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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-25314
AMERICAN COMMUNICATIONS SERVICES, INC.
(Exact name of small business issuer in its charter)
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Delaware 52-1947746
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
131 National Business Parkway
Annapolis Junction, MD. 20701
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(Address of principal executive offices) (Zip code)
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301-617-4200
(Issuer's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.01 par value
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Title of Securities
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No ____
Check here if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. ____
State issuer's revenues for its most recent fiscal year. $59,000,450.
The aggregate market value of the Common Stock, par value, $0.01 per
share, held by non-affiliates of the registrant (12,661,204 shares) as of March
12, 1998, was $205,744,565.
The number of shares of Common Stock outstanding on March 12, 1998, was
37,801,347.
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DOCUMENTS INCORPORATED BY REFERENCE
The Index to Exhibits appears on page E-1.
The registrant's definitive 1998 Proxy Statement which will be filed
pursuant to Regulation 14A is incorporated by reference into Part III of this
Annual Report on Form 10-KSB.
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AMERICAN COMMUNICATIONS SERVICES, INC.
FORM 10-KSB
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TABLE OF CONTENTS
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Page
Part I. Number
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Item 1. Description of Business. 1
Item 2. Description of Property. 19
Item 3. Legal Proceedings. 19
Item 4. Submission of Matters to a Vote of Security Holders. 20
Part II.
Item 5. Market for Common Equity and Related
Stockholder Matters. 21
Item 6. Management's Discussion and Analysis. 22
Item 7. Financial Statements. 33
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure. 33
Part III.
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance With Section 16(a) of the Exchange Act. 34
Item 10. Executive Compensation. 34
Item 11. Security Ownership of Certain Beneficial
Owners and Management. 34
Item 12. Certain Relationships and Related Transactions. 34
Item 13. Exhibits List and Reports on Form 8-K. 35
SIGNATURES 39
INDEX OF EXHIBITS 40
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
The following discussion of the business of American Communications
Services, Inc. contains certain statements of a forward-looking nature relating
to future events or the future performance of the Company. Prospective investors
are cautioned that such statements are only predictions and that actual events
or results may differ materially. In evaluating such statements, prospective
investors should specifically consider the various factors identified in this
Annual Report, including the matters set forth under "Risk Factors" in Exhibit
99.1 hereto, which could cause actual results to differ materially from those
indicated by such forward-looking statements.
American Communications Services, Inc. (the "Company" or "ACSI"), formed in
1993, seeks to be a leading facilities-based Integrated Communications Provider
("ICP") to businesses primarily in major markets in the southern half of the
United States. By the end of 1997, the Company had become one of the first
Competitive Local Exchange Carriers ("CLECs") to combine the provision of
dedicated, local and long distance voice services with frame relay, asynchronous
transfer mode ("ATM") and Internet services. Having established this suite of
telecommunications services which emphasizes data capabilities in addition to
traditional CLEC offerings, the Company has evolved into an ICP. ACSI seeks to
provide customers with superior service and competitive prices while offering a
single source for integrated communications services designed to meet its
business customers' needs. The Company's facilities-based network infrastructure
is designed to provide services to customers on an end-to-end basis, and, as of
December 31, 1997, was comprised of 1,061 route miles of fiber in its 32 local
networks in 19 states, 39 Newbridge ATM switches, 16 Lucent 5ESS switches and
approximately 22,000 backbone longhaul miles in its coast-to-coast broadband
data network. With the passage of the federal Telecommunications Act of 1996
("FTA"), the Company has enhanced the scope of its product offerings from
dedicated services to a full range of switched voice, data and Internet services
in order to meet the needs of business end-users, and is expanding its sales,
marketing, customer care and operations support systems ("OSS") capabilities.
The Company introduced local switched voice services, including local exchange
services in late 1996 and long distance services in late 1997. By December 31,
1997, ACSI had sold 43,581 customer access lines, of which 35,105 were
installed, representing a significant increase over the 360 access lines sold as
of March 31, 1997.
The Company believes that there is significant unmet demand by businesses
for integrated voice and data services from a single-source communications
provider. In addition, the domestic market for Internet-related business
services is growing rapidly. The Company believes that, through its data
network, it is well positioned to satisfy these customer demands by providing
its suite of network solutions. This suite of services is integrated through its
proprietary e.spire Internet access product, which combines its Internet Service
Provider ("ISP") capabilities and ATM, frame relay, and Internet Protocol
("IP") services. The Company also provides additional Internet-based and other
data custom solutions and value-added services such as web hosting, managed
services and firewall services. E.spire currently is offered in the Company's
Florida markets and the Company intends to offer e.spire and the Company's
other Internet-based services in substantially all of its markets by the end of
1998 to complement its existing data services.
For the year ended December 31, 1997, approximately 42% of the Company's
revenues were derived from special access and dedicated services, approximately
38% from data and Internet services and approximately 20% from switched local
and other services. Revenues for the year ended December 31, 1997, increased
$49.6 million, or 527%, to $59.0 million from $9.4 million for the year ended
December 31, 1996. As of December 31, 1997, the Company served over 3,500
telecommunications customers, excluding Internet customers.
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ACSI believes that a key factor in the successful implementation of its
strategy and its improved operating performance is the quality of its management
team. In the past fifteen months, the Company hired Jack E. Reich as President
and Chief Executive Officer and David L. Piazza as Chief Financial Officer,
complementing Tony Pompliano, the Company's founder and Chairman, and Riley
Murphy, the Company's General Counsel. In addition, the Company recently hired
Ronald E. Spears as Chief Operating Officer. Collectively, these individuals
have an average of 21 years of telecommunications industry experience. The
Company also has significantly increased its marketing and sales forces during
the past year by hiring an additional 178 employees in such departments. As of
December 31, 1997, the Company had a total of 245 employees in its marketing and
sales forces, a 250% increase from December 31, 1996.
STRATEGY
The Company seeks to provide its customers a choice for local access,
utilizing its facilities-based network infrastructure to deliver both voice and
data solutions. In order to increase penetration in its target markets, build
brand recognition and achieve its strategic objectives, the Company seeks to:
PROVIDE "ONE-STOP" INTEGRATED COMMUNICATIONS SERVICES
To meet customer demand and to accelerate penetration in its markets, the
Company has broadened the range of voice, data and Internet services it offers
and has integrated these services into a bundled package offering a single
source solution designed to meet its customers' communications needs. In 1997,
the Company introduced new voice products such as local dial tone, long
distance, audio conferencing and voice messaging services. In addition, through
the 1997 acquisition of Cybergate (the "Cybergate Acquisition"), the Company
also introduced its Internet services and, as of December 31, 1997, served over
39,000 Internet customers. In late 1997, the Company introduced e.spire, which
it intends to offer in substantially all of its markets by the end of 1998. The
Company believes that its ability to provide one-stop integrated communications
services will enable it to capture a larger portion of its customers' total
expenditures on communication services, and reduce customer turnover.
EXPLOIT RAPIDLY GROWING MARKET FOR DATA SERVICES
The Company believes that the market for data services is one of the
fastest growing segments of the communications market. The Company's new suite
of data products consists primarily of the e.spire family of high-speed Internet
and data services for small and medium-sized businesses. E.spire traffic will be
transported over ACSINet, the Company's coast-to-coast, leased broadband data
communications network.
ENHANCE FACILITIES-BASED INFRASTRUCTURE
Expansion of the Company's facilities-based infrastructure will increase
the proportion of communications traffic that is originated and/or terminated on
its network and switching facilities, which the Company believes will result in
higher long-term operating margins and greater control over its network
operations. The Company uses both an on-net and a resale strategy to capture new
customers, and intends to accelerate migration of traffic onto its own
facilities.
The Company will continue to install voice and data switches, construct
SONET digital local fiber networks and increase the reach of its data backbone.
The Company's expansion decisions are structured to efficiently deploy capital
and are based upon a number of economic factors, including customer demographics
in each market and anticipated cost savings associated with particular
installations. The Company's state-of-the-art infrastructure and high capacity
bandwidth facilitate efficient network expansion. In 1998, the Company intends
to add approximately 500 route miles of fiber optic network and nine voice and
five data switches.
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BUILD MARKET SHARE THROUGH FOCUSED CUSTOMER SALES AND SERVICE
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 differentiates ACSI as a
customer-focused telecommunications services provider. In addition to its field
sales force, the Company's major account team targets large national accounts,
and its carrier sales group targets dedicated services to long distance carriers
and ISPs. As of December 31, 1997, the Company had 245 employees in its
marketing and sales forces, an increase of over 250% from December 31, 1996. The
Company supplements its internal marketing and sales force through alternative
sales channels, and had executed 95 sales agency agreements as of December 31,
1997.
The Company currently is implementing an integrated customer care strategy
that emphasizes infrastructure improvements, training of personnel, performance
monitoring and image/brand recognition. The customer care strategy is intended
to provide a heightened level of responsive and cost efficient customer service
across the Company's full range of existing and planned products and services,
with a particular emphasis on operational support and other
information/financial systems. The Company is in the process of supplementing
its customer service effort with an integrated customer care and billing
software platform, differentiating ACSI from its major competitors.
MAINTAIN GEOGRAPHIC FOCUS
The Company intends to continue to target businesses in the southern half
of the United States, its primary service area, and strives to be the first to
market integrated communications services in each of its markets. The Company
believes that this region is attractive due to a number of factors, including:
(i) a large number of rapidly growing metropolitan clusters, such as Washington
D.C./ Baltimore/Northern Virginia, Dallas/Fort Worth/Irving, Miami/Fort
Lauderdale, Greenville/Spartanburg and Kansas City and (ii) certain markets
which may be generally less competitive.
EXPAND THROUGH STRATEGIC ACQUISITIONS AND ALLIANCES
The Company believes that acquisitions of, and joint ventures and other
strategic alliances with, related or complementary businesses in its region will
enable it to more rapidly execute its business plan by providing additional
customers, new products and services, service and technical support and
additional cash flow. For example, the Cybergate Acquisition increased the
Company's penetration of its current markets and accelerated its entry into new
markets by expanding the scope of the Company's Internet product offerings. As
part of its expansion strategy the Company plans to consider additional
acquisitions, joint ventures and strategic alliances in communications, Internet
access and other related service areas.
ACSI SERVICES
DEDICATED SERVICES. The Company's dedicated services provide high capacity
non-switched interconnections: (i) between Points of Presence ("POP") of the
same Inter Exchange Carriers ("IXC"); (ii) between POPs of different IXCs; (iii)
between large business and government end-users and their selected IXCs; (iv)
between an IXC POP and an Incumbent Local Exchange Carrier ("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
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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 Company has collocated its
network. The Company provides dedicated facilities for transporting these
aggregated volumes of long distance traffic from the ILEC central office
to its POP or between ILEC central offices.
- PRIVATE LINE SERVICES. Private line services provide dedicated facilities
between two end-user locations in the same metropolitan area (e.g., a
central banking facility and a branch office or a manufacturing facility
and its remote data processing center) and are priced like special access
services (channel termination charges plus transport and any associated
multiplexing charges). The Company expects the demand for private line
service to increase in conjunction with higher bandwidth customer
applications.
SWITCHED VOICE SERVICES. As of December 31, 1997, the Company had installed
16 Lucent 5ESS switches to provide facilities-based local exchange service in 16
of its markets. The Company also provides such services on a resale basis in 35
markets. As an adjunct to its local switched services, the Company provides long
distance, calling card and other interLATA services.
The Company's 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 Private Branch Exchange ("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; Integrated Services Digital Network ("ISDN") data services;
and origination and termination of long distance traffic between a customer
premises and interexchange carrier via shared trunks utilizing the Company's
local switch.
HIGH SPEED INTERNET AND DATA SERVICES AND CYBERGATE ACQUISITION. In January
1997, the Company consummated the Cybergate Acquisition. Cybergate, Inc.
("Cybergate"), an 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. As of December 31, 1997,
Cybergate had over 39,000 customers. The Cybergate Acquisition enabled ACSI to
become a major provider of high-speed data communications services in the
southern United States.
In 1997, the Company introduced the e.spire family of high-speed Internet
and data services for businesses as well as government and educational
institutions, ISPs and carriers. The e.spire family of services operates over
ACSINet, the Company's coast-to-coast, leased broadband data communications
network which supports the following services:
- e.spire INTERNET ACCESS SERVICE. The ACSINet Internet data backbone is
connected to the Global Internet via public and private peering
arrangements with Tier I-Internet backbone providers at strategic Network
Access Points ("NAPs") across the United States. This enables the Company
to provide high-quality dedicated and dial-up Internet connectivity and
IP transport for the business and reseller community. The service is
targeted to consumers, local and regional ISPs and corporate Internet
users requiring
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dedicated access. The service operates at dedicated speeds ranging from
56 kbps to 45 Mbps and at industry-standard dial-up speeds.
- e.spire FRAME RELAY SERVICE. This service is designed for bandwidth needs
that vary, and for interconnecting geographically dispersed networks and
equipment. Businesses of any size can take advantage of e.spire Frame
Relay for internetworking, application sharing, e-mail, file transfer,
PC-to-PC and PC-to-Server communications. The ACSINet Frame Relay
backbone is connected to frame relay networks of other key providers via
NNIs (Network-to-Network Interfaces) thus enabling the Company to offer
comprehensive solutions to local, regional, and national businesses
regardless of their location. This service supports standard
multi-protocol encapsulation which makes it easier to integrate new and
legacy systems. The service support user port connections range from 56
kbps to 1.5 Mbps with a wide range of Committed Information Rates.
- e.spire ATM SERVICE. This service provides a solution to local, regional
and national businesses with highbandwidth, delay-sensitive data
communications applications. With e.spire ATM service, the performance
needs of complex, media-rich applications such as CAD/CAM, remote
super-computing, medical imaging, video conferencing, and voice calls are
easily met. This service is also ideal for higher-volume users of
applications such as PC-to-server and file transfer. The service supports
both Constant Bit Rate and Variable Bit Rate service levels over
Permanent Virtual Circuits with user port speeds ranging from 2 Mbps to
45 Mbps.
- e.spire BUNDLED INTERNET SOLUTIONS. The Company also provides turnkey
business Internet solutions. These solutions include dedicated Internet
Access, pre-configured Customer Premises Equipment, web site hosting
account, domain name registration and maintenance, news feed, and
end-to-end service installation. These solutions enable businesses to
benefit from integrated billing and network management.
- e.spire CUSTOM NETWORK SERVICES. These services include design,
installation, maintenance, hardware (such as switches, routers and
modems) and configuration (such as maintaining consistent versions of the
router software and deploying consistent configurations) of a customer's
network. The Company's custom network services are designed to eliminate
many of the timing, coordination and inter-operability issues that arise
in installations requiring multiple vendors.
- e.spire MANAGED NETWORK SERVICE. This service provides complete
management and monitoring of all customer equipment and network elements
needed to operate dedicated Internet or frame relay services. Companies
of all sizes can enhance their competitive performance, eliminating the
need to commit their own resources to the costly, time-consuming job of
network management.
SALES, MARKETING AND SERVICE DELIVERY
The Company seeks to provide its customers a choice for local access,
utilizing its facilities-based network infrastructure to deliver both voice and
data solutions. The Company's customers include
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corporations, financial services companies, government departments and agencies,
and academic, scientific and other major institutions as well as ISPs, IXCs and
other carriers.
The Company's sales and marketing approach is to build long-term business
relationships with its customers, with the intent of becoming the single source
provider of their telecommunications services. The Company's sales force
includes specialized professionals who focus on sales to retail, wholesale and
alternate channel (agents and value-added resellers) consumers of the Company's
telecommunications services. The Company's sales staff works to gain a better
understanding of the customer's operations in order to develop innovative,
application-specific solutions to each customer's needs. Sales personnel locate
potential business customers by several methods, including customer referral,
market research, cold calling and networking alliances.
Enhanced data services, like all other Company services, are sold through
the Company's existing sales force and supported by engineers and other sales
channels such as agents and value-added resellers, including independent
providers of communications hardware to customers. This approach enables the
Company to (i) emphasize the applications solutions aspects of enhanced data
services and (ii) utilize the expertise and resources of other vendors. The
Company intends to continue expanding its sales and engineering support staff
and other technical specialists in order to meet the growing demand for enhanced
data services. See "-- Network".
Historically, the Company has established new customer relationships by
providing customers with local or data services and subsequently marketing
additional services to such customers. Having evolved into an ICP, however, the
Company intends to emphasize its ability to provide customers "one-stop"
integrated voice, data and Internet communications services in its sales and
marketing efforts.
The Company's service delivery staff is primarily responsible for
coordinating service and installation activities. Service delivery activities
include coordinating installation dates and equipment delivery and testing. The
Company's customer service and technical staff plans, engineers, monitors and
maintains the integrity, quality and availability of the Company's networks. The
Company's technical staff are available to customers 24 hours every day.
NETWORK
The Company has deployed its network infrastructure on a "smart-build"
approach, selecting the most economic alternative of constructing or leasing
facilities or a combination thereof. As of December 31, 1997, the Company had
local fiber optic networks in service in 32 markets. The Company continues to
expand those networks and will look to identify new markets for other network
expansion opportunities. The Company generally chooses to own facilities where
(i) there is no attractive fiber optic network alternative, (ii) ownership
creates strategic value for the Company and/or (iii) large concentrations of
telecommunications traffic are accessible, or have been secured, to justify
network construction. In addition to the "build" vs. "lease" decision for
network deployment, the Company also will consider potential network
acquisitions from time to time.
The Company also seeks to expand the reach of its backbone data network
through agreements with certain third parties to deliver enhanced data
communications services through a seamless data network. Often, the Company
offers data services in geographic markets where it has not deployed its own
local fiber optic network by leasing facilities from a variety of entities,
including ILECs, utilities, IXCs, cable companies and various transit/highway
authorities. In many cases, such capacity is obtained through the purchase of
"dark fiber." The combination of the Company's local networks and its broadband
data backbone network comprise the seamless network platform which the Company
utilizes to offer its broad array of telecommunications services to customers.
The Company utilizes Newbridge ATM networking technology on its data
backbone network, allowing its network capacity to be efficiently shared between
multiple platforms. The Company's local networks are
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comprised of fiber optic cable, integrated switching facilities, advanced
electronics, data switching equipment (e.g., frame relay and ATM), transmission
equipment and associated wiring and equipment. By virtue of their
state-of-the-art equipment and ring-like architecture, the Company's networks
offer electronic redundancy and diverse access routing. Through automatic
protection switching, if any electrical component or fiber optic strand fails,
the signal is instantaneously switched to a "hot standby" component or fiber.
Since network outages and transmission errors can be very disruptive and costly
to long distance carriers and other customers, consistent reliability is
critical to customers.
In those markets where the Company chooses to deploy broadband fiber
networks, the Company's strategy is to first develop the "carrier ring" portion
of its network, a high capacity network designed to be accessible to all the
major long distance carriers and key ILEC central offices in the area. This
portion of the network allows the Company to provide access to the ILEC central
offices, the IXC POPs and customer buildings. Second, the Company designs a
larger "backbone ring" extending from the carrier ring, with a view toward
making the network accessible to the largest concentration of
telecommunications-intensive business and government customers in the area. Hubs
are strategically located on the backbone ring. Third, the Company concentrates
its sales and marketing efforts on adding business and government customers
located on or very near its backbone network and hub locations. Once the Company
determines that there is sufficient customer demand in a particular area, it
extends "distribution rings" from the backbone ring to reach specific business
customers in that area. The Company's emphasis is on the building and expansion
of these local networks to reach end user customers in buildings or office parks
with substantial telecommunications needs.
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 make the Company's per customer monitoring and customer
service costs lower than if such costs were monitored on a single-city basis.
The Company also plans to enhance its use of this facility to monitor the
performance of data and switched voice services. During 1997, the Company
performed various network management services for other telecommunications
service providers and plans to continue to offer these services on a limited
basis.
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. 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.
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
competitors 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. Competitive Access Providers ("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. The FCC Interconnection Decisions in 1992
and 1993 enabled CAPs to provide interstate switched access services in
competition with ILECs, which has encouraged the development of the competitive
interstate switched access market. Competition in this market was further
enhanced with the passage of the FTA, which requires (i) removal of state, local
and
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long distance entry barriers, (ii) ILECs to provide interconnections to their
facilities, and (iii) access to rights-of-way.
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. In addition, 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 applications.
COMPETITION
The Company operates in a highly competitive environment and currently does
not have a significant market share in any of its markets. Most of its actual
and potential competitors have substantially greater financial, technical,
marketing and other resources (including brand name recognition) than the
Company. Also, the continuing trend toward business alliances in the
telecommunications industry and the absence of substantial barriers to entry in
the data and Internet services markets, could give rise to significant new
competition.
In each of its markets, the Company's primary competitor is the ILEC
serving that geographic area. ILECs are established providers of dedicated and
local telephone services to all or virtually all telephone subscribers within
their respective service areas. ILECs also have long-standing relationships with
regulatory authorities at the federal and state levels. While recent FCC
administrative decisions and initiatives provide increased business
opportunities to voice, data and Internet-service providers such as the Company,
they also provide the ILECs with increased pricing flexibility for their private
line and special access and switched access services. In addition, with respect
to competitive access services (as opposed to switched local exchange services),
the FCC recently proposed a rule that would provide for increased ILEC pricing
flexibility and deregulation for such access services either automatically or
after certain competitive levels are reached. If the ILECs are allowed
additional flexibility by regulators to offer discounts to large customers
through contract tariffs, engage in aggressive volume and term discount pricing
practices for their customers, and/or seek to charge competitors excessive fees
for interconnection to their networks, the income of competitors to the ILECs,
including the Company, could be materially adversely affected. If future
regulatory decisions afford the ILECs increased access services, pricing
flexibility or other regulatory relief, such decisions could also have a
material adverse effect on competitors to the ILEC, including the Company.
In the local exchange market, the Company also faces competition or
prospective competition from several other carriers, many of which have
significantly greater financial resources than the Company. For example, AT&T
Corp., MCI Communications Corporation and Sprint Corporation, which historically
have been purely long distance carriers, have each begun to offer local
telecommunications services in major U.S. markets using their own facilities or
by resale of the ILECs' or other providers' services. In addition to these long
distance service providers, entities that currently offer or are potentially
capable of offering local switched services include companies that have
previously been known purely as CAPs, cable television companies, electric
utilities, microwave carriers, wireless telephone system operators and large
customers who build private networks. These entities, upon entering into
appropriate interconnection agreements or
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resale agreements with ILECs, including RBOCs, can offer single source local and
long distance services, like those offered by the Company. In addition, a
continuing trend towards business combinations and alliances in the
telecommunications industry may create significant new competitors to the
Company. The proposed merger of WorldCom, Inc. and MCI Communications
Corporation or AT&T Corp.'s proposed acquisition of Teleport Communications
Group, Inc. are examples of some of the alliances that are being formed. Many of
these combined entities may have resources far greater than those of the
Company. These combined entities may provide a bundled package of
telecommunications products, including local and long distance telephony, that
is in direct competition with the products offered by the Company.
The Company will also face competition from other fixed wireless services,
including Multichannel Multipoint Distribution Service ("MMDS"), Local
Multipoint Distribution Service ("LMDS"), 24 GHz and 38 GHz wireless
communications systems, Wireless Communications Service ("WCS"), FCC Part 15
unlicensed wireless radio devices, and other services that use existing
point-to-point wireless channels on other frequencies. The FCC has issued or is
in the process of issuing licenses for these services to provide broadband
integrated telecommunications services on a point-to-point and/or
point-to-multipoint basis. Many of these service providers have already raised
substantial capital and have commenced building their wide-area networks,
primarily in urban areas. Upon entering into appropriate interconnection
agreements with ILECs, these service providers are expected to provide
integrated voice and data services comparable to those the Company currently
offers or intends to offer. Many of these companies have announced plans to
target small and medium-sized businesses and may enjoy certain advantages over
the Company with respect to the speed with which they can deploy their own
facilities directly serving end user premises to the extent that they need not
lease or resell "last mile" facilities from the ILEC. In addition, the FCC has
allocated a number of spectrum blocks for use by wireless devices that do not
require site or network licensing. A number of vendors have developed such
devices that may provide competition to the Company, in particular for certain
low data-rate transmission services.
With respect to mobile wireless telephone system operators, the FCC has
authorized cellular, personal communications service ("PCS"), and other cellular
mobile radio service ("CMRS") providers to offer wireless services to fixed
locations, rather than just to mobile customers, in whatever capacity such CMRS
providers choose. Previously, cellular providers could provide service to fixed
locations only on an ancillary or incidental basis. This authority to provide
fixed as well as mobile services will enable CMRS providers to offer wireless
local loop service and other services to fixed locations (e.g., office and
apartment buildings) in direct competition with the Company and other providers
of traditional wireless telephone service.
