
Stock in cash.
The level of the Company's indebtedness and its other obligations could
have important consequences to holders of the Notes, including the following:
(i) the debt service requirements of the Company's existing indebtedness and any
additional indebtedness could make it difficult for the Company to make payments
on the Notes; (ii) the ability of the Company to obtain any necessary financing
in the future for working capital, capital expenditures, debt service
requirements or other purposes may be limited; (iii) any cash flow from the
operations of certain of the Company's subsidiaries may need to be dedicated to
debt service payments and might not be available for other purposes; (iv) the
Company's level of indebtedness could limit its flexibility in planning for, or
reacting to, changes in its business; (v) the Company is more highly leveraged
than most of its competitors, which may place it at a competitive disadvantage;
and (vi) the Company's high degree of indebtedness will make it more vulnerable
to a downturn in its business.
HOLDING COMPANY STRUCTURE; SOURCE OF REPAYMENT OF NEW NOTES; EFFECTIVE
SUBORDINATION OF NEW NOTES TO INDEBTEDNESS OF SUBSIDIARIES
As a holding company that conducts virtually all of its business through
its subsidiaries, ACSI has no source of operating cash flow other than from
dividends and distributions from its subsidiaries. In order to pay interest on
the New Notes or the principal amount of the New Notes at maturity, or to redeem
or repurchase the New Notes, ACSI will be required to obtain distributions from
its subsidiaries, refinance its indebtedness,
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raise funds in a public or private equity or debt offering, or sell some or all
of its or its subsidiaries' assets. Moreover, the Indenture and the Existing
Indentures limit the Company's ability to incur additional indebtedness and the
AT&T Credit Facility imposes restrictions on the ability of those five
subsidiaries of ACSI that incur indebtedness thereunder to transfer funds to
ACSI in the form of dividends or other distributions. The AT&T Credit Facility,
the Indenture and the Existing Indentures also impose restrictions on the
ability of such subsidiaries to raise capital by incurring additional
indebtedness. These factors could limit ACSI's ability to meet its obligations
with respect to the New Notes.
If ACSI is required to conduct an offering of its capital stock or to
refinance the New Notes, its ability to do so on acceptable terms, if at all,
will be affected by several factors, including financial market conditions and
the value and performance of the Company at the time of such offering or
refinancing, which in turn may be affected by many factors, including economic
and industry cycles. There can be no assurance that an offering of ACSI's
Capital Stock (as defined) or a refinancing of the New Notes can or will be
completed on satisfactory terms, that they would be sufficient to enable ACSI to
make any payments with respect to the New Notes if required, or that they would
be permitted by the terms of the debt instruments of ACSI and its subsidiaries
then in effect.
The New Notes will be senior obligations only of ACSI, will be pari passu
in right of payment with certain other indebtedness of ACSI and will not be
secured by any assets. ACSI's subsidiaries will have no obligation to pay
amounts due on the New Notes and will not guarantee the New Notes. Therefore,
the New Notes will be effectively subordinated to all liabilities of ACSI's
subsidiaries, including trade payables. As of June 30, 1997, the total
liabilities of the Company's subsidiaries (after the elimination of loans and
advances by the Company to its subsidiaries) were approximately $62.7 million.
Of that amount, approximately $31.2 million in indebtedness was secured by first
priority liens in favor of AT&T on all the assets of the borrowing subsidiaries
and a pledge of the stock of such subsidiaries. See "Description of Certain
Indebtedness." Any rights of ACSI and its creditors, including the holders of
the New Notes, to participate in the assets of any of ACSI's subsidiaries upon
any liquidation or reorganization of any such subsidiary will be subject to the
prior claims of that subsidiary's creditors, including trade creditors.
CERTAIN FINANCIAL AND OPERATING RESTRICTIONS
The Existing Indentures, the AT&T Credit Facility and the Indenture impose
operating and financial restrictions on the Company and its subsidiaries. These
restrictions affect, and in certain cases significantly limit or prohibit, among
other things, the ability of the Company and its subsidiaries to incur
additional indebtedness or create liens on their assets, pay dividends, sell
assets, engage in mergers or acquisitions or make investments. Failure to comply
with any of these restrictions could limit the availability of borrowings or
result in a default thereunder. See "Description of the New Notes -- Certain
Covenants" and "Description of Certain Indebtedness." In addition, the terms of
any debt or equity financings undertaken by the Company to meet its future cash
requirements could restrict the Company's operational flexibility and thereby
adversely affect the Company's business, results of operations and financial
condition.
RAPID EXPANSION OF OPERATIONS
Subject to the sufficiency of its cash resources, ACSI 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. In addition to managing internal growth, the
Company will have to manage the growth, if any, of Cybergate's business and
integrate that business and new personnel into the Company's existing
operations. Any failure of the Company to implement its growth strategy or
manage its expanded operations effectively will have a material adverse effect
on the Company's business, operating results and financial condition.
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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 nine months,
the Company has effected a management reorganization in connection with which
the Company hired several members of senior management and saw the departure of
several significant employees and members of senior management. The Company
anticipates that continued growth will require it to integrate its newest senior
management members successfully and to recruit and hire a substantial number of
new managerial, finance, accounting and support personnel. Failure to retain and
attract new members of management who can manage the Company's growth
effectively would have a material adverse effect on the Company and its growth.
To manage its growth successfully, the Company will also have to continue to
improve and upgrade operational, financial, accounting and information systems,
controls and infrastructure as well as expand, train and manage its employee
base. In the event the Company is unable to upgrade its financial controls and
accounting and reporting systems adequately to support its anticipated growth,
the Company's business, results of operation and financial condition would be
materially adversely affected. In addition, the demands on the Company's
marketing and sales resources have grown rapidly with the Company's rapidly
expanding network and service offerings. The Company is taking steps to improve
marketing support of its expanded operations and plans to increase its existing
sales force significantly during 1997. There can be no assurance, however, that
the Company will be successful in attracting, retaining or effectively managing
and motivating such personnel or that its expanded sales force can successfully
market the Company's services or that the failure of either of the foregoing to
occur would not have a material adverse effect on the Company's business,
operating results and financial condition.
DEPENDENCE ON BILLING, CUSTOMER SERVICES AND INFORMATION SYSTEMS
Sophisticated information and processing systems are vital to the Company's
growth and its ability to monitor costs, bill customers, provision customer
orders and achieve operating efficiencies. Billing and information systems for
the Company's historical lines of business have been produced largely in-house
with partial reliance on third-party vendors. These systems have generally met
the Company's needs due in part to the low volume of customer billing. As the
Company transitions to the provisioning of local services and as its long
distance and Internet operations continue to expand, the need for sophisticated
billing and information systems will increase significantly. The Company's plans
for the development and implementation of its billing systems rely, for the most
part, on the delivery of products and services by third party vendors.
Similarly, the Company is developing customer call centers to provision service
orders. Information systems are vital to the success of the call centers, and
the information systems for these call centers are largely being developed by
third party vendors. Failure of these vendors to deliver proposed products and
services in a timely and effective manner and at acceptable costs, failure of
the Company to adequately identify all of its information and processing needs,
failure of the Company's related processing or information systems, or the
failure of the Company to upgrade systems as necessary could have a material
adverse effect on the ability of the Company to reach its objectives, on its
financial condition and on its results of operations.
DEPENDENCE ON A SMALL NUMBER OF MAJOR CUSTOMERS
The Company receives a significant portion of its revenues from a small
number of major customers, particularly the IXCs that service the Company's
markets. For the fiscal year ended June 30, 1996, the fiscal period ended
December 31, 1996 and the six month period ended June 30, 1997, approximately
60%, 40% and 29% of the Company's revenues, respectively, were attributable to
access services provided to four of the largest IXCs, including services
provided for the benefit of their customers. The Company is, and expects to
continue to be, dependent upon such customers, and the loss of any one of them
could have a material adverse effect on the Company's business, results of
operations and financial condition. Additionally, customers who account for
significant portions of the Company's revenues may have the ability to negotiate
prices for the Company's services that are more favorable to the customer and
that result in lower profit margins for the Company. The Federal
Telecommunications Act may also encourage IXCs to construct their own local
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facilities, repackage unbundled network elements and/or resell the local
services of ACSI's competitors, which may materially adversely affect the
Company. Additionally, in the six month period ended June 30, 1997,
approximately 18% of the Company's revenues were generated by ISPs. See
"-- Competition," "Business -- Competition" and "-- Regulation."
DEPENDENCE UPON SUPPLIERS; SOLE AND LIMITED SOURCES OF SUPPLY
The Company relies on other companies to supply certain key components of
its network infrastructure, including telecommunications services, network
capacity and switching and networking equipment, which, in the quantities and
quality demanded by the Company, are available only from sole or limited
sources. The Company is also dependent upon ILECs to provide telecommunications
services and facilities to the Company and its customers. The Company has from
time to time experienced delays in receiving telecommunications services and
facilities, and there can be no assurance that the Company will be able to
obtain such services or facilities on the scale and within the time frames
required by the Company at an affordable cost, or at all. Any failure to obtain
such services or additional capacity on a timely basis at an affordable cost, or
at all, would have a material adverse effect on the Company's business,
financial condition and results of operations. The Company also is dependent on
its suppliers' ability to provide necessary products and components that comply
with various Internet and telecommunications standards, interoperate with
products and components from other vendors and function as intended when
installed as part of the network infrastructure. Any failure of the Company's
sole or limited source suppliers to provide products or components that comply
with Internet standards, interoperate with other products or components used by
the Company in its network infrastructure or by its customers or fulfill their
intended function as a part of the network infrastructure could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business."
DEPENDENCE UPON NETWORK INFRASTRUCTURE; RISK OF SYSTEM FAILURE; SECURITY RISKS
The Company's success in marketing its services to business and government
users requires that the Company provide superior reliability, capacity and
security via its network infrastructure. The Company's networks and networks
upon which it depends are subject to physical damage, power loss, capacity
limitations, software defects, breaches of security (by computer virus,
break-ins or otherwise) and other factors, certain of which may cause
interruptions in service or reduced capacity for the customers. Interruptions in
service, capacity limitations or security breaches could have a material adverse
effect on the Company's business, financial condition and results of operations.
DEPENDENCE ON RIGHTS-OF-WAY AND OTHER THIRD PARTY AGREEMENTS
The Company must obtain easements, rights-of-way, franchises and licenses
(collectively, "local approvals") from various private parties, actual and
potential competitors and local governments in order to construct and maintain
its fiber optic local networks. The Company has obtained the local approvals
necessary to construct and operate its local networks in the central business
districts of all of the markets in which the Company's local networks are
presently operating or are under construction. The Company does not yet have all
of the local approvals required to implement its local network business plan in
prospective new markets or to expand its existing markets, and there can be no
assurance that the Company will be able to obtain and maintain local approvals
on acceptable terms or that ILECs, CLECs or other competitors will not obtain
similar local approvals that will allow them to compete against the Company or
enter a market before the Company or to expand the Company's existing networks
to compete effectively. Some of the agreements for local approvals obtained by
the Company may be short-term, or revocable at will, and there can be no
assurance that the Company will have continued access to local approvals after
their expiration. If any of these agreements were terminated or could not be
renewed and the Company was forced to remove its fiber from the streets or
abandon its local network in place, such termination or non-renewal would be
likely to have a material adverse effect on the Company's business, results of
operations and financial condition. Furthermore, certain of the Company's pole
attachment agreements with private entities are contingent on CLECs being
legally entitled to pole access. Certain utilities have challenged the
constitutionality of mandatory access to poles and other facilities in ongoing
litigation. If ongoing litigation or legislative activity alters current
requirements, the Company may be denied access or required to renegotiate the
rates and other terms for
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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 March 31, 1997, the Company had posted approximately $7.9
million in performance bonds and letters of credit and expects to post
additional bonds or letters of credit in the future. As of March 31, 1997, the
Company had been required to pledge approximately $4.4 million in cash
collateral to obtain these bonds and letters of credit, and may be required to
pledge substantial collateral to obtain the bonds or letters of credit in the
future. See "Business -- Implementation of Integrated Network -- Rights-of-Way"
and "-- Regulation."
EFFECT OF REGULATION
As a common carrier, the Company is subject to substantial federal, state
and local regulation. The Company's local networks do not require authorization
from the Federal Communications Commission (the "FCC") for construction or
installation. However, the Company must file FCC tariffs stating its rates,
terms and conditions of service for access services and international traffic.
State regulatory agencies regulate intrastate communications, while local
authorities control the Company's access to and use of municipal rights-of-way.
The Federal Telecommunications Act preempted all state and local legal
requirements which prohibit or have the effect of prohibiting any entity from
providing any intrastate telecommunications service. However, many states
continue to require telecommunications carriers to obtain a certificate,
license, permit or similar approval before providing services. Thus, the
Company's ability to provide additional intrastate services is dependent upon
its receipt of requisite state regulatory approval. The inability to obtain the
approvals necessary to provide intrastate switched services could have a
material adverse effect on the Company's business, results of operations and
financial condition. The Federal Telecommunications Act imposes a duty upon all
ILECs to negotiate in good faith with potential interconnectors such as the
Company to provide interconnection to the ILEC network, exchange local traffic,
make unbundled basic local network elements available and permit resale of most
local services. In the event that negotiations do not succeed, the Company has a
right to seek state Public Service Commission ("PSC") arbitration of any
unresolved issues.
Moreover, the Federal Telecommunications Act has increased local
competition by IXCs, CATVs and public utility companies, which may have a
material adverse effect on the Company. In addition, the Federal
Telecommunications Act has granted important benefits to the ILECs, including
providing ILECs substantial new pricing flexibility, restoring the ability of
RBOCs to provide long distance services and allowing RBOCs to provide certain
cable television services. Moreover, the FCC recently has taken a number of
actions intended ultimately to reduce regulation of ILECs, restructure the
manner in which ILECs charge for interexchange access services, reduce
interexchange access service rate levels and reform the current methods used to
fund universal service goals. These changes will tend to enhance the competitive
position of the ILECs, which may materially adversely affect the Company.
Furthermore, no assurance can be given that court decisions or changes in
current or future federal or state legislation or regulations would not
materially adversely affect the Company. See "-- Competition" and
"Business -- Regulation."
Internet-related 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. However on December 24, 1996, the FCC released a notice
of inquiry seeking comment on the degree of regulation which should be applied
to interstate Internet and information services. In addition, the FCC is
considering whether to make Internet providers subject to the payment of
interexchange access charges. Moreover, as discussed hereafter, the Federal
Telecommunications Act creates civil and criminal penalties for the knowing
transmission of "indecent" material over the Internet. These and other changes
in the regulatory environment relating to the telecommunications or
Internet-related services industry could have an adverse effect on the Company's
Internet-related services business. Additionally, the Federal Telecommunications
Act may permit telecommunications companies, RBOCs or others to increase the
scope or reduce the cost of their Internet access
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services. The Company cannot predict the effect that the Federal
Telecommunications Act or any future legislation, regulation or regulatory
changes may have on its business.
COMPETITION
The Company operates in a highly competitive environment for all of its
services. An increasing trend toward strategic business alliances in the
telecommunications industry may create significant new competition for ACSI.
- Dedicated and Switched Voice Services. The Company's competitors in this
market are predominantly ILECs, other CLECs and CATVs and may potentially
include microwave carriers, satellite carriers, teleports, public
utilities, wireless telecommunications providers, IXCs, integrated
communications providers and private networks built by large end-users.
With the passage of the Federal Telecommunications Act and the entry of
RBOCs into the long distance market, the Company believes that IXCs may
construct their own local facilities and/or resell local services in
order to compete with the bundled local and long distance services to be
offered by the ILECs as a result of the Federal Telecommunications Act.
Given that a substantial portion of the Company's revenues are billed to
IXCs for services provided for the benefit of their customers, such
action could have a material adverse effect on the Company. See
"Business -- Competition."
Currently, the Company does not have a significant market share in any
market. Most of the Company's actual and potential competitors have
substantially greater financial, technical and marketing resources than
the Company. In particular, ILECs have long-standing relationships with
their customers, have the potential to subsidize access services with
monopoly service revenue and benefit from certain existing federal, state
and local regulations that the Company believes, in certain respects,
favor ILECs over the Company. See "Business -- Regulation." For example,
the Interconnection Decisions issued by the FCC and the Federal
Telecommunications Act, which allow CLECs to interconnect with ILECs'
facilities, have been accompanied by increased pricing flexibility and
partially relaxed regulatory oversight of ILECs. The Company believes
that ILECs are offering and will continue to offer 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
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services by the Company and its competitors; the Company's ability to
support industry standards; and industry and general economic trends. The
Company's success in this market will depend heavily upon its ability to
provide high quality Internet connectivity and value-added Internet
services at competitive prices. See "Business -- Competition."
- Internet Services. The market for Internet access services is extremely
competitive. There are no substantial barriers to entry, and the Company
expects that competition will intensify in the future. The Company has
entered this market principally through the Cybergate Acquisition and
believes that its ability to compete successfully will depend upon a
number of factors, including: market presence; the capacity, reliability
and security of its network infrastructure; ease of access to and
navigation of the Internet; the pricing policies of its competitors and
suppliers; the timing of introductions of new products and services by
the Company and its competitors; the Company's ability to support
existing and emerging industry standards; and industry and general
economic trends.
The Company's current and prospective competitors include many large
companies that have substantially greater market presence and financial,
technical, marketing and other resources than the Company. The Company
competes or expects to compete directly or indirectly with the following
categories of companies: (1) other international, national and regional
commercial Internet service providers; (2) established on-line services
companies that currently offer or are expected to offer Internet access;
(3) computer hardware and software and other technology companies; (4)
IXCs; (5) RBOCs; (6) CATVs; and (7) nonprofit or educational Internet
service providers. The ability of these competitors or others to bundle
services and products with Internet connectivity services could place the
Company at a significant competitive disadvantage in this services
market.
IMPACT OF TECHNOLOGICAL CHANGE
The telecommunications industry is subject to rapid and significant
technological change that could materially affect the continued use of fiber
optic cable or the electronics utilized in the Company's networks. Future
technological changes, including changes related to the emerging wireline and
wireless transmission and switching technologies and Internet-related services
and technologies, could have a material adverse effect on the Company's
business, results of operations and financial condition.
The market for the Company's telecommunications services is characterized
by rapidly changing technology, evolving industry standards, emerging
competition and frequent new product and service introductions. There can be no
assurance that the Company will successfully identify new service opportunities
and develop and bring new services to market. The Company is also at risk from
fundamental changes in the way telecommunications services are marketed and
delivered. The Company's data communications service strategy assumes that
technology such as frame relay and ATM protocols, utilizing fiber optic or
copper-based telecommunications infrastructures, will continue to be the primary
protocols and transport infrastructure for data communications services. The
Company's pursuit of necessary technological advances may require substantial
time and expense, and there can be no assurance that the Company will succeed in
adapting its telecommunications services business to alternate access devices,
conduits and protocols.
STRATEGIC INVESTMENTS; BUSINESS COMBINATIONS
The Company from time to time engages in discussions with (i) potential
business partners looking toward formation of business combinations or strategic
alliances that would expand the reach of the Company's networks or services and
(ii) potential strategic investors (i.e., investors in the same or related
business) who have expressed an interest in making an investment in or acquiring
the Company. In addition to providing additional growth capital, the Company
believes that an alliance with an appropriate strategic investor or business
partner could provide operating synergies to, and enhance the competitive
position of, both ACSI and such strategic investor/business partner within the
rapidly consolidating telecommunications industry. There can be no assurance
that any agreement with any potential strategic investor or business partner
will be reached on terms acceptable to the Company. An investment, business
combination or strategic alliance could constitute a Change of Control (as
defined in the Indenture) requiring the Company
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to offer to purchase all outstanding Notes and Existing Notes. In the event that
such a Change of Control occurs at a time when the Company does not have
sufficient available funds to purchase all Notes and Existing Notes tendered or
at a time when the Company is prohibited from purchasing the Notes and the
Existing Notes, an Event of Default (as defined in the Indenture) could occur
under the relevant indenture. With the exception of the MCI Transaction,
however, the Company currently has no agreement, arrangement or understanding
with any potential strategic investor or potential business partner with respect
to any acquisition, business combination or strategic alliance.
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
The Company's directors, executive officers and principal stockholders
beneficially own approximately 72.8% of the outstanding Common Stock, including
39.6%, 22.1% and 8.8% of the outstanding Common Stock which is beneficially
owned by The Huff Alternative Income Fund, L.P. ("Huff"), which occupies three
positions on the Board of Directors, ING Equity Partners, L.P. I ("ING"), which
occupies two positions on the Board of Directors and affiliates of First
Analysis Corporation ("FAC"), which occupies one position on the Board of
Directors, respectively. In addition, Huff is the beneficial owner of
approximately 13% of the Preferred Stock issued in connection with the Unit
Offering, which has voting rights in certain circumstances. ING Baring (U.S.)
Securities, Inc., which may be deemed an affiliate of ING, is the beneficial
owner of 10% of the Preferred Stock issued in connection with the Unit Offering.
The Initial Purchasers have informed the Company that W.R. Huff (an affiliate of
Huff) on behalf of investment management accounts for which W.R. Huff acts as
investment advisor, purchased $50 million of the Old Notes in the Private
Placement, for which the Company payed W.R. Huff, on behalf of such accounts, a
fee of $750,000 with respect to such purchase. Accordingly, if they choose to
act together, these persons will be able
20
<PAGE> 25
to control the election of the Board of Directors and other matters voted upon
by the stockholders. A sale by one or more of these principal stockholders to
third parties could trigger the right of the holders of the Notes and the
Existing Notes to require the Company to repurchase the Notes and the Existing
Notes (a "Change of Control Offer"). In the event that a Change of Control Offer
occurs at a time when the Company does not have sufficient available funds to
pay the Change of Control Purchase Price (as defined in the Indenture) for all
Notes and Existing Notes tendered, or at a time when the Company is prohibited
from purchasing the Notes and the Existing Notes, an Event of Default (as
defined in the relevant indenture) could occur under the relevant indenture. In
certain circumstances, in determining whether the approval of holders of the
required principal amount of Notes has been received, the Notes held by W.R.
Huff, on behalf of investment management accounts for which it acts as
investment advisor, shall be disregarded. See "Management," "Principal
Stockholders," "Description of the New Notes" and "Description of Certain
Indebtedness -- 2005 Notes and 2006 Notes."
LACK OF PUBLIC MARKET; EXCHANGE OFFER
The New Notes will be new securities for which there is currently no
market. ACSI does not intend to apply for listing of the New Notes or the Old
Notes on any securities exchange or to seek approval for quotation through any
automated quotation system. There can be no assurance as to the development or
liquidity of any market for the New Notes or the Old Notes. If an active market
does not develop, the market price and liquidity of the New Notes or the Old
Notes will be adversely affected. Many possible events could adversely affect
the development or liquidity of any market for such securities. For example, the
SEC has broad discretion to determine whether to declare any registration
statement effective, and for a variety of reasons may delay or deny the
effectiveness of any registration statement filed by the Company. Although the
Initial Purchasers have informed the Company that they currently intend to make
a market in the Notes, they are not obligated to do so and any such
market-making may be discontinued at any time without notice. In addition, such
market-making activity may be limited during the Exchange Offer and the pendency
of any shelf registration statement. In addition, the $50 million of Notes
purchased by W.R. Huff, on behalf of investment management accounts for which it
acts as investment advisor, are subject to a lock-up agreement pursuant to which
W.R. Huff, on behalf of such accounts, has agreed with the Initial Purchasers
not to transfer or otherwise dispose of such Notes for a period of 60 days
following July 23, 1997.
21
<PAGE> 26
USE OF PROCEEDS
There will be no proceeds to the Company from the Exchange Offer. The net
proceeds to the Company from the Private Placement were approximately $208
million. Approximately $70 million of the proceeds of the Private Placement,
representing funds sufficient to pay the first five interest payments on the
Notes, were placed into the Escrow Account and, pending disbursement, the
Trustee (as defined herein) for the benefit of the holders of the Notes has a
first priority lien on the Escrow Account. Funds may be disbursed from the
Escrow Account only to pay interest on the Notes and, upon certain repurchases
or redemptions of the Notes, to pay principal of and premium, if any, thereon.
See "Description of the New Notes -- Disbursement of Funds -- Escrow Account"
and "Description of New Notes -- Security." The Company intends to use the
balance of the net proceeds from the Private Placement, approximately $138
million, to fund sales, marketing and product development costs incurred in
connection with the Company's growth, to expand voice and data networks and to
fund negative operating cash flow. The Company has estimated that as of June 30,
1997, the total remaining capital required for implementing integrated networks
and its other services and to fund negative cash flow through December 31, 1997
and December 31, 1998 was approximately $91.6 million and $237 million,
respectively. Management anticipates that the Company's current cash resources
from the Unit Offering and the Private Placement will be sufficient to fund the
Company's continuing negative cash flow and capital expenditures required
through the fourth quarter of 1998. If by the end of the fourth quarter of 1998
the Company is unable to obtain additional cash through the sale of debt or
equity securities or increases in existing or new credit facilities, the Company
will be unable to fund its operations.
In addition, the Company from time to time considers potential acquisitions
or other strategic arrangements that may fit the Company's strategic plan,
although the Company is not currently negotiating any material transaction of
this type. Any acquisitions are likely to require additional equity or debt
financing, which the Company will seek to obtain, as required.
Pending such uses, the Company has invested the net proceeds from the
Private Placement in Marketable Securities.
22
<PAGE> 27
CAPITALIZATION
The following table sets forth the total cash and cash equivalents and
capitalization of the Company (i) as of June 30, 1997, and (ii) as adjusted to
give effect to the Unit Offering and the Private Placement and application of
the estimated net proceeds therefrom. For this purpose, the net proceeds of the
Unit Offering were approximately $67 million and the net proceeds from the
Private Placement were approximately $138 million, excluding restricted cash of
approximately $70 million. The solicitation fees were approximately $8,250,000
for the consent related to the Private Placement. See "Use of Proceeds" and
"Unaudited Pro Forma Condensed Consolidated Financial Data." This table should
be read in conjunction with the Consolidated Financial Statements and related
notes thereto included in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------------------------
AS ADJUSTED FOR
UNIT OFFERING AND THE
PRIVATE
ACTUAL PLACEMENT(1)(2)
-------------- ---------------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents.......................................... $ 8,499 $ 213,364
Restricted assets invested in Marketable Securities(3)............. -- 70,000
Total cash and restricted assets................................... $ 8,499 $ 283,364
========= =========
Long term debt
12 3/4% Senior Discount Notes due 2006........................... $ 75,423 $ 75,423
13% Senior Discount Notes due 2005............................... 117,608 117,608
13 3/4% Senior Notes due 2007.................................... -- 220,000
Notes payable(4)................................................. 30,721 30,721
Other long-term liabilities...................................... 809 809
--------- ---------
Total long-term debt..................................... 224,561 444,561
Redeemable stock and options....................................... 2,000 51,089(1)
Stockholders' equity (deficit):
Common Stock, par value $0.01 per share, 75,000,000 shares
authorized, 35,926,902 shares issued and outstanding at June
30, 1997(5)(6)................................................ 359 359
Additional paid-in capital(1).................................... 113,565 135,391
Accumulated deficit.............................................. (132,149) (132,149)
--------- ---------
Total stockholders' equity (deficit)..................... (18,226) 3,600
--------- ---------
Total capitalization..................................... $ 208,335 $ 499,250
========= =========
</TABLE>
- ---------------
(1) Adjusted to give effect to the sale of 75,000 shares of Preferred Stock and
75,000 Warrants to purchase shares of Common Stock in the Unit Offering with
net proceeds of approximately $67 million. The estimated net proceeds from
the sale of the Units have been allocated to the Preferred Stock and the
Warrants based upon their relative fair values of $49.1 million for the
Preferred Stock and $21.8 million for the Warrants. Also reflects a
consulting fee of approximately $310,000 with respect to the purchase of
Units by certain principal stockholders and certain other parties in the
Unit Offering and consent solicitation fees paid out of the proceeds of the
Unit Offering of $4.375 million, which includes a solicitation agent fee of
$500,000.
(2) Adjusted to give effect to the Private Placement with estimated net proceeds
of $138 million, excluding restricted cash of $70 million. Also reflects a
consulting fee of $500,000 with respect to the expected purchase of $50
million of Notes by W.R. Huff on behalf of investment management accounts
for which it acts as investment advisor and consent solicitation fees paid
out of the proceeds of the Private Placement of $3.875 million.
(3) Represents investments in Marketable Securities sufficient to make the first
five interest payments on the Notes. The Company placed approximately $70
million of the net proceeds realized from the Private Placement,
representing funds sufficient to pay the first five interest payments on the
Notes, into the Escrow Account.
(4) Consists primarily of the AT&T Credit Facility totaling $31.2 million, of
which approximately $31.2 million had been drawn as of June 30, 1997.
(5) Excludes 7,853,741 and 5,312,476 shares reserved for issuance upon exercise
of options and warrants, respectively, outstanding at June 30, 1997, at a
weighted average exercise price of $4.62 and 500,000 shares issuable in
connection with the Company's Employee Stock Purchase Plan (as defined).
Also excludes 251,567 additional shares issuable upon exercise of the 2005
Warrants as a result of the April 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."
(6) The aggregate proceeds from the exercise of all warrants and options
outstanding at June 30, 1997, would be approximately $61.2 million.
23
<PAGE> 28
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL DATA
The following Unaudited Pro Forma Condensed Consolidated Financial Data
consist of Unaudited Pro Forma Condensed Consolidated Statements of Operations
for the fiscal year ended June 30, 1996, for the fiscal period ended December
31, 1996 and for the six months ended June 30, 1997 and Unaudited Pro Forma
Condensed Consolidated Balance Sheet as of December 31, 1996 (collectively, the
"Pro Forma Statements"). The Unaudited Pro Forma Condensed Consolidated
Statements of Operations give effect to the Cybergate Acquisition as if it
occurred on July 1, 1995 and the Unaudited Pro Forma Condensed Consolidated
Balance Sheet gives effect to the Cybergate Acquisition as if it occurred on
December 31, 1996.
Management believes that, on the basis set forth herein, the Pro Forma
Statements reflect a reasonable estimate of the Cybergate Acquisition based on
currently available information. The pro forma financial data are presented for
informational purposes only and do not purport to represent what the Company's
financial position or results of operations would have been had the Cybergate
Acquisition in fact occurred on the dates assumed or that may result from future
operations. The pro forma data should be read in conjunction with the Company's
Consolidated Financial Statements and related notes thereto which are included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1996 FISCAL PERIOD ENDED DECEMBER 31, 1996(1)
---------------------------------------------- ----------------------------------------------
THE THE
THE COMPANY THE COMPANY
COMPANY CYBERGATE ADJUSTMENTS PRO FORMA COMPANY CYBERGATE ADJUSTMENTS PRO FORMA
-------- --------- ----------- --------- -------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $ 3,415 $ 3,723 $ -- $ 7,138 $ 6,990 $ 2,636 $ -- $ 9,626
Operating expenses:
Network development and
operations..................... 5,265 1,762 -- 7,027 8,703 1,136 -- 9,839
Selling, general and
administrative................. 13,464 1,378 100(2) 14,942 20,270 1,247 50(2) 21,567
Noncash stock and compensation... 2,736 -- -- 2,736 550 -- -- 550
Depreciation and amortization.... 3,078 372 872(3) 4,322 4,911 245 436(3) 5,592
-------- ------ ------- -------- -------- ------ ----- --------
Total operating expenses......... 24,543 3,512 972 29,027 34,434 2,628 486 (37,548)
-------- ------ ------- -------- -------- ------ ----- --------
Operating income (loss).......... (21,128) 211 (972) (21,889) (27,444) 8 (486) (27,922)
Non-operating income (expense)... (6,067) (27) (320)(4) (6,414) (7,633) (53) (160)(4) (7,846)
-------- ------ ------- -------- -------- ------ ----- --------
Income (loss) before minority
interest....................... (27,195) 184 (1,292) (28,303) (35,077) (45) (646) (35,768)
Minority interest................ 413 -- -- 413 160 -- -- 160
-------- ------ ------- -------- -------- ------ ----- --------
Net income (loss)................ (26,782) 184 (1,292) (27,890) (34,917) (45) (646) (35,608)
Preferred stock dividends and
accretion...................... (3,871) -- -- (3,871) (2,003) -- -- (2,003)
-------- ------ ------- -------- -------- ------ ----- --------
Net income (loss) to common
stockholders................... $(30,653) $ 184 $(1,292) $ (31,761) $(36,920) $ (45) $ (646) $ (37,611)
======== ====== ======= ======== ======== ====== ===== ========
Net loss per common
stockholder.................... $ (4.96) $ (4.40) $ (5.48) $ (4.84)
======== ======== ======== ========
Weighted average number of common
shares outstanding............. 6,185 1,030(5) 7,215 6,734 1,030(5) 7,764
</TABLE>
24
<PAGE> 29
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED JUNE 30, 1997
--------------------------------------
THE
COMPANY
THE PRO
COMPANY CYBERGATE(6) FORMA
-------- ------------ --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................... $ 19,793 $218 $ 20,011
Operating expenses:
Network development and operations......................... 18,026 94 18,120
Selling, general and administrative........................ 29,818 94 29,912
Noncash stock and compensation............................. 824 -- 824
Depreciation and amortization.............................. 9,456 58 9,514
-------- ---- --------
Total operating expenses................................... 58,125 246 58,371
-------- ---- --------
Operating income (loss).................................... (38,333) (28) (38,361)
Non-operating income (expense)............................. (11,343) 3 (11,340)
-------- ---- --------
Income (loss) before minority interest..................... (49,676) (25) (49,701)
Minority interest.......................................... -- -- --
-------- ---- --------
Net income (loss).......................................... (49,676) (25) (49,701)
Preferred stock dividends and accretion.................... (1,095) -- (1,095)
-------- ---- --------
Net income (loss) to common stockholders................... $(50,770) $(25) $(50,795)
======== ==== ========
Net loss per common stockholder............................ $ (2.82) $ (2.81)
======== ========
Weighted average number of common shares outstanding....... 17,994 18,080
</TABLE>
- ---------------
(1) Subsequent to June 30, 1996, the Company changed its fiscal year-end from
June 30 to December 31. Accordingly, data for the fiscal period ended
December 31, 1996 is for the six months ended December 31, 1996.
(2) Represents expense related to a consulting agreement entered into by the
Company with a former shareholder of Cybergate.
(3) Reflects amortization of goodwill over a 10-year period and accounting
software over a three-year period.
(4) Reflects amortization of consent solicitation fees over the remaining terms
of the Existing Notes.
(5) Excludes adjustment for shares of Common Stock issuable if Cybergate meets
certain performance measures. Inclusion of such shares would be
anti-dilutive.
(6) Reflects Cybergate activity for the period from January 1, 1997, to January
17, 1997 (the date of acquisition).
25
<PAGE> 30
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL DATA -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------
THE
THE COMPANY
COMPANY CYBERGATE ADJUSTMENTS PRO FORMA
-------- --------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
ASSETS
Current assets:
Cash and cash equivalents................. $ 78,618 $ 60 $ (500)(1) $ 75,178
(3,000)(2)
Restricted cash........................... 2,342 -- -- 2,342
Accounts receivable....................... 2,429 127 -- 2,556
Other current assets...................... 1,203 51 -- 1,254
-------- ------ ------- --------
Total current assets................. 84,592 238 (3,500) 81,330
Networks, furniture and equipment, net......... 136,083 2,317 100(3) 138,500
Goodwill....................................... 8,385(1) 8,385
Deferred financing fees........................ 8,380 -- 3,000(2) 11,380
Other assets................................... 983 -- -- 983
-------- ------ ------- --------
Total assets......................... $230,038 $ 2,555 $ 7,985 $ 240,578
======== ====== ======= ========
LIABILITIES, REDEEMABLE STOCK, OPTIONS AND
WARRANTS, MINORITY INTEREST AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses..... $ 33,588 $ 348 $ -- $ 33,936
Notes payable -- current portion.......... 872 -- -- 872
Customer deposits and advanced billings... 0 338 -- 338
Other..................................... 4,132 -- -- 4,132
-------- ------ ------- --------
Total current liabilities................. 38,592 686 -- 39,278
Notes payable.................................. 209,538 306 100(3) 209,944
Advances due to affiliates..................... -- 551 -- 551
Dividends payable.............................. 6,946 -- -- 6,946
Other.......................................... 0 142 -- 142
-------- ------ ------- --------
Total liabilities.................... 255,076 1,685 100 256,861
Redeemable stock, options, and warrants........ 2,000 347 (347)(1) 2,000
Minority interest.............................. 0 -- -- 0
Stockholders' equity (deficit)................. (27,038) 523 8,232(1) (18,283)
-------- ------ ------- --------
Total liabilities, redeemable stock,
options and warrants, minority
interest and stockholders' equity
(deficit).......................... $230,038 $ 2,555 $ 7,985 $ 240,578
======== ====== ======= ========
</TABLE>
- ---------------
(1) Records the Cybergate Acquisition for a purchase price of $8,755,000
(1,030,000 shares of Common Stock at $8.50 per share, the per share closing
sales price of the Common Stock on January 17, 1997) plus estimated
transaction expenses of $500,000. Excludes 150,000 additional shares of
Common Stock which may be issued in 50,000 share increments (or a percentage
thereof) on March 1, 1998, 1999 and 2000 if Cybergate achieves certain
performance measures. In determining the cost of the identifiable assets and
liabilities acquired, it has been assumed that an independent appraisal will
result in fair values equal to the recorded book values as of the date of
the Cybergate Acquisition. In the opinion of management, due to the nature
of the assets and liabilities acquired, the fair values will approximate the
book values. The preliminary allocation of the purchase price results in
goodwill of approximately $8.4 million which will be amortized over 10
years.
(2) Records the payment of $3.0 million, including related transaction expenses
for solicitation fees payable to holders of the Notes in order to obtain
their consent to amend the Indentures. The amendments permit the Company to
enter into certain acquisition transactions, including the Cybergate
Acquisition.
(3) Reflects the non-exclusive assignment to Cybergate of certain accounting
software for $100,000, payable over a three-year period.
26
<PAGE> 31
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of and for the
periods ended June 30, 1995 and 1996 and December 31, 1996 are derived from and
qualified by reference to the audited Consolidated Financial Statements of the
Company contained herein and the related notes thereto, and should be read in
conjunction therewith and in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere in
this Prospectus. The Company's Consolidated Financial Statements as of and for
the periods ended June 30, 1995 and June 30, 1996 and December 31, 1996 have
been audited by KPMG Peat Marwick LLP, independent auditors. Subsequent to June
30, 1996, the Company has changed its fiscal year-end from June 30 to December
31. Accordingly, all data for the fiscal period ended December 31, 1996 is for
the six months ended December 31, 1996. The consolidated financial data of the
Company as of and for the six months ended December 31, 1995 and as of and for
the six months ended June 30, 1996 and June 30, 1997 have been derived from the
unaudited Consolidated Financial Statements of the Company which, in the opinion
of management, include all adjustments, consisting only of normal recurring
adjustments which the Company considers necessary for a fair presentation of the
results of operations and the financial condition for those periods. The
consolidated financial data for the fiscal period ended December 31, 1996 and
the six months ended June 30, 1997 are not necessarily indicative of results for
a twelve-month fiscal year.
<TABLE>
<CAPTION>
FISCAL
FISCAL YEAR SIX MONTHS PERIOD SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, DECEMBER 31, DECEMBER 31, JUNE 30,
-------------------- ------------ ------------ ------------------------
1995 1996 1995 1996 1996 1997
-------- -------- ------------ ------------ --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................... $ 389 $ 3,415 $ 989 $ 6,990 $ 2,426 $ 19,793
Operating expenses.......................... 14,797 24,543 7,966 34,434 16,576 58,125
-------- -------- -------- --------- --------- --------
Income (loss) from operations............... (14,408) (21,128) (6,977) (27,444) (14,150) (38,333)
Interest and other income................... 218 4,410 777 2,757 3,632 1,078
Interest and other expense.................. (170) (10,477) (2,835) (10,390) (7,642) (12,421)
Debt conversion expense..................... (385) -- -- -- -- --
-------- -------- -------- --------- --------- --------
Net income (loss) before minority
interest.................................. (14,746) (27,195) (9,035) (35,077) (18,160) (49,676)
Minority interest(1)........................ 48 413 156 160 257 --
-------- -------- -------- --------- --------- --------
Net income (loss)........................... (14,698) (26,782) (8,879) (34,917) (17,903) (49,676)
Preferred stock dividends and accretion..... (1,071) (3,871) (1,854) (2,003) (2,017) (1,095)
-------- -------- -------- --------- --------- --------
Net income (loss) to common stockholders.... $(15,769) $(30,653) $(10,734) $(36,920) $(19,920) $ (50,770)
======== ======== ======== ========= ========= ========
Net income (loss) per common share.......... $ (3.30) $ (4.96) $ (1.82) $ (5.48) $ (3.03) $ (2.82)
======== ======== ======== ========= ========= ========
Weighted average shares outstanding......... 4,772 6,185 5,901 6,734 6,572 17,994
OTHER DATA:
Deficiency in earnings to cover fixed
charges(2)................................ (14,746) (27,195) (9,035) (35,077) (18,160) (49,676)
EBITDA(3)................................... $ (7,443) $(14,901) $ (4,855) $(21,822) $(10,046) $ (28,052)
Depreciation and amortization............... 498 3,078 763 4,911 2,316 9,456
Capital expenditures........................ 15,303 60,856 17,657 64,574 43,199 73,213
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents................... $ 20,351 $134,116 $ 57,348 $ 78,618 $134,116 $ 8,499
Total assets................................ 37,627 223,600 147,935 230,038 223,600 243,381
Long-term liabilities....................... 4,723 189,072 110,176 216,484 189,072 224,562
Redeemable stock, options and warrants...... 2,931 2,155 2,660 2,000 2,155 2,000
Stockholders' equity (deficit).............. 22,141 8,982 26,308 (27,038) 8,982 (18,226)
</TABLE>
- ---------------
(1) Minority interest represents a 7.25% ownership of AT&T Credit Corporation in
the Company's subsidiaries that operate its networks in Louisville, Fort
Worth, Greenville, Columbia and El Paso. See "Description of Certain
Indebtedness."
(2) For purposes of computing this amount earnings (loss) consists of earnings
(loss) before minority interest and fixed charges. Fixed charges consists of
interest expense (including amortization of debt issuance costs) and
one-third of rent expense which is deemed to be representative of interest
expense.
(3) EBITDA consists of net income (loss) before net interest, income taxes,
depreciation and amortization and noncash stock compensation and, in fiscal
year ended June 30, 1995, debt conversion expense of $385,000. It is a
measure commonly used in the telecommunications industry and is presented to
assist in understanding the Company's operating results. However, it is not
intended to represent cash flow or results of operations in accordance with
Generally Accepted Accounting Principles. Noncash compensation expense
associated with employee stock options was $6.4 million and $2.7 million in
fiscal years ended June 30, 1995 and 1996, respectively, $1.2 million and
$550,000 in the six months ended December 31, 1995 and fiscal period ended
December 31, 1996, respectively and $1.5 million and $820,000 in the six
months ended June 30, 1996 and 1997, respectively. See Note 6 of "Notes to
Consolidated Financial Statements."
27
<PAGE> 32
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
General
In connection with the sale of the Old Notes pursuant to a Purchase
Agreement dated as of July 18, 1997, between the Company and the Initial
Purchasers, the Initial Purchasers and their assignees became entitled to the
benefits of the Registration Rights Agreement.
Under the Registration Rights Agreement, the Company is obligated to (i)
file the Registration Statement of which this Prospectus is a part for a
registered exchange offer with respect to an issue of new notes identical in all
material respects to the Old Notes within 60 days after July 23, 1997, the date
the Old Notes were issued (the "Issue Date"), and (ii) use its best efforts to
cause the Registration Statement to become effective within 120 days after the
Issue Date. The Exchange Offer being made hereby if commenced and consummated
within such applicable time periods will satisfy those requirements under the
Registration Rights Agreement. See "Description of the New Notes -- Exchange
Offer; Registration Rights."
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal (which together constitute the Exchange Offer),
the Company will accept for exchange up to $170,000,000 aggregate principal
amount of Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New
York City time, on the Expiration Date. The Company will issue New Notes in
exchange for an equal principal amount of outstanding Old Notes accepted in the
Exchange Offer.
As of the date of this Prospectus, $220,000,000 aggregate principal amount
of Old Notes was outstanding. This Prospectus, together with the Letter of
Transmittal, is being sent to all registered holders as of , 1997. The
Company's obligation to accept Old Notes for exchange pursuant to the Exchange
Offer is subject to certain conditions as set forth herein under
"-- Conditions."
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Old Notes for the purposes of receiving the New Notes from the Company and
delivering New Notes to such holders.
In the event the Exchange Offer is consummated, subject to certain limited
exceptions, the Company will not be required to register the Old Notes. In such
event, holders of Old Notes seeking liquidity in their investment would have to
rely on exemptions to registration requirements under the U.S. securities laws.
See "Risk Factors -- Consequences of Failure to Exchange."
Expiration Date; Extensions; Amendments
The term "Expiration Date" shall mean , 1997 (20 business days
following the commencement of the Exchange Offer), unless the Company, in its
sole discretion, extends the Exchange Offer, in which case the term "Expiration
Date" shall mean the latest date to which the Exchange Offer is extended. See
"-- Acceptance of Old Notes for Exchange; Delivery of New Notes."
In order to extend the Expiration Date, the Company will notify the
Exchange Agent of any extension by oral or written notice and will mail to the
record holders of Old Notes an announcement thereof, each prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
Expiration Date. Such announcement may state that the Company is extending the
Exchange Offer for a specified period of time.
The Company reserves the right (i) to delay accepting any Old Notes, to
extend the Exchange Offer or to terminate the Exchange Offer and not accept Old
Notes not previously accepted if any of the conditions set forth herein under
"-- Conditions" shall have occurred and shall not have been waived by the
Company, by giving oral or written notice of such delay, extension or
termination to the Exchange Agent, or (ii) to amend the terms of the Exchange
Offer in any manner deemed by it to be advantageous to the holders of the Old
Notes. Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof. If the
Exchange Offer is amended in a manner determined by the Company to constitute a
material change, the Company will promptly disclose such amendment in a manner
reasonably calculated to inform the holders of the Old Notes of such amendment
and the Company will extend the Exchange Offer for a period of five to 10
business days, depending upon the significance of the
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<PAGE> 33
amendment and the manner of disclosure to holders of the Old Notes, if the
Exchange Offer would otherwise expire during such five to 10 business day
period.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to an appropriate news agency.
NO VOTE OF THE COMPANY'S SECURITY HOLDERS IS REQUIRED UNDER APPLICABLE LAW
TO EFFECT THE EXCHANGE OFFER AND NO SUCH VOTE (OR PROXY THEREFOR) IS BEING
SOUGHT HEREBY.
Holders of Old Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer under the Delaware General Corporation Law,
the state in which the Company is incorporated.