Section 271 of the FTA prohibits a Regional Bell Operating Company ("RBOC")
from providing long-distance service that originates (or in certain cases
terminates) in one of its in-region states until the RBOC has satisfied certain
statutory conditions in that state and has received the approval of the FCC. The
FCC has denied the following applications for such approval: SBC Communications,
Inc.'s Oklahoma application in June 1997; Ameritech Inc.'s Michigan application
in August 1997; and BellSouth Corporation's applications for South Carolina and
Louisiana in December 1997 and February 1998, respectively. The Company
anticipates that a number of RBOCs will file additional applications for
in-region long distance authority in 1998. The FCC will have 90 days from the
date an application for in-region long distance authority is filed to decide
whether to grant or deny the application.
Once the RBOCs are allowed to offer widespread in-region long distance
services, both they and the largest IXCs will be in a position to offer
single-source local and long distance. On December 31, 1997, a United States
District Court judge in Texas held unconstitutional certain sections of the FTA,
including Section 271. This decision would permit the three RBOCs immediately to
begin offering widespread in-region long distance services. The decision,
however, was stayed on February 11, 1998 by the Court upon motion from the
defendants. Unless overturned on appeal, this decision could have a material
adverse effect on the Company. The Company expects that the FCC and certain IXCs
will file appeals of the decision with the United States Court of Appeals for
the Fifth Circuit. Although there can be no assurance
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as to the outcome of this litigation, the Company believes that significant
parts of the District Court decision may be reversed or vacated on appeal.
In addition, new FCC rules went into effect in February 1998 which will
make it substantially easier for many non-U.S. telecommunications companies to
enter the U.S. market, thus potentially further increasing the number of
competitors.
The market for data communications and Internet access services, including
IP switching, is extremely competitive. There are no substantial barriers to
entry, and the Company expects that competition will intensify in the future.
The Company believes that its ability to compete successfully depends on a
number of factors, including: market presence; the ability to execute a rapid
expansion strategy: the capacity, reliability and security of its network
infrastructure; ease of access to and navigation of the Internet; the pricing
policies of its competitors and suppliers; the timing of the introduction of new
services by the Company and its competitors; the Company's ability to support
industry standards; and general industry and 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.
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 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.
THE FEDERAL TELECOMMUNICATIONS ACT OF 1996
STATUTORY REQUIREMENTS. On February 1, 1996, the U.S. Congress enacted
comprehensive telecommunications reform legislation, which the President signed
into law as the FTA on February 8, 1996. The Company believes that this
legislation is likely to enhance competition in the local telecommunications
marketplace because it (i) preempts state and local entry barriers and gives the
FCC authority to enforce such preemption, (ii) requires ILECs to provide
interconnection to their facilities, (iii) facilitates end-users' choice to
switch service providers from ILECs to CLECs and (iv) requires access to
rights-of-way.
The FTA requires all LECs (including ILECs and CLECs): (i) not to prohibit
or unduly restrict resale of their services; (ii) to provide number portability;
(iii) to provide dialing parity and nondiscriminatory access to telephone
numbers, operator services, directory assistance and directory listings; (iv) to
afford access to poles, ducts, conduits and rights-of-way; and (v) to establish
reciprocal compensation arrangements for the transport and termination of local
telecommunications traffic. It also requires ILECs to negotiate local
interconnection agreements in good faith and 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, (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 unbundled network elements.
In addition, the FTA requires RBOCs to comply with certain safeguards and
offer interconnection that satisfies a prescribed 14-point competitive checklist
before the RBOCs are permitted to provide in-region
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interLATA (i.e. long distance) services. These safeguards are designed to ensure
that the RBOCs' competitors have access to local exchange and exchange access
services on nondiscriminatory terms and that subscribers of regulated
non-competitive RBOC services do not subsidize their provision of competitive
services. The safeguards also are intended to promote competition by preventing
RBOCs from using their market power in local exchange services to obtain an
anti-competitive advantage in the provision of other services.
Three RBOCs, Ameritech, Southwestern Bell ("SBC") and BellSouth, have filed
applications with the FCC for authority to provide in-region interLATA service
in selected states. The FCC has denied all such RBOC applications for in-region
long distance authority filed to date. The denials of certain of these RBOC
applications by the FCC are the subjects of judicial appeals and petitions for
rehearing at the FCC. Other RBOCs have begun the process of applying to provide
in-region interLATA service by filing with state commissions notice of their
intent to file at the FCC.
In addition, several RBOCs have challenged the constitutionality of certain
provisions of the FTA which bar the RBOCs from providing in-region interchange
and other services by filing a lawsuit in the U.S. District Court for the
Northern District of Texas (captioned SBC Communications, Inc. v. FCC, Civil
Action No. 7:97-CV-163-X (Kendall, J.)). On December 31, 1998, Judge Kendall
released an order which invalidated Sections 271-273 of the FTA as they pertain
to SBC, US West and Bell Atlantic, after finding that these provisions violated
the constitutional prohibition against "bills of attainder." Judge Kendall's
decision has been appealed to the U.S. Court of Appeals for the Fifth Circuit.
Judge Kendall has stayed the effectiveness of his order pending appellate
review.
The FTA also granted important regulatory relief to industry segments which
compete with CLECs. ILECs were given substantial new pricing flexibility. RBOCs
have the ability to obtain authorization to provide long distance services under
prescribed circumstances and were granted new rights to provide certain cable TV
services. IXCs were permitted to construct their own local facilities and/or
resell local services. State laws no longer can 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 FTA all utility holding companies are permitted to diversify into
telecommunications services.
FCC RULES IMPLEMENTING THE LOCAL COMPETITION PROVISIONS OF THE FTA. On
August 8, 1996, the FCC released a First Report and Order, a Second Report and
Order and a Memorandum Opinion and Order in its CC Docket 96-98 (combined, the
"Interconnection Orders") that established a framework of minimum, national
rules enabling state Public Service Commissions ("PSCs") and the FCC to begin
implementing many of the local competition provisions of the FTA. 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
FTA'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, its affiliates or any other party to which the ILEC
provides interconnection 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
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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.
- TRANSPORT AND TERMINATION CHARGES. The FCC rules require 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' Total
Element Long-Run Incremental Cost ("TELRIC") of providing that service.
However, as discussed below, the FCC's pricing and costing rules have
been vacated by the U.S. Court of Appeals for the Eighth Circuit (the
"Eighth Circuit").
- PRICING METHODOLOGIES. New entrants were required to pay for
interconnection and unbundled elements at rates based on the ILEC's
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 have been vacated by the
Eighth Circuit.
- RESALE. ILECs are required to offer for resale any telecommunications
service that they provide 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 have been vacated by 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.
- 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. On May 8,
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1997, the FCC released an order implementing these requirements by
reforming its existing access charge and universal service rules. See "--
Other Federal Regulation -- Universal Service Reform" below.
Most provisions of the Interconnection Orders were appealed. Numerous
appeals were consolidated for consideration by the Eighth Circuit (captioned
Iowa Utilities Board v. FCC). On July 18, 1997, the Court of Appeals released
its decision regarding issues raised in the consolidated appeals of the
Interconnection Orders. The Interconnection Orders were upheld in part and
reversed in part. A non-exclusive list of decisions rendered include that:
- The FCC exceeded its jurisdiction in establishing rules governing the
prices that ILECs may charge competitors for interconnection, unbundled
access and resale. The Court ruled that the authority to establish prices
for local communications facilities and services is reserved to the
States and, thus, vacated the FCC's pricing rules (except as they apply
to CMRS providers).
- The FCC's "pick and choose" rule, which allows competitors to select
individual terms of previously approved interconnection agreements for
their own use, conflicts with the purposes of the FTA, 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 FTA 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 FTA.
- 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 constitute an unconstitutional taking
were not decided because they were either raised by parties which lacked
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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.
The Interconnection Orders, and resulting local interconnection rules, were
vacated in part consistent with these decisions. The U.S. Supreme Court has
granted certiorari to review most aspects of the Eighth Circuit decision
regarding the Interconnection Orders. The Company cannot predict the outcome of
this litigation or the requests for reconsideration that remain pending at the
FCC. 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. However, after 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, the
Eighth Circuit issued a mandamus order instructing the FCC not to enforce such a
requirement.
SECTION 706 FORBEARANCE. Section 706 of the FTA gives the FCC the right to
forebear from regulating a market if the FCC concludes that such forbearance is
necessary to encourage the rapid deployment of advanced telecommunications
capability. Section 706 has not been used to date, but in January 1998 Bell
Atlantic filed a petition under Section 706 seeking to have the FCC deregulate
entirely the provision of packet-switched telecommunications services. Similar
petitions were filed later by the Alliance for Public Technology and U.S. WEST,
and other ILECs are expected to file similar petitions in the near future. If
these petitions are granted, RBOCs would be free to provide a bundled package of
intrastate and interstate data and Internet services similar to what the Company
presently offers. The effect of such an FCC decision on the Company's finances
and competitive position could be material.
OTHER FEDERAL 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. 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. With the exception of informational
tariffs for operator-assisted services and tariffs for interexchange
casual calling services, the FCC has ruled that IXCs must cancel their
tariffs for domestic, interstate interexchange services. Tariffs remain
required for international services. The effectiveness of those orders
currently is subject to a stay issued by the U.S. Court of Appeals for
the District of Columbia Circuit. On June 19, 1997, the FCC issued an
order granting petitions filed by Hyperion and Time-Warner to provide
CLECs the option to cease filing tariffs for interstate interexchange
access services and has proposed to make the withdrawal of CLEC access
service tariffs mandatory. Pursuant to these FCC requirements,
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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 that need not be tariffed.
- INTERNATIONAL SERVICES. Nondominant carriers such as the Company also are
required to obtain FCC authorization pursuant to Section 214 of the
Communications Act and file tariffs before providing international
communications services. The Company has obtained authority from the FCC
to provide voice and data communications services between the United
States and all foreign points on a resale basis.
- ILEC PRICE CAP REGULATION REFORM. In 1991, the FCC replaced traditional
rate of return regulation for large ILECs with price cap regulation.
Under price caps, ILECs can only raise prices for certain services by a
small percentage each year. In addition, there are constraints on the
pricing of ILEC services that are competitive with those of CLECs. On
September 14, 1995, the FCC proposed a three-stage plan that would
substantially reduce ILEC price cap regulation as local markets become
increasingly competitive and ultimately would result in granting ILECs
nondominant status. Adoption of the FCC's proposal to reduce
significantly its regulation of ILEC pricing would significantly enhance
the ability of ILECs to compete against the Company and could have a
material adverse effect on the Company. The FCC released an order on
December 24, 1996 which adopted certain of these proposals, including the
elimination of the lower service band index limits on price reductions
within the access service category. The FCC's December 1996 order also
eased the requirements necessary for the introduction of new services by
ILECs. On May 7, 1997, the FCC took further action in its CC Docket No.
94-1 updating and reforming its price cap plan for the ILECs. Among other
things, the changes require price cap LECs to reduce their price cap
indices by 6.5 percent annually, less an adjustment for inflation. The
FCC also eliminated rules that require ILECs earning more than certain
specified rates of return to "share" portions of the excess with their
access customers during the next year in the form of lower access rates.
These actions could have a significant impact on the interstate access
prices charged by the ILECs with which the Company competes.
- ACCESS CHARGES. Over the past few years, the FCC has granted ILECs
significant flexibility in pricing their interstate special and switched
access services. Under this pricing scheme, ILECs may establish pricing
zones based on access traffic density and charge different prices for
each zone. The Company anticipates that this pricing flexibility will
result in ILECs lowering their prices in high traffic density areas, the
probable area of competition with the Company. The Company also
anticipates that the FCC will grant ILECs increasing pricing flexibility
as the number of interconnections and competitors increases. On May 7,
1997, the FCC took action in its CC Docket No. 96-262 to reform the
current interstate access charge system. The FCC adopted an order which
makes various reforms to the existing rate structure for interstate
access that are designed to move access charges, over time, to more
economically efficient rate levels and structures. The following is a
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nonexclusive list of actions announced by the FCC:
SUBSCRIBER LINE CHARGE ("SLC"). The maximum permitted amount which an
ILEC may charge for SLC's on certain lines was increased. Specifically,
the ceiling was increased significantly for second and additional
residential lines, and for multi-line business customers. SLC ceiling
increases began in July 1997 and will be phased-in over a two-year
period.
PRESUBSCRIBED INTEREXCHANGE 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 interstate PICC charge is $0.53
per month for primary residential lines and $1.50 per month for second
and additional residential lines. The initial maximum interstate PICC for
multi-line business are $2.75. The ceilings will be permitted to increase
over time.
CARRIER COMMON LINE CHARGE ("CCL"). As the ceilings on the SLCs and PICCs
increase, the per-minute CCL charge will be eliminated. Until then, the
CCL will be assessed on originating minutes of use. Thus, ILECs will
charge lower rates for terminating then originating access. In addition,
Long Term Support ("LTS") payments for universal service will be
eliminated from the CCL charge.
LOCAL SWITCHING. Effective January 1, 1998, ILECs subject to price-cap
regulation were 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 changes became effective on January 1, 1998,
which altered 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 the Transport Interconnection Charge
("TIC") were reassigned to specified facilities charges. The reassignment
of tandem costs currently recovered through the TIC to the tandem
switching charge will be phased in evenly over a three-year period.
Residual TIC charges will be recovered in part through the PICC, and
price cap reductions will be targeted at the per-minute residual TIC
until it is eliminated.
In other actions, the FCC clarified that incumbent ILECs 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 FCC notice of inquiry
released on 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
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contributions to and receipts from the new universal service funding
mechanisms.
The FCC also announced that it will, in a subsequent Report and Order,
provide detailed rules for implementing a market-based approach to
further access charge reform. That process will give ILECs 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 ILECs 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. Various parties
have sought reconsideration or appeal of the FCC's access charge rulings
and all or part of the order ultimately could be set aside or revised.
The Company cannot predict the outcome of these proceedings.
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 interstate universal
service support and implements the universal service provisions of the FTA. 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 receive
a defined set of local telecommunications services at affordable rates. This is
accomplished in part through expansion of direct consumer 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 interstate
telecommunications carriers, including CLECs such as the Company.
The Company, like other telecommunications carriers that provide interstate
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 provide facilities-based service areas
designated for universal service support. The FCC's decisions in CC Docket No.
96-45 could have a significant impact on future operations of the Company.
Significant portions of the FCC's order have been appealed and are under review
by the U.S. Court of Appeals for the Fifth Circuit. The Company cannot predict
the outcome of these proceedings.
STATE REGULATION
The Company believes that most, if not all, states in which it operates or
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. However, Section
253 of the FTA prohibits 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 has the authority to preempt any such state or local
requirements to the extent necessary to enforce the FTA's open market entry
requirements. States and localities may, however, continue to regulate the
provision of intrastate
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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.
The Company has obtained intrastate authority for the provision of
dedicated services and a full range of local switched services in each of the
states where it currently provides local telecommunications services. In
addition, the Company has obtained PSC certification to provide interexchange
services in a majority of these states and is in the process of obtaining such
certification in other states. There can be no assurances that the Company will
receive the authorizations it may seek in the future from the above named PCSs
to the extent it expands into other states or seeks to provide additional
services. 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 FTA imposes a duty upon all ILECs to negotiate
in good faith with potential interconnectors to provide interconnection to the
ILEC networks, exchange local traffic, make unbundled network elements
available, and permit resale of most local services. In the event that
negotiations do not succeed, the Company has a right to seek state PSC
arbitration of any unresolved issues. The Company 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 Courts by the affected ILECs. In addition, the Company
has filed a lawsuit in U.S. District Court in Louisiana seeking review of the
pricing of interconnection and unbundled network elements approved by the
Louisiana PSC. Some of the Company's local interconnection agreements expire
during 1998 and will require renegotiation this year. There can be no assurance
that these renegotiations will be successful, or that state PSC arbitration of
any unresolved issues will be decided favorably to the Company.
The Company has experienced some difficulty in obtaining timely ILEC
implementation of local interconnection agreements. Delays encountered in
unbundled loop and number portability 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. Termination of
the existing franchise or license agreements prior to their expiration dates
could have a materially adverse effect on the Company. 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
21
<PAGE> 22
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 FTA 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.
EMPLOYEES
As of December 31, 1997, the Company employed a total of 803 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.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases 23,925 and 6,619 square foot office spaces in Annapolis
Junction, Maryland for its corporate headquarters and network management center
for approximately $29,500 and $8,520 per month as of December 31, 1997, subject
to periodic increases in specified amounts. The primary lease expires in 2005
with an option to renew for two additional five year periods. The secondary
lease terminates in April 1998. Additional office space of 30,686 square feet
is leased in Laurel, Maryland and Columbia, Maryland for additional corporate
offices, local network operations and the Company's central billing center.
These leases expire in 2005, 1998 and 2000, respectively. In addition, a lease
for approximately 60,000 square feet of space has been negotiated for office
space in Annapolis Junction, Maryland for approximately $89,000 per month. This
space will be used as the Company's corporate headquarters. The existing
corporate headquarters space will be used for additional corporate office
space. This lease will begin at the end of the first quarter of 1998 and will
expire at the end of the first quarter of 2003.
As of December 31, 1997, the Company's various operating subsidiaries have
leased facilities for their offices and network nodes. The aggregate monthly
rent on these properties is approximately $292,000. The various leases expire on
dates ranging from January 1998 to July 2007. Most have renewal options.
Additional office space and equipment rooms will be leased as additional
networks are constructed and the Company's operations are expanded.
The Company believes that its insurance coverage on these properties is
adequate and in compliance with the related leases.
ITEM 3. LEGAL PROCEEDINGS
ACSI's former Chief Financial Officer, Harry J. D'Andrea, has initiated
litigation against the Company in the Circuit Court of Maryland for Anne Arundel
County. The lawsuit alleges four different counts: breach of contract; breach of
the covenant of good faith and fair dealing; negligent misrepresentation; and
specific performance. D'Andrea seeks damages in excess of $5,000,000, and the
right to exercise options to purchase 100,000 shares of Common Stock at $4.25
per share. The litigation currently is in the discovery stage, and a trial date
has been scheduled for July 1998. The Company believes it has meritorious
defenses to the complaint and intends to defend this lawsuit vigorously.
Additionally, the Company and its subsidiaries are currently parties to
routine litigation incidental to their business, none of which, individually or
in the aggregate, is 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
22
<PAGE> 23
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".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1997.
23
<PAGE> 24
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
From March 3, 1995 until May 21, 1996, the Common Stock traded under the
symbol "ACNS" on the Nasdaq SmallCap Market. Since May 22, 1996, the Common
Stock has been included on The Nasdaq Stock Market.
The following table sets forth, for the periods indicated, the range of
high and low closing bid quotations for the Common Stock obtained from the
National Quotation Bureau for periods prior to March 3, 1995 and from The Nasdaq
SmallCap Market for the period March 3, 1995 through May 21, 1996 and high and
low closing sales prices for the Common Stock obtained from The Nasdaq Stock
Market after May 21, 1996. The quotations as set forth below for periods prior
to March 3, 1995, are believed to be representative of inter-dealer quotations,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
HIGH PRICE LOW PRICE
---------- ---------
FISCAL YEAR ENDED JUNE 30, 1995
<S> <C> <C>
First Quarter ..................... $ 4.50 $ 2.50
Second Quarter .................... 4.25 3.50
Third Quarter ..................... 3.75 3.50
Fourth Quarter .................... 4.38 3.25
FISCAL YEAR ENDED JUNE 30, 1996
First Quarter ..................... 7.50 3.63
Second Quarter .................... 6.75 5.00
Third Quarter ..................... 9.00 5.00
Fourth Quarter .................... 15.38 8.00
FISCAL PERIOD ENDED DECEMBER 31, 1996
First Quarter ..................... 13.25 8.50
Second Quarter .................... 12.38 9.88
FISCAL YEAR ENDED DECEMBER 31, 1997
First Quarter ..................... 11.13 6.50
Second Quarter .................... 7.69 4.75
Third Quarter ..................... 12.25 6.38
Fourth Quarter .................... 14.00 10.63
</TABLE>
On February 27, 1998, the last reported sales price for the Common Stock as
reported on The Nasdaq Stock Market was $14.00. As of December 31, 1997, there
were approximately 280 holders of record of the Common Stock.
DIVIDEND POLICY
The Company has never paid dividends on the Common Stock and does not
expect to declare any dividends on the Common Stock in the foreseeable future.
The Company's indentures and its credit facilities with AT&T Commercial Finance
Corporation contain certain covenants that restrict the Company's ability to
declare or pay dividends on the Common Stock.
Recent Sales of
Unregistered Securities
On December 10, 1997, the Company issued an aggregate of 100,000 shares of
Common Stock to Melco Developments, Ltd. pursuant to the exercise of warrants
for an aggregate consideration of $225,000. This transaction was
consummated as a private sale pursuant to Section 4(2) of the Securities Act of
1933.
On December 30, 1997, the Company issued 207,964 shares of Common Stock to
AT&T Credit Corporation in exchange for AT&T Credit Corporation's conveyance to
the Company of (i) 145 shares of common stock of American Communication
Services of Columbia, Inc., (ii) 14.5 shares of common stock of American
Communication Services of El Paso, Inc., (iii) 145 shares of common stock of
American Communication Services of Fort Worth, Inc., (iv) 145 shares of common
stock of American Communication Services of Greenville, Inc. and (v) 156.3
shares of common stock of American Communication Services of Louisville, Inc.
in connection with the refinancing of a $35 million credit facility. This
transaction was consummated as a private transaction pursuant to Section 4(2)
of the Securities Act of 1933.
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<PAGE> 25
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The selected data presented below under the captions "Statement of
Operations Data", "Other Data", and "Balance Sheet Data" as of and for the years
ended June 30, 1995 and 1996, the six months ended December 31, 1996 and the
year ended December 31, 1997 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". The Company's Consolidated Financial Statements as
of and for the years ended June 30, 1995 and 1996, the six months ended December
31, 1996, and the year ended December 31, 1997 have been audited by KPMG Peat
Marwick LLP, independent auditors. Subsequent to June 30, 1996, the Company
changed its fiscal year-end from June 30 to December 31. Selected data
presented below under the captions "Statement of Operations Data" and "Other
Data", for the year ended December 31, 1996 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 that
period. Network and Selected Statistical Data are derived from the Company's
records.
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Six Months Year Year
Fiscal Year Ended Ended Ended Ended
June 30, December 31, December 31, December 31,
1995 1996 1996 (1) 1996 (1) 1997
------------- ------------- ------------- ------------- -------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 389 $ 3,415 $ 6,990 $ 9,417 $ 59,000
Operating expenses:
Network, development and
operations 3,282 5,265 8,703 11,046 52,881
Selling, general and
administrative 4,598 13,464 20,270 30,656 59,851
Non-cash stock compensation 6,419 2,736 550 2,081 4,274
Depreciation and amortization 498 3,078 4,911 7,228 24,131
------------- ------------- ------------- ------------- -------------
Total operating expenses 14,797 24,543 34,434 51,011 141,137
------------- ------------- ------------- ------------- -------------
Loss from operations (14,408) (21,128) (27,444) (41,594) (82,137)
Interest and other income 218 4,410 2,757 6,390 8,686
Interest and other expense (170) (10,477) (10,390) (18,032) (41,565)
Debt conversion expense (385) 0 0 0 0
------------- ------------- ------------- ------------- -------------
Net loss before minority interest (14,746) (27,195) (35,077) (53,236) (115,016)
Minority interest (2) 48 413 160 417 0
------------- ------------- ------------- ------------- -------------
Net loss (14,698) (26,782) (34,917) (52,819) (115,016)
============= ============= ============= ============= =============
Preferred stock dividends and
accretion (1,071) (3,871) (2,003) (4,021) (11,630)
------------- ------------- ------------- ------------- -------------
Net loss to common stockholders $ (15,769) $ (30,653) $ (36,920) $(56,840) $(126,646)
============= ============= ============= ============= =============
Net loss per common share $ (3.30) $ (4.96) $ (5.48) $ (8.54) $ (4.65)
============= ============= ============= ============= =============
Weighted average shares
outstanding 4,772 6,185 6,734 6,653 27,234
OTHER DATA:
EBITDA(3) $ (7,443) $ (14,901) $ (21,822) $(31,868) $ (53,732)
Capital expenditures 15,303 60,856 64,574 107,773 135,036
<CAPTION>
June 30,
----------------------------- December 31, December 31,
1995 1996 1996 1997
------------- ------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents $ 20,351 $ 134,116 $ 78,619 $ 260,837
Total assets 37,627 223,600 230,038 638,895
Working capital 13,908 114,966 46,001 272,234
Property, plant and equipment, net 15,567 76,739 136,083 250,477
Long-term debt, including
current portion 3,798 184,382 210,410 461,285
Long-term liabilities 4,723 189,072 216,484 431,321
Redeemable stock, options and
warrants 2,931 2,155 2,000 206,160
Stockholders' equity (deficit) 22,141 8,982 (27,038) (65,356)
<CAPTION>
June 30, June 30, December 31, December 31,
1995 1996 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NETWORK AND SELECTED STATISTICAL DATA:
Networks in operation 5 15 21 32
Route miles 43 386 697 1,061
Fiber miles 1,754 28,476 48,792 92,528
Buildings connected 36 216 595 1,604
VGE circuits in service 31,920 137,431 384,134 1,052,698
Voice switches installed 0 0 1 16
Access lines sold 0 0 0 43,581
Employees 74 199 322 803
</TABLE>
25
<PAGE> 26
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
(1) Subsequent to June 30, 1996, the Company changed its fiscal year-end from
June 30 to December 31.