INTEREST ON THE NEW NOTES
The New Notes will bear interest at the rate of 13 3/4% per annum payable
semi-annually in arrears on January 15 and July 15, commencing January 15, 1998.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with any other
required documents, to the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date. In addition, either (i) certificates for such Old
Notes must be received by the Exchange Agent along with the Letter of
Transmittal, (ii) a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Old Notes, if such procedure is available, into the
Exchange Agent's account at The Depository Trust Company (the "Book-Entry
Transfer Facility") pursuant to the procedure for book-entry transfer described
below, must be received by the Exchange Agent prior to the Expiration Date or
(iii) the holder must comply with the guaranteed delivery procedures described
below. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY
IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD
BE SENT TO THE COMPANY. To be tendered effectively, the Old Notes, Letter of
Transmittal and all other required documents must be received by the Exchange
Agent prior to 5:00 p.m., New York City time, on the Expiration Date. Delivery
of all documents must be made to the Exchange Agent at its address set forth
below. Holders may also request their respective brokers, dealers, commercial
banks, trust companies or nominees to effect such tender for such holders.
The tender by a holder of Old Notes will constitute an agreement between
such holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered holder.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder promptly and instruct such
registered holder to tender on his behalf. If such beneficial owner wishes to
tender on his own behalf, such beneficial owner must, prior to completing and
executing the Letter of Transmittal and delivering his Old Notes, either make
appropriate arrangements to register ownership of the Old Notes in such owner's
name or obtain a properly completed bond power from the registered holder. The
transfer of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by any member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.
or a commercial bank or trust company having an office or correspondent in the
U.S. (an
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<PAGE> 34
"Eligible Institution") unless the Old Notes tendered pursuant thereto are
tendered (i) by a registered holder who has not completed the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions" on the Letter
of Transmittal or (ii) for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantee must be by an
Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by bond powers and a proxy which authorizes such person
to tender the Old Notes on behalf of the registered holder, in each case as the
name of the registered holder or holders appears on the Old Notes.
If the Letter of Transmittal or any Old Notes bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
person should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and withdrawal of the tendered Old Notes will be determined by the
Company in its sole discretion, which determination will be final and binding.
The Company reserves the absolute right to reject any and all Old Notes not
properly tendered or any Old Notes which, if accepted by the Company, would, in
the opinion of counsel for the Company, be unlawful. The Company also reserves
the right to waive any irregularities or conditions of tender as to particular
Old Notes. The Company's interpretation of the terms and conditions of the
Exchange Offer (including the instructions in the Letter of Transmittal) will be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of Old Notes must be cured within such time as the
Company shall determine. None of the Company, the Exchange Agent or any other
person shall be under any duty to give notification of defects or irregularities
with respect to tenders of Old Notes, nor shall any of them incur any liability
for failure to give such notification. Tenders of Old Notes will not be deemed
to have been made until such irregularities have been cured or waived. Any Old
Notes received by the Exchange Agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned without cost to such holder by the Exchange Agent to the tendering
holders of Old Notes, unless otherwise provided in the Letter of Transmittal, as
soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion, subject
to the provisions of the Indenture, to (i) purchase or make offers for any Old
Notes that remain outstanding subsequent to the Expiration Date or, as set forth
under "-- Conditions," to terminate the Exchange Offer in accordance with the
terms of the Registration Rights Agreement and (ii) to the extent permitted by
applicable law, purchase Old Notes in the open market, in privately negotiated
transactions or otherwise. The terms of any such purchases or offers could
differ from the terms of the Exchange Offer.
By tendering, each holder will represent to the Company that: (i) it is not
an affiliate of the Company (as defined under Rule 405 of the Securities Act);
(ii) any New Notes to be received by it were acquired in the ordinary course of
its business; and (iii) at the time of commencement of the Exchange Offer, it
was not engaged in, and did not intend to engage in, a distribution of such New
Notes and had no arrangement or understanding with any person to participate in
the distribution (within the meaning of the Securities Act) of the New Notes. If
a holder of Old Notes is an affiliate of the Company, and is engaged in or
intends to engage in a distribution of the New Notes or has any arrangement or
understanding with respect to the distribution of the New Notes to be acquired
pursuant to the Exchange Offer, such holder could not rely on the applicable
interpretations of the staff of the SEC and must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any secondary resale transaction. Each broker or dealer that receives New Notes
for its own account in exchange for Old Notes, where such Old Notes were
acquired by such broker or dealer as a result of market-making activities, or
other trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See "Plan of Distribution."
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly
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<PAGE> 35
after acceptance of the Old Notes. See "-- Conditions" below. For purposes of
the Exchange Offer, the Company shall be deemed to have accepted validly
tendered Old Notes for exchange when, as and if the Company has given oral or
written notice thereof to the Exchange Agent.
For each Old Note accepted for exchange, the holder of such Old Notes will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. If (i) neither the Registration Statement of which this Prospectus is
a part (the "Exchange Offer Registration Statement") relating to the Exchange
Offer nor a shelf registration statement (the "Shelf Registration Statement")
with respect to the Old Notes has been declared effective by November 20, 1997,
or (ii) notwithstanding that the Company has consummated or will consummate the
Exchange Offer, the Company is required to file a Shelf Registration Statement
and such Shelf Registration Statement is not declared effective by November 20,
1997, then commencing on November 21, 1997, additional interest shall be paid on
the Old Notes at a rate per annum equal to 0.5% of the principal amount of the
Old Notes (such additional 0.5% being herein called "Additional Interest"), such
Additional Interest being payable semi-annually in arrears each January 15 and
July 15, commencing January 15, 1998. The aggregate amount of Additional
Interest payable will in no event exceed 1.5% per annum of the principal amount.
Upon the effectiveness of the Exchange Offer Registration Statement or a Shelf
Registration Statement, Additional Interest payable on the Old Notes from the
date of such effectiveness will cease to accrue and all accrued and unpaid
interest as of the occurrence of such effectiveness shall be paid to the holders
of the Old Notes exchanged for New Notes.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Old Notes are not
accepted for any reason set forth in the terms and conditions of the Exchange
Offer or if Old Notes are submitted for a greater principal amount than the
holder desires to exchange, such unaccepted or nonexchanged Old Notes will be
returned without expense to the tendering holder thereof (or, in the case of Old
Notes tendered by book-entry transfer procedures described below, such
nonexchanged Old Notes will be credited to an account maintained with such
Book-Entry Transfer Facility) as promptly as practicable after the expiration or
termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof
with any required signature guarantees and any other required documents must, in
any case, be transmitted to and received by the Exchange Agent at one of the
addresses set forth below under "-- Exchange Agent" on or prior to the
Expiration Date or the guaranteed delivery procedures described below must be
complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes,
and the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedures for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent received from such Eligible Institution a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form provided by the Company (by facsimile
transmission, mail or hand delivery), setting forth the name and address of the
holder of Old Notes and the amount of Old Notes tendered, stating that the
tender is being made thereby and guaranteeing that within five New York Stock
Exchange ("NYSE") trading days after the date of execution of the Notice of
Guaranteed Delivery, the certificates for all physically tendered Old Notes, in
proper form for transfer, or a Book-Entry Confirmation, as
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<PAGE> 36
the case may be, and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent and (iii)
the certificates for all physically tendered Old Notes, in proper form for
transfer, or a Book-Entry Confirmation, as the case may be, and all other
documents required by the Letter of Transmittal are received by the Exchange
Agent within five NYSE trading days after the date of execution of the Notice of
Guaranteed Delivery.
WITHDRAWAL OF TENDERS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Old Notes to be withdrawn, identify the Old Notes to
be withdrawn (including the principal amount of such Old Notes) and (where
certificates for Old Notes have been transmitted) specify the name in which such
Old Notes are registered, if different from that of the withdrawing holder. If
certificates for Old Notes have been delivered or otherwise identified to the
Exchange Agent, then, prior to the release of such certificates, the withdrawing
holder must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless such holder is an Eligible Institution. If Old Notes
have been tendered pursuant to the procedure for book-entry transfer described
above, any notice of withdrawal must specify the name and number of the account
at the Book-Entry Transfer Facility to be credited with the withdrawn Old Notes
and otherwise comply with the procedures of such facility. All questions as to
the validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company, whose determination shall be final and
binding on all parties. Any Old Notes so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the Exchange Offer. Any Old
Notes which have been tendered for exchange but which are not exchanged for any
reason will be returned to the holder thereof without cost to such holder (or,
in the case of Old Notes tendered by book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry
transfer procedures described above, such Old Notes will be credited to an
account maintained with such Book-Entry Transfer Facility for the Old Notes) as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following one
of the procedures described under "-- Procedures for Tendering" above at any
time on or prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or to issue New Notes in exchange for, any
Old Notes and may terminate or amend the Exchange Offer as provided herein
before the acceptance of such Old Notes, if because of any change in law, or
applicable interpretations thereof by the Commission, the Company determines
that it is not permitted to effect the Exchange Offer, and the Company has no
obligation to, and will not knowingly, accept tenders of Old Notes from
affiliates of the Company (within the meaning of Rule 405 under the Securities
Act) or from any other holder or holders who are not eligible to participate in
the Exchange Offer under applicable law or interpretations thereof by the
Commission, or if the New Notes to be received by such holder or holders of Old
Notes in the Exchange Offer, upon receipt, will not be tradeable by such holder
without restriction under the Securities Act and the Exchange Act and without
material restrictions under the "blue sky" or securities laws of substantially
all of the states.
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EXCHANGE AGENT
The Chase Manhattan Bank has been appointed as Exchange Agent for the
Exchange Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
<TABLE>
<S> <C>
By Mail/Overnight Delivery: By Hand:
The Chase Manhattan Bank The Chase Manhattan Bank
450 West 33rd Street Corporate Trust -- Securities Window
15th Floor 55 Water Street -- Room 234
New York, New York 10001-2697 North Building
New York, New York 10041
</TABLE>
Facsimile Transmission:
(212) 638-7380
(212) 638-7381
Confirm by Telephone:
Sharon Lewis: (212) 638-0454
Carlos Esteves: (212) 638-0828
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail; however, additional solicitations may be
made by telegraph, telephone, telecopy or in person by officers and regular
employees of the Company.
The Company will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
the Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith. The Company may also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of the Prospectus and related documents to the beneficial
owners of the Old Notes, and in handling or forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Company, including fees and expenses of the Exchange Agent and
Trustee (as hereinafter defined) and accounting, legal, printing and related
fees and expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be registered or issued
in the name of, any person other than the registered holder of the Old Notes
tendered, or if tendered Old Notes are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The New Notes will be recorded in the Company's accounting records at the
same carrying value as the Old Notes as reflected in the Company's accounting
records on the date of the exchange. Accordingly, no gain or loss for accounting
purposes will be recognized upon the consummation of the Exchange Offer. The
expenses of the Exchange Offer will be amortized by the Company over the term of
the New Notes in accordance with generally accepted accounting principles.
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<PAGE> 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Holders of Old Notes are cautioned that such
statements are only predictions and that actual events or results may differ
materially. In evaluating such statements, holders of Old Notes should
specifically consider the various factors identified in this Prospectus,
including the matters set forth under the caption "Risk Factors," which could
cause actual results to differ materially from those indicated by such
forward-looking statements. The following discussion should be read in
conjunction with the consolidated financial statements and the related notes
thereto included elsewhere in this Prospectus.
OVERVIEW
ACSI is a provider of integrated local voice and data communications
services to commercial customers primarily in mid-sized metropolitan markets in
the southern United States. The Company is a rapidly growing CLEC, supplying
businesses with advanced telecommunications services on its digital SONET-based
fiber optic local networks and through resale of incumbent local exchange
carrier services. To date, the Company has derived the majority of its revenues
from the sale of dedicated services, generally at a discount to the price of the
ILECs. The Company's dedicated services include special access, switched
transport and private line services.
As a supplement to its dedicated services, the Company introduced local
switched voice services in two of its markets and began offering local switched
voice services in two additional markets using its own facilities before March
31, 1997. The Company's local switched services include: local exchange services
(dial tone), advanced ISDN and enhanced voice services. In late 1996, the
Company also deployed ACSINet, a coast-to-coast, leased broadband data
communications network through which the Company offers frame relay, ATM and
Internet access services to both ISPs and local businesses. As of June 30, 1997,
the Company had ACSINet data POPs in 44 markets, including all but one of the
markets in which the Company has operational local networks. Additionally,
primarily through the Cybergate Acquisition, the Company has begun providing
Internet services. The Cybergate Acquisition provides a foundation to support
the Company's Internet service offerings to ISPs in existing ACSI markets and to
end-users in targeted ACSI markets.
As of June 30, 1997, the Company had 31 operational local networks and had
4 additional local networks under construction. In an attempt to improve
financial performance and conserve capital, the Company is reassessing the
optimum number of local networks needed to achieve its objectives.
The Company provides dedicated services to IXCs and to those business and
government end-users whose volumes of voice and data traffic are large enough to
warrant paying a fixed monthly charge for a specific capacity requirement rather
than a usage-based variable charge. These monthly charges vary according to the
capacity of each circuit, the volume of individual circuits ordered by the
customer, the mileage of the circuits, the need for any ancillary services and
the term of the service contract, but are typically less than the rates charged
by the ILECs for similar services, volumes and terms. For the fiscal period
ended December 31, 1996, 40% of the Company's revenues were generated by four of
the largest IXCs. As of June 30, 1997, the Company had long-term operating
leases for nine Lucent 5ESS switches. The use of operating leases, rather than
the acquisition of such equipment, reduces the Company's capital requirements
but negatively impacts its EBITDA. The Company has long-term operating leases
for 9 voice and 40 data switches totaling $20.8 million at interest rates
ranging from 7% to 11% over terms ranging from 3 to 7 years, with annual
payments increasing over the term of each lease, and is currently negotiating
long term operating leases for an additional 8 voice and 20 data switches
totaling $19 million with interest rates and payment structures similar to the
existing operating leases.
Beginning in the fiscal quarter ended December 31, 1996, the Company began
providing and plans to continue to provide, local switched voice services, such
as local dial tone, termination of local calling, Centrex services, PBX
trunking, switched access and enhanced voice services, initially to existing and
new corporate customers in buildings already connected to the Company's local
networks. Revenues from the Company's local switched voice services will be
generated from fixed and usage-based charges billed directly to the end
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user at rates below those charged by ILECs for similar services. The Company
began generating revenues from its local switched voice services beginning in
the three months ending March 31, 1997.
In December 1996, the Company began providing high-speed data services to
ISPs and corporate, institutional and government customers. ACSI's data services
revenues are generated from either flat rate or usage-based recurring charges
based on network access speed and the data throughput rate requested by the
end-user as well as from non-recurring charges for installation and
provisioning. Principally through the Cybergate Acquisition, ACSI has begun to
offer direct Internet access to commercial and consumer end-users as well as
provide private label Internet services for the Company's strategic distribution
partners throughout all of the Company's markets. Revenues from the Company's
Internet services will be generated from usage-based variable rates charged
directly to the end-user by the Company.
The Company believes that integration of its SONET-based fiber optic local
networks and its coast-to-coast, leased broadband data communications network
will provide a platform for the provision of a wide variety of voice, high-speed
data and other communications services at a reduced cost. While the Company may
offer its services to customers that are not directly connected to its
integrated network through resale of the ILEC's network, the Company believes
that it can gradually migrate many of these off-net customers to higher margin
on-net accounts as it increases penetration of all its services within a given
building. As a result, the capital investment of connecting additional buildings
and customers to ACSI's integrated network should become more cost-effective.
Over time, the Company believes it can increase its market share of all of its
service offerings as a result of the reliability and quality of its integrated
network, prompt customer service, competitive pricing, cross marketing/bundling
synergies and new service offerings throughout the markets it serves.
ACSI is operating its coast-to-coast, leased broadband data communications
network via high bandwidth (DS-3) longhaul circuits pursuant to multi-year
operating leases with various IXCs. Network connectivity within each node will
be via DS-3 bandwidth, enabling the transparent migration of longhaul circuits
to DS-3 capacity as needed. Ultimately, the platform technology is capable of
upgrading the backbone to higher bandwidths without further modification.
Initially, the Company expects to experience negative cash flow from
operations in each of its operating local networks. The Company estimates that
because of the reduced operating costs associated with its smaller local
networks and its single point of service sales force, it can achieve operating
cash flow breakeven (i.e., positive EBITDA before overhead allocations) on
dedicated access services provided on its local networks within ten to 15 months
from the start of those services. Thereafter, the Company anticipates that its
profit margins will increase as each local network is expanded to connect
additional customers directly to its network backbone and as off-net customers
migrate to on-net status (thus allowing the Company to retain the portion of
customer charges previously paid out to the ILEC for resale of ILEC facilities).
The Company will also experience initial negative cash flow from operations as
its data, local switched voice and Internet services are introduced and until
networks providing those services reach operating cash flow breakeven.
CAPITAL EXPENDITURES; OPERATING CASH FLOW
As of June 30, 1997, the Company was operating 31 digital fiber optic
networks. The costs associated with the initial construction and operation of a
network may vary greatly, primarily due to market variations in geographic and
demographic characteristics, and the types of construction technologies which
can be used to deploy the network. Management estimates that construction of the
initial one-to-three mile fiber optic backbone and installation of related
network transmission equipment for dedicated services for each market will
generally cost between $3.5 million and $6.0 million depending on the size of
the market served. Including planned expansion routes, total capital
expenditures per network are estimated to average $6.0 million. In addition to
capital expenditure requirements, the Company incurs sales and marketing
(including sales commissions) and operating expenses and other expenses such as
property taxes and, in certain markets, franchise fees. Prior to the completion
of network construction, certain of these expenses, to the extent they are
related to pre-service construction, are capitalized. These additional
capitalized expenses, estimated by management to be between approximately
$500,000 and $1.0 million per network, are amortized over the
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anticipated life of the network. These costs vary depending on the size of the
market, the length of time required to build-out the network and the rate of
growth of the customer base.
As the Company develops, introduces and rolls out its high-speed data,
enhanced voice messaging and local switched services in each of its target
markets, additional capital expenditures and net operating costs will be
incurred. The amount of these costs will vary, based on the number of customers
served and the actual services provided to the customers.
Although as of June 30, 1997, the Company was generating revenues from 31
of its fiber optic networks, on a consolidated basis, it is still incurring
negative cash flows due, in part, to the funding requirements for the networks
the Company has under construction or development and, to the roll-out of its
new data and switched voice services. The Company expects it will continue to
incur a negative cash flow for at least two years. The Company anticipates that
without an infusion of additional cash following the Private Placement, it will
exhaust its cash resources at the end of the fourth quarter of 1998.
RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1997 COMPARED TO THREE AND SIX MONTH
PERIODS ENDED JUNE 30, 1996.
Revenues
The Company recorded revenues of $11.6 million for the three month period
ended June 30, 1997 and revenues of $19.8 million for the six month period ended
June 30, 1997. This compares to revenues of $1.6 million for the three month
period ended June 30, 1996 and revenues of $2.4 million for the six month period
ended June 30, 1996. Although substantially all of the revenues in the 1996
periods were derived from the provision of dedicated services, revenues in the
1997 periods were derived primarily from significant growth in dedicated
services, plus the addition of data services, Internet services and local
switched voice services.
OTHER NETWORK INFORMATION IS AS FOLLOWS:
<TABLE>
<CAPTION>
NETWORK NETWORK VOICE
ROUTE FIBER BUILDINGS GRADE FULL TIME
AS OF THE PERIOD ENDED: MILES MILES CONNECTED EQUIVALENTS EMPLOYEES
-------------------------------- ------- ------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
March 31, 1996.................. 200 9,466 133 125,208 142
June 30, 1996................... 386 28,476 216 137,431 199
March 31, 1997.................. 908 75,867 858 554,883 502
June 30, 1997................... 957 82,693 1,083 886,375 559
</TABLE>
The terms "Voice Grade Equivalents ('VGEs')" or "Voice Grade Equivalent
Circuits" are commonly used measures of telephone service equivalent to one
telephone line (64 kilobits of bandwidth) actually billed to a customer.
Total Operating Expenses
Network development and operating expenses for the three month period ended
June 30, 1997 increased to $9.4 million from $0.4 million in the three month
period ended June 30, 1996, reflecting significant increases in personnel,
network development and non-payroll operating expenses. Related personnel costs
increased to $3.3 million in the quarter ended June 30, 1997, from approximately
$0.3 million in the quarter ended June 30, 1996. Other operating expenses
related to the development of prospective new markets, which include expenses
such as contract labor and legal expenses, travel expenses, rent, utilities,
charges and taxes increased to $6.0 million in the quarter ended June 30, 1997
from approximately $0.1 million in the quarter ended June 30, 1996.
For the six month period ended June 30, 1997, total network development and
operating expenses increased to $18.0 million from $2.3 million in the six month
period ended June 30, 1996, reflecting significant increases in personnel,
network development and non-payroll operating expenses. Related personnel costs
increased to $6.5 million in the six month period ended June 30, 1997, from
approximately $3.0 million in the
36
<PAGE> 41
same period in 1996. Other operating expenses, which include expenses such as
contract labor and legal expenses, travel expenses, rent, utilities, charges and
taxes increased to $11.5 million in the six month period ended June 30, 1997
from approximately ($0.7) million in the six month period ended June 30, 1996.
In the three month period ended June 30, 1997, selling, general and
administrative expenses increased to $15.9 million from $7.7 million in the
three month period ended June 30, 1996. Related personnel costs increased to
$6.7 million in the quarter ended June 30, 1997 from $1.8 million in the quarter
ended June 30, 1996, and corresponding operating costs increased to $9.2 million
in the quarter ended June 30, 1997 from $5.9 million in the quarter ended June
30, 1996. This increase reflected costs associated with the Company's efforts to
expand significantly its national and local city sales and its marketing and
administrative staffs, as well as increased legal and other consulting expenses
associated with its aggressive programs for obtaining regulatory approvals and
certifications and providing quality network services.
In the six month period ended June 30, 1997, selling, general and
administrative expenses increased to $29.8 million from $10.4 million in the six
month period ended June 30, 1996. Related personnel costs increased to $12.1
million in the six month period ended June 30, 1997 from $1.7 million in the six
month period ended June 30, 1996, and corresponding operating costs increased to
$17.7 million in the six month period ended June 30, 1997 from $8.7 million in
the six month period ended June 30, 1996.
Depreciation and amortization expenses increased to $5.3 million in the
three month period ended June 30, 1997 from $1.7 million in the three month
period ended June 30, 1996 and increased to $9.5 million in the six month period
ended June 30, 1997 from $2.3 million in the six month period ended June 30,
1996. As of June 30, 1997, the Company increased its capital assets to $219.9
million, from $144.4 million at December 31, 1996 and from $80.1 million as of
June 30, 1996. Non-cash stock compensation expense increased to $0.6 million for
the quarter ended June 30, 1997 from ($0.5 million) for the quarter ended June
30, 1996. For the six month period ended June 30, 1997, non-cash compensation
expense decreased to $0.8 million from $1.5 million for the same period in 1996.
This expense reflects the Company's accrual of non-cash costs for options and
warrants granted to key executives, employees and others arising from the
difference between the exercise price and the valuation prices used by the
Company to record such costs and from the vesting of those options and warrants.
Certain of these options had put rights and other factors that required variable
plan accounting in both 1996 and 1995 but, at the end of fiscal 1995, the
Company renegotiated contracts with certain of its officers, establishing a
limit of $2,500,000 on the Company's "put right" obligations with respect to
those contracts. During the fiscal period ended December 31, 1996, the limit was
further reduced to $2,000,000.
Interest and Other Expenses
Interest and other income decreased to $0.2 million and $1.1 million for
the three and six month periods ended June 30, 1997, respectively from $3.0
million and $3.6 million in the three and six month periods ended June 30, 1996,
respectively. Interest and other expense increased to $6.3 million and $12.4
million in the quarter and six month period ended June 30, 1997, respectively
from $4.2 million and $7.6 million in the quarter and six month period ended
June 30, 1996, respectively. The decrease in interest and other income reflects
the decrease in available funds from the Company's sale of its 9% Series B
Preferred Stock, the 2005 Notes and the 2006 Notes. The increase in interest and
other expenses reflected the accrual of interest related to the 2005 Notes and
2006 Notes and the Company's increased borrowings under the AT&T Credit
Facility. Payments of principal and interest on the AT&T Credit Facility began
in the first quarter 1997. Payments of interest on the 2005 Notes will not begin
until May 2001 and payments of interest on the 2006 Notes will not begin until
October 2001.
FISCAL PERIOD ENDED DECEMBER 31, 1996 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1995
Revenues
During the fiscal period ended December 31, 1996, the Company recorded
revenues of $7.0 million as compared to revenues of $988,877 during the six
months ended December 31, 1995. Four of the largest IXCs accounted for
approximately $2.8 million, or 40%, of revenues for the fiscal period ended
December 31, 1996.
37
<PAGE> 42
Other network information is as follows:
<TABLE>
<CAPTION>
NETWORKS VOICE
IN ROUTE FIBER BUILDINGS GRADE FULL TIME
AS OF THE PERIOD ENDED: OPERATION MILES MILES CONNECTED EQUIVALENTS EMPLOYEES
- ------------------------------- --------- ----- ------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1995.............. 9 136 5,957 100 82,055 111
December 31, 1996.............. 21 697 48,792 595 384,134 322
</TABLE>
Total Operating Expenses
Network development and operating expenses for the fiscal period ended
December 31, 1996 increased to $8.7 million from $2.9 million in the six months
ended December 31, 1995, reflecting significant increases in personnel, network
development and non-payroll operating expenses. Related personnel costs
increased to $3.9 million in the fiscal period ended December 31, 1996, from
approximately $1.5 million in the six months ended December 31, 1995. Other
operating expenses related to the development of prospective new markets, which
include expenses such as contract labor and legal expenses and certain franchise
fees, travel expenses, rent, utilities, charges and taxes increased to $4.8
million in the fiscal period ended December 31, 1996 from approximately $1.4
million in the six months ended December 31, 1995.
In the fiscal period ended December 31, 1996, selling, general and
administrative expenses increased to $20.3 million from $3.1 million in the six
months ended December 31, 1995. Related personnel costs increased to $6.6
million in the fiscal period ended December 31, 1996 from $1.5 million in the
six months ended December 31, 1995, and corresponding operating costs increased
to $13.7 million in the fiscal period ended December 31, 1996 from $1.6 million
in the six months ended December 31, 1995. This increase reflected costs
associated with the Company's efforts in the rapid expansion of its services
offered, network deployment and geographic coverage as well as significantly
increasing its national and local city sales, marketing and administrative
staffs and increased legal and other consulting expenses associated with its
programs for obtaining regulatory approvals and certifications and providing
quality network services.
Depreciation and amortization expenses increased to $4.9 million in the
fiscal period ended December 31, 1996 from $762,657 in the six months ended
December 31, 1995. The Company increased its capital assets to $144.4 million as
of December 31, 1996, from the $32.6 million in capital assets as of December
31, 1995. Non-cash stock compensation expense decreased to $549,645 for the
fiscal period ended December 31, 1996 from $1.2 million for the six months ended
December 31, 1995. This expense reflects the Company's accrual of non-cash costs
for options granted to key executives, employees and others arising from the
difference between the exercise price and the valuation prices used by the
Company to record such costs and from the vesting of those options. Certain of
these options had put rights and other factors that required variable plan
accounting in both 1996 and 1995 but, on or about June 30, 1995, the Company
renegotiated contracts with certain of its officers, establishing a limit of
$2.5 million on the Company's "put right" obligations with respect to those
contracts. Between July 1, 1995 and June 30, 1996, the limit was further reduced
to $2.0 million.
During the fiscal period ended December 31, 1996, the Company incurred a
net operating loss of $27.4 million and generated negative cash flow from
operations of $6.7 million, compared to a net operating loss of $7.0 million and
negative cash flow from operations of $4.8 million in the six months ended
December 31, 1995.
Interest and Other Expenses
Interest and other income increased to $2.8 million for the fiscal period
ended December 31, 1996 from $777,504 in the six months ended December 31, 1995.
Interest and other expense increased to $10.4 million in the fiscal period ended
December 31, 1996 from $2.8 million in the six months ended December 31, 1995.
The increase in interest and other income reflects the significant increase in
available funds from the Company's sale of its 9% Series B Preferred Stock in
June and November 1995, the 2005 Notes in November 1995 and the 2006 Notes in
March 1996. The increase in interest and other expenses reflected the accrual of
interest related to the 2005 Notes and 2006 Notes and the Company's increased
borrowings under the AT&T Credit Facility. Payments of principal and interest on
the AT&T Credit Facility will begin in calendar 1997,
38
<PAGE> 43
payments of interest on the 2005 Notes will not begin until November 2000 and
payments of interest on the 2006 Notes will not begin until October 2001.
AT&T Credit Corporation's minority interest in certain of the Company's
operating subsidiaries reduced operating losses by approximately $160,370 for
the fiscal period ended December 31, 1996, and by $155,861 for the six month
period ended December 31, 1995.
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995
Revenues
During the fiscal year ended June 30, 1996 ("fiscal 1996"), the Company
recorded revenues of $3.4 million as compared to revenues of $388,887 during the
fiscal year ended June 30, 1995 ("fiscal 1995"). Four of the largest IXCs
accounted for approximately $2.1 million, or 60%, of revenues for fiscal 1996 as
compared to fiscal 1995 when three of the largest IXCs accounted for
approximately $331,000, or 85% of revenues for fiscal 1995, reflecting the
Company's increased sales to end-users during fiscal 1996.
Total Operating Expenses
Network development and operations expenses for fiscal 1996 increased to
$5.3 million from $3.3 million in fiscal 1995, reflecting significant increases
in personnel, network development and non-payroll operating expenses. These
increased costs were associated with developing and establishing centralized
engineering, circuit provisioning and network management functions, constructing
and initially operating the Company's competitive access networks and performing
market feasibility, engineering, rights-of-way and regulatory evaluations in
additional target cities. Related personnel costs increased to $4.5 million in
fiscal 1996 from approximately $1.3 million in fiscal 1995. Other operating
expenses related to the development of prospective new markets, which include
expenses such as contract labor and legal expenses and certain franchise fees,
travel expenses, rent, utilities, charges and taxes, decreased to $800,212 in
fiscal 1996 from approximately $1.9 million in fiscal 1995.
In fiscal 1996, selling, general and administrative expenses increased to
$13.5 million from $4.6 million in fiscal 1995. Related personnel costs
increased to $3.2 million in fiscal 1996 from $2.0 million in fiscal 1995, and
corresponding operating costs increased to $10.2 million in fiscal 1996 from
$2.2 million in fiscal 1995. This increase reflected costs associated with the
Company's efforts in expanding its national and local city sales, marketing and
administrative staffs, as well as increased legal and other consulting expenses
associated with its aggressive programs for obtaining regulatory approvals and
certifications and providing quality network services.
Depreciation and amortization expenses increased to $3.1 million in fiscal
1996 from $497,811 in fiscal 1995. During fiscal 1996 the Company increased its
capital assets to approximately $80.2 million, representing an increase from
$15.9 million at the end of fiscal 1995. Non-cash stock compensation expense
decreased to $2.7 million for fiscal 1996 from $6.4 million for fiscal 1995.
This expense reflects the Company's accrual of non-cash costs for options and
warrants granted to key executives, employees and others arising from the
difference between the exercise price and the valuation prices used by the
Company to record such costs and from the vesting of those options and warrants.
Certain of these options had put rights and other factors that required variable
plan accounting in fiscal 1994 and fiscal 1995 but, at the end of fiscal 1995,
the Company renegotiated contracts with certain of its officers, establishing a
limit of $2.5 million on the Company's put right obligations with respect to
those contracts. During fiscal 1996, the limit was further reduced to $2.0
million.
Interest and Other Expenses
Interest and other income increased to $4.4 million for fiscal 1996 from
$217,525 in fiscal 1995. Interest expense and other costs increased to $10.5
million in fiscal 1996 from $170,095 in fiscal 1995. These increases in interest
income and expenses reflected the significant increase in available funds from
the Company's sale of its 9% Series B Preferred Stock in June and November 1995
and the 2005 Notes in November 1995. The increase in interest and other expenses
reflected the accrual of interest related to the 2005 Notes and the
39
<PAGE> 44
Company's increased borrowings under the AT&T Credit Facility. Payments of
principal and interest on the AT&T Credit Facility will begin in calendar 1997,
payments of interest on the 2005 Notes do not begin until November 2000 and
payments of interest of the 2006 Notes do not begin until October 2001.
Debt conversion expense in fiscal 1995 totaled $385,000, reflecting
expenses incurred in connection with the conversion of certain of the Company's
debt to equity in September 1994. AT&T Credit Corporation's minority interest in
the Company's operating subsidiaries for which it provided funding, reduced
operating losses by approximately $412,606 for fiscal 1996, and by $48,055 for
fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has funded the construction of its local networks and
its operations with external financing. Prior to November 1995, the primary
sources of funds used to finance the building of existing networks and the
completion of new targeted networks were two preferred stock private offerings
completed in October 1994 and June 1995, through which the Company raised an
aggregate of approximately $39.6 million before related expenses, and the AT&T
Credit Facility, through which the Company has financing commitments for $31.2
million. On November 14, 1995, the Company completed a private offering of the
2005 Notes and the 2005 Warrants from which the Company received approximately
$96.1 million in net proceeds. The 2005 Notes will accrue to an aggregate
principal amount of $190.0 million by November 1, 2000, after which cash
interest will accrue and be payable on a semi-annual basis. The Company also
received net proceeds of approximately $4.7 million from the private sale of an
additional 50,000 shares of its preferred stock to a principal stockholder and
the exercise by that stockholder of warrants to purchase 214,286 shares of
Common Stock acquired in the Company's June 1995 preferred stock private
placement. On March 21, 1996, the Company completed a private offering of the
2006 Notes from which the Company received net proceeds of approximately $61.8
million. The 2006 Notes will accrue to an aggregate principal amount of $120.0
million by April 1, 2001, after which cash interest will accrue and be payable
on a semi-annual basis. On April 15, 1997, the Company completed the April
Offering. The Company completed the sale of an additional 660,000 shares on May
14, 1997 upon exercise of the underwriters' over-allotment option. The Company
received net proceeds of approximately $40.0 million from the sale of these
8,660,000 shares. On July 10, 1997, the Company completed the Unit Offering from
which the Company received net proceeds of approximately $67 million. The
Company used a portion of these funds to pay ordinary course trade accounts
payable that were more than 60 days overdue, thereby curing an Event of Default
under each of the Existing Indentures and intends to continue to use the
remaining funds towards the expansion and construction of local fiber optic
networks, the further expansion and introduction of services and to fund
negative operating cash flow.
In addition, the Company in the past has considered and expects to continue
to consider potential acquisitions or other strategic arrangements that may fit
the Company's strategic plan. Although the Company has had discussions
concerning such potential acquisitions or arrangements, to date, no agreements
have been reached with regard to any particular transaction. Any such
acquisitions or strategic arrangements that the Company might consider are
likely to require additional equity or debt financing, which the Company will
seek to obtain as required. The Company's expectations of required future
capital expenditures are based on the Company's current estimates and the
current state and federal regulatory environment. There can be no assurance that
actual expenditures will not be significantly higher or lower. In addition,
there can be no assurance that the Company will be able to meet its strategic
objectives or that such funds, if available at all, will be available on a
timely basis or on terms that are acceptable to the Company.
Management anticipates that the Company's current cash resources from the
Unit Offering and the Private Placement will be sufficient to fund the Company's
continuing negative cash flow and capital expenditures required through the
fourth quarter of 1998. Without an infusion of additional cash, the Company will
exhaust its cash resources at the end of the fourth quarter of 1998. 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
40
<PAGE> 45
raise capital through a public offering of equity securities may be limited.
Accordingly, there can be no assurance that the Company will be able to obtain
the additional financing necessary to satisfy its cash requirements or to
successfully implement its growth strategy, in which event the Company will be
forced to curtail its planned network expansion and may be unable to fund its
ongoing operations.
Preferred Stock. In October 1994, the Company completed the private
placement of 186,664 shares of its 9% Series A Convertible Preferred Stock, par
value $1.00 per share (which was later exchanged for Series A-1 Preferred Stock
that was converted into 7,466,560 shares of Common Stock simultaneous with the
completion of the April 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 connection with the Unit Offering the Company issued the Preferred
Stock. Dividends on the Preferred Stock accrue from the date of issuance, are
cumulative and are payable quarterly in arrears commencing September 30, 1997,
at a rate per annum of 14 3/4% of the liquidation preference per share.
Dividends on the Preferred Stock will be paid, at the Company's option, either
in cash or by the issuance of additional shares of Preferred Stock; provided,
however, that after June 30, 2002, to the extent and for so long as the Company
is not precluded from paying cash dividends on the 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
Preferred Stock in cash.
AT&T Credit Facility. In October 1994, the Company entered into the AT&T
Credit Facility pursuant to which AT&T Credit Corporation has agreed to provide
up to $31.2 million in financing for the development and construction of fiber
optic local networks by five of the Company's subsidiaries. In connection with
each loan made under the AT&T Credit Facility, AT&T Credit Corporation purchased
7.25% of the capital stock of the funded subsidiary, and ACSI pledged the other
shares and the assets of the subsidiary to AT&T Credit Corporation as security
for the loan. During fiscal 1995, the Company's subsidiaries in Louisville, Fort
Worth, Greenville and Columbia entered into loan agreements under the AT&T
Credit Facility providing for AT&T Credit Corporation funding of up to $19.8
million in the aggregate, and, in September 1995, the Company's subsidiary in El
Paso entered into a loan agreement under the AT&T Credit Facility providing for
up to $5.5 million of AT&T Credit Corporation funding. As of June 30, 1997, an
aggregate of $30.8 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 the credit
available under the existing AT&T Credit Facility. On June 26, 1997, each of the
Company's Subsidiaries that are parties to the AT&T Credit Facility entered into
an agreement with AT&T Credit Corporation to waive, for a period of 90 business
days commencing on the date thereof, compliance by such subsidiaries with
certain covenants contained therein. Such covenants are not expected to be
included in the New AT&T Facility.
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<PAGE> 46
On June 11, 1997, the Company notified the trustee under each of the
Existing Indentures that, as of June 10, 1997, it had approximately $13.0
million in the aggregate of ordinary course trade accounts payable that were
more than 60 days overdue. As of June 30, 1997, the Company had approximately
$17.4 million in the aggregate of ordinary course trade accounts payable that
were more than 60 days overdue. These overdue amounts constituted Indebtedness
of the Company, as that term is defined in each of the Existing Indentures. The
incurrence by the Company of such Indebtedness is not permitted under each of
the Indentures and, therefore, constituted an Event of Default (as defined in
the Existing Indentures) under each Existing Indenture. The Company used a
portion of the proceeds of the Unit Offering to pay in full all ordinary course
trade accounts payable that were more than 60 days overdue to cure such Event of
Default.
EFFECTS OF NEW ACCOUNTING STANDARDS
During early 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, Accounting for EPS, which will become effective December 15, 1997,
and will thereafter require the Company to disclose basic earnings (loss) per
share in addition to the common stock equivalent disclosure information already
required. Early adoption of SFAS No. 128 is not permitted.
While the Company does not know precisely the impact of adopting SFAS No.
128, the Company does not expect that the adoption of SFAS No. 128 will have a
material effect on the Company's consolidated financial statements.
42
<PAGE> 47
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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<PAGE> 48
- Frame Relay. Frame relay service is a fast-packet transport solution
targeted at LAN-to-LAN and legacy networks. Frame relay service is
designed to meet fluctuating, or periodic, data transfer requirements by
offering shared virtual bandwidth connectivity at high speed. Frame relay
services offer low cost data transmission with generally minimal delay,
few errors and high speed performance.
- ATM. ATM is a high bandwidth service providing virtual networking for
voice, data and multimedia traffic. The ability to combine all three
media provides opportunities to reduce costs associated with running
three separate networks. The major benefits of ATM include providing
shared access to trunk bandwidth for multiple applications and
application types, minimizing the number of wide area connections needed
and supporting user access speeds of at least 1.5 mbps (T-1). The Company
expects the growth in demand for frame relay services to slow and the
demand for ATM services to increase.
Internet Services. An increasing number of businesses and individuals have
access to the Internet through their personal computers and the use of the
modem. Individuals or businesses can connect to the Internet via a modem by
calling an ISP's local POP. ISPs connect users to the Internet via leased or
owned high-speed dedicated data lines. ISPs also help users install and
configure connectivity software and Internet access services. An ISP may offer a
commercial user Internet services at various speeds, depending on a customer's
needs, via direct connections or leased local lines to a local POP.
COMPANY STRATEGY
The Company's objective is to become a full service alternative to the ILEC
for business, government and institutional end-users in its markets by offering
superior products with excellent customer service at competitive prices. In
order to achieve this objective, the Company seeks to:
- Leverage Existing Infrastructure. The Company believes that its
integrated telecommunications networks, both its local fiber networks and
ACSINet, are capable of providing a broad range of voice and data
communications services to its customers. The Company is focusing its
efforts on improving penetration in the markets it already serves by
continuing to offer additional services. The Company believes that
providing switched local voice services permits it to increase the
traffic and revenue associated with its networks. As a further example,
the Company has filed for requisite state and federal authority to offer
calling-card, teleconferencing and other long distance services. In
markets in which it does have operational networks, the Company's
decision to pursue a resale strategy would position the Company as a
full-service provider, capable of providing its customers with a
one-stop-shopping alternative to the ILEC. In markets in which it does
not currently have an operational network, this resale strategy positions
the Company to eventually construct networks in those markets, which
networks would benefit immediately from an existing customer base.
- Develop Direct and Indirect Sales Channels to Commercial End-Users. The
Company has divided its sales and marketing efforts into three different
channels: direct sales to end-users, sales to IXCs and ISPs and sales of
private-label services through alternative distribution channels.
Direct Sales. The Company's local sales force continues to focus on the
commercial end-users in each of the markets it serves. The Company
believes that its local, customer-oriented, single point-of-service sales
structure facilitates greater customer care in both the sales and
customer service processes and helps the Company differentiate itself as
a customer-focused telecommunications services provider. The Company's
major account sales force targets large national accounts. As of June 30,
1997, the Company's sales force in this area was made up of 153 sales
people, which represents an increase of 98 sales people since December
31, 1996, and is expected to increase to 210 sales people by the end of
1997.
Sales to IXCs and ISPs. The Company sells dedicated services to long
distance carriers and ISPs who use the Company's products and services to
provide local access for their own products. For example, the Company
recently entered into an agreement with MCImetro in which, subject to
certain conditions, MCI has agreed to name ACSI as its preferred local
provider for dedicated and transport services in 21 ACSI markets for at
least a five-year period. See "Recent Developments".
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Sales Through Alternative Distribution Channels. As of August 22, 1997,
the Company had executed over 66 sales agency agreements and is actively
recruiting additional telecommunications sales agents to market the
Company's services. In addition, the Company intends to expand
distribution of its services by contracting with IXCs, utilities, CATVs,
RBOCs, other ILECs and cellular and other wireless communication
providers to resell the Company's products and services under their own
private labels. The Company is presently recruiting a dedicated sales
force to serve in the support of sales through these and other
alternative distribution channels.
- Market the Company's Services Under the ACSI Brand Name. The Company is
establishing the ACSI brand name by marketing and packaging its broad
array of communications services directly to end-users. In markets in
which it has local networks established, both switched services and data
services are marketed under the ACSI brand name; in markets in which the
Company has no network installed, it resells local switched services
under the ACSI brand name. In both types of markets, the Company also
pursues opportunities to bundle its services together to strengthen the
ACSI identity as a full-service provider of telecommunications services.
- Provide Superior Customer Service. The Company is developing and
implementing an integrated customer care strategy that is intended to
provide a heightened level of responsive customer service across its full
range of existing and planned products and services. This strategy
comprises infrastructure, training, performance monitoring and
image/brand recognition and will serve to leverage the Company's
operational support systems, other information/financial systems and
customer care organizations. The Company has made significant capital
investments in its integrated network management platform which monitors
and manages all voice and data network elements. The Company expects to
have completed customer care and billing systems by the end of 1998,
which are intended to improve the Company's provision of integrated
customer service on a cost efficient basis. These and other quality
management and improvement programs, when implemented, are expected to
enable the Company to differentiate itself in the marketplace by
providing a level of customer care and customer service that is of a
higher quality than that which is available in today's market.
- Expand Resale of Exchange Local Voice Services. Management believes that
the Company can successfully enter new markets with lower capital
investment by acting as a reseller of either local switched voice or data
services. This strategy is intended to allow the Company to build brand
name awareness and develop a customer base without incurring the initial
capital costs typically incurred by facilities-based entrants. This
strategy also enables the Company to make capital decisions based on
where its customers are most highly concentrated. Once the Company has
established a customer base, the Company plans to invest in extending its
network infrastructure in those markets that it already serves.
- Accelerate Financial Return on Incremental Expenditures. The Company is
pursuing opportunities that accelerate the return on the Company's
invested capital. The Company believes that it will achieve an earlier
return on its investment by focusing on new customer application in
existing markets rather than continuing to increase the number of new
networks built. For this reason, the Company has modified its earlier
goal of constructing 50 local networks by the end of 1998, is now
evaluating in which additional markets it will construct local networks
and is establishing a presence in additional markets through resale of
switched services and data POPs. The Company plans to redeploy into
customer applications in existing markets the capital that was scheduled
to be used to develop those additional networks. While management
continues to believe in the long-term return on capital afforded by the
constructed networks, it believes that the investment in customer
applications will have a more immediate return. As part of this strategy,
the Company has also implemented a shift in its incentive-based
compensation for a number of its key executives, toward revenue and
EBITDA and away from new network development and growth.
ACSI SERVICES
The Company currently provides, or is actively implementing plans to
provide, a wide range of local telecommunications services including dedicated
and private line, high-speed data services, including IP
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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 a ILEC central office or between two
ILEC central offices; and (v) between different locations of business or
government end-users.
- Special access services. Special access services provide a link between
an end-user location and the POP of its IXC, or links between IXC POPs,
thus bypassing the facilities of the ILEC. These services, which may be
ordered by either the long distance customer or directly by its IXC,
typically provide the customer better reliability, shorter installation
intervals, and lower costs than similar services offered by the ILEC.
Customer charges are based on the number of channel terminations, fixed
and mileage-sensitive transport charges, and costs for any services
required to multiplex circuits.
- Switched transport services. Switched transport services are offered to
IXCs that have large volumes of long distance traffic aggregated by a
ILEC switch at a central office where the CAP has collocated its network.
The Company provides dedicated facilities for transporting these
aggregated volumes of long distance traffic from the ILEC central office
to its POP or between ILEC central offices. The flat monthly charge to
the IXC is typically lower than the transport fees charged by the ILEC,
which is typically lower than special access services that include a
charge for terminating the traffic at the end-user's location and/or the
IXC POP in addition to the transport charges.
- Private line services. Private line services provide dedicated
facilities between two end-user locations in the same metropolitan area
(e.g., a central banking facility and a branch office or a manufacturing
facility and its remote data processing center) and are priced like
special access services (channel termination charges plus transport and
any associated multiplexing charges). The Company expects the demand for
private line service to increase in conjunction with higher bandwidth
customer applications.
Local Switched Voice Services. As of the date hereof, 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 August 22, 1997, the
Company is offering local switched services on a resale basis in 31 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 serevices by the fourth quarter of 1997.
The Company's local switched voice services include telephone exchange
service, including optional enhanced services such as call waiting, caller ID
and three-way conference calling; switching traffic between ACSI's switch and a
business customer's PBX and routing local, intraLATA and interLATA phone calls
according to the customers' specific requirements; providing local dial tone
services with functionality such as free internal communications, call
forwarding, call transfer, conference call and speed dialing; ISDN data
services; and origination and termination of long distance traffic between a
customer premise and interexchange carrier via shared trunks utilizing the
Company's local switch.
During the first quarter of 1997, the Company began generating revenues
from its enhanced voice services that are currently being offered to small and
mid-sized business and government end-users in a limited number of its local
network markets. The Company's goal is to expand its enhanced voice service
offerings and customer base. The Company's enhanced voice services include its
First Line and First Line Plus messaging products and services under the brand
names Virtualine and Virtualine 800, including basic voice messaging, follow-me
call routing, virtual calling card services, fax services, e-mail and paging
notification services, and automated attendant services.
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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),
the underground conduits, distribution poles, transmission towers, and
building entrances. The Company's ability to enter into such agreements
can have a material impact on the Company's capital costs for network
construction and the speed with which the Company can construct its
networks. Additionally, obtaining such agreements facilitates the
Company's ability to expand efficiently beyond the central business
district to serve additional end-users in its markets. The term of such
agreements is typically ten to 25 years, with renewal terms of five to 15
years. The Company believes that the experience of members of its senior
management team in negotiating such agreements gives it a competitive
advantage over other CLECs that have less experience in successfully
negotiating such agreements.
- Implementation of Local Network Construction. The Company initially
builds a one- to three-mile SONET-based fiber loop in the central
business district or a discrete area outside of the central business
district of a given target market. This network provides the users with
lower costs, fiber optic clarity, diversity of access, and fault tolerant
reliability of service, with automatic stand-by and rerouting in the
event of operator, system or network failure. The Company's networks are
then expanded into suburban business areas and other ILEC central offices
to serve additional customers. These expansions may be in excess of 100
route miles. The Company utilizes outside contractors to construct its
networks.
The Company, through outside consultants, prepares preliminary and final
engineering studies for the initial portions of its local networks prior
to obtaining municipal authorizations required to begin network
construction. This process enables the Company to initiate network
construction activities immediately upon receipt of municipal
authorizations. Outside plant construction of a typical downtown network
will take from four to six months, depending on various factors. The
Company also coordinates collocation with the ILEC's downtown central
office and interconnections with selected IXC POPs with other
construction milestones, reducing overall network development costs and
allowing the Company to initiate operations at an earlier date.
Following completion of its initial network and the commencement of
network operations, the Company's local staff, in consultation with
personnel at the Company's headquarters, designs expansion routes that
will enable the Company to reach additional end-users and to interconnect
with additional ILEC central offices outside the central business
district or the targeted construction area. Construction of these
expansion routes is typically done under agreements with third party
rights-of-way providers as described above, but in some instances the
Company constructs its own new facilities (typically by trenching or
directional boring) where third party facilities (whether aerial or
underground) do not exist or are not available for use by the Company.
The Company also constructs lateral
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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 the date hereof,
the Company has installed central office switching facilities in Columbus,
Georgia; Montgomery, Alabama; Birmingham, Alabama; Ft. Worth, Texas; Louisville,
Kentucky; Little Rock, Arkansas; Albuquerque, New Mexico; Tucson, Arizona; and
New Orleans, Louisiana. The Company expects to have switches installed in a
total of 16 markets by December 1997. Toward this end, the Company had long-term
lease commitments for nine initial switches as of June 30, 1997. As of August
22, 1997, the Company is offering local switched services on a resale basis in
31 markets and plans to expand further the number of markets in which it is
reselling local switched services throughout 1997 and the first quarter of 1998.
In December 1996, the Company deployed ACSINet, a coast-to-coast, leased
broadband data communications backbone network via leased inter-city fiber
connections on which customers' high-speed data and multimedia traffic may be
transported at a high-quality level on a cost-effective basis. ACSI believes its
ATM-based high bandwidth network will be capable of simultaneously supporting IP
switching, frame relay and multimedia applications. This technology will allow
network customers to migrate transparently from lower speed services to high
bandwidth services, as their data communications requirements expand.
COMPETITION
Dedicated Services. The Company operates in a highly competitive
environment and has no significant market share in any market in which it
operates. The Company provides dedicated services to large business and
government end-users. In each of the metropolitan areas to be served by the
Company's networks, the Company's dedicated services will compete principally
with the dedicated services offered by the ILEC. The ILECs, as the historical
monopoly providers of local access and other services, have long-standing
relationships with their customers and have financial and technical resources
substantially greater than those of the Company. The ILECs also offer certain
services that the Company cannot currently provide without first obtaining
requisite regulatory approvals. See "-- Regulation."
Competition for dedicated services is based on price, quality, network
reliability, customer service, service features and responsiveness to the
customer's needs. The Company believes that its management expertise, coupled
with its highly reliable, state-of-the-art digital networks, which offer
significant transmission capacity at competitive prices, will allow it to
compete effectively with the ILECs, which may have not yet fully
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deployed fiber optic networks in many of the Company's target markets. The
Company currently prices its services at a modest discount compared to the
prices of the ILEC while providing what the Company believes is a higher level
of customer service. The Company's fiber optic networks will provide both
diverse access routing and redundant electronics, design features not widely
deployed by the ILEC's networks (which were originally designed in tree and
branch or star configurations).
Other potential competitors of the Company include CATVs, public utilities,
IXCs, wireless telecommunications providers, microwave carriers, satellite
carriers, teleports, private networks built by large end-users, and other CLECs.
With the passage of the Federal Telecommunications Act and the entry of RBOCs
into the long distance market, the Company believes that IXCs may be motivated
to construct their own local facilities and/or resell the local services of
ACSI's competitors. For example, AT&T has announced its intention to offer local
services and has filed for state certification in markets which include, among
others, several of the Company's markets. See "Risk Factors -- Competition."
Other CLECs or CATVs currently are competitors in various markets in which the
Company has networks in operation or under construction. Based on management's
experience at other CLECs, it is believed the initial market entrant with an
operational fiber optic CLEC network generally enjoys a competitive advantage
over other CLECs that later enter the market. The Company expects that there
will be other CLECs operating in most, if not all, of its target markets and
that some of these CLECs may have networks in place and operating before the
Company's network is operational. While it is generally believed within the CLEC
industry that being the first market entrant to offer services typically
enhances that CLEC's competitive advantage relative to CLECs that enter the
market at a later time, the Company recognizes that in some instances it may
have other competitive advantages (such as a superior right-of-way arrangement
or large customer commitments) that it believes outweigh another CLEC's
first-to-market advantage; in these instances, the Company may elect to enter a
market where an established CLEC already exists.
High-Speed Data Services. The Company's competitors for high-speed data
services include major IXCs, other CLECs, and various providers of niche
services (e.g., Internet access providers, router management services and
systems integrators). In general, none of these competitors currently offers a
comprehensive solution for a customer's potential data service requirements, a
core premise of the Company's data strategy. The Company intends to pursue
arrangements with other data service providers to leverage each entity's
strengths in a given market or segment of the service chain by bundling elements
of complete data solutions (i.e., bundle its local access and frame relay
services with an IXC's longhaul transport services). The interconnectivity of
the Company's markets will create additional competitive advantages over other
data service providers that must obtain local access from the ILEC or another
CLEC in each market or that cannot obtain intercity transport rates on as
favorable terms as the Company.
There is significant competition for Internet access and related services
in the United States, with few barriers to entry. The Company expects that
competition will increase as existing services and network providers and new
entrants compete for customers. ACSI's current and future competitors include
telecommunications companies, including the RBOCs, IXCs, CLECs and CATVs, and
other Internet access providers, such as UUNET Technologies, Inc., Advanced
Network & Services, Inc., BBN Corporation, NETCOM On-Line Communications
Services, Inc. and PSINet Inc. Many of these competitors have greater financial,
technical, marketing and human resources, more extensive infrastructure and
stronger customer and strategic relationships than ACSI. The Company believes
that it will have a competitive advantage in offering Internet access services
to those ISPs and commercial customers in markets where ACSI has local fiber
optic network facilities relative to other Internet access providers that must
purchase local loop access from the ILEC, ACSI or another CLEC in that market.
Additionally, ACSI believes that customers with operations in multiple locations
served by ACSI local fiber optic networks will find single-source Internet
access services from ACSI more cost effective.
All of the seven original RBOCs offer at least some basic frame relay
service. The Company believes that most IXCs offer substantial domestic and
international frame relay service, generally positioned to provide significant
savings over traditional private lines. Other frame relay service providers
include WorldCom, Inc. and Intermedia Communications. A number of companies,
primarily CLECs, have announced plans to offer frame relay service. ATM
offerings are only beginning to emerge. ATM service is currently being offered
by
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most of the original RBOCs, WorldCom, Inc., AT&T, MCI, Sprint and WilTel, Inc. A
number of other data communications providers, CLECs and facilities-based CATVs
have announced their intentions to offer ATM services in the future.
A number of equipment vendors, systems integrators and Internet access and
service providers offer components of managed services. The Company believes
that it will have a competitive advantage over those managed services providers
that do not have local loop facilities.
Local Switched Voice Services. In all of the markets where the Company is
currently operating or plans to operate, the ILEC currently is a de facto
monopoly provider of local switched voice services, including enhanced voice
services. The Company expects that the Federal Telecommunications Act will
enable CLECs, CATVs, electric utilities, cellular and wireless providers, and
others to offer local switched voice services in competition with the ILECs in
the Company's target markets. The Company believes that its strategy to leverage
its basic network infrastructure into higher margin service offerings, migrating
to local switched voice services, will allow it to procure a profitable share of
the market. The Company's ability to cross-market services will create
opportunities to increase margins by migrating customers from off-network to
on-network status. As the number of end-users in a given off-network building
increases for all service offerings, the economics improve to the point where
the capital costs of connecting the building to ACSI's network are more than
covered by the increased margins represented by retaining the portion of
customer revenue paid out to the ILEC.
Competition for enhanced voice services primarily consists of basic voice
mail services offered by ILECs and cellular providers in connection with their
core offerings and customer premise-based voice mail platforms. The voice mail
offerings of the ILECs typically have limited features and flexibility compared
to the services contemplated by the Company; thus, the Company believes its
enhanced voice messaging services and focused sales efforts should be able to
penetrate effectively those segments of the small and mid-sized business market
that require more features and/or flexibility than services offered by the
ILECs. Customer premise-based platform voice mail offerings typically require a
relatively large up front capital investment and recurring maintenance costs and
are generally marketed to large companies rather than the small and mid-sized
end-users targeted by the Company.
Internet Services. The market for Internet access services is extremely
competitive. There are no substantial barriers to entry, and the Company expects
that competition will intensify in the future. The Company has entered this
market principally through the Cybergate Acquisition and believes that its
ability to compete successfully will depend upon a number of factors, including
market presence; the capacity, reliability and security of its network
infrastructure; ease of access to and navigation of the Internet; the pricing
policies of its competitors and suppliers; the timing of introductions of new
products and services by the Company and its competitors; the Company's ability
to support existing and emerging industry standards; and industry and general
economic trends.
The Company's current and prospective competitors include many large
companies that have substantially greater market presence and financial,
technical, marketing and other resources than the Company. The Company expects
to compete directly or indirectly with the following categories of companies:
(1) other international, national and regional commercial Internet service
providers; (2) established on-line services companies that currently offer or
are expected to offer Internet access; (3) computer hardware and software and
other technology companies; (4) IXCs; (5) RBOCs; (6) CATVs; and (7) nonprofit or
educational Internet service providers. The ability of these competitors or
others to bundle services and products with Internet connectivity services could
place the Company at a significant competitive disadvantage in this services
market.
REGULATION
Overview
The Company's services are subject to federal, state and local regulation.
The FCC exercises jurisdiction over all facilities and services of
telecommunications common carriers to the extent those facilities are used to
provide, originate or terminate interstate or international communications.
State regulatory commissions retain jurisdiction over the Company's facilities
and services to the extent they are used to originate or
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terminate intrastate communications. Local governments may require the Company
to obtain licenses or franchises regulating use of public rights-of-way
necessary to install and operate its networks.
Federal Regulation
The Federal Telecommunications Act. On February 1, 1996, the U.S. Congress
enacted comprehensive telecommunications reform legislation, which the President
signed into law as the Federal Telecommunications Act on February 8, 1996. The
Company believes that this legislation is likely to enhance competition in the
local telecommunications marketplace because it (i) removes state and local
entry barriers, (ii) requires ILECs to provide interconnections to their
facilities, (iii) facilitates the end-users' choice to switch service providers
from ILECs to CLECs such as the Company and (iv) requires access to
rights-of-way. The legislation also will tend to enhance the competitive
position of the ILECs and increase local competition by IXCs, CATVs and public
utility companies. Under the Federal Telecommunications Act, ILECs have
substantial new pricing flexibility; RBOCs have regained the ability to provide
long distance services and have obtained new rights to provide certain cable TV
services; IXCs are permitted to construct their own local facilities and/or
resell local services; and state laws can no longer require CATVs to obtain a
franchise before offering telecommunications services nor permit CATVs'
franchise fees to be based on their telecommunications revenues. In addition,
under the Federal Telecommunications Act all utility holding companies are
permitted to diversify into telecommunications services. See "Risk
Factors -- Competition."
The Federal Telecommunications Act requires all telecommunications carriers
(including ILECs and CLECs (such as the Company)): (i) not to prohibit or unduly
restrict resale of their services; (ii) to provide dialing parity and
nondiscriminatory access to telephone numbers, operator services, directory
assistance and directory listings; (iii) to afford access to poles, ducts,
conduits and rights-of-way; and (iv) to establish reciprocal compensation
arrangements for the transport and termination of telecommunications. It also
requires incumbent ILECs to provide interconnection (a) for the transmission and
routing of telephone exchange service and exchange access, (b) at any
technically feasible point within the ILEC's network, (c) that is at least equal
in quality to that provided by the ILEC to itself, its affiliates or any other
party to which the ILEC provides interconnection, and (d) at rates, terms and
conditions that are just, reasonable and nondiscriminatory. ILECs also are
required under the new law to provide nondiscriminatory access to network
elements on an unbundled basis at any technically feasible point, to offer their
local telephone services for resale at wholesale rates, and to facilitate
collocation of equipment necessary for competitors to interconnect with or
access the unbundled network elements.
In addition, the Federal Telecommunications Act requires RBOCs to comply
with certain safeguards and offer interconnections that satisfy a prescribed
14-point checklist before the RBOCs are permitted to provide in-region interLATA
(i.e. long distance) services. Subject to FCC approval, RBOCs may manufacture
telecommunications equipment, originate interLATA telecommunications services,
and provide interLATA information services. The safeguards are designed to
ensure that the 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.
Two RBOCs, Ameritech and Southwestern Bell ("SBC"), have filed applications
with the FCC for authority to provide in-region interLATA service. Both
applications have been denied by the FCC. 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. In addition, on July 2, 1997, SBC filed suit in
U.S. District Court in Wichita Falls, Texas challenging the constitutionality of
the provision of the Telecommunications Act governing RBOC entry into in-region
long distance markets.
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
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established a framework of minimum, national rules enabling state Public Service
Commissions ("PSCs") and the FCC to begin implementing many of the local
competition provisions of the Federal Telecommunications Act. In its
Interconnection Orders, the FCC prescribed certain minimum points of
interconnection necessary to permit competing carriers to choose the most
efficient points at which to interconnect with the ILECs' networks. The FCC also
adopted a minimum list of unbundled network elements that ILECs must make
available to competitors upon request and a methodology for states to use in
establishing rates for interconnection and the purchase of unbundled network
elements. The FCC also adopted a methodology for states to use when applying the
Federal Telecommunications Act's "avoided cost standard" for setting wholesale
prices with respect to retail services.
The following summarizes the key issues addressed in the Interconnection
Orders.
- Interconnection. ILECs are required to provide interconnection for
telephone exchange or exchange access service, or both, to any requesting
telecommunications carrier at any technically feasible point. The
interconnection must be at least equal in quality to that provided by the
ILEC to itself or its affiliates and must be provided on rates, terms and
conditions that are just, reasonable and nondiscriminatory.
- Access to Unbundled Elements. ILECs are required to provide requesting
telecommunications carriers with nondiscriminatory access to network
elements on an unbundled basis at any technically feasible point on
rates, terms, and conditions that are just, reasonable and
nondiscriminatory. At a minimum, ILECs must unbundle and provide access
to network interface devices, local loops, local and tandem switches
(including all software features provided by such switches), interoffice
transmission facilities, signaling and call-related database facilities,
operations support systems and information and operator and directory
assistance facilities. Further, ILECs may not impose restrictions,
limitations or requirements upon the use of any unbundled network
elements by other carriers.
- Methods of Obtaining Interconnection and Access to Unbundled
Elements. ILECs are required to provide physical collocation of
equipment necessary for interconnection or access to unbundled network
elements at the ILEC's premises, except that the ILEC may provide virtual
collocation if it demonstrates to the PSC that physical collocation is
not practical for technical reasons or because of space limitations.
- Pricing Methodologies. New entrants were required to pay for
interconnection and unbundled elements at rates based on the ILEC's Total
Element Long-Run Incremental Cost ("TELRIC") of providing a particular
network element plus a reasonable share of forward-looking joint and
common costs, and may include a reasonable profit. However, as discussed
below, these rules were first stayed, and later vacated, by the U.S.
Court of Appeals for the Eighth Circuit.
- Access Charges for Unbundled Switching and Access Charge Reform. IXCs
which order unbundled switching elements temporarily were required to pay
an access charge to an ILEC when the ILEC provides exchange access
service. Access charges also must be paid when an IXC originates or
terminates interexchange traffic to a customer to which it provides local
services by reselling ILEC exchange services. However, a series of access
charge reforms were announced by the FCC on May 7, 1997. See "-- Other
Regulation -- Access Charges" below.
- Resale Pricing. ILECs are required to offer for resale any
telecommunications service that the carrier provides at retail to
subscribers who are not telecommunications carriers. PSCs were required
to identify which marketing, billing, collection and other costs will be
avoided or that are avoidable by ILECs when they provide services on a
wholesale basis and to calculate the portion of the retail rates for
those services that is attributable to the avoided and avoidable costs.
However, as discussed below, the specific federal pricing requirements
were stayed, and later vacated, by the U.S. Court of Appeals for the
Eighth Circuit.
- 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
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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. 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.
- 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.
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The Interconnection Decisions, and resulting local interconnection rules, were
vacated in part consistent with these decisions. A companion appeal (captioned
Competitive Telecommunications Association v. FCC) was decided on June 27, 1997.
In the latter case, the court upheld the FCC's decision that the term
"interconnection" as used in the Federal Telecommunications Act relates to
physical access, and does not include transmission and routing services as well.
The Company expects that parties will seek rehearing of the panel decisions by
the full Eighth Circuit, or seek review of the appellate decisions by the U.S.
Supreme Court. 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.
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 concerning the
carrier's interstate circuits and deployment of network facilities. With
the exception of informational tariffs for operator-assisted services, on
October 31, 1996, the FCC announced that all nondominant IXCs may cancel
their tariffs for domestic, interstate interexchange services within nine
months of the effective date of the order. However, the FCC's
interexchange de-tariffing order was stayed by the U.S. Court of Appeals
for D.C. on February 13, 1997. In addition, 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 tariffs and has proposed to make the withdrawal of CLEC access
service tariffs mandatory. However, nondominant carriers like the Company
must offer interstate services on a nondiscriminatory basis, at just and
reasonable rates, and remain subject to FCC complaint procedures.
Pursuant to these FCC requirements, the Company has filed and maintains
tariffs for its interstate services with the FCC. All of the interstate
access and retail "basic" services (as defined by the FCC) provided by
the Company are described therein. "Enhanced" services (as defined by the
FCC) need not be tariffed. The Company believes that its enhanced voice
and Internet services are "enhanced" services which need not be tariffed.
The Company has not yet decided whether it will elect to cease filing
interstate interexchange access tariffs.
Nondomestic carriers such as the Company also are required to obtain FCC
authorization pursuant to Section 214 of the Communications Act before
providing international communications services. The Company recently
applied to the FCC for authority to provide voice and data communications
services between the United States and all foreign points.
- ILEC Price Cap Regulation Reform. In 1991, the FCC replaced traditional
rate of return regulation for large ILECs with price cap regulation.
Under price caps, ILECs can only raise prices for certain services,
including interconnection services provided to CLECs, by a small
percentage each year. In addition, there are constraints on the pricing
of ILEC services that are competitive with those of CLECs. On September
14, 1995, the FCC proposed a three-stage plan that would substantially
reduce ILEC price cap regulation as local markets become increasingly
competitive and ultimately would result in granting ILECs nondominant
status. The FCC proposed immediate elimination of the lower service band
index limit on price reductions within service categories, modification
of tariff filing requirements and revision of the structure of price cap
baskets. The FCC also sought comment on
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whether ILECs should be permitted to expand use of volume and term
discount plans. Adoption of the FCC's proposal to reduce significantly its
regulation of ILEC pricing would significantly enhance the ability of
ILECs to compete against the Company and could have a material adverse
effect on the Company. The FCC released an order on December 24, 1996
which adopted certain of these proposals, including the elimination of the
lower service band index limits on price reductions within the access
service category. The FCC's December 1996 order also eased the
requirements necessary for the introduction of new services. On May 7,
1997, the FCC took further action in its CC Docket No. 94-1 updating and
reforming its price cap plan for incumbent LECs. 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
incumbent LECs 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. The FCC has granted ILECs significant flexibility in
pricing their interstate special and switched access services on a
specific central office by central office basis. Under this pricing
scheme, ILECs may establish pricing zones based on access traffic density
and charge different prices for each zone. The Company anticipates that
this pricing flexibility will result in ILECs lowering their prices in
high traffic density areas, the probable area of competition with the
Company. The Company also anticipates that the FCC will grant ILECs
increasing pricing flexibility as the number of interconnections and
competitors increases. 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
incumbent 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 will begin in July 1997 and 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, incumbent
LECs 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, incumbent LECs subject to
price-cap regulation will be required to move non-traffic-sensitive
("NTS") costs of local switching associated with line ports to common
line and recover them through the common line charge discussed above.
Local switching costs attributable to dedicated trunk ports must be moved
to the trunking basket and recovered through flat-rate monthly charges.
Transport. The "unitary" rate structure option for tandem-switched
transport will be eliminated effective July 1, 1998. For price cap LECs,
additional rate structure charges will become effective on January 1,
1998, which will alter the recovery of certain NTS costs of
tandem-switching and multiplexing and the minutes-of-use assumption
employed to determine tandem-switched transport prices. Also effective
January 1, 1998, certain costs currently recovered through Transport
Interconnection Charge ("TIC") will be reassigned to specified facilities
charges. The reassignment of tandem costs currently recovered through the
TIC to the tandem switching charge will be phased in evenly over
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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. The access charge order has
been appealed and could be set aside or revised.
Universal Service Reform. On May 8, 1997, the FCC released an order in its
CC Docket No. 96-45, which reforms the current system of intrastate universal
service support and implements the universal services provisions of the Federal
Telecommunications Act. The FCC established a set of policies and rules that
ensure that low-income consumers and consumers that live in rural, insular and
high cost areas received a defined set of local telecommunications services at
affordable rates. This is accomplished in part through expansion of direct
consumers subsidy programs and in part by ensuring that rural, small and high
cost LECs continue to receive universal service subsidy support. The FCC also
created new programs to subsidize connection of eligible schools, libraries and
rural health care providers to telecommunications networks. These programs will
be funded by assessment of eligible revenues of nearly all providers of
intrastate telecommunications carriers, including competitive LECs such as the
Company.
The Company, like other telecommunications carriers that provide intrastate
telecommunications services, will be required to contribute a portion of its
end-user telecommunications revenues to fund universal service programs.
However, the Company also is eligible to qualify as a recipient of universal
service support if it elects to service areas designated for universal service
support over its own network. The eligibility criteria established by the FCC
provide that carriers must be a common carrier, and offer and advertise,
throughout a designated service area, all of the services supported by universal
service subsidies. Such carriers must provide the support services, at least in
part, over their own facilities or through use of unbundled network elements
purchased from incumbent LECs. The FCC's decisions in CC Docket No. 96-45 could
have a significant impact on future operations of the Company.
State Regulation
The Company believes that most, if not all, states in which it proposes to
operate will require a certification or other authorization to offer intrastate
services. Many of the states in which the Company operates or intends to operate
are in the process of addressing issues relating to the regulation of CLECs.
Some states may require authorization to provide enhanced services.
In some states, existing state statutes, regulations or regulatory policy
may preclude some or all forms of local service competition. The Federal
Telecommunications Act contains provisions that prohibit states and localities
from adopting or imposing any legal requirement that may prohibit, or have the
effect of prohibiting, the ability of any entity to provide any interstate or
intrastate telecommunications service. The FCC is required to preempt any such
state or local requirements to the extent necessary to enforce the Federal
Telecommunications Act's open market entry requirements. States and localities
may, however, continue to
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regulate the provision of intrastate telecommunications services, and,
presumably, require carriers to obtain certificates or licenses before providing
service.
Some states in which the Company operates are considering legislation which
could impede efforts by new entrants in the local services market to compete
effectively with ILECs. The Arkansas legislature, for example, recently enacted
legislation which curtails the ability of the state PSC to make available
additional network elements to CLECs or authorize CLECs to receive universal
service funding. On March 25, 1997, the Company filed a petition for Declaratory
Ruling with the FCC asking it to preempt portions of the Arkansas statute.
As of June 30, 1997 the Company had obtained intrastate authority for the
provision of dedicated services and a full range of local switched services in
Alabama, Arizona, Arkansas, Colorado, the District of Columbia, Florida,
Georgia, Kentucky, Louisiana, Maryland, Mississippi, Missouri, Nevada, New
Mexico, Oklahoma, South Carolina, Tennessee, Texas and Virginia. In addition,
the Company is seeking PSC certification to provide interLATA services in these
and other states. There can be no assurances that the Company will receive the
authorizations it may seek in the future to the extent it expands into other
states or seeks additional services from the above-named PSCs. See "Risk
Factors -- Rapid Expansion of Operations." In most states, the Company is
required to file tariffs setting forth the terms, conditions and prices for
services that are classified as intrastate.
The Company believes that, as the degree of intrastate competition
increases, the states will offer the ILECs increasing pricing flexibility. This
flexibility may present the ILECs with an opportunity to subsidize services that
compete with the Company's services with revenues generated from non-competitive
services, thereby allowing ILECs to offer competitive services at prices below
the cost of providing the service. The Company cannot predict the extent to
which this may occur or its impact on the Company's business.
Local Interconnection. The Federal Telecommunications Act imposes a duty
upon all ILECs to negotiate in good faith with potential interconnectors to
provide interconnection to the ILEC network, exchange local traffic, make
unbundled basic local network elements available, and permit resale of most
local services. In the event that negotiations do not succeed, the Company has a
right to seek state PSC arbitration of any unresolved issues. The state PSC must
conclude the arbitration within nine months of the date upon which the ILEC
received the Company's initial request for interconnection. The Company has
negotiated or arbitrated interconnection arrangements with each of the
following: BellSouth (North Carolina, South Carolina, Georgia, Florida, Alabama,
Mississippi, Louisiana, Tennessee and Kentucky), Southwestern Bell (Texas,
Arkansas, Kansas, Missouri and Oklahoma), US West (Arizona, New Mexico and
Colorado), Bell Atlantic (Maryland, Virginia and the District of Columbia), GTE
(Texas, Kentucky and Florida) and Sprint/ Central Telephone (Nevada).
Arbitration decisions involving interconnection arrangements in several states
have been challenged in lawsuits filed in U.S. District Court by the affected
ILECs.
The Company has experienced some difficulty in obtaining timely ILEC
implementation of local interconnection agreements. Delays encountered in
unbundled loop installation have caused the Company to file complaints against
BellSouth with the FCC and Georgia PSC. The Company is considering the
possibility of filing similar actions against other ILECs.
Local Government Authorizations. The Company is required to obtain street
use and construction permits and licenses and/or franchises to install and
expand its fiber optic networks using municipal rights-of-way. In some
municipalities where the Company has installed or anticipates constructing
networks, it will be required to pay license or franchise fees based on a
percentage of gross revenues or on a per linear foot basis, as well as post
performance bonds or letters of credit. There can be no assurance that the
Company will not be required to post similar bonds in the future, nor is there
any assurance that, following the expiration of existing franchises, fees will
remain at their current levels. In many markets, the ILECs do not pay such
franchise fees or pay fees that are substantially less than those required to be
paid by the Company. To the extent that competitors do not pay the same level of
fees as the Company, the Company could be at a competitive disadvantage.
However, the Telecommunications Act provides that any compensation extracted by
states and localities for use of public rights-of-way must be "fair and
reasonable," applied on a "competitively neutral and nondiscriminatory basis"
and be "publicly disclosed" by such government entity. Termination of the
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existing franchise or license agreements prior to their expiration dates could
have a materially adverse effect on the Company.
EMPLOYEES
As of June 30, 1997, the Company employed a total of 559 individuals full
time. The Company believes that its future success will depend on its continued
ability to attract and retain highly skilled and qualified employees. None of
the Company's employees is subject to a collective bargaining agreement. The
Company believes that its relations with its employees are good.
LEGAL PROCEEDINGS
On July 24, 1996, the Company was notified that a complaint against a
subsidiary had been filed in the District Court of El Paso County, Texas,
wherein the plaintiff alleged permanent paraplegia resulting from his fall into
a concealed basement during construction of the Company's El Paso network. At
the time of the incident giving rise to the lawsuit, the plaintiff was an
employee of the subcontractor hired by the Company's general contractor for this
project. The plaintiff seeks recovery from the Company's subsidiary and the
general contractor of at least $25 million in damages (plus punitive damages).
Both the Company and the general contractor have begun investigations into the
facts surrounding the incident and intend to defend against this suit
vigorously. However, based on the facts known as of the date hereof, the Company
does not believe it is likely, although it is possible, that the Company could
be liable for payment of all or a portion of the requested damages, which
potential liability could materially adversely affect the results of operation
and financial condition of the Company.
ACSI's former Chief Financial Officer, Harry J. D'Andrea, has initiated
litigation against the Company in the Circuit Court of Maryland for Anne Arundel
County. The lawsuit alleges four different counts: breach of contract; breach of
the covenant of good faith and fair dealing; negligent misrepresentation; and
specific performance. D'Andrea seeks damages in excess of $5,000,000, and the
right to exercise options to purchase 100,000 shares of ACSI common stock at
$4.25 per share. The Company received a copy of the Complaint on April 8, 1997.
The Company believes it has meritorious defenses to this complaint and intends
to defend this lawsuit vigorously.
A Houston, Texas based company named "American Communication Services,
Inc." has initiated litigation against the Company, contending that the
Company's use of the "American Communications Services, Inc." name in the State
of Texas has caused confusion and violates Texas law. The suit seeks an
injunction and attorneys fees. 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 a 23,925 square foot office space in Annapolis Junction,
Maryland for its corporate headquarters and network management center for
$28,647 per month as of December 31, 1996, subject to periodic increases in
specified amounts. The lease expires in 2002, but may be renewed for two
additional five-year terms. The Company leases a 1,358 square foot field office
in Lombard, Illinois which houses its local network development and real estate
development operations. This lease expires on January 31, 1999.
As of December 31, 1996, the Company's various operating subsidiaries have
leased facilities for their offices and network nodes. The aggregate monthly
rent on these properties is approximately $285,000. The various leases expire on
dates ranging from February 28, 1998, to April 1, 2007. Most have renewal
options. A subsidiary of the Company leases shared office space in Greenville,
SC. Additional office space and equipment rooms will be leased as additional
networks are constructed and the Company's operations are expanded.
The Company believes that its insurance coverage on these properties is
adequate and in compliance with the related leases.
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<PAGE> 64
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as of the date of this
Offering Memorandum regarding the directors and executive officers of the
Company.
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
- ---------------------------------------- --- -------------------------------------------------
<S> <C> <C>
Anthony J. Pompliano.................... 58 Executive Chairman of the Board of Directors
Jack E. Reich........................... 46 President and Chief Executive Officer --
Communications Services
George M. Tronsrue, III................. 41 President and Chief Operating Officer -- Strategy
and Technology Development
Riley M. Murphy......................... 41 Executive Vice President -- Legal and Regulatory
Affairs, General Counsel and Secretary
David L. Piazza......................... 42 Chief Financial Officer
George M. Middlemas(1).................. 51 Director
Edwin M. Banks(2)....................... 35 Director
Christopher L. Rafferty(1).............. 49 Director
Benjamin P. Giess....................... 34 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, Executive Chairman of the Board of Directors, has
more than 30 years of experience in the telecommunications industry. Mr.
Pompliano was elected a director of the Company in November 1993. He was
co-founder and President of Metropolitan Fiber Systems, the predecessor
organization to MFS Communications, a publicly-traded CLEC that was acquired by
WorldCom, Inc. in December 1996. Mr. Pompliano served as President, CEO and Vice
Chairman of MFS Communications from April 1988 until March 1991. He joined ACSI
in August 1993 after the expiration of his non-competition agreement with MFS
Communications. Before his association with MFS Communications and its
predecessor, he was Vice President -- Operations and Sales for MCI
Telecommunications International from 1981 to 1987, and prior thereto, was Vice
President -- National Operations for Western Union International, Inc. from 1960
to 1981.
Jack E. Reich, President and Chief Executive Officer -- Communications
Services, had 22 years of telecommunications industry and management experience
before joining ACSI in December 1996. For two and one-half years prior to
joining ACSI, Mr. Reich was employed by Ameritech, Inc. as President of its
Custom Business Service Organization, where Mr. Reich was responsible for full
business marketing to Ameritech's largest customers for telecommunications
services, advanced data services, electronic commerce and managed
services/outsource initiatives. Prior to that, he served as President of MCI's
Multinational Accounts organization and also served as MCI's Vice President of
Products Marketing. Mr. Reich has also held sales and marketing positions at
AT&T and ROLM Corp. Mr. Reich has a B.S. degree from St. Louis University and an
MBA from the University of Chicago.
George M. Tronsrue, III, President and Chief Operating Officer -- Strategy
and Technology Development, had 17 years of telecommunications industry and
management experience before joining ACSI in February 1994. Mr. Tronsrue served
the Company as Executive Vice President -- Strategic Planning and Business
Development from February 1994 until January 31, 1996. From 1993 until he joined
ACSI in February 1994, Mr. Tronsrue was the Regional Vice President for the
Central Region for Teleport Communications Group and the Vice President of
Emerging Markets, responsible for start-up and profit and loss management of
joint ventures with major cable television providers in eight major markets.
From 1987 until 1992, he was a member of the initial management team at MFS,
where he held senior positions in
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<PAGE> 65
planning and market development, served as Vice President of Sales and the Vice
President/General Manager for the initial start-up of MFS' New York operations,
and served as the Executive Vice President for MFS-Intelenet. Prior to joining
MFS, he was a Director of Operations for MCI Telecommunications International.
Mr. Tronsrue has a B.S. degree in Applied Sciences and Engineering from the
United States Military Academy at West Point.
Riley M. Murphy, Executive Vice President -- Legal and Regulatory Affairs
and Secretary, had twelve years of experience in the private practice of
telecommunications regulatory law for 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 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, Charter Medical Corporation and ABCO Food Service.
Christopher L. Rafferty, Director, was elected a director of the Company in
October 1994. Mr. Rafferty has been employed by WRH Partners, L.L.C., the
general partner of Huff since June 1994. From January 1993 to February 1994, Mr.
Rafferty was Vice President -- Acquisitions for Windsor Pet Care, Inc., a
venture capital-backed firm focusing on consolidating the pet care services
industry. From October 1990 to January 1993, Mr. Rafferty was a consultant
specializing in merchant banking, leveraged acquisitions and venture capital
transactions. From June 1987 to the time he started his consulting business, Mr.
Rafferty was a Managing Director of Chase Manhattan Capital Corporation, the
merchant banking and private equity investment affiliate of Chase Manhattan
Corporation. Mr. Rafferty received his undergraduate degree from Stanford
University and his law degree from Georgetown University.
Benjamin P. Giess, Director, was elected a director of the Company in June
1995. Since 1992, Mr. Giess has been employed by ING and its predecessors and
affiliates and currently serves as a Vice President responsible for originating,
structuring and managing equity and debt investments. From 1991 to 1992, Mr.
Giess worked in the Corporate Finance Group of ING Capital. From 1990 to 1991,
Mr. Giess was employed by the Corporate Finance Group of General Electric
Capital Corporation where he worked in the
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<PAGE> 66
media and entertainment group. Prior to attending business school, from 1986 to
1988, Mr. Giess was the Credit Department Manager of the Boston Branch of ABN
Amro North America, Inc. From 1984 to 1986, Mr. Giess was employed at the
Shawmut Bank of Boston. Mr. Giess also serves as a director of Matthews Studio
Equipment Group and CMI Holding Corp. Mr. Giess received his undergraduate
degree from Dartmouth College and his MBA from the Wharton School of the
University of Pennsylvania.
Olivier L. Trouveroy, Director, was elected a director of the Company in
June 1995. Since 1992, Mr. Trouveroy has been employed by ING and its
predecessors and affiliates and currently serves as a Managing Director
responsible for originating, structuring and managing equity and debt
investments. From 1990 to 1992, Mr. Trouveroy was a Managing Director in the
Corporate Finance Group ("CFG") of General Electric Capital Corporation in
charge of CFG's office in Paris, France. From 1984 to 1990, Mr. Trouveroy held
various positions in the Mergers and Acquisitions department of Drexel Burnham
Lambert in New York, most recently as a First Vice President. Mr. Trouveroy also
serves as a director of AccessLine Technologies, Inc. and Cost Plus, Inc. Mr.
Trouveroy holds B.S. and Masters degrees in Economics from the University of
Louvain in Belgium, as well as an MBA from the University of Chicago.
Peter C. Bentz, Director, was elected a director of the Company in June
1995. Since 1992, Mr. Bentz has been employed by W. R. Huff Asset Management
Co., L.L.C. as a research analyst specializing in telecommunications, media and
healthcare. Mr. Bentz received his Bachelor of Science degree from Boston
College in 1987 and his MBA from the Wharton School of the University of
Pennsylvania in 1992.
The Board is comprised of seven members who were elected by the holders of
the Company's Common Stock. All directors of the Company hold office until the
next annual meeting of stockholders and until their successors are duly elected
and qualified.
LIMITATION OF LIABILITY OF DIRECTORS
The Charter provides that a director of the Company will not be personally
liable for monetary damages to the Company or its stockholders for breach of
fiduciary duty as a director, except for liability, (i) for any breach of the
director's duty of loyalty to such corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for unlawful payments of dividends or unlawful
stock repurchases or redemption as provided in Section 174 of the DGCL or (iv)
for any transaction from which the director derived an improper personal
benefit.
This provision is intended to afford directors additional protection and
limit their potential liability from suits alleging a breach of the duty of care
by a director. As a result of the inclusion of such a provision, stockholders
may be unable to recover monetary damages against directors for actions taken by
them that constitute negligence or gross negligence or that are otherwise in
violation of their fiduciary duty of care, although it may be possible to obtain
injunctive or other equitable relief with respect to such actions. If equitable
remedies are found not to be available to stockholders in any particular
situation, stockholders may not have an effective remedy against a director in
connection with such conduct.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Amended and Restated Certificate of Incorporation and the By-laws
provide that directors and officers of the Company (as well as agents and
employees of the Company at the discretion of the Board) shall, to the fullest
extent authorized by the DGCL or any other applicable laws then in effect, be
indemnified against liabilities arising from their service as directors and
officers. Additionally, the Company has entered into indemnification agreements
with each of its executive officers and directors to reimburse them for certain
liabilities incurred in connection with the performance of their fiduciary
duties. Section 145 of the DGCL empowers a corporation to indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in
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<PAGE> 67
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in, or not opposed to, the best interests
of the corporation, and, with respect to any criminal action or proceeding, had
no reasonable cause to believe his conduct was unlawful.
Section 145 also empowers a corporation to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that such person acted in any of the
capacities set forth above, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted under similar standards, except
that no indemnification may be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the corporation
unless, and only to the extent that, the Delaware Court of Chancery or the court
in which such action was brought shall determine that despite the adjudication
of liability such person is fairly and reasonably entitled to indemnity for such
expenses which the Delaware Court of Chancery or such other court shall deem
proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to above or in the defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith; that indemnification provided for by Section 145 shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled;
and that the corporation is empowered to purchase and maintain insurance on
behalf of any person who is a or was a director, officer, employee or agent of
the corporation against any liability asserted against him in any such capacity,
or arising out of his status as such, whether or not the corporation would have
the power to indemnify him against such liabilities under Section 145.
There has not been in the past and there is not presently pending any
litigation or proceeding involving a director, officer, employee or agent of the
Company which could give rise to an indemnification obligation on the part of
the Company. In addition, except as described herein, the Board of Directors is
not aware of any threatened litigation or proceeding which may result in a claim
for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Company will, unless in the opinion of counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The foregoing summary of certain material provisions of ACSI's Charter and
By-laws is qualified in its entirety by reference to the complete text of those
documents.
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<PAGE> 68
EXECUTIVE COMPENSATION
The following table provides a summary of compensation for the fiscal
period ended December 31, 1996 and for each of the three fiscal years ended June
30, 1996, 1995 and 1994, with respect to the Company's Chief Executive Officer,
and the other five most highly compensated officers of the Company during the
fiscal year ended June 30, 1996 whose annual salary and bonus during such fiscal
year exceeded $100,000 (collectively, the "Named Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
--------------------------------------- NUMBER OF
OTHER SECURITIES
NAME AND PRINCIPAL POSITION ON ANNUAL UNDERLYING ALL OTHER
DECEMBER 31, 1996 YEAR SALARY BONUS COMPENSATION(1) OPTIONS(2) COMPENSATION
- ------------------------------------ ---- -------- -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Pompliano................ 1996* $124,167 $ 75,000(3) $ -- -- $ 2,574(4)
Executive Chairman of the Board 1996 239,583 175,000(3) -- -- 6,187(4)
of Directors 1995 219,500 175,000(3) -- 500,000 6,977(4)
1994 110,000 -- 25,000(5) 1,349,899 61,507(6)
Jack E. Reich(7).................... 1996* 20,883 -- -- 1,200,000
President and Chief Executive
Officer -- Communications Services
George M. Tronsrue, III............. 1996* 100,000 -- -- -- 2,400(4)
President and Chief Operating 1996 191,128 54,116(8) -- 50,000 4,800(4)
Officer -- Strategy and Technology 1995 150,000 135,417(8) 68,800(9) 350,001(10) --
Development 1994 53,827 50,000 -- --
Riley M. Murphy..................... 1996* 91,250 -- -- -- --
Executive Vice President -- Legal 1996 162,499 81,500(11) 37,004(9) 50,000 3,536(4)
and Regulatory Affairs, General 1995 150,000 81,500(12) -- 250,001(10) 9,783(4)
Counsel and Secretary 1994 37,500 -- 48,620(13) --
Robert H. Ottman(14)................ 1996* 90,667 -- -- -- --
Executive Vice President/Network 1996 170,000 50,000(3) 100,000(9) -- --
Services and Technical Support 1995 28,333 -- -- 250,000 --
Richard A. Kozak(15)................ 1996* 129,167 137,500(3) -- 83,334(16) 2,700(4)
President and Chief Executive 1996 232,885 200,000(3) -- -- 5,400(4)
Officer -- Corporate Services and 1995 184,378 175,000(3) -- 399,999(16) 3,750(4)
Acting Chief Financial Officer 1994 87,500 -- 39,728(5) 899,932 --
</TABLE>
- ---------------
(*) Subsequent to June 30, 1996, the Company changed its fiscal year-end to
December 31. Information is for the six months ended December 31, 1996.
(1) Excludes perquisites and other personal benefits that in the aggregate do
not exceed 10% of the Named Officers' total annual salary and bonus.
(2) See information provided in "Option Grants in Fiscal Year Ended June 30,
1996 and Fiscal Period Ended December 31, 1996" and "December 31, 1996
Option Values."
(3) Represents cash bonuses received for attainment of certain performance
goals.
(4) Represents payments received for medical or disability insurance in excess
of that provided to other employees and/or car allowances and, for Ms.
Murphy, includes payments of $6,423 of premiums in connection with
professional liability insurance for the period prior to her employment
with the Company.
(5) Consists of amounts paid to Messrs. Pompliano and Kozak as consultants for
services rendered prior to their employment by the Company in August 1993
and November 1993, respectively.
(6) Consists of $20,000 received as compensation in connection with the
Company's November 1993 sale of 400,000 shares of Common Stock and $41,507
received as compensation in connection with the Company's June 1994
issuance of $4,300,720 principal amount of 15% convertible notes.
(7) Mr. Reich commenced employment with the Company in December 1996.
(8) Represents an installment of a $244,500 bonus, $54,116 of which is due on
February 24, 1997.
(9) Includes $65,000, $100,000 and $37,004 paid to Messrs. Tronsrue and Ottman
and Ms. Murphy, respectively, in connection with relocation and moving
expenses relating to the relocation of the Company's headquarters to
Annapolis Junction, Maryland.
(10) 150,000 of these options were originally granted in the fiscal year ended
June 30, 1994 at an exercise price of $2.50 per share and such exercise
price was subsequently reduced to $2.25 per share in connection with the
Company's October 1994 Offering.
(11) Represents an installment of a $244,500 cash bonus, $81,500 of which was
paid in January 1997.
(12) This payment represents the first installment of a $244,500 cash bonus.
(13) Consists of $43,620 received for performing legal services for the Company
as outside counsel and a $5,000 for relocation expenses.
(14) Mr. Ottman commenced employment with the Company in May 1995 and his
employment was terminated in February 1997.
(15) Mr. Kozak served as the Company's President and Chief Executive Officer
during fiscal year 1996. He became Acting Chief Financial Officer in
December 1996 upon the resignation of the Company's previous Chief
Financial Officer. In connection with the Company's December 1996
management reorganization, Mr. Kozak became President and Chief Executive
Officer -- Corporate Services. Effective February 2, 1997, Mr. Kozak's
employment with the Company was terminated.
(16) In connection with the settlement of the dispute relating to the
termination of Mr. Kozak's employment, all of the options granted in fiscal
period ended December 31, 1996 and options to purchase 83,333 shares
granted in fiscal year ended June 30, 1995 were canceled. See "Certain
Transactions."
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<PAGE> 69
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
George M. Tronsrue, III......... 25,000(2) 2.2 3.40 3.875 2/22/03
25,000(3) 2.2 3.40 3.875 2/22/04
Riley M. Murphy................. 25,000(2) 2.2 3.40 3.875 3/30/03
25,000(3) 2.2 3.40 3.875 3/30/04
Robert H. Ottman................ -- -- -- -- --
Richard A. Kozak................ 83,334 5.8 15.00 11.75 11/15/04(4)
</TABLE>
- ---------------
(1) Mr. Tronsrue and Ms. Murphy were granted options in fiscal year ended June
30, 1996, and Messrs. Reich and Kozak were granted options in the fiscal
period ended December 31, 1996.
(2) These options were granted on July 6, 1995, with an exercise price of $3.40.
Mr. Tronsrue's options will vest on February 23, 1998 and Ms. Murphy's
options will vest on March 31, 1998 provided, in each case, that he or she
does not voluntarily terminate his or her employment with the Company or is
not terminated for cause prior to the applicable vesting date.