(2) Minority interest represents a 7.25% ownership of AT&T Credit Corporation in
the Company's subsidiaries that operate its networks in Louisville, Fort Worth,
Greenville, Columbia and El Paso. See "Description of Certain Indebtedness."
Such minority interest of AT&T in the Company's subsidiaries was exchanged for
207,964 shares of Common Stock on December 30, 1997 in connection with the
Company entering into the New AT&T Credit Facility.
(3) 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 $0.4 million. 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 GAAP. Noncash
compensation associated with employee stock and stock options was $6.4 million,
$2.7 million, $0.5 million, $2.1 million and $4.3 million for the years ended
June 30, 1995 and 1996, the six months ended December 31, 1996, and the years
ended December 31, 1996 and 1997, respectively. See Note 7 of Notes to the
Company's Consolidated Financial Statements.
26
<PAGE> 27
The following discussion and analysis contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Prospective investors are cautioned that such
statements are only predictions and that actual events or results may differ
materially. In evaluating such statements, prospective investors should
specifically consider the various factors identified in this Annual Report,
including the matters set forth under the caption "Risk Factors," in Exhibit
99.2 which could cause actual results to differ materially from those indicated
by such forward-looking statements. The following discussion should be read in
conjunction with the consolidated financial statements and the related notes
thereto included elsewhere or incorporated by reference in this Annual Report.
American Communications Services, Inc., formed in 1993, seeks to be a leading
facilities-based ICP to businesses primarily in major markets in the southern
half of the United States. By the end of 1997, the Company had become one of the
first CLECs to combine the provision of dedicated, local and long distance voice
services with frame relay, ATM and Internet services. Having established this
suite of telecommunications services which emphasizes data capabilities in
addition to traditional CLEC offerings, the Company has evolved into an ICP.
ACSI seeks to provide customers with superior service and competitive prices
while offering a single source for integrated communications services designed
to meet its business customers' needs. The Company's facilities-based network
infrastructure is designed to provide services to customers on an end-to-end
basis, and, as of December 31, 1997, was comprised of 1,061 route miles of fiber
in its 32 local networks in 19 states, 39 Newbridge ATM switches, 16 Lucent 5ESS
switches and approximately 22,000 backbone long haul miles in its coast-to-coast
broadband data network.
With the passage of the FTA, the Company has enhanced the scope of its
product offerings from dedicated services to a full range of switched voice,
data and Internet services in order to meet the needs of business end-users, and
is expanding its sales, marketing, customer care and OSS capabilities. The
Company introduced local switched voice services, including local exchange
services in late 1996 and long distance services in late 1997. By December 31,
1997, ACSI had sold 43,581 customer access lines, of which 35,105 were
installed, representing a significant increase over the 360 access lines sold as
of March 31, 1997.
The development of the Company's business and the construction, acquisition
and expansion of its networks require significant capital expenditures, a
substantial portion of which are incurred before realization of revenues. These
expenditures, together with the associated early operating expenses, result in
negative cash flow until an adequate customer base is established. However, as
the Company's customer base grows, the Company expects that incremental revenues
can be generated with decreasing incremental operating expenses, which may
provide positive contributions to cash flow. The Company has made specific
strategic decisions to build high capacity networks with broad market coverage,
which initially increases its level of capital expenditures and operating
losses. However, the Company believes that over the long term this strategy will
enhance the Company's financial performance by increasing the traffic flow over
its network. The Company also has entered into leased dark fiber and fiber
capacity arrangements, which allow the Company, by installing one or more
switches and related electronics, to enter a market prior to completion of its
own fiber optic network.
The following table presents key operating statistics for the Company for
the reporting periods.
<TABLE>
<CAPTION>
OPERATIONAL ROUTE FIBER ACCESS VOICE
AS OF DATE EMPLOYEES NETWORKS MILES MILES BLDGS VGE * LINES SOLD SWITCHES
-------------------- --------- ----------- ----- ----- ----- ----- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997.... 803 32 1,061 92,528 1,604 1,052,698 43,581 16
September 30, 1997... 699 32 977 85,976 1,239 989,285 28,394 9
June 30, 1997........ 559 31 957 82,693 1,083 886,375 9,177 8
March 31, 1997....... 502 28 908 75,867 858 554,883 360 5
December 31, 1996.... 322 21 697 48,792 595 384,134 0 1
September 30, 1996... 272 19 543 32,774 532 267,894 0 0
June 30, 1996........ 199 15 386 28,476 216 137,431 0 0
March 31, 1996....... 142 10 200 9,466 133 125,208 0 0
December 31, 1995.... 111 9 136 5,957 100 82,055 0 0
September 30, 1995 .. 100 5 92 4,373 79 50,303 0 0
</TABLE>
27
<PAGE> 28
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
June 30, 1995........ 74 5 43 1,754 36 31,920 0 0
</TABLE>
*The terms "Voice Grade Equivalents ("VGEs")" are commonly used measures of
telephone service equivalent to one telephone line (64 kilobits of bandwidth)
actually billed to a customer.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
REVENUES
Revenues for the year ended December 31, 1997, increased $49.6 million, or
527%, to $59.0 million from $9.4 million for the year ended December 31, 1996.
This increase was primarily attributable to the Company's rapid expansion of its
local fiber optic networks in 32 markets by the end of 1997 (up from 21 at the
end of 1996) and the increase in route miles, buildings connected and voice and
data switches deployed. In late 1996, the Company introduced its coast-to-coast
data network, deploying 39 Newbridge ATM switches by mid-1997. In addition, the
Company introduced local switched service on a resale basis in its markets, and
also provided facilities-based services in 16 of those markets by installing
Lucent 5ESS switches. Revenues also increased as a result of the Cybergate
Acquisition. For the year ended December 31, 1997, approximately 42% of the
Company's 1997 revenues were derived from special access and dedicated services,
approximately 38% from data and Internet services and approximately 20% from
switched local and other services. By contrast, 1996 revenues were derived
primarily from dedicated and special access services.
OPERATING EXPENSES
Network Development and Operations
Network development and operations expenses for the year ended December 31,
1997, increased $41.9 million, or 379%, to $52.9 million from $11.0 million for
the year ended December 31, 1996. Of these amounts, approximately $44.4 million
and $4.1 million, respectively, represented the cost of providing
telecommunications services paid to IXCs, ILECs and others for leased
telecommunications facilities and services. In addition, approximately $8.5
million and $6.9 million, respectively, represented network-related personnel
costs. The increase in costs was due primarily to the Company's rapid deployment
of operational networks, Lucent 5ESS switches and access lines.
Selling, General and Administrative
For the year ended December 31, 1997, selling, general and administrative
expenses increased $29.2 million, or 95%, to $59.9 million from $30.7 million
for the year ended December 31, 1996. Related personnel costs increased to $16.5
million for the year ended December 31, 1997 from $8.3 million for the year
ended December 31, 1996. Other sales and administrative costs increased to $43.4
million for the year ended December 31, 1997 from $22.4 million for the year
ended December 31, 1996. This increase reflected costs associated with the
Company's efforts to significantly expand its network support, sales, marketing
and administrative staff and facilities.
Non-Cash Compensation
Non-cash stock compensation expense increased $2.2 million, or 105%, to
$4.3 million for the year ended December 31, 1997 from $2.1 million for the year
ended December 31, 1996. Included in non-cash compensation for 1997 was
approximately $2.9 million accrued for the issuance of Common Stock to be issued
in connection with 1997 performance bonuses.
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<PAGE> 29
Depreciation and Amortization
Depreciation and amortization expenses increased $16.9 million, or 234%, to
$24.1 million for the year ended December 31, 1997 from $7.2 million for the
year ended December 31, 1996. This increase was due to an increase in capital
assets to $282.2 million at December 31, 1997 from $144.4 million at December
31, 1996.
INTEREST AND OTHER INCOME
Interest and other income increased $2.3 million, or 36%, to $8.7 million
for the year ended December 31, 1997 from $6.4 million for the year ended
December 31, 1996. The increase in interest and other income reflects the
increase in earnings from the proceeds received from the 13 3/4% Senior Notes
due 2007 (the "2007 Notes"), the 14 3/4% Redeemable Preferred Stock due 2008
(the "14 3/4% Preferred Stock") and the 12 3/4% Junior Redeemable Preferred
Stock due 2009 (the "12 3/4% Preferred Stock) which have been invested.
INTEREST AND OTHER EXPENSE
Interest and other expense increased $23.6 million, or 131%, to $41.6
million for the year ended December 31, 1997 from $18.0 million for the year
ended December 31, 1996. The increase reflected the accrual of interest related
to the 2006 Notes and 2007 Notes and the Company's increased borrowings under
the credit facility with AT&T Credit Corporation.
EBITDA
EBITDA decreased $21.8 million, or 69%, to ($53.7) million for the year
ended December 31, 1997 from ($31.9) million for the year ended December 31,
1996. This decrease was due to the changes in revenues, network development and
operations and selling, general and administrative expenses discussed above.
NET LOSS
As a result of the aforementioned increases in revenues, operating
expenses, depreciation and amortization, and interest income and expense, net
loss increased $62.2 million, or 118%, to $115.0 million for the year ended
December 31, 1997, from $52.8 million for the year ended December 31, 1996.
Further, net loss to common stockholders increased to $126.6 million from $56.8
million for the same periods, due to the increase in preferred stock dividends
and accretion during 1997. This increase is primarily attributable to the
issuance of 14 3/4% Preferred Stock and the 12 3/4% Preferred Stock.
SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 1995 (UNAUDITED)
REVENUES
During the six months ended December 31, 1996, the Company's revenues
increased $6.0 million, or 600%, to $7.0 million from $1.0 million 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 six months ended
December 31, 1996.
29
<PAGE> 30
OPERATING EXPENSES
Network Development and Operations
Network development and operating expenses for the six months ended
December 31, 1996 increased $5.8 million, or 200%, to $8.7 million from $2.9
million for 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 six months ended December 31, 1996
from approximately $1.4 million in the six months ended December 31, 1995.
Selling, General and Administrative
In the six months ended December 31, 1996, selling, general and
administrative expenses increased $17.2 million, or 555%, 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 six months 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 six months 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.
Non-Cash Stock Compensation
Non-cash stock compensation expense decreased $0.7 million, or 58%, to $0.5
million for the six months 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.
Depreciation and Amortization
Depreciation and amortization expenses increased $4.1 million, or 513%, to
$4.9 million in the six months ended December 31, 1996 from $0.8 million in the
six months ended December 31, 1995. The Company's capital assets increased to
$144.4 million as of December 31, 1996, from $32.6 million in capital assets as
of December 31, 1995.
INTEREST AND OTHER INCOME
Interest and other income increased $2.0 million, or 250%, to $2.8 million
for the six months ended December 31, 1996 from $0.8 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.
30
<PAGE> 31
INTEREST AND OTHER EXPENSES
Interest and other expense increased $7.6 million, or 271%, to $10.4
million in the six months ended December 31, 1996 from $2.8 million in the six
months ended December 31, 1995. The increase reflected the accrual of interest
related to the 2005 Notes and 2006 Notes and the Company's increased borrowings
under the credit facility with AT&T Credit Corporation.
MINORITY INTEREST
AT&T Credit Corporation's minority interest in certain of the Company's
operating subsidiaries reduced operating losses by approximately $0.2 million
for each of the six months ended December 31, 1996, and 1995.
EBITDA
EBITDA decreased $16.9 million, or 345%, to ($21.8) million for the six
months ended December 31, 1996 from ($4.9) million for the six months ended
December 31, 1995. This decrease was due to the changes in revenues, network
development, operations and selling, general and administrative expenses
discussed above.
NET LOSS
As a result of the aforementioned increases in revenues, operating
expenses, depreciation and amortization, and interest income and expense, net
loss increased $26.0, or 292%, to $34.9 million for the fiscal period ended
December 31, 1996, from $8.9 million for the six months ended December 31, 1995.
Further, net loss to common stockholders increased to $36.9 million from $10.7
million for the same periods, due primarily to the increase in net loss,
accompanied by a slight increase in preferred stock dividends between periods.
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 revenues
increased $3.0 million, or 750%, to $3.4 million from $0.4 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 $0.3
million, or 85% of revenues for fiscal 1995, reflecting the Company's increased
sales to end-users during fiscal 1996.
OPERATING EXPENSES
Network Development and Operations
Network development and operations expenses for fiscal 1996 increased $2.0
million 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 $0.8 million in fiscal 1996 from approximately $1.9 million in fiscal 1995.
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<PAGE> 32
Selling, General and Administrative
In fiscal 1996, selling, general and administrative expenses increased $8.9
million 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.
Non-Cash Compensation
Non-cash stock compensation expense decreased $3.7 million 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.
Depreciation and Amortization
Depreciation and amortization expenses increased $2.6 million to $3.1
million in fiscal 1996 from $0.5 million 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.
INTEREST AND OTHER INCOME
Interest and other income increased $4.2 million to $4.4 million for fiscal
1996 from $0.2 million in fiscal 1995. The increase 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.
INTEREST AND OTHER EXPENSES
Interest and other expenses increased $10.3 million to $10.5 million in
fiscal 1996 from $0.2 million in fiscal 1995. The increase reflected the accrual
of interest related to the 2005 Notes and the Company's increased borrowings
under the credit facility with AT&T Credit Corporation.
DEBT CONVERSION EXPENSE AND MINORITY INTEREST
Debt conversion expense in fiscal 1995 totaled $0.4 million, 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 $0.4 million for fiscal 1996, and by $48,055
for fiscal 1995.
EBITDA
EBITDA decreased $7.5 million to ($14.9) million at June 30, 1996 from
($7.4) million at June 30, 1995. This change was due to the changes in revenues,
network development, operations and selling, general and administrative expenses
discussed above.
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<PAGE> 33
NET LOSS
As a result of the aforementioned increases in revenues, operating
expenses, depreciation and amortization, and interest income and expense, net
loss increased $12.1 million to $26.8 million for the fiscal year ended June 30,
1996, from $14.7 million for the fiscal year ended June 30, 1995. Further, net
loss to common stockholders increased to $30.7 million from ($15.7) million for
the same periods, due primarily to the increase in net loss, accompanied by a
slight increase in preferred stock dividends between periods.
CAPITAL EXPENDITURES; OPERATING CASH FLOW
As of December 31, 1997, the Company was operating 32 digital fiber optic
networks. The costs associated with the initial construction and operation of a
network may vary, primarily due to market variations in geographic and
demographic characteristics, and the types of construction technologies which
can be used to deploy the network. In addition, the Company has implemented
aggressive network expansion and optimization programs. This is evidenced by an
increase in fiber optic cable miles to 92,528 fiber miles at December 31, 1997
from 48,792 fiber miles at December 31, 1996. The Company also significantly
increased the number of buildings connected to its network to 1,604 at December
31, 1997 from 595 at December 31, 1996.
As the Company develops, introduces and expands its high-speed data,
enhanced voice messaging and local switched services in each of its 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 December 31, 1997, the Company was generating revenues from
all of its fiber optic networks, on a consolidated basis, it is still incurring
negative cash flows due, in part, to the funding requirements for continuing
network construction or development and to the roll-out of new data and switched
voice services. The Company expects it will continue to incur negative cash flow
for at least two years. There can be no assurance that the Company's networks or
any of its other services will ever provide a revenue base adequate to sustain
profitability or generate positive cash flow. The Company estimates that in
1998, capital required for implementation of its integrated networks and its
other services and to fund negative cash flow will be approximately $200
million. The Company anticipates that current cash resources are sufficient to
fund its continuing negative cash flow and required capital expenditures in the
near future.
LIQUIDITY AND CAPITAL RESOURCES
The Company's further development and enhancement of new services as well
as the continued development, construction, expansion, operation and potential
acquisition of networks, will require substantial capital expenditures. The
funding of these expenditures is dependent upon the Company's ability to raise
substantial financing. As of December 31, 1997, the Company had raised
approximately $625 million from debt and equity financings. The Company
estimates that for 1998, capital required for expansion of its infrastructure
and services and to fund negative cash flow will be approximately $200 million.
At December 31, 1997, the Company had approximately $261.0 million of cash and
cash equivalents available for such purposes. The Company continues to consider
potential acquisitions or other arrangements that may fit the Company's
strategic plan. Any such acquisitions or arrangements that the Company might
consider are likely to require additional equity or debt financing, which the
Company will seek to obtain as required and may also require that the Company
obtain the consent of its debt holders.
Management anticipates that the Company's current cash resources are
sufficient to fund the Company's continuing negative cash flow and required
capital expenditures in the near future. To meet its additional remaining
capital requirements and to successfully implement its strategy, the Company
will be required to sell additional equity securities, increase its existing
credit facility, acquire additional credit facilities or sell
33
<PAGE> 34
additional debt securities, certain of which would require the consent of the
Company's debt holders. Accordingly, there can be no assurance that the Company
will be able to obtain the additional financing necessary to satisfy its cash
requirements or to implement its strategy successfully, in which event the
Company will be unable to fund its ongoing operations, which would have a
material adverse effect on its business, results of operations and financial
condition.
On November 14, 1995, the Company completed a private offering of the 2005
Notes and 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 offering of 8,000,000 shares
of Common Stock. In connection therewith, the Company completed the sale of an
additional 660,000 shares on May 14, 1997 upon exercise of the underwriters'
over-allotment option and received aggregate net proceeds of approximately $40.0
million from the sale of these 8,660,000 shares.
On July 10, 1997, the Company completed the issuance and sale of 75,000
units (the "Unit Offering"), consisting of 14 3/4% Redeemable Preferred Stock
due 2008 and warrants (the "Unit Warrants") from which the Company received net
proceeds of approximately $70 million. Dividends on the 14 3/4% Preferred Stock
accrue from the date of issuance, are cumulative and are payable quarterly in
arrears, at a rate per annum of 14 3/4% of the liquidation preference per share.
Dividends on the 14 3/4% Preferred Stock will be paid, at the Company's option,
either in cash or by the issuance of additional shares of 14 3/4% Preferred
Stock; provided, however, that after June 30, 2002, to the extent and for so
long as the Company is not precluded from paying cash dividends on the 14 3/4%
Preferred Stock by the terms of any then outstanding indebtedness or any other
agreement or instrument to which the Company is then subject, the Company shall
pay dividends on the 14 3/4% Preferred Stock in cash.
On July 23, 1997, the Company completed the sale of the 2007 Notes. Of the
total net proceeds of $204.3 million, the Company placed $70.0 million
representing funds sufficient to pay the first five interest payments on the
2007 Notes into an escrow account for the benefit of the holders thereof.
Payments of interest on the 2007 Notes are payable semi-annually, and began in
January 1998.
In October 1997, the Company issued the 12 3/4% Preferred Stock from which
the Company received net proceeds of approximately $146.0 million. Dividends on
the 12 3/4% Preferred Stock accrue from the date of issuance, are cumulative and
are payable quarterly in arrears, at a rate per annum of 12 3/4% of the
liquidation preference per share. Dividends on the 12 3/4% Preferred Stock will
be paid, at the Company's option, either in cash or by the issuance of
additional shares of 12 3/4% Preferred Stock; provided, however, that after
October 15, 2002, to the extent and for so long as the Company is not precluded
from paying cash dividends on the 12 3/4% Preferred Stock by the terms of any
agreement or instrument governing any of its then outstanding indebtedness, the
Company shall pay dividends on the 12 3/4% Preferred Stock in cash.
The Company intends to use the remaining proceeds from the sale of the 2005
Notes, 2006 Notes, 2007 Notes, the 14 3/4% Preferred Stock and the 12 3/4%
Preferred Stock towards expansion and construction
34
<PAGE> 35
of local fiber optic networks, the further expansion and introduction of
services and to fund negative operating cash flow.
On December 30, 1997, the Company entered into the New AT&T Credit Facility
for the development and construction of fiber optic local networks. The Company
has financing commitments for $35.0 million under the New AT&T Credit Facility,
of which $35.0 had been borrowed as of December 31, 1997. Payments of interest
on borrowings under the New AT&T Credit Facility are payable quarterly,
commencing in December 1998.
EFFECTS OF NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 129 (FAS 129), "Disclosure of Information
about Capital Structure." The Company is required to adopt the provisions of
this Statement for fiscal years ending after December 15, 1997. This Statement
continues the previous requirement to disclose certain information about an
entity's capital structure found in APB Opinions No. 10, "Omnibus Opinion --
1966," No. 15, "Earnings per Share," and FASB Statement No. 47, "Disclosure of
Long-Term Obligations," for entities that were subject to the requirements of
those standards. As the Company has been subject to the requirements of each of
those standards, adoption of FAS No. 129 will have no impact on the Company's
financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (FAS No. 130), "Reporting Comprehensive
Income." FAS No. 130 established standards for the reporting and display of
comprehensive income and its components in the financial statements. The Company
is required to adopt the provisions of this Statement for fiscal years beginning
after December 15, 1997. Earlier application is permitted; however, upon
adoption the Company will be required to reclassify previously reported annual
and interim financial statements. The Company believes that the disclosure of
comprehensive income in accordance with the provisions of FAS No. 130 will not
materially impact the manner of presentation of its financial statements as
currently and previously reported.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (FAS No. 131), "Disclosure about Segments
of an Enterprise and Related Information." FAS No. 131 requires the Company to
present certain information about operating segments and related information,
including geographic and major customer data, in its annual financial statements
and in condensed financial statements for interim periods. The Company is
required to adopt the provisions of this Statement for fiscal years beginning
after December 15, 1997. Earlier application is permitted; however, upon
adoption the Company will be required to restate previously reported annual
segment and related information in accordance with the provisions of FAS No.
131. The Company has not completed its analysis of the impact on the financial
statements that will be caused by the adoption of this Statement.
SUBSEQUENT EVENT
On February 26, 1998, the Company executed the amendments to its indentures
in order to improve the ability of the Company and its subsidiaries to incur
additional indebtedness or make certain investments or acquisitions.
YEAR 2000 PROGRAM
Many computer systems experience problems handling dates beyond the year
1999. Therefore, some computer hardware and software will need to be modified
prior to the year 2000 in order to remain functional. The Company is completing
its preliminary assessment of both the internal readiness of its computer
systems and the compliance of its network and services sold to customers. The
Company expects to implement successfully the systems and programming changes
necessary to address year 2000 issues, and based on its initial evaluation, does
not believe that the cost of such actions will have a material
35
<PAGE> 36
adverse effect on the Company's results of operations or financial condition.
There can be no assurance, however, that there will not be a delay in, or
increased costs associated with, the implementation of such changes, and the
Company's inability to implement such changes could have an adverse effect on
future results of operations. Further, if the hardware or software comprising
the Company's network elements acquired from third party vendors or the software
applications of the ILECs, long distance carriers or others on whose services
the Company depends or with whom the Company's systems interface are not year
2000 compliant, it could affect the Company's systems, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by this item are included in this Report
beginning on page F-1 following the signature page.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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<PAGE> 37
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The sections of the Company's 1998 Proxy Statement entitled "Election of
Directors - Information Concerning Director Nominees," "--Business Experience of
Director Nominees," "Section 16(a) Beneficial Ownership Reporting Compliance,"
and "Management - Business Experience of Executive Officers" are incorporated
herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The sections of the Company's 1998 Proxy Statement entitled "Election of
Directors - Directors' Compensation," "--Compensation Committee Interlocks and
Insider Participation," "Compensation of Executive Officers and Directors
Summary Compensation Table," "--Option Grants in Fiscal Year Ended December 31,
1997," "--Option Exercises and Fiscal Year End Values," and "Management
Employment and Termination Agreements" are incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section of Company's 1998 Proxy Statement entitled "Stock Ownership of
Certain Beneficial Owners, Directors and Management" is incorporated herein by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section of the Company's 1998 Proxy Statement entitled "Certain
Relationships and Related Transactions" is incorporated herein by reference.
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<PAGE> 38
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. OR
EXHIBIT INCORPORATION
NO. DESCRIPTION BY REFERENCE
-------- ------------------------------------------------------------------------------------------------------- --------------
<S> <C> <C>
3.1 Second Amended and Restated Certificate of Incorporation of the Company. #
3.2 Certificate of Designations of the Company's 9% Series A-l, Series
B-1, Series B-2, Series B-3 and Series B-4 Convertible Preferred Stock. **
3.3 Certificate of Elimination regarding the 9% Series A Preferred Stock **
3.4 Amended and Restated By-Laws of the Company, as amended. *
3.5 Governance Agreement dated November 8, 1995, between the Company and
the holders of its Preferred Stock. ++
3.8 Certificate of Correction dated March 11, 1996. #
3.9 Supplemental Governance Agreement dated February 26, 1996. #
3.10 Certificate of Designation of the Company's 14.75% Redeemable Preferred Stock due 2008. ###
3.11 Certificate of Amendment of the Certificate of Designation of the Company's 14.75% Redeemable
Preferred Stock due 2008. ###
3.12 Certificate of Designation of the Company's 12 3/4% Junior Redeemable Preferred Stock due 2009. ####
4.1 Specimen Certificate of the Company's Common Stock. *
4.2 Specimen Certificate of the Company's 9% Series A-l Preferred Stock. ****
4.3 Specimen Certificate of the Company's 9% Series B-1 Preferred Stock. ****
4.4 Specimen Certificate of the Company's 9% Series B-2 Preferred Stock. ****
4.5 Specimen Certificate of the Company's 9% Series B-3 Preferred Stock. ****
4.6 Certificate of the Company's 9% Series B-4 Preferred Stock dated
November 14, 1995. ++
4.7 Indenture dated November 14, 1995, between the Company and Chemical
Bank, as trustee, relating to $190,000,000 in principal amount of
13% Senior Discount Notes due 2005, including the form of global note. ++
4.8 Initial Global Note dated November 14, 1995. ++
4.9 Warrant Agreement dated November 14, 1995, between the Company and
Smith Barney Inc. and Salomon Brothers Inc. +++
4.10 Initial Global Warrant dated November 14, 1995. +++
4.11 Indenture dated March 21, 1996, between the
Company and Chemical Bank, as trustee, relating
to $120,000,000 in principal amount of 12 3/4%
Senior Discount Notes due 2006, including the form of global note. +++++
4.12 Warrant Agreement dated March 6, 1997 between the Company and MCI metro
Access Transmission Services, Inc. *****
4.13 Supplemental Indenture dated as of February 27, 1998 by and between American Communications
Services, Inc., a Delaware corporation and The Chase Manhattan Bank (formerly known as Chemical Bank)
relating to the 2005 Notes E-1
4.14 Supplemental Indenture dated as of February 27, 1998 by and between American Communications
Services, Inc., a Delaware corporation and The Chase Manhattan Bank (formerly known as Chemical Bank)
relating to the 2006 Notes E-2
4.15 Supplemental Indenture dated as of February 27, 1998 by and between American Communications
Services, Inc., a Delaware corporation and The Chase Manhattan Bank (formerly known as Chemical Bank)
relating to the 2007 Notes E-3
4.16 Form of Warrant ###
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 Registration Rights Agreement dated July 1, 1992, between American
Lightwave, Inc. and persons named therein. *
10.5 Supplemental Registration Rights Agreement dated June 26, 1995. ****
10.6 Management Registration Rights Agreement dated June 30, 1995. ****
10.7 Registration Rights Agreement dated June 26, 1995, between the Company
and certain Preferred Stockholders. **
10.8 Form of Warrant Agreement issued to certain Preferred Stockholders on
June 26, 1995. ****
10.9 Form of $.01 Warrant Agreement. ****
10.10 Form of $1.79 Warrant Agreement. ****
10.11 Form of $2.25 Warrant Agreement. ****
10.12 Stockholders Agreement dated June 26, 1995, between the Company and
certain Preferred Stockholders. ****
10.13 Third Amended and Restated Employment Agreement between the Company ##
</TABLE>
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<TABLE>
<S> <C> <C>
and Anthony J. Pompliano. ****
10.14 Third Amended and Restated Employment Agreement between the Company
and Richard A. Kozak. ****
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 Third Amended and Restated Employment Agreement between the Company
and Douglas R. Hudson. ****
10.18 Second Amended and Restated Employment Agreement between the Company
and Ronald W. Kaiser. ****
10.19 Employment Agreement between the Company and Robert Ottman ****
10.20 Form of Non-Qualified Stock Option Certificates, as amended, issued to
Richard A. Kozak. ****
10.21 Form of Stock Option Certificates, as amended, issued to George M.
Tronsrue, III under employment agreement. ****
10.22 Form of Stock Option Certificates, as amended, issued to Riley M. ##
Murphy under employment agreement. ****
10.23 Form of Stock Option Certificates, as amended, issued to Douglas R.
Hudson under employment agreement. ****
10.24 Form of Stock Option Certificates, as amended, issued to Ronald W.
Kaiser under employment agreement. ****
10.25 Form of Stock Option Certificates, as amended, issued to Robert Ottman. ****
10.26 Agreement, dated March 2, 1994, between the Company and Gerard Klauer
Mattison & Co., as amended. *
10.27 Agreement, dated March 20, 1995, between the Company and Gerard Klauer
Mattison & Co., as amended. ****
10.28 Agreement, dated October 19, 1994, between the Company and Marvin
Saffian & Company. *
10.29 Lease Agreement for the Company's executive offices at 131 National
Business Parkway, Suite 100, Annapolis Junction, Maryland, as amended. ****
10.30 Loan and Security Agreement, dated October 17, 1994, between AT&T Credit
Corporation and American Communication Services of Louisville, Inc. *
10.31 Loan and Security Agreement, dated February 28, 1995, between AT&T Credit
Corporation and American Communication Services of Fort Worth, Inc. ****
10.32 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. ****
10.33 Amendment No. 1 to Parent Support and Pledge Agreement (Louisville)
between the Company and AT&T Credit Corporation. ****
10.34 Amendment No. 1 to Parent Support and Pledge Agreement (Fort Worth)
between the Company and AT&T Credit Corporation. ****
10.35 Amendment No. 1 to Loan and Security Agreement between American
Communications Services of Louisville, Inc. and AT&T Credit Corporation. ****
10.36 Consulting Agreement, dated October 25, 1993, between the Company and
Thurston Partners, Inc. *
10.37 Consulting Agreement, effective July 1, 1994, between the Company and SGC
Advisory Services, Inc. *
10.38 Consulting Agreement, dated June 16, 1994, between the Company and Thurston
Partners. Inc. and Global Capital, Inc. *
10.39 Note Purchase Agreement, dated June 28, 1994. *
10.40 Investment Agreement dated October 21, 1994, between the Company and the
Purchasers named therein. *
10.41 Stock Purchase Agreement, dated October 17, 1994, between the Company and
AT&T Credit Corporation. *
10.41 American Communication Services of Louisville, Inc. Common Stock Purchase
Agreement, dated October 17, 1994. *
10.42 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. ****
10.43 Stock Purchase Agreement, dated May 12, 1995, by and among the Company,
Piedmont Teleport, Inc., Randal Holcombe and Karen Holcombe, as amended. ****
10.44 Stock and Warrant Purchase Agreement, dated June 26, 1995, between the
Company and the Purchasers named therein. **
10.45 Form of Indemnity Agreement between the Company and its Director, as
amended. ****
10.46 Assignment and Assumption Agreement dated June 21, 1995, between the
Company and Apex Investment Fund II, L.P. ****
10.47 Registration Agreement dated November 9, 1995, between the Company and
the Initial Purchasers. ++
10.48 Loan and Security Agreement, dated September 8, 1995, between AT&T Credit
Corporation and American Communications Services of E1 Paso, Inc. ++
</TABLE>
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<TABLE>
<S> <C> <C>
10.49 Parent Support and Pledge Agreement (El Paso) dated September 8, 1995,
between the Company and AT&T Credit Corporation. ++
10.50 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. ++
10.51 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"). ++
10.52 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"). ++
10.53 Amended 1994 Stock Option Plan of the Company. ++
10.54 Parent Pledge and Support Agreement dated as of October 17, 1994 between
the Company and AT&T Credit Corporation. *
10.55 American Communication Services of E1 Paso Inc. Common Stock Purchase
Agreement dated September 8, 1995. #
10.56 Form of Non-Qualified Stock Option Certificates, as amended, issued to ## ++++
Anthony J. Pompliano.
10.57 Employment Agreement between the Company and David L. Piazza. ## *****
10.58 Master Amendment to Loan and Security Agreements dated November 30, 1995, ++++
among American Communication Services of
Louisville, Inc., American Communication Services
of Fort Worth, Inc., American Communication
Services of Columbia, Inc., American
Communication Services of Greenville, Inc.,
American Communication Services of El Paso and
AT&T Credit Corporation.
10.59 Master Reaffirmation of Parent Pledge and Support Agreements dated
November 30, 1995, between the Company and AT&T Credit Corporation. *****
10.60 Letter of Amendment to Loan and Security Agreements dated December 19, 1995, ++++
among American Communication Services of Fort Worth, Inc., American
Communication Services of Columbia, Inc., American Communication Services
of Greenville, Inc., American Communication Services of El Paso and AT&T
Credit Corporation.
10.61 Second Master Amendment to Loan and Security Agreements, Waiver and ++++
Equipment Notes Modification Agreement dated September 6, 1996 among
American Communication Services of Louisville,
Inc., American Communication Services of Fort
Worth, Inc., American Communication Services of
Columbia, Inc., American Communication Services
of Greenville, Inc., American Communication
Services of El Paso and AT&T Credit Corporation.
10.62 Second Master Reaffirmation of Parent Pledge and Support Agreements ++++
dated September 6, 1996 between the Company and AT&T Credit
Corporation.
10.63 Master Equipment Lease Agreement dated August 26, 1996, between the Company ++++
and AT&T Credit Corporation.
10.64 Registration Rights Agreement dated March 6, 1997 between the Company and MCI metro ++++
Access Transmission Services, Inc.
10.65 Employment Agreement dated as of January 23, 1998 by and between ##
American Communications Services, Inc. and Ronald E. Spears E-4
10.66 American Communications Services, Inc. Annual Performance Plan effective as of January 1, 1997 E-5
10.67 Lease Agreement dated as of August 26, 1997, by and between Constellation Real Estate, Inc. and
American Communications Services, Inc. E-6
10.68 Loan and Security Agreement with AT&T Commercial Finance Corporation #####
11. Statement re: computation of per share earnings (loss). E-7
16.1 Letter re: change in certifying accountant. ***
21.1 Subsidiaries of the Registrant. ++++
23.1 Consent of KPMG Peat Marwick LLP. E-8
27.1 Financial Data Schedules. E-9
99.1 Supplemental Financial Information E-10
99.2 Risk Factors E-11
</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.
40
<PAGE> 41
**** Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1995, and incorporated herein
by reference thereto.
***** Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal period ended December 31, 1996, and incorporated
herein by reference thereto.
+ Previously filed as an exhibit to the Company's Annual Report on Form
10-QSB for the fiscal year ended June 30, 1995, and the Company's
Quarterly Report on Form 10-QSB for the fiscal quarter ended September
30, 1995, both of which are incorporated herein by reference thereto.
++ Previously filed as an exhibit to the Company's Registration Statement on
Form S-4 (File No. 33-80305) and incorporated herein by reference
thereto.
+++ Previously filed as an exhibit to the Company's Registration Statement on
Form SB-2 (File No. 33-80673) and incorporated herein by reference
thereto.
++++ Previously filed as an exhibit to the Company's Registration Statement on
Form SB-2 (File No. 33-20867) and incorporated herein by reference
thereto.
+++++ Previously filed as an exhibit to the Company's Current Report on Form
8-K dated March 26, 1996 and incorporated herein by reference thereto.
# Previously filed as an exhibit to the Company's Registration Statement on
Form S-4 (File No. 333-3632) and incorporated herein by reference
thereto.
## Management contracts or compensatory plan or arrangement.
### Previously filed as an exhibit to the Company's Quarterly Report on Form
10-QSB for the fiscal quarter ended June 30, 1997 and incorporated by
reference hereto.
#### Previously filed as an exhibit to the Company's Registration Statement
on Form S-4 (File No. 333-34395) and incorporated herein by reference.
##### Previously filed as an exhibit to the Company's Current Report on Form
8-K dated January 20, 1998 and incorporated herein by reference there
to.
b) REPORTS ON FORM 8-K
(a) On October 24, 1997 the Company filed with the SEC a Current
Report on Form 8-K, announcing the pricing and completion of its
private offering of 12 3/4% Junior Redeemable Preferred Stock due
2009.
(b) On November 6, 1997, the Company filed with the SEC a Current
Report on Form 8-K, announcing financial results for the quarter
ended September 30, 1997.
(c) On January 8, 1998, the Company filed with the SEC a Current
Report on Form 8-K, announcing the extension of its offer to
exchange its 13 3/4% Senior Notes due 2007 to January 16, 1998.
(d) On January 20, 1998, the Company filed with the SEC a Current
Report on Form 8-K, announcing the extension of its offer to
exchange its 13 3/4% Senior Notes due 2007 to January 23, 1998.
(e) On January 20, 1998, the Company filed with the SEC a Current
Report on Form 8-K, announcing that the Company had entered into a
Loan and Security Agreement with AT&T Commercial Finance
Corporation.
(f) On January 26, 1998, the Company filed with the SEC a Current
Report on Form 8-K, announcing the extension of its offer to
exchange its 13 3/4% Senior Notes due 2007 to January 27, 1998.
(g) On January 28, 1998, the Company filed with the SEC a Current
Report on Form 8-K, announcing the extension of its offer to
exchange its 13 3/4% Senior Notes due 2007 to February 2, 1998.
(h) On February 3, 1998, the Company filed with the SEC a Current
Report on Form 8-K, announcing the extension of its offer to
exchange its 13 3/4% Senior Notes due 2007 to February 3, 1998.
41
<PAGE> 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
AMERICAN COMMUNICATIONS SERVICES, INC.
<TABLE>
<S> <C>
March 20, 1998 By: /s/ Jack E. Reich
- -------------- -----------------
Date Jack E. Reich, President, Chief Executive Officer and Director
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
March 20, 1998 By: /s/ Anthony J. Pompliano
- -------------- ------------------------
Date Anthony J. Pompliano, Chairman of the Board of Directors
March 20, 1998 By: /s/ Jack E. Reich
- -------------- -----------------
Date Jack E. Reich, President, Chief Executive Officer and Director
(Principal Executive Officer)
March 20, 1998 By: /s/ David L. Piazza
- -------------- -------------------
Date David L. Piazza, Chief Financial Officer
(Principal Financial and Accounting Officer)
March 20, 1998 By: /s/ George M. Middlemas
- -------------- -----------------------
Date George M. Middlemas, Director
March 20, 1998 By: /s/ Edwin M. Banks
- -------------- ------------------
Date Edwin M. Banks, Director
March 20, 1998 By: /s/ Christopher L. Rafferty
- -------------- ---------------------------
Date Christopher L. Rafferty, Director
March 20, 1998 By: /s/ Benjamin P. Giess
- -------------- ---------------------
Date Benjamin P. Giess, Director
March 20, 1998 By: /s/ Olivier L. Trouveroy
- -------------- ------------------------
Date Olivier L. Trouveroy, Director
March 20, 1998 By: /s/ Peter C. Bentz
- -------------- ------------------
Date Peter C. Bentz, Director
</TABLE>
42
<PAGE> 43
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE NO.
-------- ------------------------------------------------------------------------------------------------------- --------------
<S> <C> <C>
4.13 Supplemental Indenture dated as of February 27, 1998 by and between American Communications
Services, Inc., a Delaware corporation and The Chase Manhattan Bank (formerly known as Chemical Bank)
relating to the 2005 Notes E-1
4.14 Supplemental Indenture dated as of February 27, 1998 by and between American Communications
Services, Inc., a Delaware corporation and The Chase Manhattan Bank (formerly known as Chemical Bank)
relating to the 2006 Notes E-2
4.15 Supplemental Indenture dated as of February 27, 1998 by and between American Communications
Services, Inc., a Delaware corporation and The Chase Manhattan Bank (formerly known as Chemical Bank)
relating to the 2007 Notes E-3
10.65 American Communications Services, Inc. and Ronald E. Spears E-4
10.66 American Communications Services, Inc. Annual Performance Plan effective as of January 1, 1997 E-5
10.67 Lease Agreement dated as of August 26, 1997, by and between Constellation Real Estate, Inc. and
American Communications Services, Inc. E-6
11 Statement re: computation of per-share earnings (loss) E-7
23.1 Consent of KPMG Peat Marwick LLP. E-8
27.1 Financial Data Schedules. E-9
99.1 Supplemental Financial Information E-10
99.2 Risk Factors E-11
</TABLE>
<PAGE> 44
AMERICAN COMMUNICATIONS SERVICES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of June 30, 1996 and December
31, 1996 and 1997......................................... F-3
Consolidated Statements of Operations for the years ended
June 30, 1995 and 1996, the six months ended December 31,
1996, and the year ended December 31, 1997................ F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended June 30, 1995 and 1996, the six months
ended December 31, 1996, and the year ended December 31,
1997...................................................... F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 1995 and 1996, the six months ended December 31,
1996, and the year ended December 31, 1997................ F-7
Notes to Consolidated Financial Statements.................. F-9
</TABLE>
F-1
<PAGE> 45
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, 1996 and December
31, 1996 and 1997, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the years ended June 30, 1995
and 1996, the six months ended December 31, 1996, and the year ended December
31, 1997. 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, 1996 and December
31, 1996 and 1997, and the results of their operations and their cash flows for
the years ended June 30, 1995 and 1996, the six months ended December 31, 1996,
and the year ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Washington, D.C.