(3) These options were granted on July 6, 1995, with an exercise price of $3.40.
Mr. Tronsrue's options will vest on February 23, 1999 and Ms. Murphy's
options will vest on March 31, 1999 provided, in each case, that he or she
does not voluntarily terminate his or her employment with the Company or is
not terminated for cause prior to the vesting date.
(4) These options were canceled in connection with the settlement of the dispute
relating to the termination of Mr. Kozak's employment. See "Certain
Transactions."
DECEMBER 31, 1996 OPTION VALUES
The following table sets forth the value of unexercised options held by the
Named Officers as of December 31, 1996. None of the Named Officers exercised
options during the fiscal year ended June 30, 1996 or the fiscal period ended
December 31, 1996.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS AT DECEMBER 31,
OPTIONS AT DECEMBER 31, 1996 1996(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Anthony J. Pompliano..................... 1,599,899 250,000 $15,455,253 $ 1,987,500
Jack E. Reich............................ -- 1,200,000 -- 1,650,000
George M. Tronsrue, III.................. 250,000 150,000 2,125,000 1,217,500
Riley M. Murphy.......................... 137,501 162,501 1,168,759 1,323,759
Robert H. Ottman......................... 100,000 150,000(2) 775,000 1,162,500
Richard A. Kozak......................... 1,133,265 250,000(3) 10,824,326 970,825
</TABLE>
- ---------------
(1) Represents the difference between the per share exercise price of the
unexercised options and $10.75, the last sale price on December 31, 1996, as
reported by the Nasdaq Stock Market.
(2) The vesting of options to purchase 75,000 of these shares was accelerated in
connection with the termination of Mr. Ottman's employment in February 1997.
(3) Of these, options to purchase 166,667 shares were canceled and the vesting
of options to purchase an additional 83,333 shares was accelerated in
connection with the settlement of the dispute relating to the termination of
Mr. Kozak's employment. See "Certain Transactions."
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<PAGE> 70
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 Executive Chairman, which terminates on August 23,
1998. Under the terms of the agreement, as amended, Mr. Pompliano is entitled to
an annual base salary of $250,000 and a cash bonus of up to $200,000 for each of
the 1997 and 1998 fiscal years based upon the Company's achievement of certain
performance goals for the relevant fiscal year. Under this employment agreement,
Mr. Pompliano has been granted options to purchase an aggregate of 1,849,899
shares of the Company's Common Stock at exercise prices ranging from $.875 per
share to $2.80 per share. 1,662,399 of these options are currently vested. Mr.
Pompliano has the right to obtain a 30-day loan from the Company for the purpose
of paying the aggregate exercise price of the options granted to him.
Mr. Pompliano has the right, for 90 days after termination of his
employment (unless he is terminated by the Company "for cause" or he voluntarily
resigns), to sell to the Company up to $1.0 million in then market value of
shares of Common Stock issued or issuable pursuant to the options granted to Mr.
Pompliano under his employment agreement, at a price equal to the
publicly-traded price of the Common Stock, less the exercise price of the
options with respect to unexercised options; provided, however, this right
cannot be exercised unless at least 5,000,000 shares of Common Stock are owned
by non-affiliates of the Company at the time of his request and the market value
of the outstanding Common Stock is at least $300 million. Mr. Pompliano's
employment agreement also contains non-compete, non-solicitation and
confidentiality provisions.
Jack E. Reich. The Company is party to an employment agreement with Jack
E. Reich, its President and Chief Executive Officer -- Communications Services,
which terminates on December 31, 2000, extendable for one year by mutual
agreement. Under the terms of this agreement, Mr. Reich is entitled to a minimum
annual base salary of $250,000, a cash bonus of $100,000 in 1997 and annual
bonuses of between $150,000 and $350,000 based on the Company's achievement of
certain performance goals. Under this employment agreement, Mr. Reich was
granted an option to purchase 1,200,000 shares of Common Stock at an exercise
price $9.375 per share. These options vest in installments between December 1997
and December 2001, subject to Mr. Reich's continued employment. Mr. Reich's
employment agreement also contains a two year non-compete/non-solicit provision.
George M. Tronsrue, III. The Company is party to an employment agreement
with George M. Tronsrue, III, its President and Chief Operating
Officer -- Strategy and Technology Development, which terminates on February 23,
1999. The agreement, as amended, calls for an annual salary $200,000, a $400 per
month car allowance and a guaranteed bonus of $244,500 payable in annual
installments through February 1997. Under the terms of this employment
agreement, Mr. Tronsrue has been granted stock options to purchase an aggregate
of 400,000 shares of Common Stock at prices ranging from $2.25 per share to
$3.40 per share. 250,000 of these options were exercisable as of December 31,
1996. Furthermore, the Company, upon Mr. Tronsrue's request, has agreed to use
its best efforts to extend a loan to Mr. Tronsrue in the aggregate amount of
$195,000, bearing the simple interest at the rate of 8% per year and payable on
the second anniversary of the loan. Mr. Tronsrue's employment agreement also
contains a two year non-compete/non-solicit provision.
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<PAGE> 71
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 a two year non-compete/non-solicit provision.
Robert H. Ottman. The Company was party to an employment agreement with
Robert Ottman, which was terminated in February 1997. In connection with Mr.
Ottman's termination, the Company accelerated the vesting of options to purchase
75,000 shares of Common Stock having an exercise price of $3.00 per share and
paid Mr. Ottman a lump sum of approximately $44,000 in severance. Mr. Ottman's
employment agreement contains a two year non-compete/non-solicit provision.
The shares of Common Stock underlying the stock options held by Messrs.
Pompliano and Tronsrue and Ms. Murphy which are discussed above are the subject
of a registration rights agreement with the Company, pursuant to which these
executive officers have been granted certain demand and piggyback registration
rights with respect to the shares of Common Stock underlying these options. Mr.
Pompliano has waived his right to demand an underwritten registration of at
least 300,000 shares of Common Stock beginning 120 days after the April
Offering. The Company has agreed to use its best efforts to have Mr. Reich's
shares included in this registration rights agreement.
1994 STOCK OPTION PLAN
On November 15, 1994, the Board adopted and on December 16, 1994,
stockholders approved the 1994 Stock Option Plan. On January 26, 1996 and
November 15, 1996, the Company's stockholders approved amendments to the 1994
Stock Option Plan (the "1994 Plan"). The 1994 Plan will terminate no later than
November 15, 2004, ten years after adoption by the Board of Directors and after
such termination no additional options may be granted. The 1994 Plan is
administered by the Compensation Committee which makes discretionary grants
("discretionary grants") of options to employees (including employees who are
officers and directors of the Company), directors who are not employees of the
Company ("Outside Directors") and consultants. The 1994 Plan also provides for
formula grants of options to Outside Directors ("formula grants"). Under the
1994 Plan, 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
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<PAGE> 72
shares on the date such option is granted (the "Grant Date"), as to 10,000
shares on the date of the first annual meeting of stockholders held at least
eight months after the Grant Date (the "First Annual Meeting") and as to 10,000
shares on the date of each of the next three annual meetings of stockholders
held after the First Annual Meeting, provided that the option will only vest on
the relevant annual meeting of stockholders date if the Outside Director is
re-elected to the Board at such meeting. Each such option shall have a term of
five years from the relevant vesting date. The exercise price per share of
Common Stock for options granted pursuant to a formula grant shall be 100% of
the fair market value as determined under the terms of the 1994 Plan.
Currently, all options granted under the 1994 Plan are nontransferable,
other than by will or by the laws of descent and distribution, and may be
exercised during the optionee's lifetime, only by the optionee, or in the event
of the optionee's legal incapacity to do so, by the optionee's guardian or legal
representative. On June 25, 1997, the Company's stockholders approved the
Company's adoption of an amendment to the 1994 Plan authorizing the inclusion of
a provision in stock option agreements relating to options granted to Outside
Directors which permits the transfer by such Outside Director of the options
granted pursuant to such stock option agreement.
As of December 31, 1996, there were 322 employees eligible to participate
and approximately 107 actual participants in the 1994 Plan. During the fiscal
year ended June 30 and the fiscal period ended December 31, 1996 there were no
grants of options pursuant to the 1994 Plan to any director or executive officer
of the Company, including the Named Officers. There were grants of options
pursuant to the 1994 Plan to all other employees as a group to acquire an
aggregate of 595,309 shares of Common Stock, at an average exercise price of
$5.41 per share, during the fiscal year ended June 30, 1996 and the fiscal
period ended December 31, 1996.
EMPLOYEE STOCK PURCHASE PLAN
On November 15, 1996, the Company's stockholders approved the Company's
adoption of an Employee Stock Purchase Plan (the "Stock Purchase Plan"). The
Stock Purchase Plan is intended to qualify as an "employee stock purchase plan"
under Section 423 of the Code. All regular full-time employees of the Company
(including officers), and all other employees whose customary employment is for
more than 20 hours per week, who in either case have been employed by the
Company for at least three months are eligible to participate in the Stock
Purchase Plan. Directors who are not employees are not eligible. A maximum of
500,000 shares of the Company's Common Stock are reserved for offering under the
Stock Purchase Plan and available for purchase thereunder, subject to
anti-dilution adjustments in the event of certain changes in the capital
structure of the Company.
Under the Stock Purchase Plan, offerings will be made at the commencement
of each offering period ("Offer Period"). During each Offer Period, deductions
are to be made from the pay of participants (in accordance with their
authorizations) and credited to their accounts under the Stock Purchase Plan.
Payroll deductions may be from 1% to 15% (in whole percentage increments) of a
participant's regular base pay. Participants may not make direct cash payments
to their accounts.
The price per share at which shares of Common Stock are to be purchased
pursuant to the Stock Purchase Plan for any Offer Period is the lesser of (a)
85% of the fair market value of Common Stock on the commencement of the Offer
Period or (b) 85% of the fair market value of Common Stock on the last business
day of an Offer Period. On the last business day of each Offer Period, amounts
credited to the accounts of participants who have been neither terminated from
the employ of the Company nor withdrawn from the Stock Purchase Plan for such
Offer Period are used to purchase shares of Common Stock in accordance with the
elections of such participants. Any amounts remaining in the accounts of
participants at the end of any Offer Period are refunded to the participants.
Only amounts credited to the accounts of participants may be applied to the
purchase of shares of Common Stock under the Stock Purchase Plan.
If for any Offer Period the number of shares of Common Stock available for
Stock Purchase Plan purposes shall be insufficient, the Board of Directors of
the Company is authorized to apportion the remaining available shares pro rata
among participating employees on the basis of their payroll deductions in effect
for such Offer Period.
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<PAGE> 73
The Company makes no cash contributions to the Stock Purchase Plan, but
bears the expenses of its administration. The Stock Purchase Plan is
administered by the Compensation Committee, which has authority to establish and
change the number and duration of the Offer Periods during the term of the Stock
Purchase Plan, and to make rulings and interpretations thereunder.
The Stock Purchase Plan will terminate when all available shares have been
purchased, or earlier in the discretion of the Compensation Committee. The first
Offer Period commenced on December 2, 1996 and will end on June 30, 1997. New
Offer Periods will commence on each July 1 and January 1 thereafter until the
Stock Purchase Plan is terminated. At December 31, 1996, there were
approximately 272 employees (including officers and directors) who were eligible
to participate in the Stock Purchase Plan.
CERTAIN TRANSACTIONS
In June 1995, the Company completed a private placement of its Series B
Preferred Stock, of which ING purchased an aggregate of 100,000 shares of 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
piggy-back registration rights with respect to any registration statements
(other than Registration Statements filed on Forms S-4 or S-8) filed by the
Company with the Commission at any time prior to the sixth anniversary of the
Equity Registration Rights Agreement, and certain demand registration rights
following the occurrence of, among other things, a qualifying offering. The
April Offering was a qualifying offering. Huff and certain of its affiliates
purchased an aggregate of 10,000 Units in the Unit Offering, acquiring thereby
10,000 shares of Preferred Stock and 10,000 Warrants. ING Baring (U.S.)
Securities, Inc., which may be deemed an affiliate of ING, purchased 7,500 Units
in the Unit Offering, acquiring thereby 7,500 shares of Preferred Stock and
7,500 Warrants.
The Company 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 April Offering. The
Company has agreed to accelerate the vesting of Mr. Kozak's remaining 83,333
options which had not vested at the time of his termination. Mr. Kozak also
agreed to waive any rights that he may have under the Equity Registration Rights
Agreement with respect to the April Offering and, upon consummation of the April
Offering, he waived all rights under the Equity Registration Rights Agreement.
Mr. Kozak has also agreed to certain non-compete, non-solicitation and
confidentiality provisions expiring on December 31, 1997. Under his employment
agreement, Mr. Kozak had been granted stock options to purchase an aggregate of
1,383,265 shares of the Company's Common Stock at exercise prices ranging from
$0.875 per share to $15.00 per share, of which options to purchase 1,133,265
shares had vested as of his termination. In January 1997, Mr. Kozak exercised
options to purchase 100,000 of these shares.
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<PAGE> 74
PRINCIPAL STOCKHOLDERS
The following table sets forth as of June 30, 1997, certain information
regarding the beneficial ownership of the Company's Common Stock outstanding
(assuming the exercise of options and warrants exercisable on or within 60 days
of such date) by (i) each person who is known to the Company to own 5% or more
of the Common Stock, (ii) each director of the Company, (iii) the Chief
Executive Officer and each of the Named Officers and (iv) all executive officers
and directors of the Company as a group.
Unless otherwise indicated, the named persons exercise sole voting and
investment power over the shares that are shown as beneficially owned by them.
<TABLE>
<CAPTION>
NUMBER PERCENTAGE
NAME OF BENEFICIAL OWNER(1) OF SHARES OF TOTAL(2)
------------------------------------------------------------- ------------ -----------
<S> <C> <C>
Anthony J. Pompliano(3)...................................... 1,662,499 4.4%
Jack E. Reich................................................ -- --
George M. Tronsrue, III(4)................................... 300,000 *
Riley M. Murphy(5)........................................... 193,752 *
George M. Middlemas(6)....................................... 1,748,147 4.9
Christopher L. Rafferty(7)................................... 8,000 *
Edwin M. Banks(7)............................................ -- --
Peter C. Bentz(7)............................................ -- --
Olivier L. Trouveroy(8)...................................... -- --
Benjamin P. Giess(8)......................................... -- --
Richard A. Kozak(9).......................................... 1,041,598 2.8
Robert H. Ottman(10)......................................... 175,000 *
The Huff Alternative Income Fund, L.P.(11)................... 14,286,960 39.6
ING Equity Partners, L.P. I(12).............................. 7,946,828 22.1
First Analysis Corporation(13).)............................. 3,156,420 8.8
All executive officers and directors as a group (10
persons)................................................... 2,520,800 6.6
</TABLE>
- ---------------
* Less than one percent.
(1) The addresses of all officers and directors listed above are in the care of
the Company.
(2) The percentage of total outstanding for each stockholder is calculated by
dividing (i) the number of shares of Common Stock deemed to be beneficially
owned by such stockholder as of June 30, 1997 by (ii) the sum of (A) the
number of shares of Common Stock outstanding as of June 30, 1997 plus (B)
the number of shares of Common Stock issuable upon the exercise of options
or warrants held by such stockholder which were exercisable as of June 30,
1997 or will become exercisable within 60 days after June 30, 1997
("currently exercisable").
(3) Includes currently exercisable options to purchase 1,662,399 shares.
(4) Includes currently exercisable options to purchase 300,000 shares.
(5) Includes currently exercisable options to purchase 193,752 shares.
(6) 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.
(7) Messrs. Banks and Bentz are employees of W.R. Huff Asset Management Co.,
L.L.C., an affiliate of Huff. Mr. Rafferty is an employee of WRH Partners,
L.L.C., the general partner of Huff. Messrs. Rafferty, Bentz and Banks
disclaim beneficial ownership of all shares held by Huff.
(8) 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.
(9) Includes currently exercisable options to purchase 1,041,598 shares. Mr.
Kozak's employment was terminated effective February 2, 1997. See "Certain
Transactions."
(10) Includes currently exercisable options to purchase 175,000 shares. Mr.
Ottman's employment with the Company was terminated in February 1997.
(11) Includes currently exercisable warrants to purchase 200,000 shares. The
address for Huff is 1776 On the Green, 67 Park Place, Morristown, NJ 07960.
(12) Includes currently exercisable warrants to purchase 100,000 shares. The
address for ING is 135 East 57th Street, 16th Floor, New York, NY 10022.
(13) Includes 1,034,465 shares of Common Stock currently owned by Apex II.
Includes 103,800 and 175,173 shares of Common Stock owned by Apex I.
Includes 359,214 and 732,213 shares of Common Stock owned by The
Productivity Fund II, L.P. ("Productivity"). Includes 714,293 shares of
Common Stock owned by Environmental Private Equity Fund II, L.P. ("EPEF").
FAC is an ultimate general partner of Apex I, Apex II, Productivity and
EPEF and may be deemed to be the beneficial owner of the shares owned by
them. FAC disclaims beneficial ownership of these shares. The address for
First Analysis Corporation is 233 South Wacker Drive, Suite 9600, Chicago,
IL 60093.
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<PAGE> 75
DESCRIPTION OF CERTAIN INDEBTEDNESS
AT&T CREDIT FACILITY
In October 1994, the Company entered into the AT&T Credit Facility pursuant
to which AT&T Credit Corporation has agreed to provide up to $31.2 million in
financing for the development and construction of fiber optic networks by the
Company's subsidiaries. Pursuant to the AT&T Credit Facility, during fiscal 1995
the Company's subsidiaries in Louisville, Fort Worth, Greenville and Columbia
entered into loan agreements with AT&T Credit Corporation providing for up to
$19.8 million in loans secured by the assets of such subsidiaries, and in
September 1995, the Company's subsidiary in El Paso entered into a separate loan
agreement with AT&T Credit Corporation pursuant to the AT&T Credit Facility
providing for up to an aggregate of approximately $5.5 million in loans secured
by its assets. During 1996, the existing loan agreements were amended to
increase the aggregate credit available under such agreements to the $31.2
million credit availability under the AT&T Credit Facility. As of June 30, 1997,
outstanding borrowings under the AT&T Credit Facility totaled approximately
$31.2 million, including accrued interest of approximately $3.9 million.
Interest rates applicable to the loans ranged from 11.93% to 14.47% as of
February 28, 1997.
The loans under the AT&T Credit Facility are secured by all of the assets
of the respective borrowing subsidiary, including its installed fiber optic
system and other equipment. The principal of borrowed amounts is payable in 28
consecutive quarterly installments, beginning with the ninth quarter after the
date of the loan. The principal of borrowed amounts may be prepaid in certain
circumstances, and must be prepaid along with a premium in other circumstances.
Interest is due quarterly. At the borrowing subsidiary's option, the interest
rate may be fixed or variable. The borrowing subsidiary has a one-time option to
convert all variable rate loans to fixed rate loans. Upon certain events of
default, additional interest ranging from 2% to 4% will become payable. Interest
may generally be deferred so long as it would not cause the outstanding
principal balance to exceed the commitment amounts for Capital Loans and for
Equipment Loans (as defined in the loan documents). To date, the Company has
elected to defer all interest due under the loans. In addition, the AT&T Credit
Facility includes covenants, some of which impose certain restrictions on the
Company and its subsidiaries including restrictions on the declaration or
payment of dividends, the conduct of certain activities, certain capital
expenditures, the creation of additional liens or indebtedness, the disposition
of assets, transactions with affiliates, and extraordinary corporate
transactions. The AT&T Credit Facility imposes restrictions on the ability of
those subsidiaries of ACSI that incur indebtedness thereunder to transfer funds
to ACSI in the form of dividends or other distributions. The AT&T Credit
Facility also imposes restrictions on the ability of such subsidiaries to raise
capital by incurring additional indebtedness. These factors could limit ACSI's
ability to meet its obligations with respect to the Notes.
Pursuant to the AT&T Credit Facility, the Company had contributed
approximately $27.8 million in capital to its subsidiaries through June 30,
1997, and AT&T Credit Corporation received 7.25% of the outstanding capital
stock of each of the Company's operating subsidiaries for which it provided
financing. The Company was required to pledge its interest in the respective
subsidiaries to AT&T Credit Corporation as a condition to each loan. Under
certain circumstances, this pledge agreement also restricts the Company's
ability to pay dividends on its capital stock.
The Company has entered into negotiations with AT&T Credit Corporation to
roll-up the five existing loan agreements comprising the AT&T Credit Facility
into the New AT&T Credit Facility (to be secured by the existing assets of the
Company including the stock, but not the assets, of certain of the Company's
subsidiaries), which the Company expects will otherwise be on terms
substantially similar to those of the existing AT&T Credit Facility. The maximum
aggregate amount of credit available under the proposed New AT&T Facility will
not exceed $35 million, which is the maximum amount of credit the Company is
allowed to borrow in its Secured Credit Facility (as defined in the Existing
Indentures and in the Indenture (as defined herein) with respect to the Notes).
On June 26, 1997, each of the Company's Subsidiaries that are parties to the
AT&T Credit Facility entered into an agreement with AT&T Credit Corporation to
waive, for a period of 90 business days commencing on the date thereof,
compliance by such subsidiaries with a certain covenants contained therein. Such
covenants are not expected to be included in the New AT&T Facility.
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<PAGE> 76
2005 NOTES AND 2006 NOTES
The terms of the 2005 Notes and the 2006 Notes include those stated in the
applicable Existing Indenture and those made a part of the applicable Existing
Indenture by reference to the Trust Indenture Act of 1939, as in effect on the
date of that Existing Indenture. The terms of the Existing Indentures are
substantially similar. The following summaries of certain provisions of the
Existing Indentures do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all of the provisions of the
applicable Existing Indenture.
The Existing Notes are general unsubordinated and unsecured senior
obligations of ACSI and rank pari passu with all other unsubordinated and
unsecured indebtedness of ACSI. As a holding company that conducts virtually all
of its business through subsidiaries, ACSI currently has no source of operating
cash flow other than from dividends and distributions from its subsidiaries.
ACSI's subsidiaries have no obligation to pay amounts due on the Notes and do
not guarantee the Notes. Therefore, the Existing Notes will be effectively
subordinated to all liabilities of ACSI's subsidiaries, including trade
payables. Any rights of ACSI and its creditors, including the holders of the
Existing Notes, to participate in the assets of any of ACSI's subsidiaries upon
any liquidation or reorganization of any such subsidiary are subject to the
prior claims of that subsidiary's creditors (including trade creditors).
Upon a Change of Control (as defined in the Existing Indentures), each
holder of the Existing Notes will have the right to require ACSI to repurchase
all or any part of such holder's Existing Notes at 101% of the respective
Accreted Value (as defined in the Existing Indentures) thereof, or, in the case
of any such repurchase on or after November 1, 2000 in the case of the 2005
Notes and on or after April 1, 2001 in the case of the 2006 Notes, 101% of the
respective principal amount thereof, plus accrued and unpaid interest, if any,
thereon, to the date of repurchase. A Change of Control would occur if, among
other things, any person or group, other than Mr. Pompliano, Mr. Kozak, certain
affiliates of First Analysis Corporation, ING or Huff, acquires more than 35% of
the total voting power of the Company.
Each of the Existing Indentures contains certain covenants which, among
other things, restrict the ability of ACSI and certain of its subsidiaries to
incur additional indebtedness, pay dividends or make distributions in respect of
ACSI's capital stock or make certain other restricted payments, create
restrictions on the ability of certain subsidiaries to make distributions on
their capital stock, create liens, enter into transactions with affiliates or
related persons, sell assets, or consolidate, merge or sell all or substantially
all of their assets.
On June 11, 1997, the Company notified the trustee under each of the
Existing Indentures that, as of June 10, 1997, it had approximately $13.0
million in the aggregate of ordinary course trade accounts payable that were
more than 60 days overdue. As of June 30, 1997, the Company had approximately
$17.4 million in the aggregate of ordinary course trade accounts payable that
were more than 60 days overdue. These overdue amounts constituted Indebtedness
of the Company, as that term is defined in each of the Existing Indentures. The
incurrence by the Company of such Indebtedness is not currently permitted under
Section 4.09 of each of the Existing Indentures and, therefore, constituted an
Event of Default (as defined in the Existing Indentures) under each Existing
Indenture. The Company used a portion of the proceeds of the Unit Offering to
pay in full all ordinary course trade accounts payable that were more than 60
days overdue to cure such Event of Default.
The 2005 Notes
The 2005 Notes mature on November 1, 2005. The yield on the 2005 Notes
equals 13% per annum, computed on a semi-annual bond equivalent basis and
calculated from November 9, 1995. The 2005 Notes will accrete at a rate of 13%,
compounded semi-annually, to an aggregate principal amount of $190,000,000 by
November 1, 2000. Cash interest will not accrue on the 2005 Notes prior to
November 1, 2000. Thereafter, interest on the 2005 Notes will accrue at the rate
of 13% per annum and will be payable in cash semi-annually 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.
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<PAGE> 77
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.
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<PAGE> 78
DESCRIPTION OF THE NOTES
GENERAL
The Old Notes were and the New Notes will be issued under an indenture,
dated as of July 23, 1997 (the "Indenture"), between the Company and The Chase
Manhattan Bank, as trustee under the Indenture (the "Trustee"). For purposes of
this Description of the New Notes, the term "Company" refers to American
Communications Services, Inc. and does not include its subsidiaries except for
purposes of financial data determined on a consolidated basis.
The terms of the New Notes include those stated in the Indenture and those
made a part of the Indenture by reference to the Trust Indenture Act of 1939 as
in effect on the date of the Indenture (the "Trust Indenture Act"). The
following summaries of certain provisions of the Indenture do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all of the provisions of the Indenture. A copy of the Indenture is available
from the Company upon request. Whenever particular defined terms of the
Indenture not otherwise defined herein are referred to, such defined terms are
incorporated herein by reference. The New Notes are subject to all such terms,
and holders of the New Notes are referred to the Indenture and the Trust
Indenture Act for a complete statement of such terms. Certain terms used herein
are defined below under " -- Certain Definitions."
The New Notes will rank pari passu in right of payment with all existing
and future senior unsecured indebtedness of the Company, including the 2005
Notes and the 2006 Notes, and will be senior in right of payment to all existing
and future subordinated indebtedness of the Company. As of March 31, 1997, the
total outstanding indebtedness of the Company that would rank pari passu with
the New Notes was approximately $186.3 million. The New Notes will not be
secured by any assets and will be effectively subordinated to any secured
indebtedness of the Company to the extent of the value of the assets securing
such indebtedness. As of March 31, 1997, the Company, on a consolidated basis,
had approximately $30.8 million outstanding of secured indebtedness.
The operations of the Company are conducted through its subsidiaries and,
therefore, the Company is dependent upon cash flow from those entities to meet
its obligations. The Company's subsidiaries will have no direct obligation to
pay amounts due on the Notes and will not guarantee the Notes. As a result, the
Notes effectively will be subordinated to all existing and future third-party
indebtedness and other liabilities of the Company's subsidiaries (including
trade payables). As of March 31, 1997, the total liabilities of the Company's
subsidiaries (after the elimination of loans and advances by the Company to its
subsidiaries) were approximately $52.3 million. Of that amount, approximately
$30.8 million in indebtedness was secured by first priority liens on all the
assets of the borrowing subsidiaries. See "Description of Certain Indebtedness."
Any rights of the Company and its creditors, including the holders of Notes, to
participate in the assets of any of the Company's subsidiaries upon any
liquidation or reorganization of any such subsidiary will be subject to the
prior claims of that subsidiary's creditors (including trade creditors).
PRINCIPAL, MATURITY AND INTEREST
The New Notes will be limited in aggregate principal amount to $220,000,000
and will mature on July 15, 2007. Interest on the New Notes will accrue at the
rate of 13 3/4% per annum and will be payable semi annually in cash on each
January 15 and July 15, commencing January 15, 1998, to the Persons who are
registered Holders at the close of business on January 1 and July 1,
respectively, immediately preceding the applicable interest payment date.
Interest on the New Notes will accrue from the most recent date to which
interest has been paid on the Old Notes, or, if no interest has been paid, from
July 23, 1997. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
If the Company does not comply with certain deadlines set forth in the
Registration Rights Agreement with respect to the Exchange Offer or the
registration of the New Notes for resale under a shelf registration statement,
holders of the New Notes will be entitled to Additional Interest. See
"-- Exchange Offer; Registration Rights."
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Principal and interest will be payable at the office of the Paying Agent
but, at the option of the Company, interest may be paid by check mailed to the
registered holders at their registered addresses. The New Notes will be issued
without coupons and in fully registered form, in denominations of $1,000 and
integral multiples thereof. Unless otherwise designated by the Company, the
Company's office or agency in New York is the office of the Trustee maintained
for such purpose.
OPTIONAL REDEMPTION
The New Notes will not be redeemable at the option of the Company prior to
July 15, 2002. Thereafter, the New Notes will be subject to redemption at the
option of the Company, in whole or in part, upon not less than 30 nor more than
60 days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below, plus accrued and unpaid interest thereon (if any), if
redeemed during the twelve months beginning July 15 of the years indicated
below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
------------------------------------------------------------------ ----------
<S> <C>
2002.............................................................. 106.875
2003.............................................................. 105.156
2004.............................................................. 103.438
2005.............................................................. 101.719
2006 and thereafter............................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to July 15, 2000, the
Company may redeem up to 35% of the aggregate principal amount of New Notes with
the net proceeds from one or more Equity Offerings of the Company at a
redemption price equal to 113.750% of the aggregate principal amount thereof on
the date of redemption; provided, however, that, after giving effect to any such
redemption, at least $143 million aggregate principal amount of the New Notes
remain outstanding.
MANDATORY REDEMPTION
Except as set forth under "-- Repurchase at the Option of Holders Upon a
Change of Control" and "-- Asset Sales," the Company is not required to make
mandatory redemption payments or sinking fund payments with respect to the New
Notes.
REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of New Notes shall
have the right to require the Company to repurchase all or any part (equal to
$1,000 principal amount or an integral multiple thereof) of such holder's New
Notes pursuant to the offer described below (the "Change of Control Offer") at a
purchase price (the "Change of Control Purchase Price") equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest, if any, to
any Change of Control Payment Date (as defined below).
Within 30 days following any Change of Control, the Company or the Trustee
(at the expense of the Company) shall mail a notice to each holder stating: (1)
that a Change of Control Offer is being made pursuant to the covenant in the
Indenture entitled "Repurchase at the Option of Holders upon a Change of
Control" and that all New Notes timely tendered will be accepted for payment;
(2) the Change of Control Purchase Price and the purchase date (the "Change of
Control Payment Date"), which shall be no earlier than 30 days nor later than 40
days from the date such notice is mailed; (3) that any New Notes or portions
thereof not tendered or accepted for payment will continue to accrue interest;
(4) that, unless the Company defaults in the payment of the Change of Control
Purchase Price, all New Notes or portions thereof accepted for payment pursuant
to the Change of Control Offer shall cease to accrue interest, from and after
the Change of Control Payment Date; (5) that holders electing to have any New
Notes or portions thereof purchased pursuant to a Change of Control Offer will
be required to surrender the New Notes, with the form entitled "Option of Holder
to Elect Purchase" on the reverse of the New Notes completed, to the Paying
Agent at the address specified in the notice prior to the close of business on
the third Business Day preceding the Change of Control Payment Date; (6) that
holders will be entitled to withdraw their election if the Paying Agent
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receives, not later than the close of business on the second Business Day
preceding the Change of Control Payment Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the holder, the principal
amount of Notes delivered for purchase, and a statement that such holder is
withdrawing his election to have such New Notes or portions thereof purchased;
and (7) that holders whose New Notes are being purchased only in part will be
issued New Notes equal in principal amount to the unpurchased portion of the New
Note or New Notes surrendered, which unpurchased portion must be equal to $1,000
in principal amount or an integral multiple thereof.
The Company will comply with the requirements of Section 14(e) under the
Exchange Act and any other securities laws and regulations, to the extent such
laws and regulations are applicable, in connection with the repurchase of New
Notes pursuant to a Change of Control Offer.
On the Change of Control Payment Date, the Company will (1) accept for
payment New Notes or portions thereof properly tendered pursuant to the Change
of Control Offer; (2) irrevocably deposit with the Paying Agent in immediately
available funds an amount equal to the Change of Control Purchase Price in
respect of all New Notes or portions thereof so tendered; and (3) deliver, or
cause to be delivered, to the Trustee the New Notes so accepted together with an
Officers' Certificate listing the New Notes or portions thereof tendered to the
Company and accepted for payment. The Paying Agent shall promptly mail to each
holder of New Notes so accepted payment in an amount equal to the Change of
Control Purchase Price for such New Notes, and the Trustee shall promptly
authenticate and mail to each holder a New Note equal in principal amount to any
unpurchased portion of the New Notes surrendered, if any; provided that each
such New Note shall be in a principal amount of $1,000 or any integral multiple
thereof.
The existence of the holders' right to require, subject to certain
conditions, the Company to repurchase New Notes upon a Change of Control may
deter a third party from acquiring the Company in a transaction that constitutes
a Change of Control. If a Change of Control Offer is made, there can be no
assurance that the Company will have sufficient funds to pay the Change of
Control Purchase Price for all New Notes tendered by holders seeking to accept
the Change of Control Offer. In addition, instruments governing other
indebtedness of the Company may prohibit the Company from purchasing any New
Notes prior to their stated maturity, including pursuant to a Change of Control
Offer. See "Description of Certain Indebtedness." In the event that a Change of
Control Offer occurs at a time when the Company does not have sufficient
available funds to pay the Change of Control Purchase Price for all New Notes
tendered pursuant to such offer or a time when the Company is prohibited from
purchasing the New Notes (and the Company is unable either to obtain the consent
of the holders of the relevant indebtedness or to repay such indebtedness), an
Event of Default would occur under the Indenture. In addition, one of the events
that constitutes a Change of Control under the Indenture is a sale, conveyance,
transfer or lease of all or substantially all of the property of the Company.
The Indenture is governed by New York law, and there is no established
definition under New York law of "substantially all" of the assets of a
corporation. Accordingly, if the Company were to engage in a transaction in
which it disposed of less than all of its assets, a question of interpretation
could arise as to whether such disposition was of "substantially all" of its
assets and whether the Company was required to make a Change of Control Offer.
Except as described herein with respect to a Change of Control, the
Indenture does not contain any other provisions that permit holders of New Notes
to require that the Company repurchase or redeem New Notes in the event of a
takeover, recapitalization or similar restructuring.
DISBURSEMENT OF FUNDS -- ESCROW ACCOUNT
Pursuant to the Indenture, the Company placed approximately $70 million of
the net proceeds realized from the sale of the Old Notes, representing funds
sufficient to pay the first five interest payments on the Old Notes or the New
Notes, as the case may be, in an escrow account (the "Escrow Account") held by
the Escrow Agent for the benefit of the Trustee under the Indenture in
accordance with the Escrow and Disbursement Agreement. The Company entered into
the Escrow and Disbursement Agreement, which provides, among other things, that
funds may be disbursed from the Escrow Account only to pay interest on the Old
Notes or the New Notes, as the case may be, (or, if a portion of the Notes has
been retired by the
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<PAGE> 81
Company, funds representing the interest payment on the retired Notes may be
paid to the Company) and, upon certain repurchases or redemptions thereof, to
pay principal of and premium, if any, thereon. Pending such disbursement, the
Company has caused all funds contained in the Escrow Account to be invested in
Marketable Securities. Interest earned on these Marketable Securities will be
added to the Escrow Account.
ASSET SALES
The Company will not, and will not permit any Restricted Subsidiary to,
consummate an Asset Sale unless (i) no Event of Default shall have occurred and
be continuing or shall occur as a consequence thereof; (ii) the Company or such
Restricted Subsidiary, as the case may be, receives net consideration at the
time of such Asset Sale at least equal to the Fair Market Value (as evidenced by
a Board Resolution delivered to the Trustee) of the Property or assets sold or
otherwise disposed of; (iii) at least 75% of the consideration received by the
Company or such Restricted Subsidiary for such Property or assets consists of
Cash Proceeds or Telecommunications Assets; and (iv) the Company or such
Restricted Subsidiary, as the case may be, uses the Net Cash Proceeds from such
Asset Sale in the manner set forth in the next paragraph.
Within 270 days after any Asset Sale, the Company or such Restricted
Subsidiary, as the case may be, may at its option (i) reinvest (or enter a
binding agreement to reinvest, provided that such reinvestment is completed
within 180 days of the date of such agreement) an amount equal to the Net Cash
Proceeds (or any portion thereof) from such Asset Sale in Telecommunications
Assets and/or (ii) apply an amount equal to such Net Cash Proceeds (or remaining
Net Cash Proceeds) to the permanent reduction of Indebtedness of the Company
(other than Indebtedness to a Restricted Subsidiary) that is pari passu with the
New Notes or to the permanent reduction of Indebtedness or preferred stock of
any Restricted Subsidiary (other than Indebtedness to, or preferred stock owned
by, the Company or another Restricted Subsidiary); provided, however, that any
Net Cash Proceeds applied to the reduction of Indebtedness represented by the
2005 Notes and 2006 Notes shall be in accordance with the next paragraph. Any
Net Cash Proceeds from any Asset Sale that are not used to reinvest in
Telecommunications Assets and/or reduce pari passu Indebtedness of the Company
or Indebtedness or preferred stock of its Restricted Subsidiaries shall
constitute Excess Proceeds.
If at any time the aggregate amount of Excess Proceeds (including any Net
Cash Proceeds applied to the permanent reduction of Indebtedness represented by
the 2005 Notes and 2006 Notes) calculated as of such date exceeds $10 million,
the Company shall, within 30 days of the date the amount of Excess Proceeds
exceeds $10 million, use such Excess Proceeds to make an offer to purchase (an
"Asset Sale Offer") on a pro rata basis, from all holders, outstanding New
Notes, Old Notes, 2005 Notes and 2006 Notes in an aggregate principal amount
equal to the maximum principal amount that may be purchased out of Excess
Proceeds, at a purchase price (the "Offer Purchase Price") in cash equal to (a)
with respect to the Existing Notes, 100% of the Accreted Value thereof (as
defined in the relevant indenture) and (b) with respect to the Old Notes and the
New Notes, 100% of the principal amount thereof, plus, in each case, accrued and
unpaid interest, if any, to the purchase date, in accordance with the procedures
set forth in the relevant indenture. Upon completion of an Asset Sale Offer
(including payment of the Offer Purchase Price), any surplus Excess Proceeds
that were the subject of such offer shall cease to be Excess Proceeds, and the
Company may then use such amounts for general corporate purposes.
The Company will comply with the requirements of Section 14(e) under the
Exchange Act and any other securities laws and regulations, to the extend such
laws and regulations are applicable, in connection with the repurchase of New
Notes pursuant to an Asset Sale Offer.
CERTAIN COVENANTS
Set forth below are certain covenants contained in the Indenture:
Limitation on Indebtedness
The Company will not, and will not permit its Restricted Subsidiaries to,
directly or indirectly, incur any Indebtedness (including Acquired Indebtedness)
and the Company will not issue any Disqualified Stock or permit any of its
Restricted Subsidiaries to issue any Disqualified Stock or preferred stock;
provided that the
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<PAGE> 82
Company may incur Indebtedness or issue Disqualified Stock if, after giving
effect to such issuance or incurrence on a pro forma basis, the Debt to EBITDA
Ratio of the Company does not exceed 5.5x in the case of any issuance or
incurrence on or before November 1, 1998, or 5.0x in the case of any issuance or
incurrence thereafter.
The foregoing limitation will not apply to: (a) the incurrence by the
Company or any of its Restricted Subsidiaries of Indebtedness under the Secured
Credit Facility; provided that the aggregate principal amount of Indebtedness
under such facility does not exceed $35 million at any one time outstanding; (b)
the Existing Indebtedness; (c) the incurrence by the Company or any of its
Restricted Subsidiaries of intercompany Indebtedness between or among the
Company and any of its Restricted Subsidiaries; (d) the incurrence by the
Company or any of its Restricted Subsidiaries of Interest Hedging Obligations
with respect to any floating rate Indebtedness that is permitted by the covenant
described in this paragraph; (e) the incurrence by the Company of any Exchange
Rate Obligations, provided that such Exchange Rate Obligations were entered into
in connection with transactions in the ordinary course of business or the
incurrence of Indebtedness that is permitted by the covenant described in this
paragraph; (f) the incurrence by the Company of Indebtedness represented by the
Existing Notes; (g) Indebtedness of the Company in connection with one or more
standby letters of credit issued in the ordinary course of business; (h)
Indebtedness in respect of performance, surety or appeal bonds provided by the
Company in the ordinary course of business; (i) Indebtedness of the Company not
to exceed, at any one time outstanding, one and a half times the amount of the
Net Cash Proceeds received by the Company from the issuance and sale of its
Qualified Stock (other than preferred stock) subsequent to the Issue Date;
provided such Indebtedness shall have a stated maturity no earlier than that of
the New Notes and is subordinated in right of payment to the New Notes; (j) the
incurrence by the Company or any of its Restricted Subsidiaries of Refinancing
Indebtedness issued in exchange for, or the proceeds of which are used to
refinance, repurchase, replace, refund or defease ("Refinance" and,
correlatively, "Refinanced" and "Refinancing") Indebtedness permitted pursuant
to clause (b) or (f) of this paragraph; provided that (i) the amount of such
Refinancing Indebtedness shall not exceed the principal amount of, premium, if
any, and accrued interest on the Indebtedness so Refinanced (or if such
Indebtedness was issued with original issue discount, the original issue price
plus amortization of the original issue discount at the time of the repayment of
such Indebtedness) plus the fees, expenses and costs of such Refinancing and
reasonable prepayment premiums, if any, in connection therewith; (ii) such
Refinancing Indebtedness shall have a stated maturity no earlier than the
Indebtedness being Refinanced; (iii) such Refinancing Indebtedness shall have an
Average Life equal to or greater than the Average Life of the Indebtedness being
Refinanced; (iv) if the Indebtedness being Refinanced is subordinated in right
of payment to the New Notes, such Refinancing Indebtedness shall be subordinated
in right of payment to the New Notes on terms at least as favorable to the
holders of New Notes as those contained in the documentation governing the
Indebtedness being so Refinanced; and (v) no Restricted Subsidiary shall incur
Refinancing Indebtedness to Refinance Indebtedness of the Company or another
Subsidiary; (k) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness of any Person which incurrence resulted directly
from an Investment described in clause (ix) of the definition of "Permitted
Investments" herein; provided that, (i) immediately after giving effect to such
Investment on a pro forma basis (and treating any Indebtedness which becomes, or
is anticipated to become, an obligation of the Company or any Restricted
Subsidiary as a result of such Investment as having been incurred by the Company
or such Restricted Subsidiary at the time of such Investment), the Company would
(A) be permitted to incur $1.00 of additional Indebtedness under the immediately
preceding paragraph or (B) have a Debt to EBITDA Ratio which is equal to or not
worse than the Debt to EBITDA Ratio of the Company immediately prior to such
Investment or (ii) such incurrence is otherwise permitted; provided further that
Indebtedness incurred by the Company and its Restricted Subsidiaries under this
clause (k) as a result of any such Investment does not exceed 50 percent of the
Fair Market Value of the Qualified Stock used as consideration in such
Investment; provided further that the aggregate principal amount of Indebtedness
incurred under this clause (k) does not exceed $50,000,000; (l) the incurrence
by the Company of Permitted Subordinated Financing; and (m) Indebtedness not
otherwise permitted to be incurred pursuant to the covenant described in this
paragraph in an aggregate amount not to exceed $428,634.
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Limitation on Issuances of Guarantees by Restricted Subsidiaries
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to the Indenture providing for a Guarantee
(a "Subsidiary Guarantee") of payment of the Notes by such Restricted Subsidiary
and (ii) such Restricted Subsidiary waives, and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the Company
or any other Restricted Subsidiary as a result of any payment by such Restricted
Subsidiary under its Subsidiary Guarantee. If the Guaranteed Indebtedness is (i)
pari passu with the Notes then the Guarantee of such Guaranteed Indebtedness
shall be pari passu with, or subordinated to, the Subsidiary Guarantee or (ii)
subordinated to the Notes, then the Guarantee of such Guaranteed Indebtedness
shall be subordinated to the Subsidiary Guarantee at least to the extent that
the Guaranteed Indebtedness is subordinated to the Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary shall provide by its terms that it shall be automatically and
unconditionally released and discharged upon the release or discharge of the
Guarantee which resulted in the creation of such Subsidiary Guarantee, except a
discharge or release by, or as a result of, payment under such Guarantee.
Limitation on Liens
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into, create, incur, assume or
suffer to exist any Liens of any kind, other than Permitted Liens, on or with
respect to any of its Property or assets now owned or hereafter acquired, or any
interest therein or any income or profits therefrom, without effectively
providing that the Notes shall be secured equally and ratably with (and provided
the Notes shall be secured prior to any secured obligation that is subordinated
in right of payment to the Notes) the obligations so secured for so long as such
obligations are so secured.
Limitation on Sale and Leaseback Transactions
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into, assume, Guarantee or
otherwise become liable with respect to any Sale and Leaseback Transaction,
unless (i) the Company or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Sale and Leaseback Transaction at
least equal to the Fair Market Value (as evidenced by a Board Resolution
delivered to the Trustee) of the Property or assets subject to such transaction;
(ii) the Attributable Indebtedness of the Company or such Restricted Subsidiary
with respect thereto is included as Indebtedness and would be permitted by the
covenant described under " -- Limitation on Indebtedness"; (iii) the Company or
such Restricted Subsidiary would be permitted to create a Lien on such Property
or assets without securing the Notes by the covenant described under
" -- Limitation on Liens"; and (iv) the Net Cash Proceeds from such transaction
are applied in accordance with the covenant described under " -- Asset Sales."
Restricted Payments
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, make any Restricted Payment unless, at
the time of and after giving effect to such proposed Restricted Payment, (i) no
Default or Event of Default shall have occurred and be continuing or shall occur
as a consequence thereof; (ii) after giving effect, on a pro forma basis, to
such Restricted Payment and the incurrence of any Indebtedness the net proceeds
of which are used to finance such Restricted Payment, the Company could incur at
least $1.00 of additional Indebtedness pursuant to the first paragraph of
"-- Limitation on Indebtedness"; and (iii) after giving effect to such
Restricted Payment on a pro forma basis, the aggregate amount expended or
declared for all Restricted Payments after the Issue Date does not exceed the
sum of (A) 50% of the Consolidated Net Income of the Company (or, if
Consolidated Net Income shall be a deficit, minus 100% of such deficit) for the
period (taken as one accounting period) beginning on the last day of the fiscal
quarter immediately preceding the Issue Date and ending on the last day of the
fiscal quarter
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immediately preceding the date of such Restricted Payment, plus (B) 100% of the
aggregate Net Cash Proceeds received by the Company subsequent to the Issue Date
from the issuance or sale (other than to a Restricted Subsidiary) of shares of
its Qualified Stock, including Qualified Stock issued upon the exercise of
options, warrants or rights to purchase Qualified Stock, plus (C) 100% of the
amount of any Indebtedness of the Company or any of its Restricted Subsidiaries
(as expressed on the face of a balance sheet in accordance with GAAP), or the
carrying value of any Disqualified Stock, which has been converted into,
exchanged for or satisfied by the issuance of shares of Qualified Stock of the
Company subsequent to the Issue Date, less the amount of any cash, or the value
of any other Property distributed by the Company or its Restricted Subsidiaries
upon such conversion, exchange or satisfaction, plus (D) 100% of the net
reduction in Investments, subsequent to the Issue Date, in any Person, resulting
from payments of interest on Indebtedness, dividends, repayments of loans or
advances, or other transfers of Property (but only to the extent such interest,
dividends, repayments or other transfers of Property are not included in the
calculation of Consolidated Net Income), in each case to the Company or any
Restricted Subsidiary from any Person (including, without limitation, from
Unrestricted Subsidiaries) or from redesignations of Unrestricted Subsidiaries
as Restricted Subsidiaries (valued in each case as provided in the definition of
"Investments"), not to exceed in the case of any Person the amount of
Investments previously made by the Company or any Restricted Subsidiary in such
Person and which was treated as a Restricted Payment, minus (E) 100% of the
amount of Investments made pursuant to clause (vii) of the following paragraph
subsequent to the Issue Date.