February 12, 1998
F-2
<PAGE> 46
AMERICAN COMMUNICATIONS SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------------
1996 1996 1997
-------- ---- ----
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (note 1)........................ $134,115,981 $ 78,618,544 $ 260,836,929
Restricted cash and investments (note 1).................. 2,342,152 2,342,152 26,525,516
Trade accounts receivable, net of allowance for doubtful
accounts of $190,000, $432,000, and $1,921,000 at June
30, 1996, December 31, 1996, and December 31, 1997,
respectively (note 1)................................... 735,260 2,429,077 15,514,278
Other current assets...................................... 1,003,465 1,202,711 6,127,267
------------ ------------ -------------
Total current assets........................................ 138,196,858 84,592,484 309,003,990
Networks, equipment and furniture, gross (note 2)........... 80,147,964 144,403,123 282,152,543
Less: accumulated depreciation and amortization........... (3,408,698) (8,320,372) (31,675,227)
------------ ------------ -------------
76,739,266 136,082,751 250,477,316
Deferred financing fees, net of accumulated amortization of
$773,000, $1,071,000, and $3,649,000 at June 30, 1996,
December 31, 1996, and December 31, 1997, respectively.... 8,334,183 8,380,283 25,031,409
Intangible assets, net of accumulated amortization of
$776,000 (notes 1 and 13)................................. -- -- 8,132,191
Restricted cash and investments (note 1).................... -- -- 45,375,000
Other assets................................................ 329,584 982,649 875,466
------------ ------------ -------------
Total assets........................................ $223,599,891 $230,038,167 $ 638,895,372
============ ============ =============
LIABILITIES, REDEEMABLE STOCK AND OPTIONS, MINORITY INTEREST, AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable -- current portion (note 6)................. $ 252,809 $ 872,031 $ 437,500
Accounts payable.......................................... 21,317,346 33,587,407 18,308,370
Accrued interest.......................................... -- -- 13,360,415
Accrued employee costs.................................... 774,262 2,057,187 2,353,247
Other accrued liabilities................................. 886,692 2,074,945 2,310,664
------------ ------------ -------------
Total current liabilities................................... 23,231,109 38,591,570 36,770,196
Long-term liabilities:
Notes payable, less current portion (note 6).............. 184,129,361 209,538,226 460,847,677
Other long-term liabilities............................... -- -- 473,693
Dividends payable (note 3)................................ 4,942,313 6,945,943 --
------------ ------------ -------------
Total liabilities................................... 212,302,783 255,075,739 498,091,566
============ ============ =============
Redeemable stock and options:
Redeemable options (note 7)............................... 2,155,025 2,000,000 1,000,000
14 3/4% Redeemable Preferred Stock due 2008 (note 5)...... -- -- 55,060,661
12 3/4% Junior Redeemable Preferred Stock due 2009 (note
5)...................................................... -- -- 150,098,992
------------ ------------ -------------
Total redeemable stock and options.......................... 2,155,025 2,000,000 206,159,653
------------ ------------ -------------
Minority interest (note 6).................................. 160,270 -- --
------------ ------------ -------------
Stockholders' equity (deficit) (notes 3, 4, 5, 6 and 7):
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, 1996 and
December 31, 1996, respectively, no shares issued and
outstanding at December 31, 1997........................ 186,664 186,664 --
Preferred stock, $1.00 par value, 277,500 shares
authorized and designated as 9% Series B Convertible
Preferred Stock; 277,500 and 227,500 shares issued and
outstanding at June 30, 1996 and December 31, 1996,
respectively, no shares issued and outstanding at
December 31, 1997....................................... 277,500 277,500 --
Common stock, $.01 par value, 75,000,000 shares
authorized, 6,645,691, 6,784,996, and 37,219,419 shares
issued and outstanding at June 30, 1996, December 31,
1996 and 1997, respectively............................. 65,837 67,850 372,194
Additional paid-in capital................................ 55,975,078 54,870,194 131,728,166
Accumulated deficit....................................... (47,523,266) (82,439,780) (197,456,207)
------------ ------------ -------------
Total stockholders' equity (deficit)........................ 8,981,813 (27,037,572) (65,355,847)
------------ ------------ -------------
Commitments and contingencies (notes 1, 6, 9 and 10)
Total liabilities, redeemable stock and options,
minority interest, and stockholders' equity
(deficit)......................................... $223,599,891 $230,038,167 $ 638,895,372
============ ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 47
AMERICAN COMMUNICATIONS SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE YEAR ENDED FOR THE YEAR ENDED MONTHS ENDED FOR THE YEAR ENDED
JUNE 30, 1995 JUNE 30, 1996 DECEMBER 31, 1996 DECEMBER 31, 1997
------------------ ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Revenues (note 1)............ $ 388,887 $ 3,415,137 $ 6,990,452 $ 59,000,450
------------ ------------ ------------ -------------
Operating expenses:
Network development and
operations............... 3,282,183 5,264,570 8,703,057 52,881,173
Selling, general, and
administrative........... 4,597,615 13,463,775 20,269,991 59,850,690
Non-cash stock compensation
(note 7)................. 6,419,412 2,735,845 549,645 4,273,669
Depreciation and
amortization............. 497,811 3,078,426 4,911,674 24,131,317
------------ ------------ ------------ -------------
Total operating expenses..... 14,797,021 24,542,616 34,434,367 141,136,849
Nonoperating income
(expenses):
Interest and other
income................... 217,525 4,409,733 2,757,461 8,685,473
Interest and other
expense.................. (170,095) (10,476,904) (10,390,330) (41,565,501)
Debt conversion expense.... (385,000) -- -- --
------------ ------------ ------------ -------------
Loss before minority
interest................... (14,745,704) (27,194,650) (35,076,784) (115,016,427)
Minority interest............ 48,055 412,606 160,270 --
------------ ------------ ------------ -------------
Net loss..................... (14,697,649) (26,782,044) (34,916,514) (115,016,427)
Preferred stock dividends and
accretion (notes 3 and
5)......................... (1,070,985) (3,871,328) (2,003,630) (11,629,712)
------------ ------------ ------------ -------------
Net loss to common
stockholders............... $(15,768,634) $(30,653,372) $(36,920,144) $(126,646,139)
============ ============ ============ =============
Basic and diluted net loss
per common share (note
8)......................... $ (3.30) $ (4.96) $ (5.48) $ (4.65)
============ ============ ============ =============
Weighted average number of
common shares
outstanding................ 4,771,689 6,185,459 6,733,759 27,233,642
============ ============ ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 48
AMERICAN COMMUNICATIONS SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996, THE SIX MONTHS ENDED DECEMBER 31,
1996, AND THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SERIES A-1 SERIES B
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
-------------------- -------------------- -------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ----------- -------- --------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1994......... 1,700 $ 1,700,000 -- $ -- -- $ -- 2,755,005 $ --
Preferred Stock exchange......... (1,700) (1,700,000) -- -- -- -- 548,387 --
Set par value for common stock... -- -- -- -- -- -- -- 33,033
Acquisition of Piedmont Teleport,
Inc............................ -- -- -- -- -- -- 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.................... -- -- -- -- -- -- -- --
Cancellation of put right
obligation..................... -- -- -- -- -- -- -- --
Warrant and stock option
exercises and stock grant...... -- -- -- -- -- -- 2,379,390 23,794
Establish limitation on common
stock put right obligation..... -- -- -- -- -- -- -- --
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 56,827
Issuance of Series B-4 Preferred
Stock (note 3)................. -- -- -- -- 50,000 50,000 -- --
Issuance of detachable warrants
(note 6)....................... -- -- -- -- -- -- -- --
Warrants and stock options
exercised...................... -- -- -- -- -- -- 900,909 9,010
Series A and B Preferred Stock
dividends accrued (note 3)..... -- -- -- -- -- -- -- --
Cancellation of and adjustments
to put right obligations....... -- -- -- -- -- -- -- --
Stock compensation expense....... -- -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- -- -- --
------ ----------- -------- --------- -------- --------- ---------- --------
Balances at June 30, 1996......... -- -- 186,664 186,664 277,500 277,500 6,645,691 65,837
Warrants and stock options
exercised...................... -- -- -- -- -- -- 139,305 1,393
Series A and B Preferred Stock
dividends accrued (note 3)..... -- -- -- -- -- -- -- --
Accretion of consulting agreement
credit to exercise price of
warrants (note 11)............. -- -- -- -- -- -- -- --
Cancellation of and adjustments
to put right obligations....... -- -- -- -- -- -- -- 620
Stock compensation expense....... -- -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- -- -- --
------ ----------- -------- --------- -------- --------- ---------- --------
Balances December 31, 1996........ -- -- 186,664 186,664 277,500 277,500 6,784,996 67,850
Shares issued to CyberGate (note
13)............................ -- -- -- -- -- -- 1,030,000 10,300
Series A and B Preferred Stock
dividends (note 3)............. -- -- -- -- -- -- -- --
Issuance of common stock (note
4)............................. -- -- -- -- -- -- 8,660,000 86,600
Conversion of preferred shares
(note 3)....................... -- -- (186,664) (186,664) (277,500) (277,500) 17,377,275 173,773
Preferred dividends paid in stock
(note 4)....................... -- -- -- -- -- -- 1,650,207 16,502
<CAPTION>
NOTES TOTAL
ADDITIONAL RECEIVABLE STOCKHOLDERS'
PAID-IN ON SALE OF ACCUMULATED EQUITY
CAPITAL COMMON STOCK DEFICIT (DEFICIT)
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Balances at June 30, 1994......... 1,080,566 (2,750) (6,043,573) (3,265,757)
Preferred Stock exchange......... 1,700,000 -- -- --
Set par value for common stock... (33,033) -- -- --
Acquisition of Piedmont Teleport,
Inc............................ -- -- -- --
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.................... (53,303) -- -- (53,303)
Cancellation of put right
obligation..................... 487,500 -- -- 487,500
Warrant and stock option
exercises and stock grant...... 349,030 -- -- 372,824
Establish limitation on common
stock put right obligation..... 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......... 42,411,448 -- (20,741,222) 22,141,217
Issuance of Series B-4 Preferred
Stock (note 3)................. 4,950,000 -- -- 5,000,000
Issuance of detachable warrants
(note 6)....................... 8,684,000 -- -- 8,684,000
Warrants and stock options
exercised...................... 289,360 -- -- 298,370
Series A and B Preferred Stock
dividends accrued (note 3)..... (3,871,328) -- -- (3,871,328)
Cancellation of and adjustments
to put right obligations....... 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......... 55,975,078 -- (47,523,266) 8,981,813
Warrants and stock options
exercised...................... 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 11)............. 18,750 -- -- 18,750
Cancellation of and adjustments
to put right obligations....... 154,406 -- -- 155,026
Stock compensation expense....... 549,645 -- -- 549,645
Net loss......................... -- -- (34,916,514) (34,916,514)
----------- ------- ------------ ------------
Balances December 31, 1996........ 54,870,194 -- (82,439,780) (27,037,572)
Shares issued to CyberGate (note
13)............................ 8,744,700 -- -- 8,755,000
Series A and B Preferred Stock
dividends (note 3)............. (1,113,744) -- -- (1,113,744)
Issuance of common stock (note
4)............................. 39,866,172 -- -- 39,952,772
Conversion of preferred shares
(note 3)....................... 290,391 -- -- --
Preferred dividends paid in stock
(note 4)....................... 7,790,716 -- -- 7,807,218
</TABLE>
F-5
<PAGE> 49
<TABLE>
<CAPTION>
SERIES A-1 SERIES B
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
-------------------- -------------------- -------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ----------- -------- --------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Warrants and stock options
exercised...................... -- -- -- -- -- -- 1,367,460 13,674
Expiration of put right
obligation (note 7)............ -- -- -- -- -- -- -- --
Stock compensation expense....... -- -- -- -- -- -- -- --
Warrants issued (note 7)......... -- -- -- -- -- -- -- --
Redeemable Preferred Warrants
(note 5)....................... -- -- -- -- -- -- -- --
Preferred stock
dividends/accretion (note 5)... -- -- -- -- -- -- -- --
NetRunner acquisition (note
13)............................ -- -- -- -- -- -- 51,166 511
Shares issued to AT&T (note 6)... -- -- -- -- -- -- 207,964 2,080
Shares issued under employee
stock purchase plan............ -- -- -- -- -- -- 90,351 904
Accretion of consulting agreement
credit to exercise price of
warrants (note 11)............. -- -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- -- -- --
------ ----------- -------- --------- -------- --------- ---------- --------
Balance at December 31, 1997...... -- -- -- $ -- -- $ -- 37,219,419 $372,194
====== =========== ======== ========= ======== ========= ========== ========
<CAPTION>
NOTES TOTAL
ADDITIONAL RECEIVABLE STOCKHOLDERS'
PAID-IN ON SALE OF ACCUMULATED EQUITY
CAPITAL COMMON STOCK DEFICIT (DEFICIT)
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Warrants and stock options
exercised...................... 3,254,481 -- -- 3,268,155
Expiration of put right
obligation (note 7)............ 1,000,000 -- -- 1,000,000
Stock compensation expense....... 4,273,669 -- -- 4,273,669
Warrants issued (note 7)......... 480,144 -- -- 480,144
Redeemable Preferred Warrants
(note 5)....................... 21,603,854 -- -- 21,603,854
Preferred stock
dividends/accretion (note 5)... (10,515,968) -- -- (10,515,968)
NetRunner acquisition (note
13)............................ 628,608 -- -- 629,119
Shares issued to AT&T (note 6)... (2,080) -- -- --
Shares issued under employee
stock purchase plan............ 538,279 -- -- 539,183
Accretion of consulting agreement
credit to exercise price of
warrants (note 11)............. 18,750 -- -- 18,750
Net loss......................... -- -- (115,016,427) (115,016,427)
----------- ------- ------------ ------------
Balance at December 31, 1997...... 131,728,166 -- (197,456,207) (65,355,847)
=========== ======= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 50
AMERICAN COMMUNICATIONS SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE SIX FOR THE
YEAR ENDED YEAR ENDED MONTHS ENDED YEAR ENDED
JUNE 30, 1995 JUNE 30, 1996 DECEMBER 31, 1996 DECEMBER 31, 1997
------------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.......................... $(14,697,649) $(26,782,044) $(34,916,514) $(115,016,427)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization... 497,811 3,078,426 4,911,674 23,525,781
Interest deferral and
accretion..................... -- 10,447,687 10,041,189 41,032,473
Amortization of deferred
financing fees................ 323,900 668,317 334,671 2,578,675
Provision for doubtful
accounts...................... 8,570 180,940 242,915 1,438,193
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 4,273,669
Accretion of consulting
agreement credit to exercise
price of warrants............. -- -- 18,750 18,750
Noncash debt conversion
expense....................... 385,000 -- -- --
Issuance of warrants under the
preferred provider
agreement..................... -- -- -- 480,144
Changes in operating assets and
liabilities:
Trade accounts receivable..... (359,007) (565,764) (1,936,732) (14,396,963)
Restricted cash related to
operating activities........ 200,000 -- -- --
Other current assets.......... (92,325) (911,140) (199,246) (4,887,960)
Other assets.................. (26,545) (107,574) (653,065) 126,026
Accounts payable.............. 3,170,885 17,474,179 12,270,061 (19,232,343)
Accrued financing fees........ 1,542,255 (1,542,255) -- --
Accrued employee costs........ 719,333 (62,247) 1,282,925 296,060
Other accrued liabilities..... 1,055,673 (382,792) 1,188,253 3,410,960
------------ ------------ ------------ -------------
Net cash (used in) provided by
operating activities.............. (900,742) 3,818,972 (6,707,007) (76,352,962)
------------ ------------ ------------ -------------
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) (7,575,081)
Restricted cash related to network
activities...................... (752,000) (1,590,152) -- (1,119,152)
Network development costs......... (14,996,303) (57,889,227) (62,746,777) (127,460,581)
------------ ------------ ------------ -------------
Net cash used in investing
activities........................ (16,073,892) (62,446,366) (64,573,896) (136,154,814)
------------ ------------ ------------ -------------
Cash flows from financing
activities:
Issuance of notes payable......... 3,510,349 166,888,210 16,329,923 223,697,586
Payment of deferred financing
fees............................ (310,175) (8,710,387) (380,771) (19,229,801)
Warrant and stock option
exercises....................... 372,824 298,370 177,338 3,268,155
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 -- --
</TABLE>
F-7
<PAGE> 51
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE SIX FOR THE
YEAR ENDED YEAR ENDED MONTHS ENDED YEAR ENDED
JUNE 30, 1995 JUNE 30, 1996 DECEMBER 31, 1996 DECEMBER 31, 1997
------------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Payment of equipment financing.... $ -- $ -- $ (343,024) $ --
Payments of notes payable --
stockholders.................... (481,692) (146,083) -- (494,724)
Payments of bridge notes.......... (1,000,000) -- -- --
Payments of secured note.......... (75,000) -- -- --
Payments of secured convertible
note............................ (77,281) -- -- --
Other long-term liabilities....... -- -- -- (562,914)
Restricted cash related to notes
payable......................... -- -- -- (68,439,212)
Shares issued under the Employee
Stock Purchase Plan............. -- -- -- 539,183
Issuance of common stock.......... -- -- -- 39,952,772
Payment of dividends.............. -- -- -- (252,423)
Issuance of redeemable preferred
stock........................... -- -- -- 216,247,539
------------ ------------ ------------ -------------
Net cash provided by financing
activities........................ 34,055,028 172,392,584 15,783,466 394,726,161
------------ ------------ ------------ -------------
Net (decrease) increase in cash and
cash equivalents.................. 17,080,394 113,765,190 (55,497,437) 182,218,385
Cash and cash equivalents, beginning
of year........................... 3,270,397 20,350,791 134,115,981 78,618,544
------------ ------------ ------------ -------------
Cash and cash equivalents, end of
year.............................. $ 20,350,791 $134,115,981 $ 78,618,544 $ 260,836,929
============ ============ ============ =============
Supplemental disclosure of cash flow
information -- interest paid on
all debt obligations.............. $ 219,554 $ 29,217 $ 14,470 $ 2,085,380
============ ============ ============ =============
Supplemental disclosure of noncash
investing and financing
activities:
Equipment financing............... $ -- $ 343,024 $ -- $ --
Dividends declared in connection
with Series A and B Preferred
Stock........................... $ 1,070,985 $ 3,871,328 $ 2,003,630 $ 1,113,744
============ ============ ============ =============
Bridge financing, secured
convertible notes and notes
payable -- stockholders converted
to equity in connection with
private placements................ $ 4,080,079 $ -- $ -- $ --
============ ============ ============ =============
Cancellation of and adjustments to
put right obligations............. $ (487,500) $ (775,753) $ (155,025) $ (1,000,000)
============ ============ ============ =============
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 $ -- $ -- $ --
============ ============ ============ =============
Purchase of CyberGate, Inc. --
1,030,000 shares.................. $ -- $ -- $ -- $ 8,755,000
============ ============ ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 52
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997
(1) BASIS OF PRESENTATION AND RELATED MATTERS
ORGANIZATION
The consolidated financial statements include the accounts of American
Communications Services, Inc. and its wholly-owned subsidiaries (ACSI or the
Company). All material intercompany accounts and transactions have been
eliminated in consolidation.
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 periods ended June 30, 1995 and
1996, the six month period ended December 31, 1996, and the twelve month period
ended December 31, 1997.
BUSINESS AND OPERATING ENVIRONMENT
ACSI is an integrated communications provider. The Company owns and
operates digital fiber optic networks and offers a variety of 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, as well as high speed data services, local
switched voice services and long-distance services using its own facilities and
on a resale basis.
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 6). 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. During the
year ended December 31, 1997, the Company raised additional funds through the
sale of Common Stock, two Preferred Stock offerings, one of which included
detachable warrants, and an offering of Senior Notes (see notes 3, 5 and 6). As
a result of the above described debt offerings, the Company will be required to
satisfy substantially higher periodic cash debt service obligations in the
future. There can be no assurance that the Company will be able to generate
sufficient cash flow or otherwise obtain funds to cover interest and principal
payments associated with currently outstanding and future debt obligations.
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 additional services, including local switched voice and
high-speed data services, will require substantial capital expenditures. The
Company's ability to fund these expenditures is dependent upon the Company
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 bondholders. 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
F-9
<PAGE> 53
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
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. Management believes that the Company's current cash resources will be
sufficient to fund the Company's continuing negative cash flow and required
capital expenditures during 1998.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturity
dates of three months or less to be cash equivalents. The Company's investments
consist of commercial paper, US 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.
RESTRICTED CASH AND INVESTMENTS
The Company has provided performance bonds and letters of credit in various
cities in connection with its operations, resulting in a restriction to cash
amounting to approximately $2,342,000, $2,342,000, and $1,223,000 at June 30,
1996, December 31, 1996, and December 31, 1997, respectively. The face amount of
all bonds and letters of credit is approximately $6,300,000 as of December 31,
1997. In addition, the Company has placed approximately $70,677,000 into an
escrow account to fund the first five interest payments of its 13 3/4 percent
senior notes due 2007 (see note 6). Approximately $25,302,000 of the escrow
account is classified as current. The escrow account is invested in cash
equivalents consisting of government and commercial securities.
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. 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). At June 30, 1996 and December 31, 1996 and
1997, fair market value approximated amortized cost.
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.
Provisions 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-10
<PAGE> 54
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (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.............................. 3-10 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>
INTANGIBLE ASSETS
Intangible assets include customer lists and goodwill. Goodwill is being
amortized on a straight-line basis over the period of expected benefit of ten
years. Amortization expense related to goodwill for the year ended December 31,
1997 was approximately $726,000.
The costs of purchased customer lists are amortized on a straight-line
basis over their estimated useful lives, generally over eighteen months. The
Company determines the useful lives of customer lists based upon the estimated
length of the acquired customers' future service. Amortization expense related
to purchased customer lists was approximately $50,000 for the year ended
December 31, 1997.
VALUATION OF LONG-LIVED ASSETS
The Company accounts for the valuation of long-lived assets under SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of. 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 undiscounted 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 estimated 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.
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. Deferred finance fees
also include payments to bondholders for debt modifications that do not result
in debt extinguishment.
REVENUE RECOGNITION
Revenue from telecommunications services 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.
F-11
<PAGE> 55
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
The Company recognizes revenue associated with engineering and construction
contracts using the percentage-of-completion method, based primarily on contract
costs incurred to date compared with total estimated contract costs. Changes to
total estimated contract costs or losses, if any, are recognized in the period
in which they are determined.
EARNINGS (LOSS) PER COMMON SHARE
During 1997, the Company adopted the provisions of SFAS No. 128, Earnings
Per Share. The computations of basic and diluted earnings (loss) per common
share are based upon the weighted average number of common shares outstanding
and potentially dilutive securities. Potentially dilutive securities include
convertible preferred stock, stock options and warrants.
INCOME TAXES
Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities and loss
carryforwards and tax credit carryforwards for which income tax benefits are
expected to be realized in future years. A valuation allowance is established to
reduce deferred tax assets if it is more likely than not that all, or some
portion, of such deferred tax assets will not be realized. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.
RECLASSIFICATIONS
Certain reclassifications have been made to the June 30, 1995 and 1996 and
December 31, 1996 consolidated financial statements to conform to the December
31, 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 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.
F-12
<PAGE> 56
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
RISKS AND UNCERTAINTIES
The Company receives a significant portion of its revenues from a small
number of major customers, particularly the long distance telecommunications
companies that service the Company's markets. For the years ended June 30, 1995
and 1996, the six months ended December 31, 1996, and the year ended December
31, 1997 approximately 85%, 60%, 40%, and 20% of the Company's revenues were
attributable to services provided to three, four, four and five, respectively,
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 results of operations.
The Company provides services to certain Internet Service Providers (ISPs).
Such companies operate in a highly competitive and uncertain environment.
Approximately 19% and 20% of the Company's revenues for the six months ended
December 31, 1996 and the year ended December 31, 1997, respectively, were
attributed to these companies. At December 31, 1996 and 1997, the Company had
trade accounts receivable of $923,000 and $5.0 million, respectively, from ISPs.
At December 31, 1997, the Company also has equipment with a carrying value of
approximately $11.7 million that is dedicated to providing service to these
ISPs. The Company believes that, if necessary, this equipment could be
redeployed throughout the Company's data network.
The Company has recorded revenues of approximately $1.6 million in 1997 for
reciprocal compensation relating to the transport and termination of Internet
traffic for local exchange carriers pursuant to various interconnection
agreements. These local exchange carriers have not paid and have disputed these
charges based on the belief that such charges are not local traffic as defined
by the various agreements. The resolution of these disputes will be based on
rulings by state public utility commissions and/or by the Federal Communications
Commission (FCC). To date, there have been no unfavorable final rulings by any
state public utility commission or the FCC that would indicate that calls placed
by end users to ISPs would not qualify as local traffic subject to the payment
of reciprocal compensation.
(2) NETWORKS, EQUIPMENT, AND FURNITURE
Networks, equipment, and furniture consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1996 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Networks and telecommunications equipment........ $76,853,865 $139,129,495 $269,213,500
Furniture and fixtures........................... 1,982,910 3,334,147 5,799,262
Computer software................................ 948,848 1,558,384 5,954,662
Leasehold improvements........................... 362,341 381,097 1,185,119
----------- ------------ ------------
80,147,964 144,403,123 282,152,543
Less -- accumulated depreciation and
amortization................................... 3,408,698 8,320,372 31,675,227
----------- ------------ ------------
Total, net of accumulated depreciation and
amortization................................... $76,739,266 $136,082,751 $250,477,316
=========== ============ ============
</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 and the year ended December 31, 1997, the Company
capitalized interest of approximately $2,268,000 and $3,933,000, respectively.
F-13
<PAGE> 57
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
(3) PRIVATE PLACEMENTS
In October 1994, the Company completed a private placement of its 9 percent
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. A total of
186,664 shares of the Series A Preferred Stock were issued. Further, as
discussed in note 7 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
percent 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 percent
Series B-1 Convertible Preferred Stock (the "Series B-1 Preferred"), 9 percent
Series B-2 Convertible Preferred Stock (the "Series B-2 Preferred") and 9
percent 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 percent 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 7 to the consolidated financial statements,
certain parties obtained warrants to purchase shares of the Company's common
stock.
During 1997, the Preferred Stock was converted into 17,377,275 shares of
common stock. In connection with its Series A-1 and Series B Preferred Stock,
the Company has recorded approximately $1,071,000, $3,871,000, $2,004,000 and
$1,114,000 for the years ended June 30, 1995 and 1996, the six months ended
December 31, 1996 and the year ended December 31, 1997, respectively, as a
reduction in additional paid-in capital, for the payment of anticipated
dividends. The Company's certificate of incorporation required the Company to
accrue dividends, on a quarterly basis, at an annual rate of 9 percent of the
face value of the Series A-1 and B Preferred Stock. These dividends were paid
during 1997 in connection with the conversion of the Preferred Stock.
(4) COMMON STOCK OFFERING
During 1997, the Company issued 8,660,000 shares of common stock for net
proceeds of approximately $40 million, net of underwriters discounts and other
expenses of the offering. Concurrently with this transaction, 186,664 shares of
the Company's Series A-1 Preferred Stock and 277,500 shares of the Company's
Series B Preferred Stock were converted into 17,377,275 shares of the Company's
Common Stock (see note 3). In addition, of the approximately $8,000,000 of
dividends accrued on the Preferred Stock prior to conversion, approximately
$7,750,000 was paid with 1,650,207 shares of the Company's common stock. The
remaining accrued dividends were paid in cash.
F-14
<PAGE> 58
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
(5) REDEEMABLE PREFERRED STOCK
On July 10, 1997, the Company consummated the sale of 75,000 units
consisting of its 14 3/4 percent Redeemable Preferred Stock due 2008 (the
"Redeemable Preferred Stock due 2008") and warrants to purchase approximately
6,023,800 shares of its Common Stock yielding net proceeds to the Company of
approximately $70.2 million, net of underwriters fees and other related
expenses. The value attributed to the warrants was approximately $21.6 million.
The number of shares the warrants are exercisable into are subject to an
increase of 1,698,375 in the event the Company fails to raise net cash proceeds
of at least $50 million through the issuance and sale of the Company's common
stock by December 31, 1998. The Company will be required to redeem all
outstanding shares of the 14 3/4 percent Preferred Stock on June 30, 2008 at a
price equal to $1,000 per share plus any accrued and unpaid dividends.
The Redeemable Preferred Stock due 2008 may be redeemed, in whole or in
part, at the option of the Company, at any time after January 1, 2003, at the
redemption prices set forth below, plus any accrued and unpaid dividends as of
that date. The redemption prices, expressed in percentages, are as follows:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003........................................................ 107.375%
2004........................................................ 104.917%
2005........................................................ 102.458%
2006 and thereafter......................................... 100.000%
</TABLE>
On October 6, 1997, the Company consummated the sale of 150,000 shares of
its 12 3/4 percent Junior Redeemable Preferred Stock due 2009 (the "Junior
Redeemable Preferred Stock due 2009") for proceeds of approximately $146.0
million, net of underwriters fees and other related expenses. The Company will
be required to redeem all outstanding shares of the Junior Redeemable Preferred
Stock due 2009 on October 15, 2009 at $1,000 per share plus any accrued and
unpaid dividends.
The Junior Redeemable Preferred Stock due 2009 may be redeemed, in whole or
in part, at the option of the Company, at any time after October 15, 2003 at the
redemption prices set forth below, plus any accrued and unpaid dividends as of
that date. The redemption prices, expressed in percentages, are as follows:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003........................................................ 106.375%
2004........................................................ 104.781%
2005........................................................ 103.188%
2006........................................................ 101.594%
2007 and thereafter......................................... 100.000%
</TABLE>
Dividends on the Redeemable Preferred Stock due 2008 and Junior Redeemable
Preferred Stock due 2009 (collectively "the Redeemable Preferred Stock") may be
paid, at the Company's option, either in cash or by the issuance of additional
shares of Redeemable 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 Redeemable Preferred Stock by the terms of any then outstanding
indebtedness, the Company is required to pay dividends on the Redeemable
Preferred Stock in cash.
F-15
<PAGE> 59
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
The holders of the Redeemable Preferred Stock are not entitled to vote on
any matter required or permitted to be voted upon by the stockholders of the
Company. If, however, after June 30, 2002, the Company violates certain
covenants, including the payment of dividends, the Redeemable Preferred
Stockholders are permitted to vote as a single class to elect not less than 25
percent of the members of the Board of Directors.
A summary of the changes in the Redeemable Preferred Stock is as follows:
<TABLE>
<CAPTION>
JUNIOR
REDEEMABLE REDEEMABLE
PREFERRED PREFERRED
STOCK STOCK
DUE 2008 DUE 2009
----------- ------------
<S> <C> <C>
Balance at issuance, net of underwriters fees and
other related expenses.............................. $48,598,386 $146,045,299
Payment of dividends in shares of Redeemable Preferred
Stock............................................... 5,348,738 --
Accrued dividends..................................... -- 3,984,375
Accretion to redemption value......................... 1,113,537 69,318
----------- ------------
Balance at December 31, 1997.......................... $55,060,661 $150,098,992
=========== ============
</TABLE>
(6) DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1996 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
AT&T Credit Corporation equipment and
working capital financing facility..... $ 14,971,122 $ 30,183,264 $ 35,000,000
2005 Senior Discount notes, interest at
13%, maturing November 1, 2005......... 102,432,137 109,402,071 126,043,037
2006 Senior Discount notes, interest at
12 3/4%, maturing April 1, 2006........ 66,635,887 70,824,922 80,242,140
2007 Senior Notes, interest at 13 3/4%,
maturing July 15, 2007................. -- -- 220,000,000
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..................... 184,382,170 210,410,257 461,285,177
Less current portion..................... 252,809 872,031 437,500
------------ ------------ ------------
$184,129,361 $209,538,226 $460,847,677
============ ============ ============
</TABLE>
F-16
<PAGE> 60
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
Principal payments for each of the years from 1998 to 2002 and thereafter,
are due as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1998....................................................... $ 437,500
1999....................................................... 2,187,500
2000....................................................... 3,937,500
2001....................................................... 5,687,500
2002....................................................... 7,437,500
Thereafter................................................. 441,597,677
------------
$461,285,177
============
</TABLE>
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 agreed to provide financing for the development
and construction of fiber optic networks by certain of the Company's
subsidiaries. Pursuant to the AT&T Credit Facility, during 1996 the Company's
subsidiaries in Louisville, Fort Worth, Greenville, Columbia, and El Paso
entered into loan agreements with AT&T Credit Corporation providing for up to
$31.2 million in loans collateralized by the assets of such subsidiaries.
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.
On December 30, 1997, the Company and AT&T Credit Corporation agreed to
amend the terms of the facility increasing the facility to $35 million and
transferring the loan agreements from the Company's five subsidiaries to the
Company as a whole. The amendment also changed the interest rates on the
outstanding loans from a range of 11.93 percent to 14.47 percent to a variable
rate equal to the three-month Commercial Paper Rate or LIBOR Rate plus 4.5
percent (10.35 percent at December 31, 1997). In addition, as part of the
modification, the Company issued 207,964 shares of common stock in exchange for
all of AT&T Credit Corporation's 7.25 percent ownership interest in the five
subsidiaries. The Company has pledged all of its shares of capital stock in its
material subsidiaries and Intercompany Notes to AT&T Credit Corporation. Under
certain circumstances, the pledge agreement also restricts the Company's ability
to receive and retain dividends in respect of the pledged collateral.
The AT&T Credit Facility includes covenants which impose certain
restrictions on the Company, 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.
SENIOR 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 2005 Notes will mature November 1, 2005. The
Company received net proceeds of
F-17
<PAGE> 61
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
approximately $96.1 million 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 $61.8 million. 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.
The 2006 Notes will mature on April 1, 2006.
On July 23, 1997, the Company completed the sale of $220 million aggregate
principal amount of 13 3/4% Senior Notes due 2007 (the "2007 Notes"). Of the
total net proceeds of approximately $204.3 million, the Company placed
approximately $70 million, representing funds, together with interest thereon,
sufficient to pay the first five semi-annual interest payments on the 2007
Notes, into an escrow account for the benefit of the holders. The 2007 Notes
accrue interest at a rate of 13 3/4%, payable in cash semi-annually, on January
15 and July 15, commencing January 15, 1998. The 2007 Notes will mature on July
15, 2007.
The 2005 Notes, 2006 Notes, and 2007 Notes (collectively the "Notes") are
general, unsubordinated and unsecured senior 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.
In June of 1997, the Company notified the trustee of the 2005 and 2006
Notes that the Company had approximately $17.4 million of trade accounts payable
that were more than 60 days overdue. These overdue amounts constituted
indebtedness of the Company as defined by the 2005 Note Indenture and 2006 Note
Indenture. The incurrence of such indebtedness constituted an event of default
under each indenture. The Company cured such event of default during July of
1997.
(7) STOCK COMPENSATION 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 were granted
options to purchase shares of Common Stock of the Company. In accordance with
their employment agreements, these individuals had 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. During the year ended December 31, 1997, put
rights related to $1,000,000 expired without exercise.
F-18
<PAGE> 62
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
On March 6, 1997, the Company entered into a preferred provider agreement
with MCIMetro Access Transmission Services, Inc. In connection with the
agreement, the Company issued warrants to purchase 620,000 shares of the
Company's Common Stock at $9.86 per share. 360,000 of these warrants vested
during 1997. The value attributed to the vested warrants was approximately $1.3
million, which is being recognized as network cost over the five year term of
the agreement. During 1997, the Company recognized approximately $215,000 in
network expense related to these warrants. The Company also agreed to issue
warrants to purchase up to an aggregate of approximately 1.7 million additional
shares of the Company's Common Stock at fair market value on the date of grant
in tranches every six months subject to certain increases in revenue to the
Company generated under the agreement. At December 31, 1997, the Company had
issued 37,582 of such warrants with an exercise price of $9.503 per share. The
value attributed to these warrants was approximately $265,000 which was
recognized as network cost in 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 for stock
option plans was approximately $6.4 million, $2.7 million, $550,000, and $1.4
million for the years ended June 30, 1995 and 1996, the six months ended
December 31, 1996, and the year ended December 31, 1997, 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>
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1996 DECEMBER 31, 1996 DECEMBER 31, 1997
------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net loss................... As reported: $(26,782,044) $(34,916,514) $(115,016,427)
Pro forma: (27,533,636) (36,828,677) (120,394,471)
Loss per common share...... As reported: (4.96) (5.48) (4.65)
Pro forma: (5.08) (5.77) (4.85)
</TABLE>
Pro forma net loss reflects compensation cost under SFAS No. 123 only for
options granted for the year ended June 30, 1996, the six months ended December
31, 1996, and the year ended December 31, 1997. 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, the six months
ended December 31, 1996, and the year ended December 31, 1997, respectively:
dividend yield of 0% for all periods; expected volatility of 50%, 50%, and 50%,
risk-free interest rates of 5.97%, 6.4%, and 6.0% and expected lives of 4.74,
4.37, and 4.06 years.
F-19
<PAGE> 63
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
A summary of the status of the Company's stock options as of June 30, 1995
and 1996, December 31, 1996, and December 31, 1997 and changes during the
periods ending on those dates is presented below:
<TABLE>
<CAPTION>
JUNE 30, 1995 JUNE 30, 1996 DECEMBER 31, 1996 DECEMBER 31, 1997
------------------ ------------------ ------------------ ------------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE (000) PRICE (000) PRICE
------ --------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year.... 859 $2.22 5,042 $1.72 6,095 $2.21 7,457 $3.60
Granted................ 4,283 1.64 1,228 4.30 1,433 9.45 2,141 8.25
Exercised.............. -- 0.00 (105) 2.46 (48) 2.02 (926) 2.39
Forfeited.............. (100) 2.51 (70) 3.57 (23) 3.54 (845) 6.60
----- ----- ----- -----
Outstanding at end of
year................. 5,042 1.72 6,095 2.21 7,457 3.60 7,827 4.69
Options exercisable at
year-end............. 2,387 3,461 4,140 4,379
Weighted-average fair
value of options
granted during the
year................. $1.16 $3.35 $5.95 $4.96
</TABLE>
The following table summarizes information about fixed stock options at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------ ------------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICE AT 12/31/97 CONTRACTUAL LIFE PRICE 12/31/97 PRICE
- ---------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.875 to 0.875 2,067,000 2.31 years $0.875 2,057,000 $0.875
2.25 to 3.10 1,995,000 3.98 2.50 1,574,000 2.46
3.27 to 8.50 1,964,000 5.92 6.36 526,000 5.67
9.00 to 11.64 1,801,000 6.47 9.70 222,000 9.37
--------- ---------- ------ --------- ------
$0.875 to 11.64 7,827,000 4.60 $4.69 4,379,000 $2.45
========= ========== ====== ========= ======
</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. During 1997,
as part of the issuance of the Redeemable Preferred Stock due 2008, the Company
issued warrants to purchase 6,023,850 shares of Common Stock $7.15 per share.
The Company also issued 657,582 warrants to MCIMetro Access Transmission
Services, Inc. during 1997. These warrants include certain anti-dilution
provisions.
F-20
<PAGE> 64
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
At December 31, 1997, unexercised warrants outstanding are as follows:
<TABLE>
<CAPTION>
NUMBER PRICE PER SHARE
---------- ----------------
<S> <C> <C>
Series A and Series B Preferred Stock placements....... 1,346,726 $0.01 -- 3.10
2005 Senior Discount Notes offering.................... 2,604,207 6.47
Redeemable Preferred Stock due 2008 offering........... 6,023,850 7.15
Other.................................................. 1,292,582 0.01 -- 9.86
---------- -------------
Total........................................ 11,267,365 $0.01 -- 9.86
========== =============
</TABLE>
The gross proceeds that would be received by the Company on the exercise of
all outstanding options and warrants is approximately $108 million.
The Company's Board of Directors has adopted an Annual Performance Plan,
through which it will award its 1997 performance bonuses to management and
employees. The Company has accrued approximately $2.9 million in non-cash
compensation cost at December 31, 1997, related to the future issuance of up to
213,000 shares of the Company's Common Stock for this purpose.
(8) BASIC AND DILUTED EARNINGS PER SHARE
The following tables present the computation of basic and diluted earnings
per share as defined under SFAS No. 128:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30, 1995
-----------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Net loss.................................... (14,697,649)
Less: Preferred stock dividends/accretion... (1,070,985)
-----------
Basic and diluted earnings per share:
Net loss to common stockholders........... (15,768,634) 4,771,689 (3.30)
</TABLE>
Convertible Preferred Stock outstanding as of June 30, 1995, convertible
into 15,591,563 shares of Common Stock, and options and warrants to purchase
5,042,189 and 3,019,235 shares of Common Stock, respectively, were not included
in the computation of diluted earnings per share for the year ended June 30,
1995 as their inclusion would be anti-dilutive.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30, 1996
-----------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Net loss.................................... (26,782,044)
Less: Preferred stock dividends/accretion... (3,871,328)
-----------
Basic and diluted earnings per share:
Net loss to common stockholders........... (30,653,372) 6,185,459 (4.96)
</TABLE>
Convertible Preferred Stock outstanding as of June 30, 1996, convertible
into 17,377,264 shares of Common Stock, and options and warrants to purchase
6,094,814 and 4,367,394 shares of Common Stock, respectively, were not included
in the computation of diluted earnings per share for the year ended June 30,
1996 as their inclusion would be anti-dilutive.
F-21
<PAGE> 65
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
--------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ -------------- ----------
<S> <C> <C> <C>
Net loss.................................... (34,916,514)
Less: Preferred stock dividends/accretion... (2,003,630)
-----------
Basic and diluted earnings per share:
Net loss to common stockholders........... (36,920,144) 6,733,759 (5.48)
</TABLE>
Convertible Preferred Stock outstanding as of December 31, 1996,
convertible into 17,377,264 shares of Common Stock, and options and warrants to
purchase 7,457,085 and 4,771,836 shares of Common Stock, respectively, were not
included in the computation of diluted earnings per share for the six months
ended December 31, 1996 as their inclusion would be anti-dilutive.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ---------
<S> <C> <C> <C>
Net loss.................................. (115,016,427)
Less: Preferred stock
dividends/accretion..................... (11,629,712)
------------
Basic and diluted earnings per share:
Net loss to common stockholders......... (126,646,139) 27,233,642 (4.65)
</TABLE>
Options and warrants to purchase 7,827,318 and 11,267,365 shares of Common
Stock, respectively, were not included in the computation of diluted earnings
per share for the year ended December 31, 1997 as their inclusion would be
anti-dilutive.
(9) COMMITMENTS AND CONTINGENCIES
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, $95,000, and $1,580,000 for the year ended June 30, 1996,
the six months ended December 31, 1996, and the year ended December 31, 1997,
respectively.
LEGAL PROCEEDINGS
A former employee of ACSI has initiated litigation against the Company for
damages in excess of $5 million, and the right to exercise options to purchase
100,000 shares of Common Stock at $4.25 per share. The lawsuit alleges four
different counts: breach of contract; breach of the covenant of good faith and
fair dealing; negligent misrepresentation; and specific performance. The Company
believes it has meritorious defenses to this complaint and intends to defend
this lawsuit vigorously.
The Company is a party to certain litigation and regulatory proceedings
arising in the ordinary course of business. In the opinion of management, based
upon the advice of counsel, the ultimate disposition of these matters will not
have a material adverse effect on the Company's consolidated financial position
or results of operations.
F-22
<PAGE> 66
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
(10) LEASES
The Company is obligated under various noncancelable operating leases for
office and node space, telecommunications equipment, and office furniture. The
minimum future lease obligations under these noncancelable operating leases as
of December 31, 1997 are approximately as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ -----------
<S> <C>
1998........................................................ $10,466,000
1999........................................................ 10,638,000
2000........................................................ 9,075,000
2001........................................................ 6,393,000
2002........................................................ 6,416,000
Thereafter.................................................. 13,983,000
-----------
$56,971,000
===========
</TABLE>
Rent expense for the years ended June 30, 1995 and 1996, the six months
ended December 31, 1996, and the year ended December 31, 1997 was approximately
$200,000, $1,166,000, $1,700,000, and $6,111,000, respectively.
(11) RELATED-PARTY TRANSACTIONS
Effective July 1, 1994, the Company engaged SGC Advisory Services, Inc.
("SGC") as a financial and business consultant for three years. SGC is an
affiliate of 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
vested on July 1, 1997, and are exercisable on or before July 1, 1999. During
the term of the agreement, SGC earned a credit for the full exercise price of
those options.
(12) INCOME TAXES
Temporary differences and carryforwards that give rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1996 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Deferred tax assets:
Capitalized start-up and other costs..... $ 3,733,898 $ 3,972,981 $ --
Stock options -- noncash compensation.... 3,848,128 4,085,146 3,681,305
Net operating loss carryforwards......... 8,791,091 23,659,463 72,279,998
Bond discounts........................... 3,390,071 7,651,263 17,195,346
Other accrued liabilities................ 496,634 964,786 940,269
----------- ----------- -----------
Total gross deferred assets................ 20,259,822 40,333,639 94,096,918
Less: valuation allowance................ 18,304,754 31,990,518 81,050,070
----------- ----------- -----------
Net deferred tax assets.................... 1,955,068 8,343,121 13,046,848
Deferred tax liabilities -- fixed assets
depreciation and amortization............ 1,955,068 8,343,121 13,046,848
----------- ----------- -----------
Net deferred tax assets (liabilities)...... $ -- $ -- $ --
=========== =========== ===========
</TABLE>
F-23
<PAGE> 67
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
The net change in the total valuation allowance for the year ended June 30,
1996, the six months ended December 31, 1996, and the year ended December 31,
1997 was an increase of $10,013,374, $13,685,764, and $49,059,552, respectively.
The valuation allowances at June 30, 1996 and December 31, 1996 and 1997 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 $184 million at December
31, 1997 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 year ended June 30, 1996,
the six months ended December 31, 1996, and the year ended December 31, 1997 as
the aforementioned deferred tax assets have provided no tax benefit.
(13) ACQUISITIONS
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 for
an aggregate purchase price of approximately $8.8 million. CyberGate, a Florida
based ISP, delivers high-speed data communications services. The acquisition has
been accounted for using the purchase method and, therefore, the Company's
consolidated financial statements include the results of operations of CyberGate
from the date of acquisition. The purchase price of $8,755,000 plus transaction
expenses of approximately $500,000 has been allocated to assets and liabilities
acquired based on their fair values and goodwill of approximately $8,400,000 has
been recorded. The goodwill is being amortized on a straight line basis over a
ten year period.
On October 3, 1997, the Company acquired the customers and receivables of
NetRunner, Inc., a Florida based ISP. In conjunction with this acquisition, the
Company placed 181,871 shares of the Company's Common Stock in escrow. As of
December 31, 1997, 51,166 of these shares had been released. The Company
recorded an intangible asset of approximately $685,000, which is being amortized
over 18 months.
(14) 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.
The Company's short- and long-term debt securities are carried at fair
market value as determined by quoted market prices.
LETTERS OF CREDIT
The fair value of the letters of credit is based on fees currently charged
for similar agreements.
F-24
<PAGE> 68
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
LONG-TERM DEBT AND REDEEMABLE PREFERRED STOCK
The fair value of the Company's long-term debt and redeemable preferred
stock 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 estimated fair values of the Company's financial
instruments at December 31, 1997 were:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
VALUE FAIR VALUE
------------ ------------
<S> <C> <C>
Cash and cash equivalents (including restricted
cash).............................................. $332,737,445 $332,737,445
Letters of credit.................................... -- 15,000
Redeemable preferred stock........................... 205,159,653 242,625,000
Long-term debt....................................... 461,285,177 539,500,000
============ ============
</TABLE>
F-25
<PAGE> 1
EXHIBIT 4.13
================================================================================
AMERICAN COMMUNICATIONS SERVICES, INC.
$190,000,000
13% SENIOR DISCOUNT NOTES DUE 2005
--------------------------------
SUPPLEMENTAL INDENTURE
Dated as of February 27, 1998
to
AMENDED AND RESTATED INDENTURE
Dated as of November 12, 1997
--------------------------------
THE CHASE MANHATTAN BANK,
Trustee
================================================================================
<PAGE> 2
SUPPLEMENTAL INDENTURE (this "Supplemental Indenture"), dated
as of February 27, 1998, by and between AMERICAN COMMUNICATIONS SERVICES, INC.,
a Delaware corporation (the "Company"), having its principal office at 131
National Business Parkway, Suite 100, Annapolis Junction, Maryland 20701, and
The Chase Manhattan Bank (formerly known as Chemical Bank), a New York banking
corporation, as trustee (the "Trustee") under the Indenture (as defined below),
having its Corporate Trust Office at 450 West 33rd Street, New York, New York
10001-2697. Capitalized terms used but not defined herein shall have the
meanings assigned to such terms in the Indenture.
WHEREAS, the Company and the Trustee previously duly executed,
and the Company duly delivered to the Trustee, an Indenture dated as of November
14, 1995, as amended by (i) the Supplemental Indenture dated as of March 11,
1996, (ii) the Supplemental Indenture dated as of January 13, 1997 and (iii) the
Supplemental Indenture dated as of July 7, 1997, and as amended and restated as
of November 12, 1997 (the "Indenture"), relating to $190,000,000 aggregate
principal amount at maturity of the Company's 13% Senior Discount Notes due 2005
(the "Notes");
WHEREAS, pursuant to Section 9.02 of the Indenture, the
Company and the Trustee have obtained the consent of the Holders of not less
than a majority in principal amount of the outstanding Notes to the amendments
made hereby;
WHEREAS, the Board of Directors of the Company has authorized
the execution of this Supplemental Indenture and its delivery to the Trustee;
WHEREAS, the Company has delivered an Officers' Certificate
and Opinion of Counsel to the Trustee pursuant to Section 9.07 of the Indenture;
and
WHEREAS, all other actions necessary to make this Supplemental
Indenture a legal, valid and binding obligation of the parties hereto in
accordance with its terms and the terms of the Indenture have been performed;
NOW, THEREFORE, in consideration of the promises contained
herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Company and the Trustee hereby
mutually covenant and agree for the equal and proportionate benefit of all
Holders of the Notes as follows:
AMENDMENTS
Upon execution of this Supplemental Indenture, the terms of
the Notes and the Indenture shall be amended as follows:
Section 1.01 of the Indenture shall be amended as follows:
by deleting clause (x) of the definition of "Permitted
Investments" and
<PAGE> 3
2
substituting in lieu thereof the following:
"(x) Investments funded or financed with Purchase Money
Debt; and
(xi) Investments in existence at the Issue Date.";
by deleting clause (v) of the definition of "Permitted Liens"
and substituting in lieu thereof the following:
"(v) Liens to secure Indebtedness permitted to be incurred
under Section 4.09(b)(i) or Section 4.09(b)(ix) hereof;" and
by adding the following definitions in appropriate
alphabetical order:
"`Debt to Capital Ratio' means, as at any date of
determination, the ratio of (i) the amount of Indebtedness of the
Company and its Restricted Subsidiaries then outstanding on a
consolidated basis as at the date of determination to (ii) the capital
of the Company and its Restricted Subsidiaries on a consolidated basis
as at such date. For purposes of this calculation, "capital" shall mean
stockholders' equity (deficit), except that all Preferred Stock shall
be included and retained earnings (deficit) shall be excluded, each as
determined in accordance with GAAP."
"`Purchase Money Debt' means Indebtedness of the Company
(including Acquired Indebtedness and Indebtedness represented by
Capital Lease Obligations, mortgage financings and purchase money
obligations) incurred for the purpose of financing all or any part of
the cost of construction, acquisition or improvement by the Company or
any Subsidiary of the Company or any joint venture of any
Telecommunications Assets of the Company, any Subsidiary of the Company
or any joint venture, and including any related notes, Guarantees,
collateral documents, instruments and agreements executed in connection
therewith, as the same may be amended, supplemented, modified or
restated from time to time."
Section 4.09(a) of the Indenture shall be amended by deleting
such paragraph in its entirety and substituting in lieu thereof the following:
"(a) The Company shall not, and shall not permit its
Restricted Subsidiaries to, directly or indirectly, incur any
Indebtedness (including Acquired Indebtedness), and the Company shall
not issue any Disqualified Stock or permit any of its Restricted
Subsidiaries to issue any
<PAGE> 4
3
Disqualified Stock or Preferred Stock; provided that the Company may
incur Indebtedness or issue Disqualified Stock if, after giving effect
to such issuance or incurrence on pro forma basis, (i) 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 or (ii) the Debt to
Capital Ratio as of the most recent available quarterly or annual
balance sheet, after giving pro forma effect to the incurrence of such
Indebtedness and any other Indebtedness incurred since such balance
sheet date and the receipt and application of the proceeds thereof,
does not exceed 2.0x; provided that in determining the amount of
Indebtedness the Company may incur in reliance upon the alternative set
forth in clause (ii), $100,000,000 shall be subtracted from such
amount."
Section 4.09(b) of the Indenture shall be amended as follows:
by deleting in its entirety clause (ix) thereof and
substituting in lieu thereof the following:
"(ix) Purchase Money Debt, provided that the amount of such
Purchase Money Debt does not exceed the cost of the construction,
acquisition or improvement of the applicable Telecommunications Assets;
provided, however that the Company may not incur, as of any date of
determination, Purchase Money Debt in excess of 50% of the amount of
accreted unsecured Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis as at such date (the "Purchase
Money Debt Allowance"); provided further, however that in calculating
such Purchase Money Debt Allowance, incurrences of Purchase Money Debt
consisting of (A) Capital Lease Obligations resulting from the
conversion of operating leases in an amount not to exceed $36,000,000
and (B) Indebtedness incurred pursuant to Section 4.09(b)(i) shall not
be included;"; and
by deleting "$428,634" at the end of clause (xiv) thereof and
substituting in lieu thereof, "$10,000,000".
MISCELLANEOUS
For all purposes of this Supplemental Indenture, except as
otherwise herein expressly provided or unless the context otherwise requires:
(A) the terms and expressions used herein shall have the same meanings as
corresponding terms and
<PAGE> 5
4
expressions used in the Indenture and (B) the words "herein," "hereof" and
"hereby" and other words of similar import used in this Supplemental Indenture
refer to this Supplemental Indenture as a whole and not any particular Article,
Section or other subdivision.
Upon execution of this Supplement Indenture, the Indenture
shall be modified in accordance herewith, but except as expressly amended
hereby, the Indenture is in all respects ratified and confirmed and all the
terms, conditions and provisions thereof shall remain in full force and effect.
Upon execution, this Supplemental Indenture shall form a part
of the Indenture and the Supplemental Indenture and the Indenture shall be read,
taken and construed as one and the same instrument for all purposes, and every
holder of Notes heretofore or hereafter authenticated and delivered under the
Indenture shall be bound hereby.
This Supplemental Indenture shall become effective as of the
date first above written.