The foregoing limitations shall not prevent the Company from (i) paying a
dividend on its Capital Stock at any time within 60 days after the declaration
thereof if, on the declaration date, the Company could have paid such dividend
in compliance with the Indenture; (ii) retiring (A) any Capital Stock of the
Company or any Restricted Subsidiary of the Company or (B) Indebtedness of the
Company that is subordinate to the Notes or (C) Indebtedness of a Restricted
Subsidiary of the Company, in exchange for, or out of the proceeds of, the
substantially concurrent sale of Qualified Stock of the Company; (iii) retiring
any Indebtedness of the Company subordinated in right of payment to the Notes in
exchange for, or out of the proceeds of, the substantially concurrent incurrence
of Indebtedness of the Company (other than Indebtedness to a Subsidiary of the
Company), provided that such new Indebtedness (A) is subordinated in right of
payment to the Notes at least to the same extent as, (B) has an Average Life at
least as long as, and (C) has no scheduled principal payments due in any amount
earlier than, any equivalent amount of principal under the Indebtedness so
retired; (iv) retiring any Indebtedness of a Restricted Subsidiary of the
Company in exchange for, or out of the proceeds of, the substantially concurrent
incurrence of Indebtedness of the Company or any Restricted Subsidiary that is
permitted under the covenant described under " -- Limitation on Indebtedness"
and that (A) is not secured by any assets of the Company or any Restricted
Subsidiary to a greater extent than the retired Indebtedness was so secured, (B)
has an Average Life at least as long as the retired Indebtedness and (C) is
subordinated in right of payment to the Notes at least to the same extent as the
retired Indebtedness; (v) retiring any Capital Stock of the Company or any
Restricted Subsidiary of the Company held by any member of the Company's (or any
of its Subsidiaries') management pursuant to any management equity subscription
agreement or stock option plan in effect on the Issue Date or upon the death or
termination of such member, provided that the aggregate price paid for all such
retired Capital Stock shall not exceed, in the aggregate, the sum of $2.0
million plus the aggregate cash proceeds received by the Company subsequent to
the Issue Date from any reissuance of Capital Stock by the Company to members of
management of the Company and its Subsidiaries; (vi) making loans to members of
management of the Company as required pursuant to employment agreements with
such members, provided that the aggregate amount of all such loans shall not
exceed $2.2 million; (vii) making Investments in an aggregate amount not to
exceed $20,000,000 in joint ventures or other risk sharing arrangements (which
may include partnerships, limited liability companies, corporations or other
arrangements) (each a "Joint Venture Entity") the purpose of which is to engage
in the same or complementary lines of business as the Company or a Restricted
Subsidiary or in businesses consistent with the fundamental nature of the
operating business of the Company or a Restricted Subsidiary; provided the
management and operations of any such Joint Venture Entity are controlled by the
Company pursuant to (a) the charter documents of such Joint Venture Entity, or
(b) an agreement between or among the holders of the Voting Stock of such Joint
Venture Entity, or (c) a management agreement of a minimum duration of three or
more years between the Company and such Joint Venture Entity; (viii) permitting
a Restricted Subsidiary which became a Restricted Subsidiary as a result of
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an Investment by the Company or a Restricted Subsidiary described in clause
(vii) of this paragraph to declare or pay any dividend or distribution on any
Capital Stock of such Subsidiary to all holders of Capital Stock of such
Subsidiary on a pro rata basis; and (ix) permitting a Restricted Subsidiary to
pay a dividend with respect to any shares of Capital Stock of such Subsidiary
held by a lender, which shares of Capital Stock were acquired by such lender in
connection with the Secured Credit Facility.
Not later than the date of making any Restricted Payment (including any
Restricted Payment Permitted to be made pursuant to the previous paragraph), the
Company shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
required calculations were computed, which calculations may be based upon the
Company's latest available financial statements.
Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, cause or suffer to exist or become effective, or enter
into, any encumbrance or restriction (other than pursuant to law or regulation)
on the ability of any Restricted Subsidiary (i) to pay dividends or make any
other distributions in respect of its Capital Stock or pay any Indebtedness or
other obligation owed to the Company or any Restricted Subsidiary of the
Company; (ii) to make loans or advances to the Company or any Restricted
Subsidiary of the Company; or (iii) to transfer any of its Property or assets to
the Company or any other Restricted Subsidiary of the Company, except: (a) any
encumbrance or restriction existing as of the Issue Date pursuant to an
agreement relating to the Secured Credit Facility or the Existing Indebtedness;
(b) any encumbrance or restriction pursuant to an agreement relating to an
acquisition of assets or Property, so long as the encumbrances or restrictions
in any such agreement relate solely to the assets or Property so acquired; (c)
any encumbrance or restriction relating to any Indebtedness of any Restricted
Subsidiary existing on the date on which such Restricted Subsidiary is acquired
by the Company or any Restricted Subsidiary (other than Indebtedness issued by
such Restricted Subsidiary in connection with or in anticipation of its
acquisition), provided that the EBITDA of such Restricted Subsidiary is not
taken into account in determining whether such acquisition is permitted by the
terms of the Indenture; (d) any encumbrance or restriction pursuant to an
agreement effecting a permitted Refinancing of Indebtedness issued pursuant to
an agreement referred to in the foregoing clauses (a) through (c), so long as
the encumbrances and restrictions contained in any such Refinancing agreement
are not materially more restrictive than the encumbrances and restrictions
contained in such agreements; (e) customary provisions restricting subletting or
assignment of any lease of the Company or any Restricted Subsidiary or customary
provisions in certain agreements that restrict the assignment of such agreement
or any rights thereunder; (f) any temporary encumbrance or restriction with
respect to a Restricted Subsidiary pursuant to an agreement that has been
entered into for the sale or disposition of all or substantially all of the
Capital Stock of, or Property and assets of, such Restricted Subsidiary; and (g)
any restriction on the sale or other disposition of assets or Property securing
Indebtedness as a result of a Permitted Lien on such assets or Property
permitted by the covenant described under "-- Limitation on Liens."
Limitation on Issuance and Sale of Capital Stock of Restricted Subsidiaries
The Company (i) shall not permit any Restricted Subsidiary to issue any
Capital Stock other than to the Company or a Restricted Subsidiary and (ii)
shall not permit any Person other than the Company or a Restricted Subsidiary to
own any Capital Stock of any Restricted Subsidiary (other than directors'
qualifying shares), except for (a) a sale of 100% of the Capital Stock of a
Restricted Subsidiary sold in a transaction not prohibited by the covenant
described under "-- Asset Sales"; (b) Capital Stock of a Restricted Subsidiary
issued and outstanding on the Issue Date and held by Persons other than the
Company or any Restricted Subsidiary; (c) Capital Stock of a Restricted
Subsidiary issued and outstanding prior to the time that such Person becomes a
Restricted Subsidiary so long as such Capital Stock was not issued in
contemplation of such Person's becoming a Restricted Subsidiary or otherwise
being acquired by the Company; (d) any Disqualified Stock permitted to be issued
under "Limitation on Indebtedness"; (e) Capital Stock of a Subsidiary issued to
a lender or lenders under the Secured Credit Facility in an aggregate amount not
to exceed 7.25% of the
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outstanding Capital Stock of such Subsidiary; and (f) Capital Stock of a Person
which became or will become a Restricted Subsidiary as a result of an Investment
by the Company or a Restricted Subsidiary described in clause (vii) of the
second paragraph of the covenant described under "Restricted Payments" herein,
provided that, (A) the Company or such Restricted Subsidiary, as the case may
be, receives net consideration at the time of such issuance at least equal to
the Fair Market Value (as evidenced by a Board Resolution delivered to the
Trustee) of the Capital Stock issued, (B) any consideration received by the
Company or such Restricted Subsidiary in respect of such issuance consist of
Cash Proceeds and/or Telecommunications Assets and (C) the Company or such
Restricted Subsidiary, as the case may be, within 270 days of such issuance,
uses the Net Cash Proceeds from such issuance to (1) reinvest (or enters a
binding agreement to reinvest, provided that such reinvestment is completed
within 180 days of the date of such agreement) an amount equal to the Net Cash
Proceeds (or any portion thereof) from such issuance in Telecommunications
Assets and/or (2) apply an amount equal to such Net Cash Proceeds (or remaining
Net Cash Proceeds) from such issuance to repurchase or redeem Notes or to
permanently reduce Indebtedness of the Company (other than Indebtedness to a
Restricted Subsidiary) that is pari passu with the Notes or to permanently
reduce Indebtedness or preferred stock of any Restricted Subsidiary (other than
Indebtedness to, or preferred stock owned by, the Company or another Restricted
Subsidiary).
Transactions with Affiliates
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, sell, lease, transfer, or otherwise
dispose of any of its Properties or assets to, or purchase any Property or
assets from, or enter into any contract, agreement, understanding, loan, advance
or Guarantee with or for the benefit of, any Affiliate (each of the foregoing,
an "Affiliate Transaction"), unless (a) such Affiliate Transaction is on terms
that are no less favorable to the Company or such Restricted Subsidiary than
those that would have been obtained in a comparable arm's-length transaction by
the Company or such Restricted Subsidiary with a Person that is not an Affiliate
and (b) the Company delivers to the Trustee (i) with respect to any Affiliate
Transaction involving aggregate payments in excess of $1.0 million, a Board
Resolution certifying that such Affiliate Transaction complies with clause (a)
above and that such Affiliate Transaction has been approved by a majority of the
Independent Directors, who have determined that such Affiliate Transaction is in
the best interests of the Company or such Restricted Subsidiary and (ii) with
respect to any Affiliate Transaction (other than Permitted Subordinated
Financing) involving aggregate payments in excess of $5.0 million, an opinion as
to the fairness from a financial point of view to the Company or such Restricted
Subsidiary issued by an investment banking firm of national standing together
with an Officers' Certificate to the effect that such opinion complies with this
clause (ii); provided that the following shall not be deemed Affiliate
Transactions: (i) any employment agreement entered into by the Company or any of
its Restricted Subsidiaries in the ordinary course of business and consistent
with industry practice; (ii) any agreement or arrangement with respect to the
compensation of a director of the Company or any Restricted Subsidiary approved
by the Board of Directors and consistent with industry practice; (iii)
transactions between or among the Company and its Restricted Subsidiaries; (iv)
transactions permitted by the covenant described under "-- Restricted Payments";
(v) transactions pursuant to contracts existing on the Issue Date and listed in
a schedule to the Indenture; and (vi) loans and advances to employees and
officers of the Company or a Restricted Subsidiary in the ordinary course of
business and consistent with the past practice of the Company or such Restricted
Subsidiary, provided that the aggregate principal amount of all such loans and
advances shall not exceed $3.0 million at any one time outstanding, and
provided, further, that in the event the aggregate principal amount of all such
loans or advances exceeds $1.0 million at any one time outstanding, the Company
shall, within 180 days of the date such amount first exceeds $1.0 million,
reduce such amount to an amount less than $1.0 million.
Restricted and Unrestricted Subsidiaries
(a) The Company may designate a Subsidiary (including a newly formed or
newly acquired Subsidiary) of the Company or any of its Restricted Subsidiaries
as an Unrestricted Subsidiary if such Subsidiary does not have any obligations
which, if in Default, would result in a cross default on Indebtedness of the
Company or a Restricted Subsidiary (other than Indebtedness to the Company or a
Restricted Subsidiary), and (i) such
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subsidiary has total assets of $1,000 or less or (ii) such designation is
effective immediately upon such Person becoming a Subsidiary. Unless so
designated as an Unrestricted Subsidiary, any Person that becomes a Subsidiary
of the Company or any of its Restricted Subsidiaries shall be classified as a
Restricted Subsidiary thereof. Except as provided in clause (a)(i), no
Restricted Subsidiary may be redesignated as an Unrestricted Subsidiary.
(b) The Company will not, and will not permit any of its Restricted
Subsidiaries to, take any action or enter into any transaction or series of
transactions that would result in a Person (other than a newly formed Subsidiary
having no outstanding Indebtedness other than Indebtedness to the Company or a
Restricted Subsidiary at the date of determination) becoming a Restricted
Subsidiary (whether through an acquisition, the redesignation of an Unrestricted
Subsidiary or otherwise) unless, after giving effect to such action, transaction
or series of transactions, on a pro forma basis, (i) the Company could incur at
least $1.00 of additional Indebtedness pursuant to the first paragraph of
"-- Limitation on Indebtedness" and (ii) no Default or Event of Default would
occur; provided, however,that the foregoing restriction shall not apply to a
Person which becomes a Restricted Subsidiary as a result of (a) an Investment
described in clause (ix) of the definition of "Permitted Investments" herein or
(b) an Investment described in clause (vii) of the second paragraph of the
covenant described under "Restricted Payments" herein. Subject to this clause
(b), an Unrestricted Subsidiary may be redesignated as a Restricted Subsidiary.
(c) The designation of a Subsidiary as an Unrestricted Subsidiary or the
designation of an Unrestricted Subsidiary as a Restricted Subsidiary in
compliance with clause (b) shall be made by the Board of Directors pursuant to a
Board Resolution delivered to the Trustee and shall be effective as of the date
specified in such Board Resolution, which shall not be prior to the date such
Board Resolution is delivered to the Trustee.
Reports
Whether or not the Company is subject to Section 13(a) or 15(d) of the
Exchange Act, or any successor provision thereto, the Company shall file with
the SEC the annual reports, quarterly reports and other documents which the
Company would have been required to file with the SEC pursuant to such Section
13(a) or 15(d) or any successor provision thereto if the Company were subject
thereto, such documents to be filed with the SEC on or prior to the respective
dates (the "Required Filing Dates") by which the Company would have been
required to file them. The Company shall also (whether or not it is required to
file reports with the SEC), within 30 days of each Required Filing Date, (i)
transmit by mail to all holders of Notes, as their names and addresses appear in
the Security Register and to any Persons that request such reports in writing,
without cost to such holders or Persons, and (ii) file with the Trustee copies
of the annual reports, quarterly reports and other documents (without exhibits)
which the Company has filed or would have filed with the SEC pursuant to Section
13(a) or 15(d) of the Exchange Act, any successor provisions thereto or this
covenant. The Company shall not be required to file any report with the SEC if
the SEC does not permit such filing. In addition to the foregoing, commencing
with the unaudited information for the fiscal quarter ended September 30, 1997,
the Company will file with the SEC and will thereafter transmit by mail to the
Holders and file with the Trustee within the same time periods as set forth in
the second next preceding sentence, unaudited information, on an aggregate Fiber
Network basis (before headquarter allocations) segmented by the calendar year in
which each such Fiber Network became operational, setting forth the investment
in plant, property and equipment to date, revenue, EBITDA, EBIT, access lines,
fiber miles, route miles, buildings connected and voice grade equivalents;
provided, however, that the Company will provide such unaudited information with
respect to (i) all Fiber Networks that were initially operational at any time
prior to December 31, 1995 (all such Fiber Networks shall be deemed to have
become operational in calendar year 1995) and (ii) all Fiber Networks that were
initially operational in each succeeding calendar year (including all or any
portion of the then current year); and provided, further, that the Company need
no longer comply with the information requirements of this sentence after four
consecutive fiscal quarters for which the ratio of EBITDA of the Company to
Consolidated Interest Expense (other than dividends or distributions with
respect to preferred stock or Disqualified Stock of the Company) of the Company
is greater than 1.0 or after the occurrence of a Change of Control.
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Limitation on Construction of Fiber Networks
The Company may construct Fiber Networks in no more than 45 Metropolitan
Areas until the earlier of such time as (i) the ratio of EBITDA of the Company
to Consolidated Interest Expense (other than dividends or distributions with
respect to preferred stock or Disqualified Stock of the Company) of the Company
is greater than 1.0 for four consecutive fiscal quarters and (ii) the occurrence
of a Change of Control.
CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER
The Company will not, in any transaction or series of transactions,
consolidate with, or merge with or into, any other Person (other than a merger
of a Restricted Subsidiary into the Company in which the Company is the
continuing corporation), or sell, convey, assign, transfer, lease or otherwise
dispose of all or substantially all of the Property and assets of the Company
and the Restricted Subsidiaries taken as a whole to any other Person, unless:
(i) either (a) the Company shall be the continuing corporation or (b)
the corporation (if other than the Company) formed by such consolidation or
into which the Company is merged, or the Person which acquires, by sale,
assignment, conveyance, transfer, lease or disposition, all or
substantially all of the Property and assets of the Company and the
Restricted Subsidiaries taken as a whole (such corporation or Person, the
"Surviving Entity"), shall be a corporation organized and validly existing
under the laws of the United States of America, any political subdivision
thereof, any state thereof or the District of Columbia, and shall expressly
assume, by a supplemental indenture, the due and punctual payment of the
principal of (and premium, if any) and interest on all the Notes and the
performance of the Company's covenants and obligations under the Indenture;
(ii) immediately after giving effect to such transaction or series of
related transactions on a pro forma basis (including, without limitation,
any Indebtedness incurred or anticipated to be incurred in connection with
or in respect of such transaction or series of related transactions), no
Event of Default or Default shall have occurred and be continuing or would
result therefrom; and
(iii) immediately after giving effect to such transaction or series of
related transactions on a pro forma basis (including, without limitation,
any Indebtedness incurred or anticipated to be incurred in connection with
or in respect of such transaction or series of related transactions), the
Company (or the Surviving Entity, if the Company is not continuing) would
(A) be permitted to incur $1.00 of additional Indebtedness pursuant to the
first paragraph of "-- Limitation on Indebtedness" or (B) have a Total
Market Capitalization of at least $1.0 billion and total Indebtedness in an
amount less than 40% of its Total Market Capitalization.
SECURITY
The Old Notes are and the New Notes will be secured, pending disbursement
pursuant to the Escrow and Disbursement Agreement, by a pledge of the Escrow
Account, which initially contains approximately $70 million of the net proceeds
from the sale of the Old Notes (the "Collateral"), representing funds sufficient
to pay the first five interest payments on the Old Notes or the New Notes, as
the case may be.
The Company entered into the Escrow and Disbursement Agreement which
provided for the grant by the Company to the Trustee for the benefit of the
Holders of security interests in the Collateral. All such security interests
will secure the payment and performance when due of all of the obligations of
the Company under the Indenture with respect to the Notes and under such Notes,
as provided in the Escrow and Disbursement Agreement. The Liens created by the
Escrow and Disbursement Agreement will be first priority security interests in
the Collateral. The ability of holders to realize upon any such funds or
securities may be subject to certain bankruptcy law limitations in the event of
the bankruptcy of the Company.
Funds will be disbursed from the Escrow Account only to pay interest on the
Old Notes or the New Notes, as the case may be, and, upon certain repurchases or
redemptions of the Old Notes or the New Notes, as the case may be, to pay
principal of and premium, if any, thereon. Pending such disbursements, all funds
contained in the Escrow Account will be invested in Marketable Securities. Upon
the acceleration of the maturity of the Old Notes or the New Notes, as the case
may be, or the failure to pay principal at maturity or
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upon certain redemptions and repurchases of the Old Notes or the New Notes, as
the case may be, the Escrow and Disbursement Agreement provides for the
foreclosure by the Trustee upon the net proceeds of the Escrow Account. Under
the terms of the Indenture, the proceeds of the Escrow Account shall be applied,
first, to amounts owing to the Trustee in respect of fees and expenses of the
Trustee and second, to the obligations under the Notes and the Indenture.
Pursuant to the Escrow and Disbursement Agreement, if the Company makes the
first five interest payments on the Notes in a timely manner, immediately after
the fifth interest payment any remaining Marketable Securities will be released
from the Escrow Account to the Company and thereafter the Notes will be
unsecured.
EVENTS OF DEFAULT
Each of the following is an "Event Of Default" under the Indenture:
(a) default in the payment of interest on any Note when the same
becomes due and payable, and the continuance of such default for a period
of 30 days;
(b) default in the payment of the principal of (or premium, if any,
on) any Note at its maturity, upon optional redemption, required repurchase
(including pursuant to a Change of Control Offer or an Asset Sale Offer) or
otherwise or the failure to make an offer to purchase any Note as required;
(c) the Company fails to comply with any of its covenants or
agreements contained in "-- Limitation on Indebtedness," "-- Limitation on
Sale and Leaseback Transactions" or "-- Restricted Payments," or fails to
perform or comply with the provisions described under "-- Repurchase at the
Option of the Holders Upon a Change of Control," "-- Asset Sales" or
"-- Consolidation, Merger, Conveyance, Lease or Transfer";
(d) default in the performance, or breach, of any covenant or warranty
of the Company in the Indenture (other than a covenant or warranty
addressed in (a), (b) or (c) above) and continuance of such Default or
breach for a period of 30 days after written notice thereof has been given
to the Company by the Trustee or to the Company and the Trustee by holders
of at least 25% of the aggregate principal amount of the outstanding Notes;
(e) Indebtedness of the Company or any Restricted Subsidiary is not
paid when due within the applicable grace period, if any, or is accelerated
by the holders thereof and, in either case, the principal amount of such
unpaid or accelerated Indebtedness exceeds $10 million;
(f) the entry by a court of competent jurisdiction of one or more
final judgments against the Company or any Restricted Subsidiary in an
uninsured or unindemnified aggregate amount in excess of $10 million which
is not discharged, waived, appealed, stayed, bonded or satisfied for a
period of 60 consecutive days;
(g) the entry by a court having jurisdiction in the premises of (i) a
decree or order for relief in respect of the Company or any Significant
Restricted Subsidiary in an involuntary case or proceeding under U.S.
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal, state or foreign bankruptcy, insolvency or other similar law or
(ii) a decree or order adjudging the Company or any Significant Restricted
Subsidiary a bankrupt or insolvent, or approving as properly filed a
petition seeking reorganization, arrangement, adjustment or composition of
or in respect of the Company or any Significant Restricted Subsidiary under
U.S. bankruptcy laws, as now or hereafter constituted, or any other
applicable Federal, state or foreign bankruptcy, insolvency or similar law,
or appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or any Significant
Restricted Subsidiary or of any substantial part of the Property or assets
of the Company or any Significant Restricted Subsidiary, or ordering the
winding up or liquidation of the affairs of the Company or any Significant
Restricted Subsidiary, and the continuance of any such decree or order for
relief or any such other decree or order unstayed and in effect for a
period of 60 consecutive days; or
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(h) (i) the commencement by the Company or any Significant Restricted
Subsidiary of a voluntary case or proceeding under U.S. bankruptcy laws, as
now or hereafter constituted, or any other applicable Federal, state or
foreign bankruptcy, insolvency or other similar law or of any other case or
proceeding to be adjudicated a bankrupt or insolvent; or (ii) the consent
by the Company or any Significant Restricted Subsidiary to the entry of a
decree or order for relief in respect of the Company or any Significant
Restricted Subsidiary in an involuntary case or proceeding under U.S.
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal, state or foreign bankruptcy, insolvency or other similar law or to
the commencement of any bankruptcy or insolvency case or proceeding against
the Company or any Significant Restricted Subsidiary; or (iii) the filing
by the Company or any Significant Restricted Subsidiary of a petition or
answer or consent seeking reorganization or relief under U.S. bankruptcy
laws, as now or hereafter constituted, or any other applicable Federal,
state or foreign bankruptcy, insolvency or other similar law; or (iv) the
consent by the Company or any Significant Restricted Subsidiary to the
filing of such petition or to the appointment of or taking possession by a
custodian, receiver, liquidator, assignee, trustee, sequestrator or similar
official of the Company or any Significant Restricted Subsidiary or of any
substantial part of the Property or assets of the Company or any
Significant Restricted Subsidiary, or the making by the Company or any
Significant Restricted Subsidiary of an assignment for the benefit of
creditors; or (v) the admission by the Company or any Significant
Restricted Subsidiary in writing of its inability to pay its debts
generally as they become due; or (vi) the taking of corporate action by the
Company or any Significant Restricted Subsidiary in furtherance of any such
action.
If any Event of Default (other than an Event of Default specified in clause
(g) or (h) above) occurs and is continuing, then and in every such case the
Trustee or the holders of not less than 25% of the outstanding aggregate
principal amount of Notes may declare all unpaid principal of, and any accrued
and unpaid interest on, all Notes then outstanding to be immediately due and
payable by a notice in writing to the Company (and to the Trustee if given by
holders of the Notes), and upon any such declaration, such amount will become
and be immediately due and payable. If any Event of Default specified in clause
(g) or (h) above occurs, all unpaid principal of, and any accrued and unpaid
interest on, the Notes then outstanding shall become immediately due and payable
without any declaration or other act on the part of the Trustee or any holder of
Notes. In the event of a declaration of acceleration because an Event of Default
set forth in clause (e) above has occurred and is continuing, such declaration
of acceleration shall be automatically rescinded and annulled if the event of
default triggering such Event of Default pursuant to clause (e) shall be
remedied, or cured or waived by the holders of the relevant Indebtedness, within
60 days after such event of default. Under certain circumstances, the holders of
a majority in principal amount of the outstanding Notes by notice to the Company
and the Trustee may rescind an acceleration and its consequences.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required, within 30
days after becoming aware of any Default or Event of Default, to deliver to the
Trustee a statement describing such Default or Event of Default, its status and
what action the Company is taking or proposes to take with respect thereto.
AMENDMENT, SUPPLEMENT AND WAIVER
The Company and the Trustee may, at any time and from time to time, without
notice to or consent of any holder of Notes, enter into one or more indentures
supplemental to the Indenture (l) to evidence the succession of another Person
to the Company and the assumption by such successor of the covenants of the
Company in the Indenture and the Notes; (2) to add to the covenants of the
Company, for the benefit of the holders, or to surrender any right or power
conferred upon the Company by the Indenture; (3) to add any additional Events of
Default; (4) to provide for uncertificated Notes in addition to or in place of
certificated Notes; (5) to evidence and provide for the acceptance of
appointment under the Indenture of a successor Trustee; (6) to secure the Notes;
(7) to cure any ambiguity in the Indenture, to correct or supplement any
provision in the Indenture which may be inconsistent with any other provision
therein or to add any other provisions with respect to matters or questions
arising under the Indenture; provided such actions shall not adversely affect
the interests of the holders in any material respect; or (8) to comply with the
requirements of
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the Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act.
With the consent of the holders of not less than a majority in principal
amount of the outstanding Notes, the Company and the Trustee may enter into one
or more indentures supplemental to the Indenture for the purpose or adding any
provisions to or changing in any manner or eliminating any of the provisions of
the Indenture or modifying in any manner the rights of the holders; provided
that no such supplemental indenture shall, without the consent of the holders of
not less than 75% in principal amount of the outstanding Notes, modify the
obligations of the Company to make offers to purchase Notes upon a Change of
Control or from the proceeds of Asset Sales; and, provided, further, that no
such supplemental indenture shall, without the consent of the holder of each
outstanding Note: (l) change the stated maturity of the principal of, or any
installment of interest on, any Note, or reduce the principal amount thereof (or
premium, if any), or the interest thereon that would be due and payable upon
maturity thereof, or change the place of payment where, or the coin or currency
in which, any Note or any premium or interest thereon is payable, or impair the
right to institute suit for the enforcement of any such payment on or after the
maturity thereof; (2) reduce the percentage in principal amount of the
outstanding Notes, the consent of whose holders is necessary for any such
supplemental indenture or required for any waiver of compliance with certain
provisions of the Indenture or certain Defaults thereunder; (3) subordinate in
right of payment, or otherwise subordinate, the Notes to any other Indebtedness;
or (4) modify any provision of this paragraph (except to increase any percentage
set forth herein).
The holders of not less than a majority in principal amount of the
outstanding Notes may, on behalf of the holders of all the Notes, waive any past
Default under the Indenture and its consequences, except Default (1) in the
payment of the principal of (or premium, if any) or interest on any Note, or (2)
in respect of a covenant or provision hereof which under the first proviso to
the prior paragraph cannot be modified or amended without the consent of the
holders of not less than 75% in principal amount of the outstanding Notes, or
(3) in respect of a covenant or provision hereof which under the second proviso
to the prior paragraph cannot be modified or amended without the consent of the
holder of each outstanding Note affected; provided with respect to any past
Default referred to in clause (2) of this paragraph, the holders of not less
than 75% in principal amount of the outstanding Notes may waive such Default.
SATISFACTION AND DISCHARGE OF THE INDENTURE, DEFEASANCE
The Company may terminate its obligations under the Indenture when (i)
either (A) all outstanding Notes have been delivered to the Trustee for
cancellation or (B) all such Notes not theretofore delivered to the Trustee for
cancellation have become due and payable, will become due and payable within one
year or are to be called for redemption within one year under irrevocable
arrangements satisfactory to the Trustee for the giving of notice of redemption
by the Trustee in the name and at the expense of the Company, and the Company
has irrevocably deposited or caused to be deposited with the Trustee funds in an
amount sufficient to pay and discharge the entire indebtedness on the Notes, not
theretofore delivered to the Trustee for cancellation, for principal of
(premium, if any, on) and interest to the date of deposit or maturity or date of
redemption; (ii) the Company has paid or caused to be paid all sums payable by
the Company under the Indenture; and (iii) the Company has delivered an
Officers' Certificate and an Opinion of Counsel relating to compliance with the
conditions set forth in the Indenture.
The Company, at its election, shall (a) be deemed to have paid and
discharged its debt on the Notes and the Indenture shall cease to be of further
effect as to all outstanding Notes (except as to (i) rights of registration of
transfer, substitution and exchange of Notes and the Company's right of optional
redemption, (ii) rights of holders to receive payments of principal of, premium,
if any, and interest on the Notes (but not the Change of Control Purchase Price
or the Offer Purchase Price) and any rights of the holders with respect to such
amounts, (iii) the rights, obligations and immunities of the Trustee under the
Indenture and (iv) certain other specified provisions in the Indenture) or (b)
cease to be under any obligation to comply with certain restrictive covenants
including those described under "-- Certain Covenants," after the irrevocable
deposit by the Company with the Trustee, in trust for the benefit of the
holders, at any time prior to the maturity of the Notes, of (A) money in an
amount, (B) U.S. Government Obligations which through the
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payment of interest and principal will provide, not later than one day before
the due date of payment in respect of the Notes, money in an amount, or (C) a
combination thereof, sufficient to pay and discharge the principal of, and
interest on, the Notes then outstanding on the dates on which any such payments
are due in accordance with the terms of the Indenture and of the Notes. Such
defeasance or covenant defeasance shall be deemed to occur only if certain
conditions are satisfied, including, among other things, delivery by the Company
to the Trustee of an opinion of outside counsel acceptable to the Trustee to the
effect that (i) such deposit, defeasance and discharge will not be deemed, or
result in, a taxable event for federal income tax purposes with respect to the
holders; and (ii) the Company's deposit will not result in the trust or the
Trustee being subject to regulation under the Investment Company Act of 1940.
THE TRUSTEE
The Chase Manhattan Bank is the Trustee under the Indenture.
The holders of not less than a majority in principal amount of the
outstanding Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. Except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. The Indenture provides that in case an Event of Default shall
occur (which shall not be cured or waived), the Trustee will be required, in the
exercise of its rights and powers under the Indenture, to use the degree of care
of a prudent person in the conduct of such person's own affairs. Subject to such
provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any of the holders of the
Notes, unless such holders shall have offered to the Trustee indemnity
satisfactory to it against any loss, liability or expense.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes or the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation, solely by reason of such person's or
entity's status as a director, officer, employee, incorporator or stockholder of
the Company. By accepting a Note, each holder waives and releases all such
liability (but only such liability). The waiver and release are part of the
consideration for issuance of the Notes. Nonetheless, such waiver way not be
effective to waive liabilities under the federal securities laws and it has been
the view of the SEC that such a waiver is against public policy.
EXCHANGE OFFER; REGISTRATION RIGHTS
In connection with the Private Placement, the Company and the Initial
Purchasers entered into the Registration Rights Agreement pursuant to which the
Company agreed that it will, at its cost, for the benefit of the Holders of Old
Notes, (i) on or prior to September 21, 1997, file the Exchange Offer
Registration Statement with respect to the Exchange Offer to exchange the Old
Notes for the New Notes, which New Notes will have terms substantially identical
in all material respects to the Old Notes (except that the New Notes will not
contain terms with respect to transfer restrictions) and (ii) use commercially
reasonable efforts to cause the Exchange Offer Registration Statement to be
declared effective under the Securities Act on or prior to November 20, 1997.
Upon the Exchange Offer Registration Statement being declared effective, the
Company will offer the New Notes in exchange for surrender of the Old Notes. The
Company will keep the Exchange Offer open for not less than 20 business days (or
longer if required by applicable law) after the date notice of the Exchange
Offer is mailed to the Holders. For each of the Old Notes surrendered to the
Company pursuant to the Exchange Offer, the Holder who surrendered such Old
Notes will receive a New Note having a principal amount equal to that of the
surrendered Old Notes. Interest on each New Note will accrue (A) from the later
of (i) the last interest payment date on which interest was paid on the New Note
surrendered in exchange therefor, or (ii) if the New Note is surrendered for
exchange on a date in a period which includes the record date for an interest
payment date to occur on or after the date of such exchange and as to which
interest will be paid, the date of such interest payment date or (B) if no
interest has been paid on the Old Notes, from July 23, 1997.
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Under existing interpretations of the SEC contained in several no-action
letters to third parties, the New Notes will be freely transferable by holders
thereof (other than affiliates of the Company) after the Exchange Offer without
further registration under the Securities Act; provided, however, that each
Holder that wishes to exchange its Old Notes for New Notes will be required to
represent (i) that any New Notes to be received by it will be acquired in the
ordinary course of its business, (ii) that at the time of the commencement of
the Exchange Offer it has no arrangement or understanding with any person to
participate in the distribution (within the meaning of Securities Act) of the
New Notes in violation of the Securities Act, (iii) that it is not an
"affiliate" (as defined in Rule 405 promulgated under the Securities Act) of the
Company, (iv) if such Holder is not a broker-dealer, that it is not engaged in,
and does not intend to engage in, the distribution of New Notes and (v) if such
Holder is a broker-dealer (a "Participating Broker-Dealer") that will receive
New Notes for its own account in exchange for Old Notes that were acquired as a
result of market-making or other trading activities, that it will deliver a
prospectus in connection with any resale of such New Notes. The SEC has taken
the position that Participating Broker-Dealers may fulfill their prospectus
delivery requirements with respect to the New Notes (other than a resale of an
unsold allotment from the original sale of the Old Notes) with the prospectus
contained in the Exchange Offer Registration Statement. The Company has agreed
to make available, for a period of 180 days after consummation of the Exchange
Offer, a prospectus meeting the requirements of the Securities Act for use by
Participating Broker-Dealers and other persons, if any, with similar prospectus
delivery requirements for use in connection with any resale of New Notes.
If, (i) because of any change in law or in currently prevailing
interpretations of the staff of the SEC, the Company is not permitted to effect
an Exchange Offer, (ii) the Exchange Offer Registration Statement is not
declared effective within 120 days of the Issue Date, (iii) in certain
circumstances, certain holders of unregistered Notes so request or (iv) in the
case of any Holder that participates in the Exchange Offer, such Holder does not
receive New Notes on the date of the exchange that may be sold without
restriction under state and federal securities laws (other than due solely to
the status of such Holder as an affiliate of the Company within the meaning of
the Securities Act), then in each case, the Company will (x) promptly deliver to
the Holders and the Trustee written notice thereof and (y) at its sole expense,
(a) as promptly as practicable (but in no event later than 60 days after the
Issue Date), file a Shelf Registration statement covering resales of the Old
Notes or the New Notes as the case may be, (b) use its commercially reasonable
efforts to cause the Shelf Registration Statement to be declared effective under
the Securities Act and (c) use its commercially reasonable efforts to keep
effective the Shelf Registration Statement until the earlier of three years
after the Issue Date and such time as all of the applicable Notes have been sold
thereunder. The Company will, in the event that a Shelf Registration Statement
is filed, provide to each Holder copies of the prospectus that is a part of the
Shelf Registration Statement, notify each such Holder when the Shelf
Registration Statement for the Notes has become effective and take certain other
actions as are required to permit unrestricted resales of the Notes. A Holder
that sells Notes pursuant to the Shelf Registration Statement will be required
to be named as a selling security holder in the related prospectus and to
deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under Securities Act in connection with such sales and will
be bound by the provisions of the Registration Rights Agreement that are
applicable to such a Holder (including certain indemnification rights and
obligations).
If the Company fails to comply with the above provision or if the Exchange
Offer Registration Statement or the Shelf Registration Statement fails to become
effective, then, as liquidated damages, additional interest (the "Additional
Interest") shall become payable in respect of the Notes as follows:
(i) if (A) neither the Exchange Offer Registration Statement nor the
Shelf Registration Statement is filed with the SEC within 60 days following
the Issue Date or (B) notwithstanding that the Company has consummated or
will consummate an Exchange Offer, the Company is required to file a Shelf
Registration Statement and such Shelf Registration Statement is not filed
on or prior to the date required by the Registration Rights Agreement, then
commencing on the day after either such required filing date, Additional
Interest shall be paid on the principal amount of the Notes at a rate per
annum equal to 0.5% of the principal amount of the Notes; or
(ii) if (A) neither the Exchange Offer Registration Statement nor a
Shelf Registration Statement is declared effective by the SEC within 120
days following the Issue Date or (B) notwithstanding that the
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Company has consummated or will consummate an Exchange Offer, the Company
is required to file a Shelf Registration Statement and such Shelf
Registration Statement is not declared effective by the Commission on or
prior to the 120th day following the Issue Date, then, commencing on the
day after either such required effective date, Additional Interest shall be
paid on the principal amount of the Notes at a rate per annum equal to 0.5%
of the principal amount of the Notes; or
(iii) if applicable, the Shelf Registration Statement has been
declared effective and such Shelf Registration Statement ceases to be
effective at any time prior to the second anniversary of the Issue Date
(other than after such time as all Notes have been disposed of thereunder),
then Additional Interest shall be paid on the principal amount of the Notes
at a rate per annum equal to 0.5% of the principal amount of the Notes
commencing on the day such Shelf Registration Statement ceases to be
effective;
provided, however, that the Additional Interest rate on the Notes may not exceed
in the aggregate 1.5% per annum of the principal amount; provided, further,
however, that (1) upon the filing of the Exchange Offer Registration Statement
or a Shelf Registration Statement (in the case of clause (i) above), (2) upon
the effectiveness of the Exchange Offer Registration Statement or a Shelf
Registration Statement (in the case of clause (ii) above), or (3) upon the
effectiveness of the Shelf Registration Statement which had ceased to remain
effective (in the case of clause (iii) above), Additional Interest on the Notes
as a result of such clause (or the relevant subclause thereof), as the case may
be, shall cease to accrue and the terms of the Notes shall revert to the
original terms set forth on the cover page of this Prospectus.
Any amounts of Additional Interest due pursuant to clause (i), (ii) or
(iii) above will be payable in cash on January 15 and July 15 of each year.
In addition, certain investment management accounts for which W.R. Huff
acts as investment advisor and on behalf of which W.R. Huff purchased Old Notes
in the Private Placement are entitled to demand registration rights with respect
to Notes, if any, held by them after the expiration date of the Shelf
Registration Statement.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by, all the provisions of the Registration Rights Agreement, a copy
of which will be available upon request to the Company.
BOOK-ENTRY; DELIVERY AND FORM
All New Notes will be represented by a single permanent global certificate
in definitive, fully registered form (the "Global Note"). The Global Note will
be deposited on the Issue Date with, or on behalf of, The Depository Trust
Company, New York, New York ("DTC") and registered in the name of a nominee of
DTC.
The Global Note. The Company expects that pursuant to procedures
established by DTC (i) upon the issuance of the Global Note, DTC or its
custodian will credit, on its internal system, the principal amount of New Notes
of the individual beneficial interests represented by such Global Note to the
respective accounts of persons who have accounts with such depositary and (ii)
ownership of beneficial interests in the Global Note will be shown on, and the
transfer of such ownership will be effected only through, records maintained by
DTC or its nominee (with respect to interests of participants) and the records
of participants (with respect to interests of persons other than participants).
Such accounts initially were designated by or on behalf of the Initial
Purchasers and ownership of beneficial interests in the Global Note will be
limited to persons who have accounts with DTC ("participants") or persons who
hold interests through participants.
So long as DTC, or its nominee, is the registered owner or holder of the
Notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the New Notes represented by such Global Note for all
purposes under the Indenture. No beneficial owner of an interest in the Global
Note will be able to transfer that interest except in accordance with DTC's
procedures, in addition to those provided for under the Indenture with respect
to the Notes.
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Payments of the principal of, premium (if any), and interest (including
Additional Interest) on, the Global Note will be made to DTC or its nominee, as
the case may be, as the registered owner thereof. None of the Company, the
Trustee or any Paying Agent will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, interest (including Additional Interest) on the
Global Note, will credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of the Global Note as shown on the records of DTC or its nominee. The Company
also expects that payments by participants to owners of beneficial interests in
the Global Note held through such participants will be governed by standing
instructions and customary practice, as is now the case with securities held for
the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a holder requires physical delivery of a Note in
definitive form (a "Certificated Security") for any reason, including to sell
Notes to persons in states which require physical delivery of the Notes, or to
pledge such securities, such holder must transfer its interest in the Global
Note, in accordance with the normal procedures of DTC and with the procedures
set forth in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange as
described below) only at the direction of one or more participants to whose
account the DTC interests in the Global Note are credited and only in respect of
such portion of the aggregate principal amount of Notes as to which such
participant or participants has or have given such direction. However, if there
is an Event of Default under the Indenture, DTC will exchange the Global Note
for Certificated Securities, which it will distribute to its participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Note and a successor depositary is not
appointed by the Company within 90 days, Certificated Securities will be issued
in exchange for the Global Note.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Notes in accordance with the Indenture.
The Company, the Registrar and the Trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a holder to pay any taxes and fees required by law or
permitted by the Indenture.
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CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any capitalized terms used herein for which no definition
is provided.
"Acquired Indebtedness" means, with respect to any specified Person,
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person,
but excluding Indebtedness which is extinguished, retired or repaid in
connection with such other Person merging with or into or becoming a Subsidiary
of such specified Person.
"Affiliate" means, as to any Person, any other Person which directly or
indirectly controls, or is under common control with, or is controlled by, such
Person; provided that each Unrestricted Subsidiary shall be deemed to be an
Affiliate of the Company and of each other Subsidiary of the Company; provided,
further, neither the Company nor any of its Restricted Subsidiaries shall be
deemed to be Affiliates of each other; and provided, further, any lender under
the Secured Credit Facility and its Affiliates shall not be deemed to be
Affiliates of the Company or any Restricted Subsidiary solely as a result of the
existence of the Secured Credit Facility or their holdings of Capital Stock of
the Company or any Restricted Subsidiary acquired in connection with the Secured
Credit Facility. For purposes of this definition, "control" (including, with
correlative meanings, the terms "controlling," "under common control with" and
"controlled by"), and as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of Voting Stock, by agreement or otherwise; provided that beneficial
ownership of 10% or more of the Voting Stock of a Person shall be deemed to be
control.
"Asset Sale" means, with respect to any Person, any transfer, conveyance,
sale, lease or other disposition (including, without limitation, by way of
consolidation or merger, but excluding by means of any Sale and Leaseback
Transaction or by the granting of a Lien permitted under "-- Limitation on
Liens") by such Person or any of its Restricted Subsidiaries to any Person other
than the Company or a Restricted Subsidiary of the Company, in one transaction,
or a series of related transactions (each hereinafter referred to as a
"Disposition"), of Property or assets of such Person or any of its Restricted
Subsidiaries, the Fair Market Value of which exceeds $2 million, other than (i)
a Disposition of Property in the ordinary course of business consistent with
industry practice, (ii) a Disposition that constitutes a Restricted Payment
permitted under "-- Restricted Payments" and (iii) a Disposition by the Company
in connection with a transaction permitted under "-- Consolidation, Merger,
Conveyance, Lease or Transfer."
"Attributable Indebtedness" means, with respect to any Sale and Leaseback
Transaction of any Person, as at the time of determination, the greater of (i)
the capitalized amount in respect of such transaction that would appear on the
balance sheet of such Person in accordance with GAAP and (ii) the present value
(discounted at a rate consistent with accounting guidelines, as determined in
good faith by such Person) of the payments during the remaining term of the
lease (including any period for which such lease has been extended or may, at
the option of the lessor, be extended) or until the earliest date on which the
lessee may terminate such lease without penalty or upon payment of a penalty (in
which case the rental payments shall include such penalty).
"Average Life" means, as of any date, with respect to any debt security or
Disqualified Stock, the quotient obtained by dividing (i) the sum of the
products of (x) the number of years from such date to the dates of each
scheduled principal payment or redemption payment (including any sinking fund or
mandatory redemption payment requirements) of such debt security or Disqualified
Stock multiplied in each case by (y) the amount of such principal or redemption
payment, by (ii) the sum of all such principal or redemption payments.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board of Directors.
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"Board Resolution" means a duly adopted resolution of the Board of
Directors in full force and effect at the time of determination and certified as
such.
"Capital Lease Obligation" of any Person means the obligation to pay rent
or other payment amounts under a lease of (or other Indebtedness arrangement
conveying the right to use) real or personal property of such Person which is
required to be classified and accounted for as a capital lease or a liability on
the face of a balance sheet of such Person in accordance with GAAP and the
stated maturity thereof shall be the date of the last payment of rent or any
amount due under such lease prior to the first date upon which such lease may be
terminated by the lessee without payment of a penalty.
"Capital Stock" in any Person means any and all shares, interests,
participations or other equivalents in the equity interest (however designated)
in such Person and any rights (other than Indebtedness convertible into an
equity interest), warrants or options to acquire an equity interest in such
Person.
"Cash Proceeds" means, with respect to any Asset Sale or issuance or sale
of Capital Stock by any Person, the aggregate consideration received in respect
of such sale or issuance by such Person in the form of cash or Eligible Cash
Equivalents.