The Trustee accepts the amendment to the Indenture effected by
this Supplemental Indenture and agrees to execute the trust created by the
Indenture, as hereby amended, but only upon the terms and conditions set forth
in the Indenture, as hereby amended, including the terms and provisions defining
and limiting the liabilities and responsibilities of the Trustee, which terms
and provisions shall in like manner define and limit the Trustee's liabilities
in the performance of the trust created by the Indenture, as hereby amended.
Without limiting the generality of the foregoing, the Trustee has no
responsibility for the correctness of the recitals of fact herein contained
which shall be taken as the statements of the Company and makes no
representations as to the validity or sufficiency of this Supplemental
Indenture, except as to the due and valid execution hereof by the Trustee, and
shall incur no liability or responsibility in respect of the validity thereof.
The Trustee's execution of this Supplemental Indenture should not be construed
to be an approval or disapproval of the advisability of the amendments to the
Indenture provided herein.
THIS SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY IN SAID STATE.
This Supplemental Indenture may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original,
and all of such counterparts shall together constitute one and the same
instrument.
<PAGE> 6
5
IN WITNESS WHEREOF, the parties hereto have caused this
Supplemental Indenture to be duly executed as of the day and year first above
written.
AMERICAN COMMUNICATIONS SERVICES, INC.
By:
-----------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK, as Trustee
By:
-----------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 4.14
================================================================================
AMERICAN COMMUNICATIONS SERVICES, INC.
$120,000,000
12 3/4% SENIOR DISCOUNT NOTES DUE 2006
--------------------------------
SUPPLEMENTAL INDENTURE
Dated as of February 27, 1998
to
AMENDED AND RESTATED INDENTURE
Dated as of November 12, 1997
--------------------------------
THE CHASE MANHATTAN BANK,
Trustee
================================================================================
<PAGE> 2
SUPPLEMENTAL INDENTURE (this "Supplemental Indenture"), dated
as of February 27, 1998, by and between AMERICAN COMMUNICATIONS SERVICES, INC.,
a Delaware corporation (the "Company"), having its principal office at 131
National Business Parkway, Suite 100, Annapolis Junction, Maryland 20701, and
The Chase Manhattan Bank (formerly known as Chemical Bank), a New York banking
corporation, as trustee (the "Trustee") under the Indenture (as defined below),
having its Corporate Trust Office at 450 West 33rd Street, New York, New York
10001-2697. Capitalized terms used but not defined herein shall have the
meanings assigned to such terms in the Indenture.
WHEREAS, the Company and the Trustee previously duly executed,
and the Company duly delivered to the Trustee, an Indenture dated as of March
26, 1996, as amended by (i) the Supplemental Indenture dated as of January 13,
1997 and (ii) the Supplemental Indenture dated as of July 7, 1997, and as
amended and restated as of November 12, 1997 (the "Indenture"), relating to
$120,000,000 aggregate principal amount at maturity of the Company's 12 3/4%
Senior Discount Notes due 2006 (the "Notes");
WHEREAS, pursuant to Section 9.02 of the Indenture, the
Company and the Trustee have obtained the consent of the Holders of not less
than a majority in principal amount of the outstanding Notes to the amendments
made hereby;
WHEREAS, the Board of Directors of the Company has authorized
the execution of this Supplemental Indenture and its delivery to the Trustee;
WHEREAS, the Company has delivered an Officers' Certificate
and Opinion of Counsel to the Trustee pursuant to Section 9.07 of the Indenture;
and
WHEREAS, all other actions necessary to make this Supplemental
Indenture a legal, valid and binding obligation of the parties hereto in
accordance with its terms and the terms of the Indenture have been performed;
NOW, THEREFORE, in consideration of the promises contained
herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Company and the Trustee hereby
mutually covenant and agree for the equal and proportionate benefit of all
Holders of the Notes as follows:
<PAGE> 3
2
I
AMENDMENTS
Upon execution of this Supplemental Indenture, the terms of
the Notes and the Indenture shall be amended as follows:
I.1. Section 1.01 of the Indenture shall be amended as
follows:
(a) by deleting clause (x) of the definition of "Permitted
Investments" and substituting in lieu thereof the following:
"(x) Investments funded or financed with Purchase Money
Debt; and
(xi) Investments in existence at the Issue Date.";
(b) by deleting clause (v) of the definition of "Permitted
Liens" and substituting in lieu thereof the following:
"(v) Liens to secure Indebtedness permitted to be incurred
under Section 4.09(b)(i) or Section 4.09(b)(ix) hereof;" and
(c) by adding the following definitions in appropriate
alphabetical order:
"`Debt to Capital Ratio' means, as at any date of
determination, the ratio of (i) the amount of Indebtedness of the
Company and its Restricted Subsidiaries then outstanding on a
consolidated basis as at the date of determination to (ii) the capital
of the Company and its Restricted Subsidiaries on a consolidated basis
as at such date. For purposes of this calculation, "capital" shall mean
stockholders' equity (deficit), except that all Preferred Stock shall
be included and retained earnings (deficit) shall be excluded, each as
determined in accordance with GAAP."
"`Purchase Money Debt' means Indebtedness of the Company
(including Acquired Indebtedness and Indebtedness represented by
Capital Lease Obligations, mortgage financings and purchase money
obligations) incurred for the purpose of financing all or any part of
the cost of construction, acquisition or improvement by the Company or
any Subsidiary of the Company or any joint venture of any
Telecommunications Assets of the Company, any Subsidiary of the Company
or any joint venture, and including any related notes, Guarantees,
collateral documents, instruments and agreements executed in connection
therewith, as the same may be amended, supplemented, modified or
restated from time to time."
<PAGE> 4
3
I.2. Section 4.09(a) of the Indenture shall be amended by
deleting such paragraph in its entirety and substituting in lieu thereof the
following:
"(a) The Company shall not, and shall not permit its
Restricted Subsidiaries to, directly or indirectly, incur any
Indebtedness (including Acquired Indebtedness), and the Company shall
not issue any Disqualified Stock or permit any of its Restricted
Subsidiaries to issue any Disqualified Stock or Preferred Stock;
provided that the Company may incur Indebtedness or issue Disqualified
Stock if, after giving effect to such issuance or incurrence on pro
forma basis, (i) 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 or (ii) the Debt to Capital Ratio as of the most recent
available quarterly or annual balance sheet, after giving pro forma
effect to the incurrence of such Indebtedness and any other
Indebtedness incurred since such balance sheet date and the receipt and
application of the proceeds thereof, does not exceed 2.0x; provided
that in determining the amount of Indebtedness the Company may incur in
reliance upon the alternative set forth in clause (ii), $100,000,000
shall be subtracted from such amount."
I.3. Section 4.09(b) of the Indenture shall be amended as
follows:
(a) by deleting in its entirety clause (ix) thereof and
substituting in lieu thereof the following:
"(ix) Purchase Money Debt, provided that the amount of such
Purchase Money Debt does not exceed the cost of the construction,
acquisition or improvement of the applicable Telecommunications Assets;
provided, however that the Company may not incur, as of any date of
determination, Purchase Money Debt in excess of 50% of the amount of
accreted unsecured Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis as at such date (the "Purchase
Money Debt Allowance"); provided further, however that in calculating
such Purchase Money Debt Allowance, incurrences of Purchase Money Debt
consisting of (A) Capital Lease Obligations resulting from the
conversion of operating leases in an amount not to exceed $36,000,000
and (B) Indebtedness incurred pursuant to Section 4.09(b)(i) shall not
be included;"; and
(b) by deleting "$428,634" at the end of clause (xiv) thereof
and substituting in lieu thereof, "$10,000,000".
<PAGE> 5
4
II
MISCELLANEOUS
II.1. For all purposes of this Supplemental Indenture, except
as otherwise herein expressly provided or unless the context otherwise requires:
(A) the terms and expressions used herein shall have the same meanings as
corresponding terms and expressions used in the Indenture and (B) the words
"herein," "hereof" and "hereby" and other words of similar import used in this
Supplemental Indenture refer to this Supplemental Indenture as a whole and not
any particular Article, Section or other subdivision.
II.2. Upon execution of this Supplement Indenture, the
Indenture shall be modified in accordance herewith, but except as expressly
amended hereby, the Indenture is in all respects ratified and confirmed and all
the terms, conditions and provisions thereof shall remain in full force and
effect.
II.3. Upon execution, this Supplemental Indenture shall form a
part of the Indenture and the Supplemental Indenture and the Indenture shall be
read, taken and construed as one and the same instrument for all purposes, and
every holder of Notes heretofore or hereafter authenticated and delivered under
the Indenture shall be bound hereby.
II.4. This Supplemental Indenture shall become effective as of
the date first above written.
II.5. The Trustee accepts the amendment to the Indenture
effected by this Supplemental Indenture and agrees to execute the trust created
by the Indenture, as hereby amended, but only upon the terms and conditions set
forth in the Indenture, as hereby amended, including the terms and provisions
defining and limiting the liabilities and responsibilities of the Trustee, which
terms and provisions shall in like manner define and limit the Trustee's
liabilities in the performance of the trust created by the Indenture, as hereby
amended. Without limiting the generality of the foregoing, the Trustee has no
responsibility for the correctness of the recitals of fact herein contained
which shall be taken as the statements of the Company and makes no
representations as to the validity or sufficiency of this Supplemental
Indenture, except as to the due and valid execution hereof by the Trustee, and
shall incur no liability or responsibility in respect of the validity thereof.
The Trustee's execution of this Supplemental Indenture should not be construed
to be an approval or disapproval of the advisability of the amendments to the
Indenture provided herein.
II.6. THIS SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY IN SAID STATE.
<PAGE> 6
5
II.7. This Supplemental Indenture may be executed in any
number of counterparts, each of which when so executed shall be deemed to be an
original, and all of such counterparts shall together constitute one and the
same instrument.
<PAGE> 7
6
IN WITNESS WHEREOF, the parties hereto have caused this
Supplemental Indenture to be duly executed as of the day and year first above
written.
AMERICAN COMMUNICATIONS SERVICES, INC.
By:
-----------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK, as Trustee
By:
-----------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 4.15
================================================================================
AMERICAN COMMUNICATIONS SERVICES, INC.
$220,000,000
13 3/4% SENIOR NOTES DUE 2007
--------------------------------
SUPPLEMENTAL INDENTURE
Dated as of February 27, 1998
to
INDENTURE
Dated as of July 23, 1997
--------------------------------
THE CHASE MANHATTAN BANK,
Trustee
================================================================================
<PAGE> 2
SUPPLEMENTAL INDENTURE (this "Supplemental Indenture"), dated
as of February 27, 1998, by and between AMERICAN COMMUNICATIONS SERVICES, INC.,
a Delaware corporation (the "Company"), having its principal office at 131
National Business Parkway, Suite 100, Annapolis Junction, Maryland 20701, and
The Chase Manhattan Bank (formerly known as Chemical Bank), a New York banking
corporation, as trustee (the "Trustee") under the Indenture (as defined below),
having its Corporate Trust Office at 450 West 33rd Street, New York, New York
10001-2697. Capitalized terms used but not defined herein shall have the
meanings assigned to such terms in the Indenture.
WHEREAS, the Company and the Trustee previously duly executed,
and the Company duly delivered to the Trustee, an Indenture dated as of July 23,
1997 (the "Indenture"), relating to $220,000,000 aggregate principal amount of
the Company's 13 3/4% Senior Notes due 2007 (the "Notes");
WHEREAS, pursuant to Section 9.02 of the Indenture, the
Company and the Trustee have obtained the consent of the Holders of not less
than a majority in principal amount of the outstanding Notes to the amendments
made hereby;
WHEREAS, the Board of Directors of the Company has authorized
the execution of this Supplemental Indenture and its delivery to the Trustee;
WHEREAS, the Company has delivered an Officers' Certificate
and Opinion of Counsel to the Trustee pursuant to Section 9.07 of the Indenture;
and
WHEREAS, all other actions necessary to make this Supplemental
Indenture a legal, valid and binding obligation of the parties hereto in
accordance with its terms and the terms of the Indenture have been performed;
NOW, THEREFORE, in consideration of the promises contained
herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Company and the Trustee hereby
mutually covenant and agree for the equal and proportionate benefit of all
Holders of the Notes as follows:
I
AMENDMENTS
Upon execution of this Supplemental Indenture, the terms of
the Notes and the Indenture shall be amended as follows:
I.1. Section 1.01 of the Indenture shall be amended as
follows:
(a) by deleting clause (x) of the definition of "Permitted
Investments" and substituting in lieu thereof the following:
"(x) Investments funded or financed with Purchase Money
Debt; and
<PAGE> 3
2
(xi) Investments in existence at the Issue Date.";
(b) by deleting clause (v) of the definition of "Permitted
Liens" and substituting in lieu thereof the following:
"(v) Liens to secure Indebtedness permitted to be incurred
under Section 4.09(b)(i) or Section 4.09(b)(ix) hereof;" and
(c) by adding the following definitions in appropriate
alphabetical order:
"`Debt to Capital Ratio' means, as at any date of
determination, the ratio of (i) the amount of Indebtedness of the
Company and its Restricted Subsidiaries then outstanding on a
consolidated basis as at the date of determination to (ii) the capital
of the Company and its Restricted Subsidiaries on a consolidated basis
as at such date. For purposes of this calculation, "capital" shall mean
stockholders' equity (deficit), except that all Preferred Stock shall
be included and retained earnings (deficit) shall be excluded, each as
determined in accordance with GAAP."
"`Purchase Money Debt' means Indebtedness of the Company
(including Acquired Indebtedness and Indebtedness represented by
Capital Lease Obligations, mortgage financings and purchase money
obligations) incurred for the purpose of financing all or any part of
the cost of construction, acquisition or improvement by the Company or
any Subsidiary of the Company or any joint venture of any
Telecommunications Assets of the Company, any Subsidiary of the Company
or any joint venture, and including any related notes, Guarantees,
collateral documents, instruments and agreements executed in connection
therewith, as the same may be amended, supplemented, modified or
restated from time to time."
<PAGE> 4
3
I.2. Section 4.09(a) of the Indenture shall be amended by
deleting such paragraph in its entirety and substituting in lieu thereof the
following:
"(a) The Company shall not, and shall not permit its
Restricted Subsidiaries to, directly or indirectly, incur any
Indebtedness (including Acquired Indebtedness), and the Company shall
not issue any Disqualified Stock or permit any of its Restricted
Subsidiaries to issue any Disqualified Stock or Preferred Stock;
provided that the Company may incur Indebtedness or issue Disqualified
Stock if, after giving effect to such issuance or incurrence on pro
forma basis, (i) 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 or (ii) the Debt to Capital Ratio as of the most recent
available quarterly or annual balance sheet, after giving pro forma
effect to the incurrence of such Indebtedness and any other
Indebtedness incurred since such balance sheet date and the receipt and
application of the proceeds thereof, does not exceed 2.0x; provided
that in determining the amount of Indebtedness the Company may incur in
reliance upon the alternative set forth in clause (ii), $100,000,000
shall be subtracted from such amount."
I.3. Section 4.09(b) of the Indenture shall be amended as
follows:
(a) by deleting in its entirety clause (ix) thereof and
substituting in lieu thereof the following:
"(ix) Purchase Money Debt, provided that the amount of such
Purchase Money Debt does not exceed the cost of the construction,
acquisition or improvement of the applicable Telecommunications Assets;
provided, however that the Company may not incur, as of any date of
determination, Purchase Money Debt in excess of 50% of the amount of
accreted unsecured Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis as at such date (the "Purchase
Money Debt Allowance"); provided further, however that in calculating
such Purchase Money Debt Allowance, incurrences of Purchase Money Debt
consisting of (A) Capital Lease Obligations resulting from the
conversion of operating leases in an amount not to exceed $36,000,000
and (B) Indebtedness incurred pursuant to Section 4.09(b)(i) shall not
be included;"; and
(b) by deleting "$428,634" at the end of clause (xiv) thereof
and substituting in lieu thereof, "$10,000,000".
<PAGE> 5
4
II
MISCELLANEOUS
II.1. For all purposes of this Supplemental Indenture, except
as otherwise herein expressly provided or unless the context otherwise requires:
(A) the terms and expressions used herein shall have the same meanings as
corresponding terms and expressions used in the Indenture and (B) the words
"herein," "hereof" and "hereby" and other words of similar import used in this
Supplemental Indenture refer to this Supplemental Indenture as a whole and not
any particular Article, Section or other subdivision.
II.2. Upon execution of this Supplement Indenture, the
Indenture shall be modified in accordance herewith, but except as expressly
amended hereby, the Indenture is in all respects ratified and confirmed and all
the terms, conditions and provisions thereof shall remain in full force and
effect.
II.3. Upon execution, this Supplemental Indenture shall form a
part of the Indenture and the Supplemental Indenture and the Indenture shall be
read, taken and construed as one and the same instrument for all purposes, and
every holder of Notes heretofore or hereafter authenticated and delivered under
the Indenture shall be bound hereby.
II.4. This Supplemental Indenture shall become effective as of
the date first above written.
II.5. The Trustee accepts the amendment to the Indenture
effected by this Supplemental Indenture and agrees to execute the trust created
by the Indenture, as hereby amended, but only upon the terms and conditions set
forth in the Indenture, as hereby amended, including the terms and provisions
defining and limiting the liabilities and responsibilities of the Trustee, which
terms and provisions shall in like manner define and limit the Trustee's
liabilities in the performance of the trust created by the Indenture, as hereby
amended. Without limiting the generality of the foregoing, the Trustee has no
responsibility for the correctness of the recitals of fact herein contained
which shall be taken as the statements of the Company and makes no
representations as to the validity or sufficiency of this Supplemental
Indenture, except as to the due and valid execution hereof by the Trustee, and
shall incur no liability or responsibility in respect of the validity thereof.
The Trustee's execution of this Supplemental Indenture should not be construed
to be an approval or disapproval of the advisability of the amendments to the
Indenture provided herein.
II.6. THIS SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY IN SAID STATE.
<PAGE> 6
5
II.7. This Supplemental Indenture may be executed in any
number of counterparts, each of which when so executed shall be deemed to be an
original, and all of such counterparts shall together constitute one and the
same instrument.
<PAGE> 7
6
IN WITNESS WHEREOF, the parties hereto have caused this
Supplemental Indenture to be duly executed, and their respective corporate seals
to be hereunto affixed and duly attested, all as of the day and year first above
written.
AMERICAN COMMUNICATIONS SERVICES, INC.
By:
-----------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK, as Trustee
By:
-----------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 10.65
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Employment
Agreement"), made as of this 23rd day of January, 1998 by and between AMERICAN
COMMUNICATIONS SERVICES, INC., a Delaware corporation, having its principal
place of business at 131 National Business Parkway, Suite 100, Annapolis
Junction, Maryland 20701 (which, together with any affiliates or subsidiaries
are hereinafter collectively referred to as "Company") and Ronald E. Spears, an
individual residing at 390 Oenoke Ridge Road, New Canaan, Connecticut 06840
(hereinafter referred to as "Employee").
WITNESSETH
WHEREAS, the Company desires to employ the services of
Employee as its Chief Operating Officer ("COO") under the terms and conditions
set forth herein; and
WHEREAS, Employee desires to provide services as COO for the
Company under the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the promises and of the
mutual covenants undertaken herein, and with the intent to be legally bound
hereby, the Company and Employee hereby agree as follows:
1. Employment. The Company hereby agrees to employ
Employee and Employee hereby agrees to said employment in accordance with the
terms and conditions hereinafter set forth.
2. Term. Employment hereunder shall be deemed to have
commenced as of February 1, 1998 (the "Effective Date") and continue through
February 1, 2002, unless otherwise terminated pursuant to the terms hereof, or
otherwise extended or renewed by written agreement upon such terms and
conditions as are then mutually acceptable to the Employee and the Company.
3. Location. The Company shall provide office space for
Employee at the Company's headquarters within the Annapolis Junction, Maryland
metropolitan area or wherever the Company's headquarters may be located.
4. Duties. Employee shall serve as CHIEF OPERATING
OFFICER of the Company. Employee shall report to, and take direction from the
Chief Executive Officer ("CEO"). Employee shall be responsible for
engineering, operations, provisioning and network management, marketing, field
sales and operations, network distribution, network construction and other
duties commensurate with Employee's position as COO or any other position of
comparable seniority as directed by the CEO. Employee shall devote his full
business time to the affairs of the Company.
5. Compensation.
a. Salary. Employee shall be compensated by the
payment of $250,000 per annum, paid bi-weekly, in accordance with the Company's
standard payroll practices for employees at his level, (as such amount may be
increased from time to time, "Base Salary"). Employee understands that all
salary and bonus compensation paid to Employee under
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<PAGE> 2
this Employment Agreement shall be subject to the usual and customary federal
and state tax withholding and other employment taxes as required by law.
Except for the cash bonuses payable in accordance with section 5(b) hereof, in
the event Employee is terminated for Cause as defined in paragraph 12 hereof or
voluntarily terminates his employment with the Company, all compensation shall
be prorated if employment is terminated other than at the end of a calendar
month. Employee will receive a salary review on the anniversary of this
Agreement. Additional or increased compensation, while not formalized, will be
based on the Company's performance as well as his individual contribution to
that performance, and shall be determined at the sole discretion of the CEO and
the Company's Board of Directors (the "Board").
b. Cash Bonuses. On February 13, 1998, Employee
shall be entitled to receive, a one-time, lump-sum payment of $100,000 as a
signing bonus in consideration of execution of this Agreement. In addition, in
February of 1999, Employee shall be eligible to receive a cash bonus (the
"Performance Bonus") of up to $150,000 based upon the achievement of certain
performance goals as reasonably determined by the CEO. Such Performance Bonus
will be payable within sixty (60) days after the completion of the 1998 fiscal
year of the Company. Future bonus opportunities for each successive year
during the term of this Agreement, shall be based upon objectives established
by the CEO and the Compensation Committee and will be payable within sixty (60)
days after completion of each fiscal year in which the bonus, if any, is
earned. The performance goals for the fiscal year ending December 31, 1998,
shall be determined within thirty (30) days of the Effective Date and the
performance goals for each fiscal year thereafter will be determined no later
than thirty (30) days after the end of the preceding fiscal year.
Notwithstanding the foregoing, if, after the fiscal year ending December 31,
1998, the Company eliminates Performance Bonuses for senior management of the
Company, other than for Jack E. Reich and Anthony J. Pompliano, the Company
shall not be required to pay the Performance Bonus to Employee. If, however,
senior management (other than Anthony J. Pompliano or Jack E. Reich) continues
to be paid, or be eligible for a similar type bonus, Employee will be entitled
to the Performance Bonus on the terms set forth in Paragraph 5.b.
c. Stock Options.
(i) In addition to the foregoing compensation,
Employee is hereby granted non-qualified options under the Company's Amended
1994 Stock Option Plan (the "Plan") to purchase up to 400,000 shares of the
common stock of the Company upon the following terms and conditions (such
options are referred to herein as the "Stock Options"). Subject to the vesting
requirements set forth herein, the Stock Options shall be exercisable as to
each tranche of shares through the day immediately preceding the fifth (5th)
anniversary of the vesting date for such tranche. The exercise price of the
Stock Options will be 85% of the last reported sale price of the common stock
on January 23, 1998, the date of grant as determined pursuant to the terms of
the Plan. The Stock Options will vest on an "earn out" basis, that is 100,000
Stock Options will vest after completion of Employee's first year of employment
with the Company (February 2, 1999), 100,000 Stock Options will vest after
completion of Employee's second year of employment with the Company (February
2, 2000), 100,000 Stock Options will vest after completion of Employee's third
year of employment with the Company (February 2, 2001), and 100,000 Stock
Options will vest after completion of Employee's fourth year of employment with
the Company (February 2, 2002). The Stock Options shall not vest if, prior to
the relevant vesting date, Employee voluntarily terminated his employment with
the Company or if Employee is terminated for Cause as set forth in paragraph
12. If Employee is terminated without Cause, the Stock Options shall vest only
as expressly provided in Paragraph
- 2 -
<PAGE> 3
12 (ii).
(ii) With respect to amendments to the Plan, and
with respect to future stock option plans or programs to be participated in by
senior officers or key employees of the Company or its successor companies,
Employee shall participate in an equitable manner, and at a level consistent
with the participation of other officers and key employees of the Company.