"Change of Control" shall be deemed to occur if (i) the sale, conveyance,
transfer or lease of all or substantially all of the assets of the Company to
any "Person" or "group" (within the meaning of Sections 13(d)(3) and 14(d)(2) of
the Exchange Act or any successor provision to either of the foregoing,
including any group acting for the purpose of acquiring, holding or disposing of
securities within the meaning of Rule 13d-5(b)(i) under the Exchange Act) (other
than any Permitted Holder or any Restricted Subsidiary of the Company) shall
have occurred; (ii) any "Person" or "group" (within the meaning of Sections
13(d)(3) and 14(d)(2) of the Exchange Act or any successor provision to either
of the foregoing, including any group acting for the purpose of acquiring,
holding or disposing of securities within the meaning of Rule 13d-5(b)(i) under
the Exchange Act), other than any Permitted Holder, becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 35% of the
total voting power of all classes of the Voting Stock of the Company and/or
warrants or options to acquire such Voting Stock, calculated on a fully diluted
basis, and such voting power percentage is greater than or equal to the total
voting power percentage then beneficially owned by the Permitted Holders in the
aggregate; or (iii) during any period of two consecutive years, individuals who
at the beginning of such period constituted the Board of Directors (together
with any new directors whose election or appointment by such board or whose
nomination for election by the shareholders of the Company was approved by a
vote of a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors then in office.
"Consolidated Interest Expense" means, with respect to any Person for any
period, without duplication, (A) the sum of (i) the aggregate amount of cash and
non-cash interest expense (including capitalized interest) of such Person and
its Restricted Subsidiaries for such period as determined on a consolidated
basis in accordance with GAAP in respect of Indebtedness (including, without
limitation, (v) any amortization of debt discount, (w) net costs associated with
Interest Hedging Obligations (including any amortization of discounts), (x) the
interest portion of any deferred payment obligation, (y) all accrued interest
and (z) all commissions, discounts and other fees and charges owed with respect
to letters of credit, bankers' acceptances or similar facilities) paid or
accrued, or scheduled to be paid or accrued, during such period; (ii) dividends
or distributions with respect to preferred stock or Disqualified Stock of such
Person (and of its Restricted Subsidiaries if paid to a Person other than such
Person or its Restricted Subsidiaries) declared and payable in cash; (iii) the
portion of any rental obligation of such Person or its Restricted Subsidiaries
in respect of any Capital Lease Obligation allocable to interest expense in
accordance with GAAP; (iv) the portion of any rental obligation of such Person
or its Restricted Subsidiaries in respect of any Sale and Leaseback Transaction
allocable to interest expense (determined as if such were treated as a Capital
Lease Obligation); and (v) to the extent any Indebtedness of any other Person is
Guaranteed by such Person or any of its Restricted Subsidiaries, the aggregate
amount of interest paid, accrued or scheduled to be paid or accrued, by such
other Person during such period attributable to any such Indebtedness, less (B)
to the extent included in
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(A) above, amortization or write-off of deferred financing costs of such Person
and its Restricted Subsidiaries during such period and any charge related to any
premium or penalty paid in connection with redeeming or retiring any
Indebtedness of such Person and its Restricted Subsidiaries prior to its stated
maturity; in the case of both (A) and (B) above, after elimination of
intercompany accounts among such Person and its Restricted Subsidiaries and as
determined in accordance with GAAP.
"Consolidated Net Income" of any Person means, for any period, the
aggregate net income (or net loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis determined in accordance
with GAAP; provided that there shall be excluded therefrom, without duplication,
(i) all items classified as extraordinary, (ii) any net income of any Person
other than such Person and its Restricted Subsidiaries, except to the extent of
the amount of dividends or other distributions actually paid to such Person or
its Restricted Subsidiaries by such other Person during such period; (iii) the
net income of any Person acquired by such Person or any of its Restricted
Subsidiaries in a pooling-of-interests transaction for any period prior to the
date of the related acquisition; (iv) any gain or loss, net of taxes, realized
on the termination of any employee pension benefit plan; (v) net gains (but not
net losses) in respect of Asset Sales by such Person or its Restricted
Subsidiaries; (vi) the net income (but not net loss) of any Restricted
Subsidiary of such Person to the extent that the payment of dividends or other
distributions to such Person is restricted by the terms of its charter or any
agreement, instrument, contract, judgment, order, decree, statute, rule,
governmental regulation or otherwise, except for any dividends or distributions
actually paid by such Restricted Subsidiary to such Person; (vii) with regard to
a non-wholly owned Restricted Subsidiary, any aggregate net income (or loss) in
excess of such Person's or such Restricted Subsidiary's pro rata share of such
non-wholly owned Restricted Subsidiary's net income (or loss); and (viii) the
cumulative effect of changes in accounting principles.
"Consolidated Tangible Assets" of any Person means, as of any date, the sum
for such Person and its Restricted Subsidiaries (after eliminating intercompany
items) of the net book value of all Property and assets of such Person and its
Restricted Subsidiaries reflected on a balance sheet of such Person or such
Restricted Subsidiary, as the case may be, prepared in accordance with GAAP,
less the net book value of all items that would be classified as intangibles
under GAAP, including, without limitation, (i) licenses, patents, patent
applications, copyrights, trademarks, trade names, goodwill, noncompete
agreements and organizational expenses, and (ii) un-amortized deferred financing
costs, debt discount and expenses.
"Debt to EBITDA Ratio" means, as at any date of determination, the ratio of
(i) the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis as at the date of determination to (ii) the
aggregate amount of EBITDA of the Company and its Restricted Subsidiaries for
the four preceding fiscal quarters for which financial information is available
immediately prior to the date of determination; provided that any Indebtedness
incurred or retired by the Company or any of its Restricted Subsidiaries during
the fiscal quarter in which the date of determination occurs shall be calculated
as if such Indebtedness was so incurred or retired on the first day of the
fiscal quarter in which the date of determination occurs; and provided, further,
that (x) if the transaction giving rise to the need to calculate the Debt to
EBITDA Ratio would have the effect of increasing or decreasing Indebtedness or
EBITDA in the future, Indebtedness or EBITDA shall be calculated on a pro forma
basis as if such transaction had occurred on the first day of such four fiscal
quarter period preceding the date of determination and (y) if during such four
fiscal quarter period the Company or any of its Restricted Subsidiaries shall
have engaged in any Asset Sale, EBITDA for such period shall be reduced by an
amount equal to the EBITDA (if positive), or increased by an amount equal to the
EBITDA (if negative), directly attributable to the assets which are the subject
of such Asset Sale and any related retirement of Indebtedness as if such Asset
Sale and related retirement of Indebtedness had occurred on the first day of
such period or (z) if during such four fiscal quarter period the Company or any
of its Restricted Subsidiaries shall have acquired any material assets outside
the ordinary course of business, EBITDA shall be calculated on a pro forma basis
as if such asset acquisition and related financing had occurred on the first day
of such period.
"Default" means any event, act or condition, the occurrence of which is, or
after notice or the passage of time or both would be, an Event of Default.
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"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, or otherwise, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, or is exchangeable for
Indebtedness at any time, in whole or in part, on or prior to the date on which
the Notes mature.
"EBIT" means the amount calculated in the same manner as EBITDA, but not
including clauses (iii) and (iv) of the definition thereof.
"EBITDA" means, with respect to any Person for any period, the sum for such
Person for such period of Consolidated Net Income plus, to the extent reflected
in the income statement of such Person for such period from which Consolidated
Net Income is determined, without duplication, (i) Consolidated Interest
Expense, (ii) income tax expense, (iii) depreciation expense, (iv) amortization
expense, (v) any non-cash expense related to the issuance to employees of such
Person of options to purchase Capital Stock of such Person and (vi) any charge
related to any premium or penalty paid in connection with redeeming or retiring
any Indebtedness prior to its stated maturity and minus, to the extent reflected
in such income statement, any non-cash credits that had the effect of increasing
Consolidated Net Income of such Person for such period. This definition of
EBITDA is used only for the purpose of this Description of the Notes and the
Indenture.
"Eligible Cash Equivalents" means (i) securities issued or directly and
fully guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof), (ii) time deposits and
certificates of deposit of any commercial bank organized in the United States
having capital and surplus in excess of $500 million with a maturity date not
more than one year from the date of acquisition, (iii) repurchase obligations
with a term of not more than seven days for underlying securities of the types
described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (ii) above, (iv) direct obligations issued by
any state of the United States of America or any political subdivision of any
such state or any public instrumentality thereof maturing, or subject to tender
at the option of the holder thereof within ninety days after the date of
acquisition thereof and, at the time of acquisition, having a rating of A or
better from Standard & Poor's Ratings Group ("Standard & Poor's") or A-2 or
better from Moody's Investors Service, Inc. ("Moody's"), (v) commercial paper
issued by the parent corporation of any commercial bank organized in the United
States having capital and surplus in excess of $500 million and commercial paper
issued by others having one of the two highest ratings obtainable from either
Standard & Poor's or Moody's and in each case maturing within ninety days after
the date of acquisition, (vi) overnight bank deposits and bankers' acceptances
at any commercial bank organized in the United States having capital and surplus
in excess of $500 million, (vii) deposits available for withdrawal on demand
with a commercial bank organized in the United States having capital and surplus
in excess of $500 million and (viii) investments in money market funds
substantially all of whose assets comprise securities of the types described in
clauses (i) through (vi).
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus of not less than $500 million or its equivalent in
foreign currency, whose debt is rated "A" (or higher) according to Standard &
Poor's or Moody's at the time as of which any investment or rollover therein is
made.
"Equity Offering" means an offering of Common Stock of the Company
resulting in net proceeds to the Company in excess of $20 million.
"Escrow Account" means an escrow account for the deposit of approximately
$70 million of the net proceeds from the sale of the Notes under the Escrow and
Disbursement Agreement.
"Escrow Agent" means The Bank of New York, as Escrow Agent under the Escrow
and Disbursement Agreement, or any successor thereto appointed pursuant to such
agreement.
"Escrow and Disbursement Agreement" means the Escrow and Disbursement
Agreement, dated as of the date of the Indenture, by and among the Escrow Agent,
the Trustee and the Company, governing the disbursement of funds from the Escrow
Account.
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"Exchange Rate Obligation" means, with respect to any Person, any currency
swap agreements, forward exchange rate agreements, foreign currency futures or
options, exchange rate collar agreements, exchange rate insurance and other
agreements or arrangements, or combination thereof, designed to provide
protection against fluctuations in currency exchange rates.
"Existing Indebtedness" means Indebtedness outstanding on the date of the
Indenture (other than under the Secured Credit Facility), including the 2005
Notes and the 2006 Notes, and disclosed in a schedule attached to the Indenture,
and the incurrence by the Company of Indebtedness represented by the 2005 Notes
and the 2006 Notes.
"Fair Market Value" means, with respect to any asset or Property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy, as determined in good faith by the Board of
Directors.
"Fiber Network" means a digital fiber optic telecommunications network
wholly owned by the Company that serves a Metropolitan Area.
"GAAP" means United States generally accepted accounting principles,
consistently applied, as set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board, or in such other statements by such other entity as may be
approved by a significant segment of the accounting profession of the United
States, that are applicable to the circumstances as of the date of
determination; provided that, except as otherwise specifically provided, all
calculations made for purposes of determining compliance with the terms of the
provisions of the Indenture shall utilize GAAP as in effect on the Issue Date.
"Guarantee" means any direct or indirect obligation, contingent or
otherwise, of a Person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other Person in any manner (and
"Guaranteed," "Guaranteeing" and "Guarantor" shall have meanings correlative to
the foregoing).
"incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), extend,
assume, Guarantee or otherwise become liable in respect of such Indebtedness or
other obligation or the recording, as required pursuant to GAAP or otherwise, of
any such Indebtedness or obligation on the balance sheet of such Person (and
"incurrence," "incurred," "incurrable" and "incurring," shall have meanings
correlative to the foregoing); provided that a change in GAAP that results in an
obligation of such Person that exists at such time becoming Indebtedness shall
not be deemed an incurrence of such Indebtedness. Indebtedness otherwise
incurred by a Person before it becomes a Subsidiary of the Company shall be
deemed to have been incurred at the time at which it becomes a Subsidiary.
"Indebtedness" means at any time (without duplication), with respect to any
Person, whether recourse is to all or a portion of the assets of such Person,
and whether or not contingent, (i) any obligation of such Person for money
borrowed, (ii) any obligation of such Person evidenced by bonds, debentures,
notes, Guarantees or other similar instruments, including, without limitation,
any such obligations incurred in connection with acquisition of Property, assets
or businesses, excluding trade accounts payable made in the ordinary course of
business, (iii) any reimbursement obligation of such Person with respect to
letters of credit, bankers' acceptances or similar facilities issued for the
account of such Person, (iv) any obligation of such Person issued or assumed as
the deferred purchase price of Property or services (but excluding trade
accounts payable or accrued liabilities arising in the ordinary course of
business, which in either case are not more than 60 days overdue or which are
being contested in good faith), (v) any Capital Lease Obligation of such Person,
(vi) the maximum fixed redemption or repurchase price of Disqualified Stock of
such Person and, to the extent held by other Persons, the maximum fixed
redemption or repurchase price of Disqualified Stock of such Person's Restricted
Subsidiaries, at the time of determination, (vii) the notional amount of any
Interest Hedging Obligations or Exchange Rate Obligations of such Person at the
time of determination, (viii) any Attributable Indebtedness with respect to any
Sale and Leaseback Transaction to which such Person is a party and (ix) any
obligation of the type referred to in clauses (i) through (viii) of this
definition of another Person and all dividends and distributions of another
Person the payment of which, in either case, such Person has
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Guaranteed or is responsible or liable for, directly or indirectly, as obligor,
Guarantor or otherwise. For purposes of the preceding sentence, the maximum
fixed repurchase price of any Disqualified Stock that does not have a fixed
repurchase price shall be calculated in accordance with the terms of such
Disqualified Stock as if such Disqualified Stock were repurchased on any date on
which Indebtedness shall be required to be determined pursuant to the Indenture;
provided that if such Disqualified Stock is not then permitted to be
repurchased, the repurchase price shall be the book value of such Disqualified
Stock. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability of any Guarantees at such date; provided that
for purposes of calculating the amount of the 2005 Notes or 2006 Notes
outstanding at any date, the amount of such 2005 Notes or 2006 Notes shall be
the Accreted Value (as defined in the relevant indenture) thereof as of such
date unless cash interest has commenced to accrue pursuant to the relevant
indenture, in which case the amount of the 2005 Notes or 2006 Notes outstanding
will be determined pursuant to the relevant indenture and will not include any
accrued and unpaid cash interest which would otherwise be included in Accreted
Value because of clause (iii) of the definition thereof in the relevant
indenture.
"Interest Hedging Obligation" means, with respect to any Person, an
obligation of such Person pursuant to any interest rate swap agreement, interest
rate cap, collar or floor agreement or other similar agreement or arrangement
designed to protect against or manage such Person's or any of its Subsidiaries'
exposure to fluctuations in interest rates.
"Investment" in any Person means any direct, indirect or contingent (i)
advance or loan to, Guarantee of any Indebtedness of, extension of credit or
capital contribution to such Person, (ii) the acquisition of any shares of
Capital Stock, bonds, notes, debentures or other securities of such Person, or
(iii) the acquisition, by purchase or otherwise, of all or substantially all of
the business, assets or stock or other evidence of beneficial ownership of such
Person; provided that Investments shall exclude commercially reasonable
extensions of trade credit. The amount of any Investment shall be the original
cost of such Investment, plus the cost of all additions thereto and minus the
amount of any portion of such investment repaid to such Person in cash as a
repayment of principal or a return of capital, as the case may be, but without
any other adjustments for increases or decreases in value, or write-ups,
write-downs or write-offs with respect to such Investment. In determining the
amount of any Investment involving a transfer of any Property other than cash,
such Property shall be valued at its Fair Market Value at the time of such
transfer.
"Issue Date" means the date on which the Notes were first authenticated and
delivered under the Indenture.
"Lien" means, with respect to any Property or other asset, any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien (statutory or other), charge, easement, encumbrance, preference,
priority or other security or similar agreement or preferential arrangement of
any kind or nature whatsoever on or with respect to such Property or other asset
(including, without limitation, any conditional sale or title retention
agreement having substantially the same economic effect as any of the
foregoing).
"Marketable Securities" means (i) U.S. Government Securities maturing not
more than two years after the date of acquisition; (ii) any certificate of
deposit maturing not more than 270 days after the date of acquisition issued by
or time deposit of an Eligible Institution; (iii) commercial paper maturing not
more than 270 days after the date of acquisition issued by a corporation (other
than an Affiliate of the Company) with a rating, at the time as of which any
investment therein is made, of "A-1" (or higher) according to Standard & Poor's
or "P-1" (or higher) according to Moody's; (iv) any banker's acceptances or
money market deposit accounts issued or offered by an Eligible Institution; and
(v) any fund investing exclusively in investments of the types described in
clauses (i) through (iv) above.
"Maturity" means, when used with respect to a Note, the date on which the
principal of such Note becomes due and payable as provided therein or in the
Indenture, whether on the date specified in such Note as the fixed date on which
the principal of such Note is due and payable, on the Change of Control Payment
Date or purchase date established pursuant to the terms of the Indenture with
regard to a Change of Control Offer or an Asset Sale Offer, as applicable, or by
declaration of acceleration, call for redemption or otherwise.
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"Metropolitan Area" means the 31 metropolitan areas in which the Company,
as of June 30, 1997, has a Fiber Network and other metropolitan areas deemed in
the reasonable business judgment of the management of the Company to provide an
opportunity for the building and operation of such a Fiber Network with the
reasonable potential to produce financial results for the Company at least
substantially comparable to the metropolitan areas in which the Company has such
operational Fiber Networks.
"Net Cash Proceeds" means, with respect to the sale of any Property or
assets by any Person or any of its Restricted Subsidiaries, Cash Proceeds
received net of (i) all reasonable out-of-pocket expenses of such Person or such
Restricted Subsidiary incurred in connection with such sale, including, without
limitation, all legal, title and recording tax expenses, commissions and other
fees and expenses incurred (but excluding any finder's fee or broker's fee
payable to any Affiliate of such Person) and all federal, state, foreign and
local taxes arising in connection with such sale that are paid or required to be
accrued as liability under GAAP by such Person or its Restricted Subsidiaries,
(ii) all payments made or required to be made by such Person or its Restricted
Subsidiaries on any Indebtedness which is secured by such Properties or other
assets in accordance with the terms of any Lien upon or with respect to such
Properties or other assets or which must, by the terms of such Lien, or in order
to obtain a necessary consent to such transaction or by applicable law, be
repaid in connection with such sale and (iii) all contractually required
distributions and other payments made to minority interest holders (but
excluding distributions and payments to Affiliates of such Person) in Restricted
Subsidiaries of such Person as a result of such transaction; provided that, in
the event that any consideration for a transaction (which would otherwise
constitute Net Cash Proceeds) is required to be held in escrow pending
determination of whether a purchase price adjustment will be made, such
consideration (or any portion thereof) shall become Net Cash Proceeds only at
such time as it is released to such Person or its Restricted Subsidiaries from
escrow; provided, further, that any non-cash consideration received in
connection with any transaction, which is subsequently converted to cash, shall
be deemed to be Net Cash Proceeds at such time, and shall thereafter be applied
in accordance with the Indenture.
"Officers' Certificate" means a certificate signed by the Chairman of the
Board, a Vice Chairman of the Board, the President or a Vice President, and by
the Chief Financial Officer, the Chief Accounting Officer, the Treasurer, an
Assistant Treasurer, the Secretary or an Assistant Secretary of the Company and
delivered to the Trustee, which shall comply with the Indenture.
"Permitted Holders" means The Huff Alternative Income Fund, L.P., ING
Equity Partners, L.P.I., Apex Investment Fund I, L.P., Apex Investment Fund II,
L.P., The Productivity Fund II, L.P. and Anthony J. Pompliano and the respective
Affiliates (other than the Company and the Restricted Subsidiaries) of each of
the foregoing.
"Permitted Investments" means (i) Eligible Cash Equivalents; (ii)
Investments in Property used in the ordinary course of business; (iii)
investments in any Person as a result of which such Person becomes a Restricted
Subsidiary in compliance with the Indenture; (iv) Investments pursuant to
certain agreements or obligations of the Company or a Restricted Subsidiary, in
effect an the Issue Date, to make such Investments, and disclosed in a Schedule
attached to the Indenture; (v) Investments in prepaid expenses, negotiable
instruments held for collection and lease, utility and workers' compensation,
performance and other similar deposits; (vi) Interest Hedging Obligations with
respect to any floating rate Indebtedness that is permitted by the terms of the
Indenture to be outstanding; (vii) Exchange Rate Obligations; provided that such
Exchange Rate Obligations were entered into in connection with transactions in
the ordinary course of business or the incurrence of Indebtedness that is
permitted by the terms of the Indenture to be outstanding; (viii) bonds, notes,
debentures or other debt securities received as a result of Asset Sales
permitted under the covenant described under "-- Asset Sales"; (ix) Investments
by the Company or a Restricted Subsidiary in or in respect of a Person to the
extent the consideration for such Investment consists of shares of Qualified
Stock of the Company; and (x) Investments in existence at the Issue Date.
"Permitted Liens" means (i) Liens on Property or assets of a Person
existing at the time such Person is merged into or consolidated with the Company
or any Subsidiary of the Company, provided that such Liens were in existence
prior to the contemplation of such merger or consolidation and do not secure any
Property or assets of the Company or any of its Subsidiaries other than the
Property or assets subject to the Liens prior to
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such merger or consolidation; (ii) Liens on Telecommunications Assets existing
during the time of the construction thereof; (iii) Liens incurred or deposits
made to secure the performance of tenders, bids, leases, statutory or regulatory
obligations, surety or appeal bonds, performance bonds or other obligations of a
like nature incurred in the ordinary course of business consistent with industry
practice; (iv) Liens existing as of the Issue Date; (v) Liens to secure
borrowings permitted under clause (a) of the second paragraph of "-- Limitation
on Indebtedness"; (vi) any Lien on Property of the Company in favor of the
United States of America or any state thereof, or any instrumentality of either,
to secure certain payments pursuant to any contract or statute; (vii) any Lien
for taxes or assessments or other governmental charges or levies not then due
and payable (or which, if due and payable, are being contested in good faith and
for which adequate reserves are being maintained, to the extent required by
GAAP); (viii) easements, rights-of-way, licenses and other similar restrictions
on the use of Properties or minor imperfections of title that, in the aggregate,
are not material in amount and do not in any case materially detract from the
Properties subject thereto or interfere with the ordinary conduct of the
business of the Company or its Subsidiaries; (ix) any Lien to secure obligations
under workmen's compensation laws or similar legislation, including any Lien
with respect to judgments which are not currently dischargeable; (x) any
statutory warehousemen's, materialmen's or other similar Liens for sums not then
due and payable (or which, if due and payable, are being contested in good faith
and with respect to which adequate reserves are being maintained, to the extent
required by GAAP); (xi) any interest or title of a lessor in Property subject to
a Capital Lease Obligation; (xii) Liens to secure any Vendor Financing
Indebtedness; provided that such Liens do not extend to any Property or assets
other than the Property or assets the acquisition of which was financed by such
Indebtedness; (xiii) Liens in favor of the Company or any Restricted Subsidiary;
(xiv) Liens on Property or assets of a Person existing prior to the time such
Person is acquired by the Company as a result of (a) an Investment described in
clause (ix) of the definition of "Permitted Investments" herein or (b) an
Investment described in clause (vii) of the second paragraph of the covenant
described under "Restricted Payments" herein; provided that such Liens were in
existence prior to the contemplation of such Investment and do not secure any
Property or assets of the Company or any of its Subsidiaries other than the
Property or assets subject to the Liens prior to such Investment; (xv) Liens
securing reimbursement obligations with respect to letters of credit that
encumber documents and other Property relating to such letters of credit and the
products and proceeds thereof; (xvi) Liens on the Escrow Account and all funds
and securities therein securing only the Notes equally and ratably and (xvii)
Liens to secure any permitted extension, renewal, refinancing or refunding (or
successive extensions, renewals, refinancings or refundings), in whole or in
part, of any Indebtedness secured by Liens referred to in the foregoing clauses
(i) through (v) and (xii), provided that such Liens do not extend to any other
Property or assets and the principal amount of the Indebtedness secured by such
Liens is not increased.
"Permitted Subordinated Financing" means Indebtedness or preferred stock of
the Company issued to a Permitted Holder on terms specified in the Indenture,
provided that (i) in the case of Permitted Subordinated Financing that
constitutes Indebtedness, such Indebtedness is subordinated in right of payment
to the Notes and has a maturity of 180 days or less and (ii) in the case of
Permitted Subordinated Financing that constitutes preferred stock, such
preferred stock is retired within 180 days of issuance.
"Person" means any individual, corporation, partnership, joint venture,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Property" means, with respect to any Person, any interest of such Person
in any kind of property or asset, whether real, personal or mixed, or tangible
or intangible, excluding Capital Stock in any other Person.
"Qualified Stock" of any Person means a class of Capital Stock other than
Disqualified Stock.
"Refinancing Indebtedness" means any Indebtedness incurred in connection
with the Refinancing of other Indebtedness.
"Restricted Payment" means (i) a dividend or other distribution declared or
paid on the Capital Stock of the Company or to the Company's stockholders (in
their capacity as such), or declared or paid to any Person other than the
Company or a Restricted Subsidiary of the Company on the Capital Stock of any
Restricted Subsidiary of the Company, in each case, other than dividends,
distributions or payments made solely in Qualified Stock of the Company or such
Restricted Subsidiary, (ii) a payment made by the Company or any
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of its Restricted Subsidiaries (other than to the Company or any Restricted
Subsidiary) to purchase, redeem, acquire or retire any Capital Stock of the
Company or of a Restricted Subsidiary, (iii) a payment made by the Company or
any of its Restricted Subsidiaries (other than a payment made solely in
Qualified Stock of the Company) to redeem, repurchase, defease (including an
in-substance or legal defeasance) or otherwise acquire or retire for value
(including pursuant to mandatory repurchase covenants), prior to any scheduled
maturity, scheduled sinking fund or mandatory redemption payment, Indebtedness
of the Company or such Restricted Subsidiary which is subordinate (whether
pursuant to its terms or by operation of law) in right of payment to the Notes
and which was scheduled to mature on or after the maturity of the Notes or (iv)
an Investment in any Person, including an Unrestricted Subsidiary or the
designation of a Subsidiary as an Unrestricted Subsidiary, other than (a) a
Permitted Investment, (b) an Investment by the Company in a Restricted
Subsidiary or (c) an Investment by a Restricted Subsidiary in the Company or a
Restricted Subsidiary.
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been classified as an "Unrestricted Subsidiary."
"Sale and Leaseback Transaction" means, with respect to any Person, any
direct or indirect arrangement pursuant to which Property is sold or transferred
by such Person or a Restricted Subsidiary of such Person and is thereafter
leased back from the purchaser or transferee thereof by such Person or one of
its Restricted Subsidiaries.
"Secured Credit Facility" means the AT&T Credit Facility as in effect on
the Issue Date and additional secured credit agreements to which the Company is
or becomes a party, in an aggregate amount not to exceed $35 million, and all
related amendments, notes, collateral documents, guarantees, instruments and
other agreements executed in connection therewith, as the same may be amended,
modified, supplemented, restated, renewed, extended, refinanced, substituted or
replaced from time to time.
"Significant Restricted Subsidiary" means a Restricted Subsidiary that is a
"significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X under the
Securities Act and the Exchange Act.
"Subsidiary" means, with respect to any Person, (i) any corporation more
than 50% of the outstanding shares of Voting Stock of which is owned, directly
or indirectly, by such Person, or by one or more other Subsidiaries of such
Person, or by such Person and one or more other Subsidiaries of such Person,
(ii) any general partnership, joint venture or similar entity, more than 50% of
the outstanding partnership or similar interests of which are owned, directly or
indirectly, by such Person, or by one or more other Subsidiaries of such Person,
or by such Person and one or more other Subsidiaries of such Person and (iii)
any limited partnership of which such Person or any Subsidiary of such Person is
a general partner.
"Telecommunications Assets" means, with respect to any Person, assets
(including, without limitation, rights-of-way, trademarks and licenses to use
copyrighted material), that are utilized by such Person, directly or indirectly,
in a Telecommunications Business. Telecommunications Assets shall include stock,
joint venture or partnership interests in another Person, provided that
substantially all of the assets of such other Person consist of
Telecommunications Assets, and provided, further, that if such stock, joint
venture or partnership interests are held by the Company or a Restricted
Subsidiary, such other Person either is, or immediately following the relevant
transaction shall become, a Restricted Subsidiary of the Company pursuant to the
Indenture. The determination of what constitutes Telecommunication Assets shall
be made by the Board of Directors and evidenced by a Board Resolution delivered
to the Trustee.
"Telecommunications Business" means the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data through
owned or leased transmission facilities, (ii) creating, developing or marketing
communications-related network equipment, software and other devices for use in
(i) above or (iii) evaluating, participating or pursuing any other activity or
opportunity that is related to those specified in (i) or (ii) above.
"Telecommunications Company" means any Person substantially all of the
assets of which consist of Telecommunications Assets.
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"Total Market Capitalization" of any Person means, at the time of
determination, the product of (i) the aggregate amount of outstanding shares of
common stock of such Person (which shall not include any common stock issuable
upon the exercise of options or warrants on, or securities convertible or
exchangeable into, shares of common stock of such Person) and (ii) the average
closing price of such common stock over the preceding 20 consecutive Trading
Days. If no such closing price exists with respect to shares of any such class,
the value of such shares shall be determined by the Board of Directors in good
faith as evidenced by a Board Resolution delivered to the Trustee.
"Trading Day" means, with respect to a security traded on a securities
exchange, automated quotation system or market, a day on which such exchange,
system or market is open for a full day of trading.
"U.S. Government Obligations" means (x) securities that are (i) direct
obligations of the United States of America for the payment of which the full
faith and credit of the United States of America is pledged or (ii) obligations
of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America, which, in either case, are not callable or redeemable at the
option of the issuer thereof, and (y) depository receipts issued by a bank (as
defined in Section 3(a)(2) of the Securities Act) as custodian with respect to
any U.S. Government Obligation which is specified in clause (x) above and held
by such bank for the account of the holder of such depository receipt, or with
respect to any specific payment of principal or interest on any U.S. Government
Obligation which is so specified and held, provided that (except as required by
law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by the
custodian in respect of the U.S. Government Obligation or the specific payment
of principal or interest of the U.S. Government Obligation evidenced by such
depository receipt.
"Unrestricted Subsidiary" means any Subsidiary of the Company that the
Company has classified as an "Unrestricted Subsidiary" and that has not been
reclassified as a Restricted Subsidiary, pursuant to the terms of the Indenture.
"Vendor Financing Indebtedness" of any Person means an obligation owed by
such Person to a vendor of any Telecommunications Assets solely in respect of
the purchase price of such assets, provided that the amount of such Indebtedness
does not exceed the Fair Market Value of such assets, and provided, further,
that such Indebtedness is incurred within 180 days of the acquisition of such
assets.
"Voting Stock" means, with respect to any Person, securities of any class
or classes of Capital Stock in such Person entitling the holders thereof
(whether at all times or at the times that such class of Capital Stock has
voting power by reason of the happening of any contingency) to vote in the
election of members of the board of directors or comparable body of such Person.
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U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER
The following is a general discussion of the material U.S. Federal income
tax consequences of the Exchange Offer to holders of Old Notes. This summary is
based upon current provisions of the Internal Revenue Code of 1986, as amended,
regulations of the Treasury Department, administrative rulings and
pronouncements of the Internal Revenue Service and judicial decisions currently
in effect, all of which are subject to change, possibly with retroactive effect.
The discussion does not deal with all aspects of U.S. Federal income taxation
that may be relevant to particular investors in light of their personal
investment circumstances, nor does it address considerations applicable to
investors subject to special treatment under the U.S. Federal income tax laws.
In addition, the discussion does not consider the effect of any foreign, state,
local, gift, estate or other tax laws that may be applicable to a particular
investor. EACH POTENTIAL INVESTOR SHOULD CONSULT ITS TAX ADVISOR REGARDING THE
PARTICULAR TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF THE NOTES
INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS.
The exchange of an Old Note for a New Note pursuant to the Exchange Offer
should not constitute a taxable exchange.
Upon failure to comply with certain of its obligations under the
Registration Rights Agreement, the Company would be required to pay Additional
Interest on the Notes. Although the matter is not free from doubt, if Additional
Interest becomes payable on the Notes, all or a portion of any interest or
Additional Interest earned on the Notes might constitute original issue discount
for U. S. Federal income tax purposes, which must be reported as income by
holders of the Notes as such original issue discount accrues.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Notes where such
Notes were acquired as a result of market-making activities or other trading
activities. The Company has agreed that, starting on the Expiration Date and
ending on the close of business 180 days after the Expiration Date, it will make
this Prospectus, as amended or supplemented, available to any broker-dealer for
use in connection with any such resale. In addition, until , 1997, all
dealers effecting transactions in the New Notes may be required to deliver a
prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit of any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such
documents in the Letter of Transmittal. The Company has agreed to pay all
expenses incident to the Exchange Offer (including the expenses of one counsel
for the Holders of the Notes) other than commissions
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<PAGE> 107
or concessions of any brokers or dealers and will indemnify the Holders of the
New Notes (including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the New Notes will be passed upon for
the Company by Riley M. Murphy, Annapolis Junction, Maryland.
EXPERTS
The consolidated financial statements of American Communications Services,
Inc. as of June 30, 1995 and 1996 and December 31, 1996, and for the years ended
June 30, 1995 and 1996 and six months ended December 31, 1996, have been
included herein and in the registration statement in reliance upon the report of
KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS
On April 21, 1995, pursuant to authorization of its Board of Directors and
approval of its Audit Committee, the Company dismissed the firm of Coopers &
Lybrand L.L.P. ("Coopers & Lybrand") as its auditors and retained KPMG Peat
Marwick LLP ("KPMG Peat Marwick"). Coopers & Lybrand's report for each of the
fiscal years ended June 30, 1993, and June 30, 1994, indicated uncertainties as
to the Company's ability to continue as a going concern. However, Coopers &
Lybrand's report for these years did not contain an adverse opinion or a
disclaimer of opinion and was not qualified or modified as to audit scope or
accounting principles.
During the fiscal years ended June 30, 1993, and June 30, 1994, and the
subsequent interim periods immediately preceding the change in accountants,
there were no disagreements with Coopers & Lybrand on any matter of accounting
principles or practice, financial statement disclosure, or auditing scope or
procedure, which if not resolved to the satisfaction of Coopers & Lybrand would
have caused them to make reference to the subject matter of the disagreement in
connection with their reports on the Company's financial statements. During the
fiscal years ended June 30, 1993, and June 30, 1994, and the subsequent interim
periods immediately preceding the change in accountants, there were no
reportable events (as that term is used in Regulation S-K, Item 304(a)(1)(v)(A)
through (D) of the Exchange Act), except that at the March 30, 1994, meeting of
the Audit Committee at which representatives of Coopers & Lybrand were present,
Coopers & Lybrand communicated to the Audit Committee that through approximately
August 1993, documentation of equity or other non-cash transactions and controls
over cash were less than adequate. This matter was then discussed. The Company
has authorized Coopers & Lybrand to respond fully to the inquiries of KPMG Peat
Marwick concerning such reportable events.
103
<PAGE> 108
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
104
<PAGE> 109
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
105
<PAGE> 110
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.
106
<PAGE> 111
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> 112
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> 113
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> 114
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> 115
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> 116
AMERICAN COMMUNICATIONS SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996 AND THE SIX MONTHS ENDED DECEMBER 31,
1996
<TABLE>
<CAPTION>
SERIES A-1 SERIES B COMMON
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK STOCK
--------------------- ------------------- ------------------- ---------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
------ ----------- ------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1994........................ 1,700 $ 1,700,000 -- $ -- -- $ -- 2,755,005
Preferred Stock exchange (note 12)............... (1,700) (1,700,000) -- -- -- -- 548,387
Set par value for common stock (note 5).......... -- -- -- -- -- -- --
Acquisition of Piedmont Teleport, Inc. (note
13)............................................. -- -- -- -- -- -- 62,000
Write-off of note receivable for common stock.... -- -- -- -- -- -- --
Series A Preferred private placement, net of
related costs (note 3).......................... -- -- 186,664 186,664 -- -- --
Series B Preferred private placement, net of
related costs (note 3).......................... -- -- -- -- 227,500 227,500 --
Issuance of put right obligations (notes 6 and
9).............................................. -- -- -- -- -- -- --
Cancelation of put right obligation (note 9)..... -- -- -- -- -- -- --
Warrant and stock option exercises and stock
grant (note 6).................................. -- -- -- -- -- -- 2,379,390
Establish limitation on common stock put right
obligation (note 6)............................. -- -- -- -- -- -- --
Series A Preferred Stock dividends accrued (note
3).............................................. -- -- -- -- -- -- --
Net loss......................................... -- -- -- -- -- -- --
------ ----------- ------- -------- ------- -------- ---------
Balances at June 30, 1995........................ -- $ -- 186,664 $186,664 227,500 $227,500 5,744,782
Issuance of Series B-4 Preferred Stock (note
3).............................................. -- -- -- -- 50,000 50,000 --
Issuance of detachable warrants (notes 4 and
6).............................................. -- -- -- -- -- -- --
Warrants and stock options exercised (note 6).... -- -- -- -- -- -- 900,909
Series A and B Preferred Stock dividends accrued
(note 3)........................................ -- -- -- -- -- -- --
Cancelation of and adjustments to put right
obligations (note 6)............................ -- -- -- -- -- -- --
Stock compensation expense....................... -- -- -- -- -- -- --
Net loss......................................... -- -- -- -- -- -- --
------ ----------- ------- -------- ------- -------- ---------
Balances at June 30, 1996........................ -- $ -- 186,664 $186,664 277,500 $277,500 6,645,691
Warrants and stock options exercised (note 6).... -- -- -- -- -- -- 139,305
Series A and B Preferred Stock dividends accrued
(note 3)........................................ -- -- -- -- -- -- --
Accretion of consulting agreement credit to
exercise price of warrants (note 9)............. -- -- -- -- -- -- --
Cancelation of and adjustments to put right
obligations (note 6)............................ -- -- -- -- -- -- --
Stock compensation expense....................... -- -- -- -- -- -- --
Net loss......................................... -- -- -- -- -- -- --
------ ----------- ------- -------- ------- -------- ---------
Balances at December 31, 1996.................... -- $ -- 186,664 $186,664 277,500 $277,500 6,784,996
====== =========== ======= ======== ======= ======== =========
<CAPTION>
NOTES
RECEIVABLE TOTAL
COMMON ADDITIONAL ON SALE OF STOCKHOLDERS'
STOCK PAID-IN COMMON ACCUMULATED EQUITY
------
AMOUNT CAPITAL STOCK DEFICIT (DEFICIT)
------- ----------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1994........................ $ -- $ 1,080,566 $ (2,750) $ (6,043,573) $ (3,265,757)
Preferred Stock exchange (note 12)............... -- 1,700,000 -- -- --
Set par value for common stock (note 5).......... 33,033 (33,033) -- -- --
Acquisition of Piedmont Teleport, Inc. (note
13)............................................. -- -- -- -- --
Write-off of note receivable for common stock.... -- (2,750) 2,750 -- --
Series A Preferred private placement, net of
related costs (note 3).......................... -- 15,009,461 -- -- 15,196,125
Series B Preferred private placement, net of
related costs (note 3).......................... -- 20,434,000 -- -- 20,661,500
Issuance of put right obligations (notes 6 and
9).............................................. -- (53,303) -- -- (53,303)
Cancelation of put right obligation (note 9)..... -- 487,500 -- -- 487,500
Warrant and stock option exercises and stock
grant (note 6).................................. 23,794 349,030 -- -- 372,824
Establish limitation on common stock put right
obligation (note 6)............................. -- 4,510,962 -- -- 4,510,962
Series A Preferred Stock dividends accrued (note
3).............................................. -- (1,070,985) -- -- (1,070,985)
Net loss......................................... -- -- -- (14,697,649) (14,697,649)
------- ----------- ------- ------------ ------------
Balances at June 30, 1995........................ $56,827 $42,411,448 $ -- $(20,741,222) $ 22,141,217
Issuance of Series B-4 Preferred Stock (note
3).............................................. -- 4,950,000 -- -- 5,000,000
Issuance of detachable warrants (notes 4 and
6).............................................. -- 8,684,000 -- -- 8,684,000
Warrants and stock options exercised (note 6).... 9,010 289,360 -- -- 298,370
Series A and B Preferred Stock dividends accrued
(note 3)........................................ -- (3,871,328) -- -- (3,871,328)
Cancelation of and adjustments to put right
obligations (note 6)............................ -- 775,753 -- -- 775,753
Stock compensation expense....................... -- 2,735,845 -- -- 2,735,845
Net loss......................................... -- -- -- (26,782,044) (26,782,044)
------- ----------- ------- ------------ ------------
Balances at June 30, 1996........................ $65,837 $55,975,078 $ -- $(47,523,266) $ 8,981,813
Warrants and stock options exercised (note 6).... 1,393 175,945 -- -- 177,338
Series A and B Preferred Stock dividends accrued
(note 3)........................................ -- (2,003,630) -- -- (2,003,630)
Accretion of consulting agreement credit to
exercise price of warrants (note 9)............. -- 18,750 -- -- 18,750
Cancelation of and adjustments to put right
obligations (note 6)............................ 620 154,405 -- -- 155,025
Stock compensation expense....................... -- 549,646 -- -- 549,646
Net loss......................................... -- -- -- (34,916,514) (34,916,514)
------- ----------- ------- ------------ ------------
Balances at December 31, 1996.................... $67,850 $54,870,194 $ -- $(82,439,780) $ (27,037,572)
======= =========== ======= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 117
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> 118
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> 119
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> 120
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> 121
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> 122
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> 123
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> 124
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> 125
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> 126
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> 127
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> 128
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> 129
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.
(8) LEASES
The Company is obligated under various noncancelable operating leases for
office and node space as well as office furniture. The minimum future lease
obligations under these noncancelable operating leases as of December 31, 1996
are approximately as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
-------------------------------------------------------- -----------
<S> <C>
1997.................................................... $ 3,980,000
1998.................................................... 4,320,000
1999.................................................... 4,560,000
2000.................................................... 4,051,000
2001.................................................... 3,078,000
Thereafter.............................................. 13,640,000
-----------
$33,629,000
===========
</TABLE>
Rent expense for the years ended June 30, 1995 and June 30, 1996 and for
the six months ended December 31, 1996 was approximately $200,000, $1,166,000
and $1,700,000, respectively.
(9) RELATED-PARTY TRANSACTIONS
In October 1993, the Company executed a financial consulting and advisory
agreement with a related party for a period of six months. In consideration, the
related party received warrants to purchase 300,000 shares of ACSI common stock
exercisable at $.875 per share if a future equity financing was successfully
completed. The related party had the right to resell the shares to ACSI for
$2.50 per share two years from the date of the agreement. At June 30, 1994, the
Company provided an accrual of $487,500 for this redemption privilege at the
redemption price net of the exercise price. In June 1995, the Company's
obligations to repurchase the shares were assumed by a stockholder of the
Company. Accordingly, as of June 30, 1995, the $487,500 share value has been
transferred from redeemable stock, options, and warrants to additional paid-in-
capital.
On June 16, 1994, the Company entered into a financial consulting agreement
for capital raising activities with an entity controlled by significant
stockholders of the Company. Under this agreement, the Company paid $153,750 for
consulting services rendered through the date of the agreement relating to
placement of the Convertible Bridge Notes. Additionally, the Company agreed to
pay a $7,500 monthly consulting fee for a two year period beginning on the
closing date of the first private placement. During the six months ended
December 31, 1996 and the years ended June 30, 1996 and 1995, the Company paid
$22,500, $90,000 and $67,500 under this arrangement, respectively.
F-19
<PAGE> 130
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective July 1, 1994, the Company engaged SGC Advisory Services, Inc.
("SGC") as a financial and business consultant for three years. SGC is an
affiliate of a former director of the Company. Pursuant to the agreement, the
Company will compensate SGC as follows: (1) a monthly fee of $5,000; and (2)
options to purchase up to 50,000 shares of the Company's Common Stock which vest
on July 1, 1997, and are exercisable on or before July 1, 1999. At the end of
each month of the term of the agreement, SGC earns a credit against the exercise
price of those options equal to 1/36th of the exercise price. The shares issued
upon exercise of the options will be priced at $2.25 per share and the shares
issued will have piggy back registration rights.
(10) INCOME TAXES
Temporary differences and carryforwards that give rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER
JUNE 30, JUNE 30, 31,
1995 1996 1996
---------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Capitalized start-up and other costs... $4,163,941 $ 3,733,898 $ 3,972,981
Stock options--noncash compensation.... 2,768,488 3,848,128 4,085,146
Net operating loss carryforwards....... 1,149,755 12,181,162 31,310,726
Other accrued liabilities.............. 454,391 496,634 964,786
---------- ----------- -----------
Total gross deferred assets.............. 8,536,575 20,259,822 40,333,639
Less: valuation allowance.............. 8,291,380 18,304,754 31,990,518
---------- ----------- -----------
Net deferred tax assets.................. 245,195 1,955,068 8,343,121
Deferred tax liabilities--fixed assets
depreciation and amortization.......... 245,195 1,955,068 8,343,121
---------- ----------- -----------
Net deferred tax assets (liabilities).... -- -- --
========== =========== ===========
</TABLE>
The valuation allowance for deferred tax assets as of July 1, 1994 was
$2,375,327. The net change in the total valuation allowance for the years ended
June 30, 1995 and June 30, 1996 and for the six months ended December 31, 1996
was an increase of $5,916,053, $10,013,374 and $13,685,764, respectively. The
valuation allowances at June 30, 1996 and December 31, 1996 are a result of the
uncertainty regarding the ultimate realization of the tax benefits related to
the deferred tax assets. The utilization of the tax benefits associated with net
operating losses of approximately $80,000,000 at December 31, 1996 is dependent
upon the Company's ability to generate future taxable income. The net operating
loss carryforward period expires commencing in 2008 through the year 2012.
Further, as a result of certain financing and capital transactions, an annual
limitation on the future utilization of the net operating loss carryforward may
have occurred.
No income tax provision has been provided for the years ended June 30, 1995
and June 30, 1996 and the six months ended December 31, 1996 as the
aforementioned deferred tax assets have provided no tax benefit.
(11) ACQUISITION
On September 12, 1994 the Company executed a Stock Purchase Agreement with
Piedmont Teleport, Inc. under which the Company acquired certain assets,
liabilities, and certain right-of-way agreements for $20,000 in cash and the
issuance of 62,000 shares of the Company's common stock. The Company accounted
for the acquisition as a purchase and, accordingly, the purchase price was
allocated to the assets acquired and liabilities assumed based upon their
estimated fair values at September 12, 1994. The seller had the right to put
these shares back to the Company on November 1, 1996 for a price of $2.50 per
share. Accordingly, this obligation was recorded as redeemable stock until
November 1996 at which time it was reclassed to additional paid in capital.
F-20
<PAGE> 131
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following notes summarize the major methods and assumptions used in
estimating the fair value of financial instruments:
Cash and Cash Equivalents
The carrying amount approximates fair value due to the relatively short
period to maturity of these instruments.
Letters of Credit
The fair value of the Letters of credit is based on fees currently charged
for similar agreements.
Short-Term and Long-Term Debt
The fair value of the Company's long-term debt is estimated based on the
quoted market prices for the same or similar issues if available or based on the
present value of expected cash flows at rates currently available to the Company
for borrowings with similar terms.
The carrying amounts and fair values of the Company's financial instruments
at December 31, 1996 were:
<TABLE>
<CAPTION>
1996
----------------------------
CARRYING FAIR
VALUE VALUE
------------ ------------
<S> <C> <C>
Cash and cash equivalents (including restricted cash)... 80,960,696 80,960,696
Letters of credit....................................... -- 25,000
Long-term debt.......................................... 210,410,259 208,583,264
</TABLE>
(13) SUBSEQUENT EVENT
On January 17, 1997, the Company acquired 100% of the outstanding capital
stock of Cybergate, Inc. in exchange for 1,030,000 shares of common stock plus
up to an additional 150,000 shares if certain performance goals are achieved.
Cybergate, a Florida based Internet services provider, delivers high-speed data
communications services. The acquisition will be recorded using the purchase
method of accounting.
F-21
<PAGE> 132
AMERICAN COMMUNICATIONS SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1997
1996 (UNAUDITED)
------------- -------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents..................................... $ 78,618,544 $ 8,499,115
Restricted cash............................................... 2,342,152 5,156,258
Accounts receivable, net...................................... 2,429,077 6,653,925
Other current assets.......................................... 1,202,711 1,461,345
------------- -------------
Total current assets....................................... 84,592,484 21,770,643
------------- -------------
Networks, furniture and equipment, gross........................ 144,403,123 219,933,362
(less: Accumulated depreciation)........................... (8,320,372) (17,029,394)
------------- -------------
136,082,751 202,903,968
Deferred financing fees......................................... 8,380,283 10,340,377
Goodwill (net of accumulated amortization)...................... -- 7,748,679
Other assets.................................................... 982,649 617,309
------------- -------------
Total assets............................................... $ 230,038,167 $ 243,380,976
------------- -------------
Liabilities, Redeemable Stock, Options and Warrants and
Stockholders' Equity
Current Liabilities
Accounts payable.............................................. $ 33,587,407 $ 28,621,966
Accrued liabilities........................................... 4,132,132 5,097,044
Notes payable -- current portion.............................. 872,031 1,325,532
------------- -------------
Total current liabilities.................................. 38,591,570 35,044,542
------------- -------------
Long Term Liabilities
Notes payable................................................. 209,538,226 223,753,180
Other Long Term Liabilities................................... -- 808,781
Dividends payable............................................. 6,945,943 --
------------- -------------
Total liabilities.......................................... 255,075,739 259,606,503
------------- -------------
Redeemable stock, options and warrants.......................... 2,000,000 2,000,000
------------- -------------
Stockholders' Equity/(Deficit)
Preferred stock, $1.00 par value, 186,664 shares authorized
and designated as 9% Series A-1 Convertible Preferred
Stock, 186,664 and 0 shares, respectively, issued and
outstanding................................................ 186,664 --
Preferred stock, $1.00 par value, 277,500 shares designated as
9% Series B Convertible Preferred Stock, authorized,
277,500 and 0, respectively, issued and outstanding........ 277,500 --
Common Stock, $0.01 par value, 75,000,000 shares authorized,
6,784,996 and 35,926,902 shares, respectively, issued and
outstanding................................................ 67,850 359,269
Additional paid-in-capital.................................... 54,870,194 113,564,536
Accumulated deficit........................................... (82,439,780) (132,149,332)
------------- -------------
Total stockholders' equity/(deficit)............................ (27,037,572) (18,225,527)
------------- -------------
Total Liabilities, Redeemable Stock, Options and Warrants and
Stockholders' Equity/(deficit)................................ $ 230,038,167 $ 243,380,976
------------- -------------
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements
F-22
<PAGE> 133
AMERICAN COMMUNICATIONS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
--------------------------------- ---------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996 1997 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............................................ $ 1,609,621 $ 11,615,836 $ 2,426,260 $ 19,792,511
Operating Expenses
Network, development and operations............... 388,347 9,357,277 2,342,861 18,026,390
Selling, general and administrative............... 7,735,834 15,893,562 10,386,097 29,818,429
Non-cash compensation expense..................... (454,339) 584,458 1,531,426 824,002
Depreciation and amortization..................... 1,685,765 5,338,596 2,315,769 9,456,250
------------ ---- ------------ ---- ----------- ---- ------------
Total Operating Expenses............................ 9,355,607 31,173,893 16,576,153 58,125,071
Non-operating income/expenses
Interest and other income......................... (2,970,916) (193,620) (3,632,229) (1,077,691)
Interest and other expense........................ 4,141,366 6,287,621 7,641,990 12,420,763
------------ ---- ------------ ---- ----------- ---- ------------
Net loss before minority interest................... 8,916,436 25,652,058 18,159,654 49,675,632
Minority interest................................... (154,671) -- (256,745) --
------------ ---- ------------ ---- ----------- ---- ------------
Net loss............................................ 8,761,765 25,652,058 17,902,909 49,675,632
------------ ---- ------------ ---- ----------- ---- ------------
Preferred stock dividends/accretion................. 1,061,344 106,201 2,016,833 1,094,839
------------ ---- ------------ ---- ----------- ---- ------------
Net loss to common stockholders..................... 9,823,109 25,758,259 19,919,742 50,770,471
------------ ---- ------------ ---- ----------- ---- ------------
Net loss per common/common equivalent share......... ($1.49) ($0.92) ($3.03) ($2.82)
Average number of common/common
equivalent shares outstanding....................... 6,605,501 28,025,238 6,572,061 17,994,161
------------ ---- ------------ ---- ----------- ---- ------------
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements
F-23
<PAGE> 134
AMERICAN COMMUNICATIONS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
-----------------------------
JUNE 30, 1996 JUNE 30, 1997
------------- -------------
<S> <C> <C>
Cash Flow from Operating Activities
Net Loss........................................................ $ (17,902,909) $ (49,675,632)
Adjustments to reconcile net loss to net cash used in operating
activities: Depreciation and amortization..................... 2,294,569 9,456,250
Interest deferral and accretion............................... 7,573,427 12,239,366
Amortization of deferred financing fees....................... 668,317 473,666
Provision for doubtful accounts............................... 151,934 859,621
Loss attributable to minority interest........................ (324,012) --
Noncash compensation.......................................... 1,531,426 824,002
Changes in operating assets and liabilities:
Restricted cash related to operating activities............ -- (2,814,106)
Trade accounts receivable.................................. (330,530) (5,084,469)
Other current assets....................................... (458,272) (258,634)
Other assets............................................... (107,574) 365,340
Accounts payable........................................... 16,271,487 (4,162,403)
Other accrued liabilities.................................. (1,666,634) 964,912
-------------- --------------
Net cash provided by (used in) operating activities............. 7,701,229 (36,812,087)
-------------- --------------
Cash flows from investing activities:
Restricted cash related to network activities................. (890,152) --
Purchase of furniture and equipment........................... (1,538,943) (4,911,864)
Network development costs..................................... (41,660,076) (68,301,375)
-------------- --------------
Net cash (used in) investing activities......................... (44,089,171) (73,213,239)
-------------- --------------
Cash flows from financing activities:
Issuance of notes payable and warrants........................ 66,234,486 1,737,297
Issuance of common stock...................................... -- 40,702,000
Issuance of Series B Preferred Stock.......................... 274,682
Payment of notes payable...................................... -- (238,291)
Payment of dividends.......................................... -- (290,193)
Payment of deferred financing fees............................ (3,459,582) (3,299,499)
Warrant and stock option exercises............................ 279,233 1,294,583
-------------- --------------
Net cash flow provided by financing activities.................. 63,328,819 39,905,897
-------------- --------------
Net increase/(decrease) in cash and cash equivalents............ 26,940,877 (70,119,429)
Cash and cash equivalents -- beginning of period................ $ 107,175,104 $ 78,618,544
-------------- --------------
Cash and cash equivalents -- end of period...................... $ 134,115,981 $ 8,499,115
-------------- --------------
Supplemental disclosure of cash flow information:
Dividends declared with preferred stock....................... $ 2,016,833 $ 1,094,839
-------------- --------------
(Decrease) in accrued redeemable warrant cost................. $ (504,554) $ --
-------------- --------------
(Increase) in goodwill........................................ $ -- $ (8,118,632)
-------------- --------------
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements
F-24
<PAGE> 135
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS
BUSINESS AND ORGANIZATION
American Communications Services, Inc. (ACSI or the Company) provides a
broad range of integrated local voice and data communications services primarily
to commercial customers in mid-sized markets in the southern United States. The
Company manages and operates its own local fiber optic networks.
BASIS OF PRESENTATION AND RELATED MATTERS
Effective December 31, 1996, the Company changed its fiscal year from a
twelve month period ended June 30, to a twelve month period ended December 31.
The consolidated financial statements include the accounts of ACSI and its
majority-owned subsidiaries. All of the Company's subsidiaries are wholly owned
with the exception of the Louisville, Fort Worth, El Paso, Greenville and
Columbia subsidiaries, in which the Company has a 92.75% ownership interest. All
material intercompany accounts and transactions have been eliminated in
consolidation.
In the opinion of management, the accompanying unaudited interim financial
information reflects all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation thereof. Certain information and footnote
disclosure normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to instructions, rules and regulations prescribed by the Securities and Exchange
Commission. Although the Company believes that the disclosures provided are
adequate to make the information presented not misleading, these unaudited
interim condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996. Operating results for the three and six months periods ended
June 30, 1997 are not necessarily indicative of the results expected for the
full year.
SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS AND RESTRICTED CASH
Pursuant to SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", the Company's short and long-term debt securities and
marketable equity securities are accounted for at market value. The fair market
value of short- and long-term investments is determined based on quoted market
prices for those investments. The Company's marketable securities have been
classified as available for sale and are recorded at current market value with
an offsetting adjustment to stockholders' equity (deficit).
The Company's investments consist of commercial paper, U.S. Government
Securities and money market instruments, all with original maturities of 90 days
or less. The fair market value of such securities approximates amortized cost.
At December 31, 1996 and June 30, 1997, cash equivalents consists of government
securities and overnight investments.
The Company has provided performance bonds and letters of credit in various
cities in connection with its operations, resulting in a restriction of cash
amounting to $2,342,152 and $5,156,258 at December 31, 1996 and June 30, 1997,
respectively. The face amount of all bonds and letters of credits was
approximately $6,200,000 as of December 31, 1996, and $8,072,000 as of June 30,
1997.
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,
F-25
<PAGE> 136
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
design and construction, negotiation of rights-of-way, obtaining legal and
regulatory authorizations and the amount of interest costs associated with the
network development.
Provision for depreciation of networks, equipment and furniture is computed
using the straight-line method over the estimated useful lives of the assets
beginning in the month a network is substantially complete and available for use
and equipment and furniture are acquired.
The estimated useful lives of the Company's principal classes of assets are
as follows:
<TABLE>
<S> <C>
Networks:
Fiber optic cables and installation costs.................................... 20 years
Telecommunications equipment................................................. 3-7 years
Interconnection and collocation costs........................................ 3-10 years
Leasehold improvements......................................................... Life of lease
Furniture and fixtures......................................................... 5 years
Capitalized network development costs.......................................... 3-20 years
</TABLE>
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" on
January 1, 1996. This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.
DEFERRED FINANCING FEES
Deferred financing fees include commitment fees and other costs related to
certain debt financing transactions and are being amortized using the effective
interest method over the initial term of the related debt.
REVENUE RECOGNITION
Revenue is recognized as services are provided. Billings to customers for
services in advance of providing such services are deferred and recognized as
revenue when earned. The Company also enters into managed services agreements
with certain customers. Under such agreements the Company provides use of
Company owned equipment, collocation and network access services. Revenue is
recognized on a monthly basis as these services are provided to the customer.
EARNINGS (LOSS) PER COMMON SHARE
The computation of earnings (loss) per common share is based upon the
weighted average number of common shares outstanding. The effect of including
common stock options and warrants as common stock equivalents would be
anti-dilutive and is excluded from the calculation of loss per common share.
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
F-26
<PAGE> 137
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
benefits are expected to be realized in future years. A valuation allowance is
established to reduce deferred tax assets if it is more likely than not that
all, or some portion, of such deferred tax assets will not be realized. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.
RECLASSIFICATIONS
Certain reclassifications have been made to the June 30, 1996 consolidated
financial statements to conform to the June 30, 1997 presentation. Such
reclassifications had no effect on net loss or total stockholders' equity
(deficit).
STOCK OPTION PLAN
Prior to July 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees", and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
July 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock Based
Compensation", which permits entities to recognize as expense over the vesting
period the fair value of all stock based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosure for employee stock option grants as if the fair-
value based method defined in SFAS No. 123 had been applied. The Company has
elected to continue to apply the provisions of APB Opinion No. 25.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results may differ from those estimates.
CONCENTRATION OF CREDIT RISK
The Company receives a significant portion of its revenues from a small
number of major customers, particularly the long distance telecommunications
companies that service the Company's markets. The Company provides managed
services to certain Internet service providers. Such companies operate in a
highly competitive and uncertain environment.
FINANCING ACTIVITIES
To date, the Company has funded the construction of its networks and its
operations with external financings, as described below.
AT&T CREDIT FACILITY
In October 1994, the Company entered into the AT&T Credit Facility pursuant
to which AT&T Credit Corporation has agreed to provide up to $31.2 million in
financing for the development and construction of 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
F-27
<PAGE> 138
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
subsidiary, and ACSI pledged the other shares and the assets of the subsidiary
to AT&T Credit Corporation as security for the loan. As of June 30, 1997, an
aggregate of $31.2 million had been borrowed under these agreements. Principal
amounts payable on the AT&T Credit Facility during 1997 are approximately
$872,000.
The Company has entered into negotiations with AT&T Capital Corporation to
roll-up the five existing loan agreements comprising the AT&T Credit Facility
into one loan agreement to be entered into with the Company, and to be secured
by the existing assets of the Company (including the stock, but not the assets,
of certain of the Company's subsidiaries) (the "New AT&T Facility"). The Company
expects the New AT&T Facility to otherwise be on terms substantially similar to
those of the existing AT&T Credit Facility. The maximum aggregate amount of
credit available under the proposed New AT&T Facility will not exceed $35.0
million as defined by the Company's existing indentures. On June 26, 1997, each
of the Company's Subsidiaries that are parties to the AT&T Credit Facility
entered into an agreement with AT&T Credit Corporation to waive, for a period of
90 business days commencing on the date thereof, compliance by such subsidiaries
with certain covenants contained therein. Such covenants are not expected to be
included in the New AT&T Facility.
9% SERIES A CONVERTIBLE PREFERRED STOCK
In October 1994, the Company completed the private placement of 186,664
shares of its 9% Series A Convertible Preferred Stock, par value $1.00 per share
(which was later exchanged for Series A-1 Preferred Stock that was converted
into 7,466,560 shares of Common Stock simultaneous with the completion of the
Offering) with accompanying warrants to purchase an aggregate of 2,674,506
shares of Common Stock, for an aggregate consideration of $16.8 million (before
deduction of estimated offering expenses), including the conversion of $4.3
million of outstanding debt. Of the warrants sold in October 1994, warrants to
acquire 1,491,222 shares of Common Stock were exercised by a principal
stockholder for an aggregate exercise price of approximately $100,000. The
Series A Preferred Stock was converted into an aggregate of 7,350,160 shares of
common stock simultaneously with the completion of the April Offering discussed
below.
9% SERIES B CONVERTIBLE PREFERRED STOCK
In June 1995, the Company completed a private placement of 227,500 shares
of its Series B Preferred Stock with accompanying warrants to purchase an
aggregate of 1,584,303 shares of Common Stock, for an aggregate consideration of
$22.8 million. In addition, in November 1995, the Company completed a private
placement of 50,000 shares of its Series B Preferred Stock together with the
exercise of accompanying warrants to purchase 214,286 shares of Common Stock to
a principal stockholder for an aggregate consideration of $4.7 million. The
Series B Preferred Stock was converted into an aggregate of 9,910,704 shares of
Common Stock simultaneously with the completion of the April Offering discussed
below.
2005 SENIOR DISCOUNT NOTES (2005 NOTES)
On November 14, 1995, the Company completed an offering of 190,000 Units
(the "Units") consisting of $190,000,000 principal amount of 13% Senior Discount
Notes due 2005 (the "2005 Notes") and warrants to purchase 2,432,000 shares of
the Company's common stock at a price of $7.15 per share (the "2005 Warrants").
The 2005 Notes will accrete at a rate of 13% compounded semi-annually to an
aggregate principal amount of $190,000,000 by November 1, 2000. Thereafter,
interest on the 2005 Notes will accrue at the annual rate of 13% and will be
payable in cash semi-annually on November 1 and May 1, commencing May 1, 2001.
The Company received net proceeds of approximately $96,105,000 from the sale of
the Units. The value ascribed to the 2005 Warrants was $8,684,000.
F-28
<PAGE> 139
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
2006 SENIOR DISCOUNT NOTES (2006 NOTES)
On March 21, 1996, the Company completed an offering of $120,000,000 of
12-3/4% Senior Discount Notes due 2006 (the "2006 Notes") resulting in net
proceeds of approximately $61,800,000. The 2006 Notes will accrete at a rate of
12-3/4% compounded semi-annually, to an aggregate principal amount of
$120,000,000 by April 1, 2001. Thereafter, interest on the 2006 Notes will
accrue at the annual rate of 12-3/4% and will be payable in cash semi-annually
on April 1 and October 1, commencing on October 1, 2001. The 2006 Notes will
mature on April 1, 2006.
COMMON EQUITY (APRIL OFFERING)
On April 15, 1997, the Company consummated the issuance and sale of
5,060,000 shares of Common Stock (inclusive of the May 14, 1997 exercise by the
underwriters of their overallotment option) at a price per share of $5.00 in an
underwritten public offering, and the issuance and sale directly to certain of
its principal stockholders of 3,600,000 shares of Common Stock at a purchase
price of $4.70 per share (together, the "April Offering"). Total net proceeds to
the Company from the April Offering were approximately $40 million.
In addition, the Company recently completed additional financings,
described below.
14-3/4% REDEEMABLE PREFERRED STOCK (UNIT OFFERING)
On July 10, 1997, the Company consummated the private placement of 75,000
units, (the "Unit Offering"), consisting of its 14-3/4% Redeemable Preferred
Stock due 2008 (the "Redeemable Preferred Stock") and warrants to purchase
shares of common stock. The Company received net proceeds of approximately $67
million from the sale of these units. Each unit includes a warrant to purchase
80.318 shares of ACSI common stock subject to an increase of 22.645 additional
shares of common stock in the event that the Company fails to raise net proceeds
of at least $50 million through the issuance and sale of its qualified capital
stock on or before December 31, 1998. Dividends on the Redeemable Preferred
Stock will accrue from the date of issuance, are cumulative and will be payable
in arrears on March 31, June 30, September 30 and December 31, commencing
September 30, 1997. Dividends may be paid, at the Company's option, on any
dividend payment date either in cash or by the issuance of additional shares of
preferred stock, provided however, that after June 30, 2002, to the extent and
for so long as the Company is not precluded from paying cash dividends on the
Redeemable Preferred Stock by the terms of any then outstanding indebtedness or
any other agreement or instrument to which the Company is subject, the Company
shall pay the dividends in cash. The company is required to redeem all the
Redeemable Preferred Stock outstanding on June 30, 2008 at a redemption price
equal to 100.00% of the liquidation preference thereof, plus, without
duplication, accrued and unpaid dividends to the date of redemption.
2007 SENIOR NOTES (2007 NOTES)
On July 18, 1997, the Company completed the private placement of $220
million of 13-3/4% Senior Notes due 2007. The Company received net proceeds of
approximately $209 million from the sale of the 2007 Notes, of which,
approximately $70 million has been placed in escrow solely to fund the first
five interest payments or otherwise for the benefit of the holders of the 2007
Notes. The 2007 Notes bear interest at 13-3/4% compounded semi-annually in
arrears, payable on January 15 and July 15 each year, commencing on January 15,
1998. The notes mature on July 15, 2007. The 2007 Notes will not be redeemable
at the option of the Company prior to July 15, 2002, except that any time prior
to July 15, 2000, the Company may redeem up to 35% of the aggregate principal
amount of the 2007 Notes with the net proceeds from one or more equity offerings
of the Company, at a redemption price equal to 113.75% of the aggregate
principal amount thereof on the date of the redemption, subject to other
conditions.
F-29
<PAGE> 140
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SECURITIES TO WHICH IT RELATES, NOR DOES IT CONSTITUTE
AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES OR IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF NOR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information................ i
Summary............................... 1
Risk Factors.......................... 11
Use of Proceeds....................... 22
Capitalization........................ 23
Unaudited Pro Forma Condensed
Consolidated Financial Data......... 24
Selected Consolidated Financial
Data................................ 27
Exchange Offer........................ 28
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 34
Business.............................. 43
Management............................ 60
Certain Transactions.................. 69
Principal Stockholders................ 70
Description of Certain Indebtedness... 71
Description of the New Notes.......... 74
U.S. Federal Income Tax Consequences
of the Exchange Offer............... 102
Plan of Distribution.................. 102
Legal Matters......................... 103
Experts............................... 103
Change in Independent Public
Accountants......................... 103
Glossary.............................. 104
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
---------------------------------------------
PROSPECTUS
---------------------------------------------
$170,000,000
LOGO
OFFER TO EXCHANGE ITS
13 3/4% SENIOR NOTES
DUE 2007, WHICH HAVE BEEN
REGISTERED UNDER THE
SECURITIES ACT OF 1933,
AS AMENDED, FOR UP TO $170,000,000
AGGREGATE PRINCIPAL AMOUNT OF ITS
OUTSTANDING 13 3/4% SENIOR NOTES
DUE 2007
, 1997
======================================================
<PAGE> 141
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Second Restated Certificate of Incorporation provides that a director
of the Company will not be personally liable for monetary damages to the Company
or its stockholders for breach of fiduciary duty as a director, except for
liability, (i) for any breach of the director's duty of loyalty to such
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases or redemption as
provided in Section 174 of the DGCL or (iv) for any transaction from which the
director derived an improper personal benefit.
The Second Restated Certificate of Incorporation and the Amended and
Restated By-laws further provide that directors and officers of the Company (as
well as agents and employees of the Company at the discretion of the Board)
shall, to the fullest extent authorized by the DGCL or any other applicable laws
then in effect, be indemnified against liabilities arising from their service as
directors and officers. The Company has entered into indemnification agreements
with each of its executive officers and directors to reimburse them for certain
liabilities incurred in connection with the performance of their fiduciary
duties.
Section 145 of the DGCL empowers a corporation to indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Section 145 also empowers a corporation to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that such person acted in any of the
capacities set forth above, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted under similar standards, except
that no indemnification may be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the corporation
unless, and only to the extent that, the Delaware Court of Chancery or the court
in which such action was brought shall determine that despite the adjudication
of liability such person is fairly and reasonably entitled to indemnity for such
expenses which the Delaware Court of Chancery or such other court shall deem
proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to above or in the defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith, that indemnification provided for by Section 145 shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled;
and that the corporation is empowered to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation against any liability asserted against him in any such capacity or
arising out of his status as such, whether or not the corporation would have the
power to indemnify him against such liability under Section 145.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the
II-1
<PAGE> 142
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- --------------------------------------------------------------------- --------------
<C> <S> <C>
3.1 Second Restated Certificate of Incorporation of the Company. ........ --
3.2 Certificate of 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. ................................. ++
3.8 Certificate of Correction dated March 11, 1996....................... -
3.9 Supplemental Governance Agreement dated February 26, 1996............ -
4.1 Specimen Certificate of the Company's Common Stock. ................. *
4.2 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. ..................................................... --
5.1 Opinion of Riley M. Murphy, General Counsel of the Company. .........
----
9.1 Standstill Agreement dated June 26, 1995, between the Company and
certain of its Preferred Stockholders. .............................. ****
9.2 Standstill Agreement dated November 8, 1995, between the Company and
certain of its Preferred Stockholders. .............................. ++
</TABLE>
II-2
<PAGE> 143
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- --------------------------------------------------------------------- --------------
<C> <S> <C>
9.3 Voting Rights Agreement dated November 8, 1995, between the Company
and certain of its Preferred Stockholders. .......................... ++
9.4 Amendment to Voting Rights Agreement dated December 14, 1995. ....... -
10.1 Exchange Agreement, dated June 1, 1994, between the Company and
certain of its Preferred Shareholders. .............................. *
10.2 Exchange Agreement, dated June 26, 1995, between the Company and its
9% Series A Preferred Shareholders. ................................. **
10.3 Company's Amended 1994 Stock Option Plan. ........................... ++
10.4 Company's Employee Stock Purchase Agreement. ........................ ++++
10.5 Registration Rights Agreement dated July 1, 1992, between American
Lightwave, Inc. and persons named therein. .......................... *
10.6 Supplemental Registration Rights Agreement dated June 26, 1995. ..... ****
10.7 Management Registration Rights Agreement dated June 30, 1995. ....... ****
10.8 Registration Rights Agreement dated June 26, 1995, between the
Company and certain Preferred Stockholders. ......................... **
10.9 Form of Warrant Agreement issued to certain Preferred Stockholders on
June 26, 1995. ...................................................... ****
10.10 Form of $.01 Warrant Agreement. ..................................... ****
10.11 Form of $1.79 Warrant Agreement. .................................... ****
10.12 Form of $2.25 Warrant Agreement. .................................... ****
10.13 Stockholders Agreement dated June 26, 1995, between the Company and
certain Preferred Stockholders. ..................................... ****
10.14 Third Amended and Restated Employment Agreement between the Company
and Anthony J. Pompliano. ........................................... ****
10.15 Third Amended and Restated Employment Agreement between the Company
and George M. Tronsrue, III. ........................................ ****
10.16 Third Amended and Restated Employment Agreement between the Company
and Riley M. Murphy. ................................................ ****
10.17 Employment Agreement between the Company and Jack E. Reich. ......... ****
10.18 Employment Agreement between the Company and David L. Piazza. ....... ++++
10.19 Form of Stock Option Certificates, as amended, issued to executive
officers under employment agreements................................. ****
10.20 Agreement, dated March 2, 1994, between the Company and Gerard Klauer
Mattison & Co., as amended. ......................................... *
10.21 Agreement, dated March 20, 1995, between the Company and Gerard
Klauer Mattison & Co., as amended. .................................. ****
10.22 Agreement, dated October 19, 1994, between the Company and Marvin
Saffian & Company. .................................................. *
10.23 Lease Agreement for the Company's executive offices at 131 National
Business Parkway, Suite 100, Annapolis Junction, Maryland, as
amended. ............................................................ ****
10.24 Loan and Security Agreement, dated October 17, 1994, between AT&T
Credit Corporation and American Communication Services of Louisville,
Inc. ................................................................ *
10.25 Loan and Security Agreement, dated February 28, 1995, between AT&T
Credit Corporation and American Communication Services of Fort Worth,
Inc. ................................................................ ****
10.26 Loan and Security Agreement, dated June 30, 1995, between AT&T Credit
Corporation and American Communication Services of Greenville, Inc.
and American Communication Services of Columbia, Inc. ............... ****
10.27 Amendment No. 1 to Parent Support and Pledge Agreement (Louisville)
between the Company and AT&T Credit Corporation. .................... ****
10.28 Amendment No. 1 to Parent Support and Pledge Agreement (Fort Worth)
between the Company and AT&T Credit Corporation. .................... ****
10.29 Amendment No. 1 to Loan and Security Agreement between American
Communications Services of Louisville, Inc. and AT&T Credit
Corporation. ........................................................ ****
10.30 Consulting Agreement, dated October 25, 1993, between the Company and
Thurston Partners, Inc.. ............................................ *
10.31 Consulting Agreement, effective July 1, 1994, between the Company and
SGC Advisory Services, Inc. ......................................... *
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. ....................... *
</TABLE>
II-3
<PAGE> 144
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- --------------------------------------------------------------------- --------------
<C> <S> <C>
10.34 Investment Agreement dated October 21, 1994, between the Company and
the Purchasers named therein. ....................................... *
10.35 Stock Purchase Agreement, dated October 17, 1994, between the Company
and AT&T Credit Corporation. ........................................ *
10.36 American Communication Services of Louisville, Inc. Common Stock
Purchase Agreement, dated October 17, 1994 .......................... *
10.37 Stock Purchase Agreement, dated November 28, 1994, by and among the
Company, CitiLink Corp., and the former directors and shareholders of
CitiLink Corp., as amended August 3, 1995. .......................... ****
10.38 Stock Purchase Agreement dated December 17, 1996 by and between the
Company and Cybergate, Inc. ......................................... ++++
10.39 Stock Purchase Agreement, dated May 12, 1995, by and among the
Company, Piedmont Teleport, Inc., Randal Holcombe and Karen Holcombe,
as amended. ......................................................... ****
10.40 Stock and Warrant Purchase Agreement, dated June 26, 1995, between
the Company and the Purchasers named therein......................... **
10.41 Form of Indemnity Agreement between the Company and its Directors, as
amended. ............................................................ ****
10.42 Assignment and Assumption Agreement dated June 21, 1995, between the
Company and Apex Investment Fund II, L.P. ........................... ****
10.43 Registration Rights Agreement dated November 9, 1995, between the
Company and certain initial purchasers. ............................. ++
10.44 Loan and Security Agreement, dated September 8, 1995, between AT&T
Credit Corporation and American Communications Services of El Paso,
Inc. ................................................................ ++
10.45 Parent Support and Pledge Agreement (El Paso) dated September 8,
1995, between the Company and AT&T Credit Corporation. .............. ++
10.46 Letter Agreement dated November 14, 1995, between the Company and ING
Equity Partners, L.P. I, with respect to the purchase of 50,000
shares of the Company's 9% Series B-4 Convertible Preferred Stock and
warrants to purchase 214,286 shares of Common Stock. ................ ++
10.47 Warrant to Purchase Shares of American Communications Services, Inc.
Common Stock dated December 28, 1995, between the Company and Gerard
Klauer, Mattison & Co. ("GKM Warrant I"). ........................... ++
10.48 Warrant to Subscribe For and Purchase Common Stock of American
Communications Services, Inc. dated December 28, 1995, between the
Company and Gerard Klauer, Mattison & Co. ("GKM Warrant II"). ....... ++
10.49 Amendment to Amended 1994 Stock Option Plan of the Company........... (o)
10.50 Parent Pledge and Support Agreement dated as of October 17, 1994
between the Company and AT&T Credit Corporation...................... *
10.51 American Communication Services of El Paso Inc. Common Stock Purchase
Agreement dated September 8, 1995.................................... *
10.52 Registration Rights Agreement dated as of July 10, 1997, among the
Company, BT Securities Corporation, Alex. Brown & Sons Incorporated,
The Huff Alternative Income Fund, L.P., General Motors Domestic Group
Pension Trust, Societe Generale Securities Corporation, ING Baring
(U.S.) Securities, Inc. and McDermott Inc. Master Trust. ............ --
10.53 Registration Rights Agreement dated as of July 23, 1997 among the
Company and BT Securities Corporation as representatives of the
Initial Purchasers named therein. ................................... --
11.1 Statement re: computation of per share earnings (loss). ............. +
16.1 Letter re: change in certifying accountant. ......................... ***
21.1 Subsidiaries of the Registrant. ..................................... ++++
23.1 Consent of KPMG Peat Marwick LLP. ...................................
---
23.2 Consent of Riley M. Murphy (included in Exhibit 5.1) ................
----
24.1 Power of Attorney (included on page II-7). ..........................
---
25.1 Statement of Eligibility and Qualification on Form T-1 of The Chase
Manhattan Bank under the Indenture dated July 23, 1997. .............
---
</TABLE>
II-4
<PAGE> 145
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- --------------------------------------------------------------------- --------------
<C> <S> <C>
99.1 Form of Letter of Transmittal. ...................................... ---
99.2 Form of Notice of Guaranteed Delivery. ..............................
---
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies
and Other Nominees. .................................................
---
99.4 Form of Letter to Clients. ..........................................
---
99.5 Form of Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9........................................
---
</TABLE>
- ---------------
* Previously filed as an exhibit to the Company's Registration
Statement on Form SB-2 (File No. 33-87200) and incorporated herein by
reference thereto.
** Previously filed as an exhibit to the Company's Current Report on
Form 8-K dated June 26, 1995, and incorporated herein by reference
thereto.
*** Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the fiscal quarter ended March 31, 1995, and
incorporated herein by reference thereto.
**** Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1995, and incorporated
herein by reference thereto.
+ Previously filed as an exhibit to the Company's Transition Report on
Form 10-KSB for the transition period from July 1, 1996 to December
31, 1996, and the Company's Quarterly Report on Form 10-QSB for the
fiscal quarter ended June 30, 1997, both of which are incorporated
herein by reference thereto.
++ Previously filed as an exhibit to the Company's Registration
Statement on Form S-4 (File No. 33-80305) and incorporated herein by
reference thereto.
+++ Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (File No. 33-80673) and incorporated herein by reference
thereto.
++++ Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (File No. 333-20867) and incorporated herein by reference
thereto.
+++++ Previously filed as an exhibit to the Company's Current Report on Form
8-K dated March 26, 1996 and incorporated herein by reference thereto.
++++++ Previously filed as an exhibit to the Company's Current Report on Form
8-K dated January 17, 1997 and incorporated herein by reference
thereto.
+++++++ To be filed by amendment.
- Previously filed as an exhibit to the Company's Registration
Statement on Form S-4 (File No. 333-3632) and incorporated herein by
reference thereto.
-- Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the fiscal quarter ended June 30, 1997 and
incorporated by reference hereto.
--- Filed herewith.
---- To be filed by amendment.
() (o) Previously filed as an exhibit to the Company's Definitive Proxy
Statement filed on October 14, 1996 and incorporated herein by
reference thereto.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions set forth in response to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion of
the Securities and 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
II-5
<PAGE> 146
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
For purposes of determining any liability under the Securities Act, the
registrant will treat the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant under rule 424(b)(1), or (4) or
497(h) under the Securities Act (sec.sec.230.424(b)(1), (4) or 230.497(h)) as
part of this registration statement as of the time the Commission declared it
effective.
For purposes of determining any liability under the Securities Act, treat
each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
II-6
<PAGE> 147
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 26TH DAY OF AUGUST, 1997.
AMERICAN COMMUNICATIONS SERVICES,
INC.,
Registrant
By: /s/ ANTHONY J. POMPLIANO
------------------------------------
Anthony J. Pompliano
Executive Chairman of the
Board of Directors
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Anthony J. Pompliano 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>
/s/ ANTHONY J. POMPLIANO Executive Chairman of the August 26, 1997
- --------------------------------------- Board of Directors
Anthony J. Pompliano (Principal Executive Officer)
/s/ DAVID L. PIAZZA Chief Financial Officer August 26, 1997
- --------------------------------------- (Principal Financial and
David L. Piazza Accounting Officer)
/s/ GEORGE M. MIDDLEMAS Director August 26, 1997
- ----------------------------------------
George M. Middlemas
/s/ EDWIN M. BANKS Director August 26, 1997
- ----------------------------------------
Edwin M. Banks
/s/ CHRISTOPHER L. RAFFERTY Director August 26, 1997
- ----------------------------------------
Christopher L. Rafferty
</TABLE>
II-7
<PAGE> 148
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ----------------------------------- -----------------
<S> <C> <C>
Director August 26, 1997
/s/ BENJAMIN P. GIESS
- ----------------------------------------
Benjamin P. Giess
Director August 26, 1997
/s/ OLIVIER L. TROUVEROY
- ----------------------------------------
Olivier L. Trouveroy
Director August 26, 1997
/s/ PETER C. BENTZ
- ----------------------------------------
Peter C. Bentz
</TABLE>
II-8
<PAGE> 149
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. ++
3.8 Certificate of Correction dated March 11, 1996. -
3.9 Supplemental Governance Agreement dated February 26, 1996. -
4.1 Specimen Certificate of the Company's Common Stock. *
4.2 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> 150
<TABLE>
<CAPTION>
SEQUENTIALLY
INCORPORATION NUMBERED
EXHIBIT NO. DESCRIPTION BY REFERENCE PAGE
- ----------- ------------------------------------------------------------ ------------- ------------
<C> <S> <C> <C>
5.1 Opinion of Riley M. Murphy, General Counsel of the Company. ----
9.1 Standstill Agreement dated June 26, 1995, between the
Company and certain of its Preferred Stockholders. ****
9.2 Standstill Agreement dated November 8, 1995, between the
Company and certain of its Preferred Stockholders. ++
9.3 Voting Rights Agreement dated November 8, 1995, between the
Company and certain of its Preferred Stockholders. ++
9.4 Amendment to Voting Rights Agreement dated December 14,
1995. -
10.1 Exchange Agreement, dated June 1, 1994, between the Company
and certain of its Preferred Shareholders. *
10.2 Exchange Agreement, dated June 26, 1995, between the Company
and its 9% Series A Preferred Shareholders. **
10.3 Company's Amended 1994 Stock Option Plan. ++
10.4 Company's Employee Stock Purchase Agreement. ++++
10.5 Registration Rights Agreement dated July 1, 1992, between
American Lightwave, Inc. and persons named therein. *
10.6 Supplemental Registration Rights Agreement dated June 26,
1995. ****
10.7 Management Registration Rights Agreement dated June 30,
1995. ****
10.8 Registration Rights Agreement dated June 26, 1995, between
the Company and certain Preferred Stockholders. **
10.9 Form of Warrant Agreement issued to certain Preferred
Stockholders on June 26, 1995. ****
10.10 Form of $.01 Warrant Agreement. ****
10.11 Form of $1.79 Warrant Agreement. ****
10.12 Form of $2.25 Warrant Agreement. ****
10.13 Stockholders Agreement dated June 26, 1995, between the
Company and certain Preferred Stockholders. ****
10.14 Third Amended and Restated Employment Agreement between the
Company and Anthony J. Pompliano. ****
10.15 Third Amended and Restated Employment Agreement between the
Company and George M. Tronsrue, III. ****
10.16 Third Amended and Restated Employment Agreement between the
Company and Riley M. Murphy. ****
10.17 Employment Agreement between the Company and Jack E. Reich. ****
10.18 Employment Agreement between the Company and David L.
Piazza. ++++
10.19 Form of Stock Option Certificates, as amended, issued to
executive officers under employment agreements. ****
10.20 Agreement, dated March 2, 1994, between the Company and
Gerard Klauer Mattison & Co., as amended. *
10.21 Agreement, dated March 20, 1995, between the Company and
Gerard Klauer Mattison & Co., as amended. ****
10.22 Agreement, dated October 19, 1994, between the Company and
Marvin Saffian & Company. *
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. *
</TABLE>
<PAGE> 151
<TABLE>
<CAPTION>
SEQUENTIALLY
INCORPORATION NUMBERED
EXHIBIT NO. DESCRIPTION BY REFERENCE PAGE
- ----------- ------------------------------------------------------------ ------------- ------------
<C> <S> <C> <C>
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. ++
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. ++
</TABLE>
<PAGE> 152
<TABLE>
<CAPTION>
SEQUENTIALLY
INCORPORATION NUMBERED
EXHIBIT NO. DESCRIPTION BY REFERENCE PAGE
- ----------- ------------------------------------------------------------ ------------- ------------
<C> <S> <C> <C>
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. --
11.1 Statement re: computation of per share earnings (loss). +
16.1 Letter re: change in certifying accountant. ***
21.1 Subsidiaries of the Registrant. ++++
23.1 Consent of KPMG Peat Marwick LLP.
---
23.2 Consent of Riley M. Murphy (included in Exhibit 5.1).
----
24.1 Power of Attorney (included on page II-7).
---
25.1 Statement of Eligibility and Qualification on Form T-1 of
The Chase Manhattan Bank under the Indenture dated July 23,
1997.
---
99.1 Form of Letter of Transmittal.
---
99.2 Form of Notice of Guaranteed Delivery.
---
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.
---
99.4 Form of Letter to Clients.
---
99.5 Form of Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9.
---
</TABLE>
- ---------------
* Previously filed as an exhibit to the Company's Registration
Statement on Form SB-2 (File No. 33-87200) and incorporated herein by
reference thereto.
** Previously filed as an exhibit to the Company's Current Report on
Form 8-K dated June 26, 1995, and incorporated herein by reference
thereto.
*** Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the fiscal quarter ended March 31, 1995, and
incorporated herein by reference thereto.
**** Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1995, and incorporated
herein by reference thereto.
<PAGE> 153
+ Previously filed as an exhibit to the Company's Transition Report on
Form 10-KSB for the transition period from July 1, 1996 to December
31, 1996, and the Company's Quarterly Report on Form 10-QSB for the
fiscal quarter ended June 30, 1997, both of which are incorporated
herein by reference thereto.
++ Previously filed as an exhibit to the Company's Registration
Statement on Form S-4 (File No. 33-80305) and incorporated herein by
reference thereto.
+++ Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (File No. 33-80673) and incorporated herein by reference
thereto.
++++ Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (File No. 333-20867) and incorporated herein by reference
thereto.
+++++ Previously filed as an exhibit to the Company's Current Report on Form
8-K dated March 26, 1996 and incorporated herein by reference thereto.
++++++ Previously filed as an exhibit to the Company's Current Report on Form
8-K dated January 17, 1997 and incorporated herein by reference
thereto.
+++++++ To be filed by amendment.
- Previously filed as an exhibit to the Company's Registration
Statement on Form S-4 (File No. 333-3632) and incorporated herein by
reference thereto.
-- Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the fiscal quarter ended June 30, 1997 and
incorporated by reference hereto.
--- Filed herewith.
---- To be filed by amendment.
() (o) Previously filed as an exhibit to the Company's Definitive Proxy
Statement filed on October 14, 1996 and incorporated herein by
reference thereto.
<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
August 25, 1997
<PAGE> 1
EXHIBIT 25.1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF
A TRUSTEE PURSUANT TO SECTION 305(b)(2) [ ]
THE CHASE MANHATTAN BANK
(EXACT NAME OF TRUSTEE AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
NEW YORK 13-4994650
(STATE OF INCORPORATION (I.R.S. EMPLOYER
IF NOT A NATIONAL BANK) IDENTIFICATION NO.)
270 PARK AVENUE
NEW YORK, NEW YORK 10017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
WILLIAM H. MCDAVID
GENERAL COUNSEL
270 PARK AVENUE
NEW YORK, NEW YORK 10017
TEL: (212) 270-2611
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
AMERICAN COMMUNICATIONS SERVICES, INC.
(EXACT NAME OF OBLIGOR AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
ANNAPOLIS JUNCTION 36-3845300
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
131 NATIONAL BUSINESS PARKWAY, SUITE 100
ANNAPOLIS JUNCTION, MD 20701
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
------------------------
13 3/4% SENIOR NOTES DUE 2007
(TITLE OF THE INDENTURE SECURITIES)
================================================================================
<PAGE> 2
GENERAL
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
New York State Banking Department, State House, Albany, New York 12110
Board of Governors of the Federal Reserve System, Washington, D.C.
20551
Federal Reserve Bank of New York, District No. 2, 33 Liberty Street,
New York, N.Y.
Federal Deposit Insurance Corporation, Washington, D.C. 20429
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
ITEM 2. AFFILIATIONS WITH THE OBLIGOR.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
2
<PAGE> 3
ITEM 16. LIST OF EXHIBITS
List below all exhibits filed as a part of this Statement of Eligibility.
1. A copy of the Articles of Association of the Trustee as now in effect,
including the Organization Certificate and the Certificates of Amendment dated
February 17, 1969, August 31, 1977, December 31, 1980, September 9, 1982,
February 28, 1985, December 2, 1991 and July 10, 1996 (see Exhibit 1 to Form T-1
filed in connection with Registration Statement No. 333-06249, which is
incorporated by reference).
2. A copy of the Certificate of Authority of the Trustee to Commence
Business (see Exhibit 2 to Form T-1 filed in connection with Registration
Statement No. 33-50010, which is incorporated by reference. On July 14, 1996, in
connection with the merger of Chemical Bank and The Chase Manhattan Bank
(National Association), Chemical Bank, the surviving corporation, was renamed
The Chase Manhattan Bank).
3. None, authorization to exercise corporate trust powers being contained
in the documents identified above as Exhibits 1 and 2.
4. A copy of the existing By-Laws of the Trustee (see Exhibit 4 to Form T-1
filed in connection with Registration Statement No. 333-06249, which is
incorporated by reference).
5. Not applicable.
6. The consent of the Trustee required by Section 321(b) of the Act (see
Exhibit 6 to Form T-1 filed in connection with Registration Statement No.
33-50010, which is incorporated by reference. On July 14, 1996, in connection
with the merger of Chemical Bank and The Chase Manhattan Bank (National
Association), Chemical Bank, the surviving corporation, was renamed The Chase
Manhattan Bank).
7. A copy of the latest report of condition of the Trustee, published
pursuant to law or the requirements of its supervising or examining authority.
8. Not applicable.
9. Not applicable.
3
<PAGE> 4
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the
Trustee, The Chase Manhattan Bank, a corporation organized and existing under
the laws of the State of New York, has duly caused this statement of eligibility
to be signed on its behalf by the undersigned, thereunto duly authorized, all in
the City of New York and State of New York, on the 20th day of August 1997.
THE CHASE MANHATTAN BANK
By /s/ ANDREW M. DECK
------------------------------------
Andrew M. Deck
Vice President
4
<PAGE> 5
EXHIBIT 7 TO FORM T-1
BANK CALL NOTICE
RESERVE DISTRICT NO. 2
CONSOLIDATED REPORT OF CONDITION OF
THE CHASE MANHATTAN BANK
OF 270 PARK AVENUE, NEW YORK, NEW YORK 10017
AND FOREIGN AND DOMESTIC SUBSIDIARIES,
A MEMBER OF THE FEDERAL RESERVE SYSTEM,
AT THE CLOSE OF BUSINESS JUNE 30, 1997, IN
ACCORDANCE WITH A CALL MADE BY THE FEDERAL RESERVE BANK OF THIS
DISTRICT PURSUANT TO THE PROVISIONS OF THE FEDERAL RESERVE ACT.
<TABLE>
<CAPTION>
DOLLAR AMOUNTS
IN MILLIONS
ASSETS --------------------
<S> <C> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin.............................. $ 13,892
Interest-bearing balances....................................................... 4,282
Securities:
Held to maturity securities....................................................... 2,857
Available for sale securities..................................................... 34,091
Federal Funds sold and securities purchased under agreements to resell............ 29,970
Loans and lease financing receivables:
Loans and leases, net of unearned income........................................ $124,827
Less: Allowance for loan and lease losses....................................... 2,753
Less: Allocated transfer risk reserve........................................... 13
--------
Loans and leases, net of unearned income, allowance, and reserve................ 122,061
Trading Assets.................................................................... 56,042
Premises and fixed assets (including capitalized leases).......................... 2,904
Other real estate owned........................................................... 306
Investments in unconsolidated subsidiaries and associated companies............... 232
Customers' liability to this bank on acceptances outstanding...................... 2,092
Intangible assets................................................................. 1,532
Other assets...................................................................... 10,448
--------
TOTAL ASSETS.................................................................. $280,709
========
LIABILITIES
Deposits
In domestic offices............................................................. $ 91,249
Noninterest-bearing............................................................. $ 38,157
Interest-bearing................................................................ 53,092
--------
In foreign offices, Edge and Agreement subsidiaries, and IBF's.................. 70,192
Noninterest-bearing............................................................. $ 3,712
Interest-bearing................................................................ 66,480
Federal funds purchased and securities sold under agreements to repurchase........ 35,185
Demand notes issued to the U.S. Treasury.......................................... 1,000
Trading liabilities............................................................... 42,307
Other Borrowed money (includes mortgage indebtedness and obligations under
capitalized leases):
With a remaining maturity of one year or less................................... 4,593
With a remaining maturity of more than one year through three years............. 260
With a remaining maturity of more than three years.............................. 146
Bank's liability on acceptances executed and outstanding.......................... 2,092
Subordinated notes and debentures................................................. 5,715
Other liabilities................................................................. 11,373
TOTAL LIABILITIES............................................................. 264,112
--------
EQUITY CAPITAL
Perpetual Preferred stock and related surplus..................................... 0
Common stock...................................................................... 1,211
Surplus (exclude all surplus related to preferred stock).......................... 10,283
Undivided profits and capital reserves............................................ 5,280
Net unrealized holding gains (Losses) on available-for-sale securities............ (193)
Cumulative foreign currency translation adjustments............................... 16
TOTAL EQUITY CAPITAL.......................................................... 16,597
--------
TOTAL LIABILITIES, LIMITED-LIFE PREFERRED STOCK AND EQUITY CAPITAL............ $280,709
========
</TABLE>
5
<PAGE> 6
I, Joseph L. Sclafani, E.V.P. & Controller of the above-named bank, do
hereby declare that this Report of Condition has been prepared in conformance
with the instructions issued by the appropriate Federal regulatory authority and
is true to the best of my knowledge and belief.
JOSEPH L. SCLAFANI
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us, and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the appropriate Federal regulatory authority and is true and correct.
WALTER V. SHIPLEY
THOMAS C. LABRECQUE
WILLIAM B. HARRISON, JR.
DIRECTORS
<PAGE> 1
EXHIBIT 99.1
LETTER OF TRANSMITTAL
AMERICAN COMMUNICATIONS SERVICES, INC.
OFFER TO EXCHANGE ITS REGISTERED
13 3/4% SENIOR NOTES DUE 2007
FOR UP TO $170,000,000 AGGREGATE PRINCIPAL AMOUNT
OF ITS OUTSTANDING
13 3/4% SENIOR NOTES DUE 2007
PURSUANT TO THE PROSPECTUS, DATED , 1997
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON
, 1997, UNLESS EXTENDED (THE "EXPIRATION DATE"), TENDERS MAY BE
WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
<TABLE>
<S> <C> <C>
By Mail/Overnight Delivery: Facsimile Transmission Number: By Hand:
The Chase Manhattan Bank (212) 638-7380 The Chase Manhattan Bank
450 West 33rd Street (212) 638-7381 Corporate Trust -- Securities
15th Floor (For Eligible Institutions Window
New York, New York 10001-2697 Only) 55 Water Street -- Room 234
Confirm by Telephone: North Building
Sharon Lewis: (212) 638-0454 New York, NY 10041
Carlos Esteves: (212) 638-0828
For Information Call:
Andrew Deck: (212) 946-3348
</TABLE>
Delivery of this instrument to an address other than as set forth above, or
transmission of instructions via facsimile other than as set forth above, will
not constitute a valid delivery.
The undersigned acknowledges that he or she has received the Prospectus,
dated , 1997 (the "Prospectus"), of American Communications
Services, Inc., a Delaware corporation (the "Company"), and this Letter of
Transmittal (this "Letter"), which together constitute the Company's offer (the
"Exchange Offer") to exchange an aggregate principal amount of up to
$170,000,000 of 13 3/4% Senior Notes due 2007 (the "New Notes") of the Company
for an equal principal amount of the Company's outstanding 13 3/4% Senior Notes
due 2007 (the "Old Notes").
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount at maturity equal to that of the
surrendered Old Note. Interest on the New Notes will accrue at the rate of
13 3/4% per annum and will be payable semi-annually in arrears on January 15 and
July 15, commencing January 15, 1998. If (i) neither a registration statement
(the "Exchange Offer Registration Statement") relating to the Exchange Offer nor
a shelf registration statement (the "Shelf Registration Statement") with respect
to the Old Notes has been declared effective by November 20, 1997, or (ii)
notwithstanding that the Company has consummated or will consummate the Exchange
Offer, the Company is required to file a Shelf Registration Statement and such
Shelf Registration Statement is not declared effective by November 20, 1997,
then commencing on November 21, 1997, additional interest shall be paid on the
Old Notes at a rate per annum equal to 0.5% of the principal amount of the Old
Notes (such additional 0.5% being herein called "Special Interest"). The
aggregate amount of Special Interest payable will in no event exceed 1.5% per
annum of the principal amount. Upon the effectiveness of the Exchange Offer
Registration Statement or a Shelf Registration Statement, Special Interest
payable on the Old Notes from the date of such effectiveness will cease to
accrue and all accrued and unpaid interest as of the occurrence of such
effectiveness shall be paid to the holders of the Old Notes exchanged for New
Notes. The Company reserves the right, at any time or from time to time, to
extend the Exchange Offer at its discretion, in which event the term "Expiration
Date" shall mean the latest time and date to which the Exchange Offer is
extended. The Company shall notify the holders of the Old Notes of any extension
by means of a press release or other public
<PAGE> 2
announcement prior to 9:00 A.M., New York City time, on the next business day
after the previously scheduled Expiration Date.
This Letter is to be completed by a holder of Old Notes either if
certificates are to be forwarded herewith or if a tender of Old Notes, if
available, is to be made by book-entry transfer to the account maintained by the
Exchange Agent at The Depository Trust Company (the "Book-Entry Transfer
Facility") pursuant to the procedures set forth in "The Exchange Offer" section
of the Prospectus. Holders of Old Notes whose certificates are not immediately
available, or who are unable to deliver their certificates or confirmation of
the book-entry tender of their Old Notes into the Exchange Agent's account at
the Book-Entry Transfer Facility (a "Book-Entry Confirmation") and all other
documents required by this Letter to the Exchange Agent on or prior to the
Expiration Date, must tender their Old Notes according to the guaranteed
delivery procedures set forth in "The Exchange Offer -- Guaranteed Delivery
Procedures" section of the Prospectus. See Instruction 1. Delivery of documents
to the Book-Entry Transfer Facility does not constitute delivery to the Exchange
Agent.
The undersigned has completed the appropriate boxes below and signed this
Letter to indicate the action the undersigned desires to take with respect to
the Exchange Offer.
<PAGE> 3
List below the Old Notes to which this Letter relates. If the space
provided below is inadequate, the certificate numbers and principal amount of
Old Notes should be listed on a separate signed schedule affixed hereto.
[CAPTION]
<TABLE>
<S> <C> <C> <C>
DESCRIPTION OF OLD NOTES
<S> <C> <C> <C>
<CAPTION>
1 2 3
<S> <C> <C> <C>
<CAPTION>
AGGREGATE PRINCIPAL
NAMES(S) AND ADDRESS(ES) OF REGISTERED HOLDERS(S) CERTIFICATE PRINCIPAL AMOUNT AMOUNT
(PLEASE FILL IN, IF BLANK) NUMBER(S)* OF OLD NOTE(S) TENDERED**
<S> <C> <C> <C>
TOTAL
* Need not be completed if Old Notes are being tendered by book-entry transfer.
** Unless otherwise indicated in this column, a holder will be deemed to have tendered ALL of the Old Notes
represented by the Old Notes indicated in column 2. See Instruction 2. Old Notes tendered hereby must be in
denominations of principal amount of $1,000 and any integral multiple thereof. See Instruction 1.
</TABLE>
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution
Account Number
------------------------------ Transaction Code Number
------------------------------
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE
FOLLOWING:
Name(s) of Registered Holder(s)
Window Ticket Number (if any)
Date of Execution of Notice of Guaranteed Delivery
Name of Institution which guaranteed delivery
IF DELIVERED BY BOOK-ENTRY TRANSFER, COMPLETE THE FOLLOWING:
Account Number
------------------------------ Transaction Code Number
------------------------------
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name:
Address:
<PAGE> 4
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the aggregate principal amount of Old
Notes indicated above. Subject to, and effective upon, the acceptance for
exchange of the Old Notes tendered hereby, the undersigned hereby sells, assigns
and transfers to, or upon the order of, the Company all right, title and
interest in and to such Old Notes as are being tendered hereby.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Old Notes
tendered hereby and that the Company will acquire good and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim when the same are accepted by the Company. The
undersigned hereby further represents that any New Notes acquired in exchange
for Old Notes tendered hereby will have been acquired in the ordinary course of
business of the person receiving such New Notes, whether or not such person is
the undersigned, that neither the holder of such Old Notes nor any such other
person is engaged in, or intends to engage in a distribution of such New Notes,
or has an arrangement or understanding with any person to participate in the
distribution of such New Notes, and that neither the holder of such Old Notes
nor any such other person is an "affiliate," as defined in Rule 405 under the
Securities Act of 1933, as amended (the "Securities Act"), of the Company.
The undersigned also acknowledges that this Exchange Offer is being made by
the Company based upon the Company's understanding of an interpretation by the
staff of the Securities and Exchange Commission (the "Commission") as set forth
in no-action letters issued to third parties, that the New Notes issued in
exchange for the Old Notes pursuant to the Exchange Offer may be offered for
resale, resold and otherwise transferred by holders thereof (other than any such
holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act), without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that: (1) such
holders are not affiliates of the Company within the meaning of Rule 405 under
the Securities Act; (2) such New Notes are acquired in the ordinary course of
such holders' business; and (3) such holders are not engaged in, and do not
intend to engage in, a distribution of such New Notes and have no arrangement or
understanding with any person to participate in the distribution of such New
Notes. However, the staff of the Commission has not considered the Exchange
Offer in the context of a no-action letter and there can be no assurance that
the staff of the Commission would make a similar determination with respect to
the Exchange Offer as in other circumstances. If a holder of Old Notes is an
affiliate of the Company, and is engaged in or intends to engage in a
distribution of the New Notes or has any arrangement or understanding with
respect to the distribution of the New Notes to be acquired pursuant to the
Exchange Offer, such holder could not rely on the applicable interpretations of
the staff of the Commission and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any secondary
resale transaction. If the undersigned is a broker-dealer that will receive New
Notes for its own account in exchange for Old Notes, it represents that the Old
Notes to be exchanged for the New Notes were acquired by it as a result of
market-making activities or other trading activities and acknowledges that it
will deliver a prospectus in connection with any resale of such New Notes;
however, by so acknowledging and by delivering a prospectus, the undersigned
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Old Notes tendered hereby. All authority
conferred or agreed to be conferred in this Letter and every obligation of the
undersigned hereunder shall be binding upon the successors, assigns, heirs,
executors, administrators, trustees in bankruptcy and legal representatives of
the undersigned and shall not be affected by, and shall survive, the death or
incapacity of the undersigned. This tender may be withdrawn only in accordance
with the procedures set forth in "The Exchange Offer -- Withdrawal of Tenders"
section of the Prospectus.
<PAGE> 5
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, please deliver the New Notes (and, if applicable,
substitute certificates representing Old Notes for any Old Notes not exchanged)
in the name of the undersigned or, in the case of a book-entry delivery of Old
Notes, please credit the account indicated above maintained at the Book-Entry
Transfer Facility. Similarly, unless otherwise indicated under the box entitled
"Special Delivery Instructions" below, please send the New Notes (and, if
applicable, substitute certificates representing Old Notes for any Old Notes not
exchanged) to the undersigned at the address shown above in the box entitled
"Description of Old Notes."
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD NOTES"
ABOVE AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE OLD NOTES AS
SET FORTH IN SUCH BOX ABOVE.
<PAGE> 6
------------------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if certificates for Old Notes not exchanged
and/or New Notes are to be issued in the name of and sent to someone other
than the person(s) whose signature(s) appear(s) on this Letter above, or
if Old Notes delivered by book-entry transfer which are not accepted for
exchange are to be returned by credit to an account maintained at the
Book-Entry Transfer Facility other than the account indicated above.
Issue New Notes and/or Old Notes to:
Name(s):
------------------------------------------
(PLEASE TYPE OR PRINT)
------------------------------------------------------
(PLEASE TYPE OR PRINT)
Address:
-------------------------------------------
------------------------------------------------------
(INCLUDING ZIP CODE)
(COMPLETE ACCOMPANYING SUBSTITUTION FORM W-9)
[ ] Credit unexchanged Old Notes delivered by book-entry transfer to the
Book-Entry Transfer Facility account set forth below.
------------------------------------------------------
(BOOK-ENTRY TRANSFER FACILITY
ACCOUNT NUMBER, IF APPLICABLE)
======================================================
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if certificates for Old Notes not exchanged
and/or New Notes are to be sent to someone other than the person(s) whose
signature(s) appear(s) on this Letter above or to such person(s) at an
address other than shown in the box entitled "Description of Old Notes" on
this Letter above.
Mail New Notes and/or Old Notes to:
Name(s):
------------------------------------------
(PLEASE TYPE OR PRINT)
------------------------------------------------------
(PLEASE TYPE OR PRINT)
Address:
-------------------------------------------
------------------------------------------------------
(INCLUDING ZIP CODE)
- ------------------------------------------------------
IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF (TOGETHER WITH THE CERTIFICATES FOR
OLD NOTES OR A BOOK-ENTRY CONFIRMATION AND ALL OTHER REQUIRED
DOCUMENTS OR THE NOTICE OF GUARANTEED DELIVERY) MUST BE RECEIVED BY
THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE
EXPIRATION DATE.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING ANY BOX ABOVE.
<PAGE> 7
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
(COMPLETE ACCOMPANYING SUBSTITUTE FORM W-9 ON REVERSE SIDE)
Dated: , 1997
x:
- ----------------------------------------------------------------
- ------------------------------, 1997
x:
- ----------------------------------------------------------------
- ------------------------------, 1997
(SIGNATURE(S) OF OWNER) (DATE)
Area Code and Telephone Number:
If a holder is tendering any Old Notes, this Letter must be signed by the
registered holder(s) as the name(s) appear(s) on the certificate(s) for the Old
Notes or by any person(s) authorized to become registered holder(s) by
endorsements and documents transmitted herewith. If signature is by a trustee,
executor, administrator, guardian, officer or other person acting in a fiduciary
or representative capacity, please set forth full title. See Instruction 3.
Name(s):
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE TYPE OR PRINT)
Capacity:
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(INCLUDING ZIP CODE)
SIGNATURE GUARANTEE
(IF REQUIRED BY INSTRUCTION 3)
Signature Guaranteed by
an Eligible Institution:
- --------------------------------------------------------------------------------
(AUTHORIZED SIGNATURE)
- --------------------------------------------------------------------------------
(TITLE)
- --------------------------------------------------------------------------------
(NAME AND FIRM)
Dated: , 1997
<PAGE> 8
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER TO EXCHANGE REGISTERED
13 3/4% SENIOR NOTES DUE 2007 FOR UP TO $170,000,000 AGGREGATE PRINCIPAL
AMOUNT OF OUTSTANDING 13 3/4% SENIOR NOTES DUE 2007 OF
AMERICAN COMMUNICATIONS SERVICES, INC.
1. DELIVERY OF THIS LETTER AND OLD NOTES; GUARANTEED DELIVERY PROCEDURES.
This Letter is to be completed by holders of Old Notes either if
certificates are to be forwarded herewith or if tenders are to be made pursuant
to the procedures for delivery by book-entry transfer set forth in "The Exchange
Offer -- Book-Entry Transfer" section of the Prospectus. Certificates for all
physically tendered Old Notes, or Book-Entry Confirmation, as the case may be,
as well as a properly completed and duly executed Letter of Transmittal (or
facsimile thereof) and any other documents required by this Letter, must be
received by the Exchange Agent at the address set forth herein on or prior to
the Expiration Date, or the tendering holder must comply with the guaranteed
delivery procedures set forth below. Old Notes tendered hereby must be in
denominations of principal amount of maturity of $1,000 and any integral
multiple thereof.
Holders of Old Notes whose certificates for Old Notes are not immediately
available or who cannot deliver their certificates and all other required
documents to the Exchange Agent on or prior to the Expiration Date, or who
cannot complete the procedure for book-entry transfer on a timely basis, may
tender their Old Notes pursuant to the guaranteed delivery procedures set forth
in "The Exchange Offer -- Guaranteed Delivery Procedures" section of the
Prospectus. Pursuant to such procedures, (i) such tender must be made through an
Eligible Institution (as defined below), (ii) prior to the Expiration Date, the
Exchange Agent must receive from such Eligible Institution a properly completed
and duly executed Letter of Transmittal (or facsimile thereof) and Notice of
Guaranteed Delivery, substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery), setting forth the name and
address of the holder of Old Notes and the amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that within five New York
Stock Exchange ("NYSE") trading days after the date of execution of the Notice
of Guaranteed Delivery, the certificates for all physically tendered Old Notes,
or a Book-Entry Confirmation, as the case may be, and any other documents
required by this Letter will be deposited by the Eligible Institution with the
Exchange Agent, and (iii) the certificates for all physically tendered Old
Notes, in proper form for transfer, or Book-Entry Confirmation, as the case may
be, and all other documents required by this Letter, are received by the
Exchange Agent within five NYSE trading days after the date of execution of the
Notice of Guaranteed Delivery.
The method of delivery of this Letter, the Old Notes and all other required
documents is at the election and risk of the tendering holders, but the delivery
will be deemed made only when actually received or confirmed by the Exchange
Agent. If Old Notes are sent by mail, it is suggested that the mailing be made
sufficiently in advance of the Expiration Date to permit delivery to the
Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date.
See "The Exchange Offer" section of the Prospectus.
2. PARTIAL TENDERS (NOT APPLICABLE TO HOLDERS OF OLD NOTES WHO TENDER BY
BOOK-ENTRY TRANSFER).
If less than all of the Old Notes evidenced by a submitted certificate are
to be tendered, the tendering holder(s) should fill in the aggregate principal
amount of Old Notes to be tendered in the box above entitled "Description of Old
Notes -- Principal Amount Tendered." A reissued certificate representing the
balance of nontendered Old Notes will be sent to such tendering holder, unless
otherwise provided in the appropriate box on this Letter, promptly after the
Expiration Date. ALL OF THE OLD NOTES DELIVERED TO THE EXCHANGE AGENT WILL BE
DEEMED TO HAVE BEEN TENDERED UNLESS OTHERWISE INDICATED.
<PAGE> 9
3. SIGNATURES ON THIS LETTER, BOND POWERS AND ENDORSEMENTS; GUARANTEE OF
SIGNATURES.
If this Letter is signed by the registered holder of the Old Notes tendered
hereby, the signature must correspond exactly with the name as written on the
face of the certificates without any change whatsoever.
If any tendered Old Notes are owned of record by two or more joint owners,
all such owners must sign this Letter.
If any tendered Old Notes are registered in different names on several
certificates, it will be necessary to complete, sign and submit as many separate
copies of this Letter as there are different registrations of certificates.
When this Letter is signed by the registered holder of the Old Notes
specified herein and tendered hereby, no endorsements of certificates or
separate bond powers are required. If, however, the New Notes are to be issued,
or any untendered Old Notes are to be reissued, to a person other than the
registered holder, then endorsements of any certificates transmitted hereby or
separate bond powers are required. Signatures on such certificates must be
guaranteed by an Eligible Institution.
If this Letter is signed by a person other than the registered holder of
any certificates specified herein, such certificates must be endorsed or
accompanied by appropriate bond powers, in either case signed exactly as the
name of the registered holder appears on the certificates and the signatures on
such certificates must be guaranteed by an Eligible Institution.
If this Letter or any certificates or bond powers are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
proper evidence satisfactory to the Company of their authority to so act must be
submitted.
Endorsements on certificates for Old Notes or signatures on bond powers
required by this Instruction 3 must be guaranteed by a firm which is a member of
a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust company
having an office or correspondent in the United States (an "Eligible
Institution").
SIGNATURES ON THIS LETTER NEED NOT BE GUARANTEED BY AN ELIGIBLE
INSTITUTION, PROVIDED THE OLD NOTES ARE TENDERED: (I) BY A REGISTERED HOLDER OF
OLD NOTES (WHICH TERM, FOR PURPOSES OF THE EXCHANGE OFFER, INCLUDES ANY
PARTICIPANT IN THE BOOK-ENTRY TRANSFER FACILITY SYSTEM WHOSE NAME APPEARS ON A
SECURITY POSITION LISTING AS THE HOLDER OF SUCH OLD NOTES) TENDERED WHO HAS NOT
COMPLETED THE BOX ENTITLED "SPECIAL ISSUANCE INSTRUCTIONS" OR "SPECIAL DELIVERY
INSTRUCTIONS" ON THIS LETTER, OR (II) FOR THE ACCOUNT OF AN ELIGIBLE
INSTITUTION.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS.
Tendering holders of Old Notes should indicate in the applicable box the
name and address to which New Notes issued pursuant to the Exchange Offer and/or
substitute certificates evidencing Old Notes not exchanged are to be issued or
sent, if different from the name or address of the person signing this Letter.
In the case of issuance in a different name, the employer identification or
social security number of the person named must also be indicated. A holder of
Old Notes tendering Old Notes by book-entry transfer may request that Old Notes
not exchanged be credited to such account maintained at the Book-Entry Transfer
Facility as such holder of Old Notes may designate hereon. If no such
instructions are given, such Old Notes not exchanged will be returned to the
name or address of the person signing this Letter.
5. TAX IDENTIFICATION NUMBER.
Federal income tax law generally requires that a tendering holder whose Old
Notes are accepted for exchange must provide the Company (as payor) with such
holder's correct Taxpayer Identification Number ("TIN") on Substitute Form W-9
below or otherwise establish a basis for exemption from backup withholding. If
such holder is an individual, the TIN is his or her social security number. If
the Company is not provided with the current TIN or an adequate basis for an
exemption, such tendering holder may be
<PAGE> 10
subject to a $50 penalty imposed by the Internal Revenue Service. In addition,
delivery of New Notes to such tendering holder may be subject to backup
withholding in an amount equal to 31% of all reportable payments made after the
exchange.
Certain holders (including, among others, all corporations and certain
foreign individuals) are not subject to these backup withholding and reporting
requirements. See the enclosed Guidelines of Certification of Taxpayer
Identification Number on Substitute Form W-9 (the "W-9 Guidelines") for
additional instructions.
To prevent backup withholding, each tendering holder of Old Notes must
provide its correct TIN by completing the "Substitute Form W-9" set forth below,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN) and that (i) the holder is exempt from backup withholding, (ii) the holder
has not been notified by the Internal Revenue Service that such holder is
subject to a backup withholding as a result of a failure to report all interest
or dividends or (iii) the Internal Revenue Service has notified the holder that
such holder is no longer subject to backup withholding. If the tendering holder
of Old Notes is a nonresident alien or foreign entity not subject to backup
withholding, such holder must give the Company a completed Form W-8, Certificate
of Foreign Status. These forms may be obtained from the Exchange Agent. If the
Old Notes are in more than one name or are not in the name of the actual owner,
such holder should consult the W-9 Guidelines for information on which TIN to
report. If such holder does not have a TIN, such holder should consult the W-9
Guidelines for instructions on applying for a TIN, check the box in Part 2 of
the Substitute Form W-9 and write "applied for" in lieu of its TIN. Note:
checking this box and writing "applied for" on the form means that such holder
has already applied for a TIN or that such holder intends to apply for one in
the near future. If a holder checks the box in Part 2 of the Substitute Form W-9
and writes "applied for" on that form, backup withholding at a 31% rate will
nevertheless apply to all reportable payments made to such holder. If such a
holder furnishes its TIN to the Company within 60 days, however, any amounts so
withheld shall be refunded to such holder.
Backup withholding is not an additional Federal income tax. Rather, the
Federal income tax liability of persons subject to backup withholding will be
reduced by the amount of tax withheld. If withholding results in overpayment of
taxes, a refund may be obtained from the Internal Revenue Service.
6. TRANSFER TAXES.
The Company will pay all transfer taxes, if any, applicable to the transfer
of Old Notes to it or its order pursuant to the Exchange Offer. If, however, New
Notes and/or substitute Old Notes not exchanged are to be delivered to, or are
to be registered or issued in the name of, any person other than the registered
holder of the Old Notes tendered hereby, or if tendered Old Notes are registered
in the name of any person other than the person signing this Letter, or if a
transfer tax is imposed for any reason other than the transfer of Old Notes to
the Company or its order pursuant to the Exchange Offer, the amount of any such
transfer taxes (whether imposed on the registered holder or any other persons)
will be payable by the tendering holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted herewith, the amount of such
transfer taxes will be billed directly to such tendering holder.
EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT WILL NOT BE NECESSARY FOR
TRANSFER TAX STAMPS TO BE AFFIXED TO THE OLD NOTES SPECIFIED IN THIS LETTER.
7. WAIVER OF CONDITIONS.
The Company reserves the absolute right to waive satisfaction of any or all
conditions enumerated in the Prospectus.
8. NO CONDITIONAL TENDERS.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders of Old Notes, by execution of this Letter, shall
waive any right to receive notice of the acceptance of their Old Notes for
exchange.
<PAGE> 11
Neither the Company, the Exchange Agent nor any other person is obligated
to give notice of any defect or irregularity with respect to any tender of Old
Notes nor shall any of them incur any liability for failure to give any such
notice.
9. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES.
Any holder whose Old Notes have been mutilated, lost, stolen or destroyed
should contact the Exchange Agent at the address indicated above for further
instructions.
10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering, as well as requests for
additional copies of the Prospectus and this Letter, may be directed to the
Exchange Agent, at the address and telephone number indicated above.
<PAGE> 12
TO BE COMPLETED BY ALL TENDERING HOLDERS
(SEE INSTRUCTION 5)
<TABLE>
<S> <C>
PAYOR'S NAME: AMERICAN COMMUNICATIONS SERVICES, INC.
SUBSTITUTE PART 1 -- PLEASE PROVIDE YOUR TIN TIN:
FORM W-9 IN THE BOX AT RIGHT AND CERTIFY BY -------------------------------
SIGNING AND DATING BELOW SOCIAL SECURITY NUMBER(S) OR
EMPLOYER IDENTIFICATION NUMBER(S)
DEPARTMENT OF THE TREASURY PART 2 -- TIN APPLIED FOR [ ]
INTERNAL REVENUE SERVICE
CERTIFICATION -- UNDER PENALTIES OF PERJURY, I CERTIFY THAT:
(1) the number shown on this form is my correct Taxpayer
Identification Number (or I am waiting for a number to be issued to
PAYER'S REQUEST FOR TAXPAYER me),
IDENTIFICATION NUMBER ("TIN") (2) I am not subject to backup withholding because: (a) I am exempt
AND CERTIFICATION from backup withholding, or (b) I have not been notified by the
Internal Revenue Service (the "IRS") that I am subject to backup
withholding as a result of a failure to report all interest or
dividends, or (c) the IRS has notified me that I am no longer
subject to backup withholding, and
(3) any other information provided on this form is true and correct.
SIGNATURE DATE _______________
You must cross out item (2) of the above certification if you have been notified by the IRS that you
are subject to backup withholding because of underreporting of interest or dividends on your tax
returns and you have not been notified by the IRS that you are no longer subject to backup withholding.
</TABLE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED
THE BOX IN PART 2 OF SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (a) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office or (b) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number by the time of the exchange, 31 percent
of all reportable payments made to me thereafter will be withheld until I
provide a number.
<TABLE>
<S> <C>
- ------------------------------------------------------------------ ------------------------------------------------
Signature Date
</TABLE>
<PAGE> 1
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY FOR
AMERICAN COMMUNICATIONS SERVICES, INC.
This form or one substantially equivalent hereto must be used to accept the
Exchange Offer of American Communications Services, Inc. (the "Company") made
pursuant to the Prospectus, dated , 1997 (the "Prospectus"), and the
enclosed Letter of Transmittal (the "Letter of Transmittal") if certificates for
Old Notes of the Company are not immediately available or if the procedure for
book-entry transfer cannot be completed on a timely basis or time will not
permit all required documents to reach the Company prior to 5:00 P.M., New York
City time, on the Expiration Date of the Exchange Offer. Such form may be
delivered or transmitted by facsimile transmission, mail or hand delivery to The
Chase Manhattan Bank (the "Exchange Agent") as set forth below. In addition, in
order to utilize the guaranteed delivery procedure to tender Old Notes pursuant
to the Exchange Offer, a completed, signed and dated Letter of Transmittal (or
facsimile thereof) must also be received by the Exchange Agent prior to 5:00
P.M., New York City time, on the Expiration Date. Capitalized terms not defined
herein are defined in the Prospectus.
DELIVERY TO: THE CHASE MANHATTAN BANK, EXCHANGE AGENT
<TABLE>
<S> <C> <C>
By Mail/Overnight Delivery: Facsimile Transmission Number: By Hand:
The Chase Manhattan Bank (212) 638-7380 The Chase Manhattan Bank
450 West 33rd Street (212) 638-7381 Corporate Trust--Securities
15th Floor Window
(For Eligible Institutions
New York, New York 10001-2697 Only) 55 Water Street--Room 234
Confirm by Telephone: North Building
Sharon Lewis: (212) 638-0454 New York, NY 10041
Carlos Esteves: (212) 638-0828
For Information Call:
Andrew Deck: (212) 946-3348
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL
NOT CONSTITUTE A VALID DELIVERY.
Ladies and Gentlemen:
Upon the terms and conditions set forth in the Prospectus and the
accompanying Letter of Transmittal, the undersigned hereby tenders to the
Company the principal amount of Old Notes set forth below, pursuant to the
guaranteed delivery procedure described in "The Exchange Offer -- Guaranteed
Delivery Procedures" section of the Prospectus.
<TABLE>
<S> <C>
Principal Amount of Old Notes Tendered:
If Old Notes will be delivered by book-entry
transfer to The Depository Trust Company,
$ provide account number.
- --------------------------------------------
Certificate Nos. (if available):
- --------------------------------------------
Total Principal Amount Represented by Old
Notes Certificate(s):
$ Account Number
- --------------------------------------------.. -----------------------------------
</TABLE>
<PAGE> 2
ALL AUTHORITY HEREIN CONFERRED OR AGREED TO BE CONFERRED SHALL SURVIVE THE
DEATH OR INCAPACITY OF THE UNDERSIGNED AND EVERY OBLIGATION OF THE UNDERSIGNED
HEREUNDER SHALL BE BINDING UPON THE HEIRS, PERSONAL REPRESENTATIVES, SUCCESSORS
AND ASSIGNS OF THE UNDERSIGNED.
PLEASE SIGN HERE
<TABLE>
<S> <C> <C>
X --------------------------------------------- -----------------------------------------
X
--------------------------------------------- -----------------------------------------
SIGNATURE(S) OF OWNER(S) DATE
OR AUTHORIZED SIGNATORY
</TABLE>
Area Code and Telephone Number:
Must be signed by the holder(s) of Old Notes as the name(s) of such
holder(s) appear(s) on the Old Notes certificate(s) or on a security position
listing, or by person(s) authorized to become registered holder(s) by
endorsement and documents transmitted with this Notice of Guaranteed Delivery.
If any signature is by a trustee, executor, administrator, guardian,
attorney-in-fact, officer or other person acting in a fiduciary or
representative capacity, such person must set forth his or her full title below.
PLEASE PRINT NAME(S) AND ADDRESS(ES)
<TABLE>
<S> <C>
Name(s): --------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Capacity:
--------------------------------------------------------------------------------
Address(es):
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>
GUARANTEE
The undersigned, a member of a registered national securities exchange, or
a member of the National Association of Securities Dealers, Inc., or a
commercial bank or trust company having an office or correspondent in the United
States, hereby guarantees that the certificates representing the principal
amount of Old Notes tendered hereby in proper form for transfer, or timely
confirmation of the book-entry transfer of such Old Notes into the Exchange
Agent's account at The Depository Trust Company pursuant to the procedures set
forth in "The Exchange Offer -- Guaranteed Delivery Procedures" section of the
Prospectus, together with a properly completed and duly executed Letter of
Transmittal (or facsimile thereof) with any required signature guarantee and any
other documents required by the Letter of Transmittal, will be received by the
Exchange Agent at the address set forth above, no later than five New York Stock
Exchange trading days after the date of execution hereof.
<TABLE>
<S> <C>
- --------------------------------------------- ---------------------------------------------
NAME OF FIRM AUTHORIZED SIGNATURE
- --------------------------------------------- ---------------------------------------------
ADDRESS TITLE
Name:
- ---------------------------------------------
ZIP CODE (PLEASE TYPE OR PRINT)
Area Code and Tel. No.: Dated:
</TABLE>
NOTE: DO NOT SEND CERTIFICATES FOR OLD NOTES WITH THIS FORM. CERTIFICATES FOR
OLD NOTES SHOULD ONLY BE SENT WITH YOUR LETTER OF TRANSMITTAL.
<PAGE> 1
EXHIBIT 99.3
AMERICAN COMMUNICATIONS SERVICES, INC.
OFFER TO EXCHANGE ITS REGISTERED
13 3/4% SENIOR NOTES DUE 2007
FOR UP TO $170,000,000 AGGREGATE PRINCIPAL AMOUNT
OF ITS OUTSTANDING
13 3/4% SENIOR NOTES DUE 2007
To: Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees:
American Communications Services, Inc. (the "Company") is offering to
exchange (the "Exchange Offer"), upon and subject to the terms and conditions
set forth in the Prospectus, dated , 1997 (the "Prospectus"), and
the enclosed Letter of Transmittal (the "Letter of Transmittal"), its registered
13 3/4% Senior Notes due 2007 (the "New Notes") for up to $170,000,000 aggregate
principal amount of its outstanding 13 3/4% Senior Notes due 2007 (the "Old
Notes"). The Exchange Offer is being made in order to satisfy certain
obligations of the Company contained in the Registration Agreement dated as of
July 23, 1997, between the Company and the Initial Purchasers.
We are requesting that you contact your clients for whom you hold Old Notes
regarding the Exchange Offer. For your information and for forwarding to your
clients for whom you hold Old Notes registered in your name or in the name of
your nominee, or who hold Old Notes registered in their own names, we are
enclosing the following documents:
1. Prospectus dated , 1997;
2. The Letter of Transmittal for your use and for the information of
your clients;
3. A Notice of Guaranteed Delivery to be used to accept the Exchange
Offer if certificates for Old Notes are not immediately available or time
will not permit all required documents to reach the Exchange Agent prior to
the Expiration Date (as defined below) or if the procedure for book-entry
transfer cannot be completed on a timely basis;
4. A form of letter which may be sent to your clients for whose
account you hold Old Notes registered in your name or the name of your
nominee, with space provided for obtaining such clients' instructions with
regard to the Exchange Offer;
5. Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9; and
6. Return envelopes addressed to The Chase Manhattan Bank, the Exchange
Agent for the Old Notes.
YOUR PROMPT ACTION IS REQUESTED. THE EXCHANGE OFFER WILL EXPIRE AT 5:00
P.M., NEW YORK CITY TIME, ON , 1997 (THE "EXPIRATION DATE") (20
BUSINESS DAYS FOLLOWING THE COMMENCEMENT OF THE EXCHANGE OFFER), UNLESS EXTENDED
BY THE COMPANY. THE OLD NOTES TENDERED PURSUANT TO THE EXCHANGE OFFER MAY BE
WITHDRAWN AT ANY TIME BEFORE 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION
DATE.
To participate in the Exchange Offer, a duly executed and properly
completed Letter of Transmittal (or facsimile thereof), with any required
signature guarantees and any other required documents, should be sent to the
Exchange Agent and certificates representing the Old Notes should be delivered
to the Exchange Agent, all in accordance with the instructions set forth in the
Letter of Transmittal and the Prospectus.
If holders of Old Notes wish to tender, but it is impracticable for them to
forward their certificates for Old Notes prior to the expiration of the Exchange
Offer or to comply with the book-entry transfer procedures on a timely basis, a
tender may be effected by following the guaranteed delivery procedures described
in the Prospectus under "The Exchange Offer -- Guaranteed Delivery Procedures."
<PAGE> 2
The Company will, upon request, reimburse brokers, dealers, commercial
banks and trust companies for reasonable and necessary costs and expenses
incurred by them in forwarding the Prospectus and the related documents to the
beneficial owners of Old Notes held by them as nominee or in a fiduciary
capacity. The Company will pay or cause to be paid all stock transfer taxes
applicable to the exchange of Old Notes pursuant to the Exchange Offer, except
as set forth in Instruction 6 of the Letter of Transmittal.
Any inquiries you may have with respect to the Exchange Offer, or requests
for additional copies of the enclosed materials, should be directed to the
Exchange Agent for the Old Notes, at its address and telephone number set forth
on the front of the Letter of Transmittal.
Very truly yours,
American Communications Services, Inc.
NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY
OTHER PERSON AS AN AGENT OF THE COMPANY OR THE EXCHANGE AGENT, OR AUTHORIZE YOU
OR ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENTS ON BEHALF OF
EITHER OF THEM WITH RESPECT TO THE EXCHANGE OFFER, EXCEPT FOR STATEMENTS
EXPRESSLY MADE IN THE PROSPECTUS OR THE LETTER OF TRANSMITTAL.
Enclosures
<PAGE> 1
EXHIBIT 99.4
AMERICAN COMMUNICATIONS SERVICES, INC.
OFFER TO EXCHANGE ITS REGISTERED
13 3/4% SENIOR NOTES DUE 2007
FOR UP TO $170,000,000 AGGREGATE PRINCIPAL AMOUNT
OF ITS OUTSTANDING
13 3/4% SENIOR NOTES DUE 2007
To Our Clients:
Enclosed for your consideration is a Prospectus, dated , 1997
(the "Prospectus"), and the enclosed Letter of Transmittal (the "Letter of
Transmittal"), relating to the offer (the "Exchange Offer") of American
Communications Services, Inc. (the "Company") to exchange its registered 13 3/4%
Senior Notes due 2007 (the "New Notes") for up to $170,000,000 aggregate
principal amount of its outstanding 13 3/4% Senior Notes due 2007 (the "Old
Notes"), upon the terms and subject to the conditions described in the
Prospectus. The Exchange Offer is being made in order to satisfy certain
obligations of the Company contained in the Registration Agreement dated as of
July 23, 1997, between the Company and the Initial Purchasers thereto.
This material is being forwarded to you as the beneficial owner of the Old
Notes carried by us in your account but not registered in your name. A TENDER OF
SUCH OLD NOTES MAY ONLY BE MADE BY US AS THE HOLDER OF RECORD AND PURSUANT TO
YOUR INSTRUCTIONS.
Accordingly, we request instructions as to whether you wish us to tender on
your behalf the Old Notes held by us for your account, pursuant to the terms and
conditions set forth in the enclosed Prospectus and Letter of Transmittal.
Your instructions should be forwarded to us as promptly as possible in
order to permit us to tender the Old Notes on your behalf in accordance with the
provisions of the Exchange Offer. The Exchange Offer will expire at 5:00 p.m.,
New York City time, on , 1997, (the "Expiration Date") (20 business
days following the commencement of the Exchange Offer) unless extended by the
Company. Any Old Notes tendered pursuant to the Exchange Offer may be withdrawn
at any time before 5:00 p.m., New York City time, on the Expiration Date.
Your attention is directed to the following:
1. The Exchange Offer is for any and all Old Notes.
2. The Exchange Offer is subject to certain conditions set forth in
the Prospectus in the section captioned "The Exchange Offer -- Conditions."
3. Any transfer taxes incident to the transfer of Old Notes from the
holder to the Company will be paid by the Company, except as otherwise
provided in the Instructions in the Letter of Transmittal.
4. The Exchange Offer expires at 5:00 p.m., New York City time, on the
Expiration Date, unless extended by the Company.
If you wish to have us tender your Old Notes, please so instruct us by
completing, executing and returning to us the instruction form on the back of
this letter. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR INFORMATION ONLY
AND MAY NOT BE USED DIRECTLY BY YOU TO TENDER OLD NOTES.
<PAGE> 2
INSTRUCTIONS WITH RESPECT TO
THE EXCHANGE OFFER
The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein relating to the Exchange Offer made by American
Communications Services, Inc. with respect to its Old Notes.
This will instruct you to tender the Old Notes held by you for the account
of the undersigned, upon and subject to the terms and conditions set forth in
the Prospectus and the related Letter of Transmittal.
Please tender the Old Notes held by you for my account as indicated below:
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL AMOUNT OF OLD NOTES
---------------------------------------------
<S> <C>
13 3/4% Senior Notes due 2007................
---------------------------------------------
[ ] Please do not tender any Old Notes held
by you for my account.
Dated:, 1997
---------------------------------------------
---------------------------------------------
SIGNATURE(S)
---------------------------------------------
---------------------------------------------
---------------------------------------------
PLEASE PRINT NAME(S) HERE
---------------------------------------------
---------------------------------------------
ADDRESS(ES)
---------------------------------------------
AREA CODE(S) AND TELEPHONE NUMBER(S)
---------------------------------------------
TAX IDENTIFICATION OR SOCIAL SECURITY NO(S).
</TABLE>
None of the Old Notes held by us for your account will be tendered unless
we receive written instructions from you to do so. Unless a specific contrary
instruction is given in the space provided, your signature(s) hereon shall
constitute an instruction to us to tender all the Old Notes held by us for your
account.
<PAGE> 1
EXHIBIT 99.5
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYER.--Social Security numbers have nine digits separated by two hyphens: i.e.
000-00-0000. Employer identification numbers have nine digits separated by only
one hyphen: i.e. 00-0000000. The table below will help determine the number to
give the payer.
<TABLE>
<C> <S> <C>
- ---------------------------------------------------------
GIVE THE
FOR THIS TYPE OF ACCOUNT: SOCIAL SECURITY
NUMBER OF--
- ---------------------------------------------------------
1. An individual's account The individual
2. Two or more individuals The actual owner of
(joint account) the account or, if
combined funds, any
one of the
individuals(1)
3. Husband and wife (joint The actual owner of
account) the account or, if
joint funds, either
person(1)
4. Custodian account of a minor The minor(2)
(Uniform Gift to Minors Act)
5. Adult and minor (joint account) The adult or, if
the minor is the
only contributor,
the minor(1)
6. Account in the name of guardian The ward, minor, or
or committee for a designated incompetent
ward, minor, or incompetent person(3)
person
7. a. The usual revocable savings The grantor-
trust account (grantor is trustee(1)
also trustee)
b. So-called trust account that The actual owner(1)
is not a legal or valid trust
under State law
=========================================================
GIVE THE EMPLOYER
FOR THIS TYPE OF ACCOUNT: IDENTIFICATION
NUMBER OF--
- ---------------------------------------------------------
8. Sole proprietorship account The owner(4)
9. A valid trust, estate, or The legal entity
pension trust (do not furnish the
identifying number
of the personal
representative or
trustee unless the
legal entity itself
is not designated
in the account
title.)(5)
10. Corporate account The corporation
11. Religious, charitable, The organization
educational or other tax-exempt
organization account
12. Partnership account held in the The partnership
name of the business
13. Association, club, or other The organization
tax-exempt organization
14. A broker or registered nominee The broker or
nominee
15. Account with the Department of The public entity
Agriculture in the name of a
public entity (such as a State
or local government, school
district, or prison) that
receives agricultural program
payments
- ---------------------------------------------------------
</TABLE>
(1) List first and circle the name of the person whose number you furnish. If
only one person on a joint account has a Social Security number, that
person's number must be furnished.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Circle the ward's, minor's or incompetent person's name and furnish such
person's social security number.
(4) You must show your individual name, but you may also enter your business or
"doing business as" name. You may use either your Social Security number or
employer identification number (if you have one).
(5) List first and circle the name of the legal trust, estate, or pension trust.
NOTE: If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.
<PAGE> 2
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
PAGE 2
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or Form
SS-4, Application for Employer Identification Number (for businesses and all
other entities), at the local office of the Social Security Administration or
the Internal Revenue Service (the "IRS") and apply for a number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding on ALL payments include the
following:
- A corporation.
- A financial institution.
- An organization exempt from tax under Section 501(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), or an individual retirement plan, or
a custodial account under Section 403(b)(7), if the account satisfies the
requirements of Section 401(f)(7).
- The United States or any of its agencies or instrumentalities.
- A State, the District of Columbia, a possession of the United States, or any
political subdivision or instrumentality thereof.
- A foreign government, a political subdivision of a foreign government, or
any agency or instrumentality thereof.
- An international organization or any agency, or instrumentality thereof.
- A registered dealer in securities or commodities registered in the U.S., the
District of Columbia or a possession of the U.S.
- A real estate investment trust.
- A common trust fund operated by a bank under Section 584(a) of the Code.
- An exempt charitable remainder trust, or a non-exempt trust described in
Section 4947(a)(1) of the Code.
- An entity registered at all times under the Investment Company Act of 1940.
- A foreign central bank of issue.
- A middleman known in the investment community as a nominee or who is listed
in the most recent publication of the American Society of Corporate
Secretaries, Inc., Nominee List.
Payments of dividends and patronage dividends not generally subject to backup
withholding include the following:
- Payments to nonresident aliens subject to withholding under Section 1441 of
the Code.
- Payments to partnerships not engaged in a trade or business in the U.S. and
which have at least one nonresident partner.
- Payments of patronage dividends where the amount received is not paid in
money.
- Payments made by certain foreign organizations.
- Payments made to a nominee.
- Section 404(k) payments made by an ESOP.
Payments of interest not generally subject to backup withholding include the
following:
- Payments of interest on obligations issued by individuals. NOTE: You may be
subject to backup withholding if this interest is $600 or more and is paid
in the course of the payer's trade or business and you have not provided
your correct taxpayer identification number to the payer.
- Payments of tax-exempt interest (including exempt-interest dividends under
Section 852 of the Code).
- Payments described in Section 6049(b)(5) of the Code to nonresident aliens.
- Payments on tax-free covenant bonds under Section 1451 of the Code.
- Payments made by certain foreign organizations.
- Payments made to a nominee.
- Mortgage interest paid by you.
Exempt payees described above should file Form W-9 to avoid possible erroneous
backup withholding. FILE THIS FORM WITH THE PAYER. FURNISH YOUR TAXPAYER
IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, SIGN AND DATE THE
FORM AND RETURN IT TO THE PAYER. IF YOU ARE A NONRESIDENT ALIEN OR A FOREIGN
ENTITY NOT SUBJECT TO BACKUP WITHHOLDING, FILE WITH PAYER A COMPLETED INTERNAL
REVENUE FORM W-8 (CERTIFICATE OF FOREIGN STATUS).
Certain payments other than interest, dividends, and patronage dividends that
are not subject to information reporting are also not subject to backup
withholding. For details, see the regulations under Sections 6041, 6041A(a),
6045, and 6050A of the Code and the regulations promulgated thereunder.
PRIVACY ACT NOTICE.--Section 6109 requires most recipients of dividends,
interest, or other payments to give taxpayer identification numbers to payers
who must report the payments to the IRS. The IRS uses the numbers for
identification purposes. Payers must be given the numbers whether or not
recipients are required to file tax returns. Payers must generally withhold 31%
of taxable interest, dividends, and certain other payments to a payee who does
not furnish a taxpayer identification number to a payer. Certain penalties may
also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.--If you fail
to furnish your taxpayer identification number to a payer, you are subject to a
penalty of $50 for each such failure unless your failure is due to reasonable
cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.--If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--Willfully falsifying
certifications or affirmations may subject you to criminal penalties including
fines and/or imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX
CONSULTANT OR THE INTERNAL REVENUE SERVICE