6. Other Payments and Benefits. It is understood and
agreed that Employee's permanent residence is not in the state of Maryland or
otherwise within the Annapolis Junction, Maryland metropolitan area. Company
agrees to pay for a corporate apartment for Employee for fifteen (15) months
after the Effective Date. After the first fifteen (15) months of this
Agreement, Employee and the Company's CEO will discuss whether it is necessary
for Employee to relocate his permanent residence to the Annapolis Junction,
Maryland metropolitan area, or such other area as determined by the location of
Company's corporate headquarters, and if it is determined by the CEO that such
relocation is desirable, the Company will reimburse Employee for the reasonable
costs of such relocation in accordance with Company's relocation policy. In the
event Employee voluntarily terminates his employment with the Company prior to
completion of his six months of employment subsequent to said relocation, he
will be required to reimburse the Company for any moving expenses paid.
7. Fringe Benefit Plans. Employee shall be entitled to
all benefits accorded to Company officers in general . Employee shall also be
entitled to participate in fringe benefit plans, including, but not limited to,
the Company's medical and dental insurance, life insurance, disability
insurance, stock option plans, or other benefit plans which may be adopted or
amended by the Company from time to time during the term of this Employment
Agreement to the same extent and in the same manner as other senior employees
similarly situated. Employee's health (medical and dental) benefits coverage
shall commence of April 1, 1998. All other benefits shall commence in
accordance with the Company policy.
8. Employee and Company Representations. Employee
hereby represents and warrants to the Company that (i) the execution, delivery
and performance of this Employment Agreement by Employee do not and will not
conflict with, breach, violate or cause a default under any contract,
agreement, instrument, order, judgment or decree to which Employee is a party
or is presently bound; and (ii) Employee is not a party to or bound by any
employment agreement or non-competition agreement with any other person or
entity.
9. Business Expenses. The Company shall reimburse
Employee for all reasonable business and professional expenses incurred by
Employee in connection with his employment within thirty (30) days of the
Company's receipt of vouchers, receipts or other appropriate documentation
which conform to the requirements of the Company's expense reimbursement
procedures.
10. Vacation. Employee shall be entitled to an initial
annual vacation of three (3) weeks. Scheduling of each vacation shall be with
the reasonable consent of the CEO.
11. Professional Education. Employee's attendance at
professional seminars, and the payment and/or reimbursement of costs and
expenses associated therewith, shall be decided on an ad hoc basis by the
Company and Employee.
12. Severance.
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<PAGE> 4
(i) The Company reserves the right to terminate
Employee's employment at any time, in its sole discretion, without Cause after
one year of employment. For purposes of this Employment Agreement, "Cause"
shall mean (a) the conviction for a felony or any crime involving moral
turpitude or the commission of any other act involving dishonesty, conflict of
interest, or fraud with respect to the Company; (b) substantial failure to
perform duties as reasonably directed by the Company, which failure is not
cured within fifteen (15) days' written notice thereof to Employee from the
Company (c) gross negligence, intentional or willful misconduct or (d) any
other material breach of this Employment Agreement by Employee which is not
cured within thirty (30) days' after written notice thereof to Employee from
the Company.
(ii) If Employee's employment is terminated without Cause
("Termination") at any time after the Effective Date, Employee shall receive
his then current Base Salary and health and medical benefits coverage at the
Company's expense for a period of one year from the date of Termination,
compensation for unused vacation for the year in which Employee is terminated
and he shall then vest in all Stock Options which would vest during that fiscal
year, plus an additional 50,000 unvested Stock Options. Any substantial
reduction in Employee's responsibilities, reduction in title, or reduction in
Base Salary, will constitute a constructive termination without cause and will
entitle Employee to terminate his employment and to deem such termination a
termination without cause and to receive all of the benefits for such
termination except that the Base Salary shall be the Base Salary before any
such reduction.
(iii) In the event of a sale or merger as defined in
Section 10(c ) of the Amended 1994 Stock Option Plan, Employee may, at his sole
discretion, terminate this Agreement and shall be entitled to severance
payments consisting of one year Base Salary and health and medical benefits as
set forth in subparagraph (ii) above, and the Stock Options shall be subject to
the provisions of Section 10(c ).
(iv) Employee will not be required to mitigate the amount
of any payment or benefit provided in this paragraph 12 by seeking other
employment or otherwise, nor will the amount of compensation or benefit
provided for in this paragraph be reduced by any compensation he may earn as a
result of his subsequent employment by another employer.
13. Loyalty. The performance of services hereunder shall
be Employee's exclusive employment relationship and Employee shall devote his
full business time and best efforts to the performance of services under this
Employment Agreement. During the term of this Employment Agreement, Employee
shall not at any time or place whatsoever, either directly or indirectly,
engage in business or render services to any extent whatsoever to any third
party, except under and pursuant to this Employment Agreement, unless expressly
agreed upon by the parties.
14. Confidential Information. Employee acknowledges that
the proprietary information, observations and data obtained by Employee while
employed by the Company concerning the business or affairs of the Company or
any affiliate or subsidiary thereof ("Confidential Information") is the
property of the Company. Therefore, Employee agrees not to disclose to any
unauthorized person or use for the Employee's account any Confidential
Information without the prior written consent of the Company unless and to the
extent that the aforementioned matters become generally known to and available
for use by the public other than as a result of Employee's acts or omissions.
Upon request, Employee shall deliver to the Company at the termination of this
Employment Agreement, or at any other time the Company
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<PAGE> 5
may request, all memoranda, notes, plans, records, reports and other documents
(and copies thereof) relating to the Confidential Information or the business
of the Company. This provision shall not apply to information (other than
Confidential Information even if obtained prior to this Agreement) deemed to be
known by Employee at the time of the execution of the Employment Agreement,
including information gained by virtue of his past experience and know-how, or
to his general expertise.
15. Work Product. Employee agrees that all methods,
analyses, reports, plans and all similar or related information which (i)
relate to the Company or any of its affiliates or subsidiaries and which (ii)
are conceived, developed or made by Employee in the course of his employment by
the Company ("Work Product") belong to the Company. Employee will promptly
disclose such Work Product to the Company and perform all actions reasonably
requested by the Company to establish and confirm such ownership by the
Company.
16. Covenants Not to Compete or Solicit. For one (1)
year following the termination of Employee's employment with the Company,
Employee covenants and agrees with the Company not to engage, either directly
or indirectly, as an equity owner or personally as an officer, director,
employee, partner, consultant or agent, in the rendering of any of the same
services as are provided by the Company at the time Employee's employment with
the Company is terminated, or which the Company has targeted to provide in its
written business plan which has been approved by the Board of Directors as of
the time of such termination, in any of the market areas in which the Company
is providing such services at the time of such termination, or in any of the
market areas in which the Company has targeted to provide such services in its
business plan at the time of such termination, provided that Employee may own
up to 2% of the outstanding equity securities of any publicly-traded company
regardless of whether any such company is a competitor of the Company, so long
as Employee's relationship to any such company is that of a strictly passive
investor.
For one (1) year following termination of employment under the
terms of this Employment Agreement, Employee covenants and agrees with the
Company not to, either directly or indirectly, whether acting on behalf of
himself or a corporation, partnership, joint venture or some other entity:
a. induce or attempt to induce any employee of the
Company to leave the Company's employ, or in any way
interfere with the relationship between the Company
and any employee thereof; and/or
b. hire directly or through another entity any person
who was an employee of the Company at any time during
the twelve (12) months preceding Employee's
termination.
Employee represents that he has disclosed to the Company in
writing all obligations to third parties which might limit his ability to
perform services under this Employment Agreement.
17. Non-Assignability. Neither this Employment Agreement
nor any right or interest hereunder shall be assignable or subject to any
encumbrance, pledge, hypothecation, attachment, or anticipation of any kind by
Employee, his spouse or his legal representatives, without the Company's
written consent but shall inure to the benefit of and be binding upon
Employee's estate. If Employee should die while any amounts would still be
payable to
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<PAGE> 6
Employee under this Agreement, all such amounts will be paid in accordance with
this Agreement to Employee's estate.
18. Entire Agreement. This Employment Agreement shall be
the entire agreement and understanding of the parties relating to the subject
matter hereof, and any prior negotiations, promises, agreements,
representations, warranties, or understandings relating to the same subject
matter, and except as specifically provided herein, shall be subject to
subsequent modification only by another mutually signed written instrument
which by its terms evidences an intention to modify or amend the provisions
hereof.
19. Choice of Law. This Employment Agreement shall be
construed in accordance with the internal laws of the State of Maryland. For
purposes of this Employment Agreement, the parties consent to jurisdiction in
the State of Maryland.
20. Cost of Enforcement. Each party shall bear its own
costs and attorneys' fees in connection with any suit or proceeding against the
other to enforce any provision of this Employment Agreement or to recover
damages resulting from a breach hereof, however, the party which prevails in
any such suit or proceeding shall be entitled to receive from the
non-prevailing party the costs and reasonable attorneys' fees of the prevailing
party incurred in such suit or proceeding.
21. Severability. In the event that any provision hereof
is determined to be illegal or unenforceable, such determination shall not
affect the validity or enforceability of the remaining provisions hereof, all
of which shall remain in full force and effect.
22. Counterparts. This Employment Agreement may be
executed in one or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument. This Employment Agreement shall become effective upon the
execution of a counterpart hereof by each of the parties hereto.
23. Notices. Any notice, request, claim, demand,
document and other communication hereunder to either party shall be effective
upon receipt (or refusal of receipt) and shall be in writing and delivered
personally or sent by telex or telecopy (with such telex or telecopy confirmed
promptly in writing sent by first class mail) or other similar means of
communications, as follows:
(i) If to the Company, addressed to American
Communications Services, Inc., 131 National Business
Parkway, Suite 100,
Annapolis Junction, Maryland 20701
Attention: General Counsel; or
(ii) If to Employee, addressed to him at:
390 Oenoke Ridge Road
New Canaan, Connecticut 06840
or, in each case, to such other address or telex or telecopy number as such
party may designate in writing to the other by written notice given in the
manner specified herein.
All such communications shall be deemed to have been given,
delivered or made when so delivered personally or sent by telex or telecopy
(confirmation received), or five
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<PAGE> 7
business days after being so mailed.
INTENDING TO BE LEGALLY BOUND BY THIS EMPLOYMENT AGREEMENT,
the parties have signed below as of the date first written above.
EMPLOYEE: AMERICAN COMMUNICATIONS SERVICES, INC.
- ----------------------- --------------------------------------
Ronald E. Spears Jack E. Reich
CEO and President
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<PAGE> 1
EXHIBIT 10.66
American Communications Services, Inc.
Annual Performance Plan
1. PURPOSE.
The purpose of the Plan is to enable the Company, through awards of incentive
compensation, to attract and retain employees; to motivate these employees to
promote the long-term growth and profitability of the Company; and to associate
the interests of these employees with those of the Company's stockholders.
2. DEFINITIONS.
"Award" shall mean the annual incentive award granted to a Participant for a
Performance Period under the Plan, the value of which shall be determined by the
Committee.
"Board of Directors" shall mean the Board of Directors of the Company.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Committee" shall mean the Compensation Committee of the Board of Directors.
"Company" shall mean American Communications Services, Inc.
"Disability" shall mean a disability under the Company's Long-Term Disability
Plan.
"Employee" shall mean any person employed by the Company on a full-time,
salaried basis.
"Exchange Act" shall mean the Securities Act of 1933, as amended.
"Fair Market Value" shall mean
(i) if the security is not registered under the Exchange Act,
the value of the security (A) most recently determined as of a date
within six months preceding such date by an independent financial
expert selected by the Company or (B) if no such determination shall
have been made within such six month period, determined as of such date
by an independent financial expert selected by te Company, or
(ii) if the security is registered under the Exchange Act, the
average of the daily market prices of the security for the 20
consecutive trading days immediately preceding such date or, if the
security has been registered under the
<PAGE> 2
2
Exchange Act for less than 20 consecutive trading days before such
date, the average of the daily market prices for all trading days
preceding such date for which daily market prices are available. The
daily market price for each such trading day shall be: (A) in the case
of a security listed or admitted to trading on any National Securities
Exchange, the closing sales price, regular way, on such day, or if no
sale takes place on such day, the average of the closing bid and asked
prices on such day on the principal National Securities Exchange on
which such security is listed or admitted, (B) in the case of a
security not then listed or admitted to trading on any National
Securities Exchange, the last reported sale price on such day, or if no
sale takes place on such day, the average of the closing bid and asked
prices on such day, as reported by a reputable quotation source
designated by the Company, (C) in the case of a security not then
listed or admitted to trading on any National Securities Exchange and
as to which no such reported sale price or bid and asked prices are
available, the average of the reported high bid and low asked prices on
such day, as reported by a reputable quotation source or a newspaper of
general circulation in The City of New York customarily published on
each business day, designated by the Company, or, if there shall be no
bid and asked prices on such day, the average of the high bid and low
asked prices, as so reported on the most recent day (not more than 10
days prior to the date in question) for which prices have been so
reported or (D) if the prices specified in clause (A), (B) or (C) are
not available, the Fair Market Value of a security shall be determined
as if such security were not registered under the Exchange Act.
"Participant" shall mean an Employee who has been designated by the Committee to
participate in this Plan.
"Performance Period" shall mean each fiscal year of American Communications
Services, Inc. or such other period of time designated by the Committee with
respect to which an Award shall be earned.
"Plan" shall mean the American Communications Services, Inc. Annual Performance
Plan, as set forth herein, as from time to time amended and in effect.
"Retirement" shall mean retirement after age 65 or such earlier age as may be
approved by the Company in writing.
"Sale" shall have the same meaning as in the Company's Amended 1994 Stock Option
Plan.
"Stock" shall mean shares of common stock of the Company.
<PAGE> 3
3
"Target Award" shall mean the target Award for the Participant for that
Performance Period, as established by the Committee.
3. ADMINISTRATION.
The Plan shall be administered by the Committee, which shall have full authority
and discretion to interpret the Plan, to establish rules and regulations
relating to the Plan, to determine the criteria for eligibility to participate
in the Plan, the performance targets under the Plan and the amount of the
Awards, and to make all other determinations and take all other actions
necessary or appropriate for the proper administration of the Plan. The
Committee may, at its discretion, delegate any of its responsibilities hereunder
as it deems appropriate. The Committee's interpretation of the Plan, and all
actions taken within the scope of its authority, shall be final and binding on
the Company, its stockholders, Participants, Employees, former Employees and
beneficiaries.
4. ESTABLISHMENT OF GOALS; GRANT OF AWARDS.
The Committee shall approve the level of performance goals which must be
achieved during each Performance Period in order for a Participant to earn an
Award payable under the Plan. Each Participant shall be granted an Award, if
any, for that Performance Period determined by the Committee in its sole
discretion.
5. PAYMENT OF AWARDS.
(i) Subject to the provisions of Section 6, the Committee may
authorize payment of Stock to the Participant during the Performance Period
equal to a designated percentage of the value of such Participant's Target Award
for that Performance Period. The amount of Stock received shall be calculated
using the Fair Market Value of the Stock on such date.
(ii) Subject to the provisions of Section 6, each Participant shall be
eligible to receive after the close of a Performance Period Stock equal to the
remaining value of such Participant's actual Award for that Performance Period.
The amount of Stock received shall be calculated using the Fair Market Value of
the Stock as of the date in which the Committee determines the value of the
Award.
(iii) Subject to the provisions of this Section 5 and Section 6, an
Award shall be paid as soon as practicable after the Committee has determined
(i) that the Participant is eligible to receive such Award and (ii) the value of
the Award.
<PAGE> 4
4
(iv) The Committee may defer payment of an Award, or a portion
thereof, at its discretion.
(v) In the event of a Sale, the Committee, in its sole discretion,
may terminate any or all active Performance Periods with respect to any
Participant ("Termination Date") and pay such Participant Stock equal to the
value of such Participant's Target Award for the terminated Performance Period,
less any payment previously made in respect of that Performance Period. The
amount of Stock received shall be calculated using the Fair Market Value of the
Stock on the Termination Date.
6. LIMITATIONS ON RIGHTS TO PAYMENT OF AWARDS.
(i) No Participant shall have any right to receive payment of any
unpaid portion of an Award under the Plan for a Performance Period unless the
Participant remains in the employ of the Company or any of its affiliates
through the the date of payment of an Award. However, in the event that, prior
to the end of the Performance Period, a Participant's employment with the
Company and its affiliates terminates due to the Participant's death or
Disability or Retirement, the Participant (or, in the event of the Participant's
death, the person or estate determined under Section 7) shall remain eligible to
receive a portion of the Award based on the amount of time the Participant was
employed during the Performance Period. Notwithstanding the preceding two
sentences, the Committee may, if in the reasonable opinion of the Committee
circumstances warrant such action, approve payment of an Award to a Participant
whose employment terminates prior to the Award Payment Date for reasons other
than death or Disability or Retirement.
(ii) Those Participants hired during a Performance Period may, in the
Committee's discretion, be eligible to receive, subject to this Section 6, a
portion of the Award based on the amount of time the Participant was employed
during the Performance Period; provided, however, that Participants hired during
the fourth quarter of a Performance Period shall not be eligible to receive an
Award for such period.
7. DESIGNATION OF BENEFICIARY.
A Participant may designate a beneficiary or beneficiaries who, in the event of
the Participant's death prior to full payment of any Award hereunder, shall
receive payment of any Award due under the Plan. Such designation shall be made
by the Participant on a form prescribed by the Committee. The Participant may,
at any time, change or revoke such designation. A beneficiary designation will
be effective only if it is made in writing on a
<PAGE> 5
5
form provided by the Company. If the Participant does not designate a
beneficiary or the beneficiary dies prior to receiving any payment of an Award,
Awards payable under the Plan shall be paid to the Participant's estate. If the
beneficiary dies after receiving any payment of an Award, any amounts remaining
to be paid shall be paid to the beneficiary's estate.
8. AMENDMENTS.
The Board of Directors may at any time amend (in whole or in part) this Plan
provided that no such amendment shall adversely affect an Award previously
granted.
9. TERMINATION.
The Board of Directors may terminate this Plan (in whole or in part) at any
time. The termination shall not adversely affect an Award previously granted.
10. MISCELLANEOUS PROVISIONS.
(i) This Plan is not a contract between the Company and its
Employees; it is totally gratuitous on the part of the Company. No Employees or
other person shall have any claim or right to be granted an Award under this
Plan. Neither the establishment of this Plan, nor any action taken hereunder,
shall be construed as giving any Employee any right to be retained in the employ
of the Company.
(ii) A Participant's right and interest under the Plan may not be
assigned or transferred, except as provided in Section 7 hereof, and any
attempted assignment or transfer shall be null and void and shall extinguish the
Company's obligation under the Plan to pay Awards with respect to the
Participant.
(iii) The Plan shall be unfunded except that the Company may
establish a grantor trust to assist it in meeting its obligations hereunder.
(iv) The Company shall have the right to deduct from Awards paid any
taxes or other amounts required by law to be withheld.
(v) The Stock may consist, in whole or in part, of unissued
Stock or treasury Stock.
(vi) The Plan shall be construed, interpreted and governed in
accordance with the laws of the State of Maryland, without reference to rules
relating to conflicts of law.
11. EFFECTIVE DATE
<PAGE> 6
6
The Plan shall be effective as of January 1, 1997.
<PAGE> 1
EXHIBIT 10.67
133 NATIONAL BUSINESS PARKWAY
NATIONAL BUSINESS PARK
(American Communications Services, Inc.- Suites 200 and 300)
THIS AGREEMENT OF LEASE (the "Lease") made this ______________ day of
______________________, 1997, by and between CONSTELLATION REAL ESTATE, INC., a
Maryland corporation, Agent for Owner ("Landlord") and AMERICAN COMMUNICATIONS
SERVICES, INC., a Delaware corporation ("Tenant"), witnesseth that the parties
hereby agree as follows:
1. Premises. Landlord is the owner of that certain building situate
within the National Business Park and having an address of 133 National Business
Parkway, Annapolis Junction, Maryland 20701 (the "Building").
Landlord does hereby lease unto Tenant, and Tenant does hereby rent
from Landlord, that portion of the Building on the second and third floors
designated as Suite s 200 and 300 containing the agreed upon equivalent of
59,545 square feet of rentable area (the "Premises") described on the schedule
attached hereto as Exhibit "A" and made a part hereof. In addition thereto,
Tenant shall have the right to use, on a non-exclusive basis, and in common with
the other tenants of the Building the Common Areas of the Building (as that term
is defined in Section 5.2.6 hereof), and as shown on Exhibit "A-1" attached
hereto and made a part hereof. The measurements of the Premises and the Building
are computed in accordance with the BOMA-Z specification and the rentable area
of the Premises and Building includes a core factor of twelve percent (12%). The
total rentable area of the Building is 88,666 square feet.
2. Term.
2.1 Commencement Date and Initial Term. This Lease shall commence on
the "Commencement Date" (as herein defined) and shall be for a term ("Initial
Term") of five (5) years, plus the portion of a calendar month, if any, from the
Commencement Date to the last day of the calendar month in which such
Commencement Date occurs. As used in this Lease, the term "Commencement Date",
as advanced or postponed pursuant to the terms hereof, shall be defined as the
earlier to occur of (a) the date on which Tenant takes possession and occupancy
of the Premises, or (b) the date which is fifteen (15) days following that date
which is the first on which he following events have occurred, namely (i) the
Premises are "substantially completed", as defined in Section 2.2 following,
(ii) Landlord has given Tenant written notice that the Premises are
"substantially completed", and (iii) the "Target Date" as defined in Section 2.2
has arrived.
2.2 Substantial Completion. Landlord shall use its best efforts to
"substantially complete" the Premises by November 15, 1997 ("Target Date").
"Substantially complete" means that: (i) the construction of the improvements
described in Section 34 has been completed so that Tenant can use the Premises
for their intended purposes without material interference to Tenant conducting
its ordinary business activities, (ii) the Premises have been approved for
occupancy by governmental authorities having jurisdiction, (iii) the Tenant has
ready and unobstructed access to the Building and Premises through the lobby,
hallways and fully operational elevators, and (iv) the Premises are ready for
installation of any equipment, furniture, fixtures or decoration that Tenant
will install. Landlord shall keep Tenant advised by weekly reports as to its
progress with regard to "substantially completing" the Premises by the Target
Date. Tenant and Landlord agree to cooperate in the resolution of outstanding
issues within forty-eight (48) hours to maintain jointly agreed to construction
schedules.
2.3 Tenant's Option to Extend Term. Provided Tenant is not in default
of its obligations to the Landlord pursuant to this Lease and any applicable
cure period has not expired, Tenant shall have the option to extend the Term of
this Lease for one (1) additional period of either three (3) years or five (5)
years (the "Renewal Term"), to commence immediately upon the expiration of the
Initial Term upon the same terms, covenants and conditions contained in this
Lease, except that (i) Tenant shall pay to Landlord as base rent during the
Renewal Term ninety-five percent (95%) of the then "Prevailing Market Rate" for
the Premises as hereinafter defined, (ii) Landlord shall grant Tenant a tenant
improvement allowance in the amount of Six Dollars
<PAGE> 2
($6.00) per square foot of area in the Premises, (iii) the Base Taxes and Base
Building Expenses shall be adjusted to the most recently completed Tax Year and
calendar year, respectively.
For purposes of this Section 2.3, the term "Prevailing Market Rental"
shall mean the annual per rentable square foot rental rate then being charged in
new leases consummated within six (6) months prior to the date of Tenant's
Notice, which such leases are for Class A office premises comparable to the
Premises and located in office buildings comparable to the Building within a ten
(10) mile radius of the Building (excluding the Town Center, Columbia). In the
determination of the "Prevailing Market Rental," the following factors shall be
used in making any such determination (i) consideration of annual rental rates
per rentable square foot; (ii) total rentable square feet leased; (iii) types of
escalation clauses (including without limitation operation expense stops, real
estate tax stops, and Consumer Price Index adjustments); (iv) length of relevant
term; (viii) utilities or services included within the base rent for the
comparable premises (including by way of example and not by way of limitation
electricity); and (v) the brokerage commissions with respect to such comparable
premises. Notwithstanding the foregoing, the comparable leases shall (i) have at
least a five (5) or three (3) year term depending on the length of the Renewal
Term elected by Tenant, (ii) contain at least 10,000 square feet of space, and
(iii) be in a building which is not newer than the Building. All rent payable
with respect to the Renewal Term shall be payable in the same manner set forth
in Section 5.1 of this Lease.
In order to exercise its option granted herein, Tenant shall so notify
Landlord in writing of its intent to renew and the length of the Renewal Term
not less than one hundred and eighty (180) days prior to the expiration of the
Initial Term. Within thirty (30) days following the exercise by Tenant of its
option to extend the Lease for the Renewal Term, Landlord shall notify Tenant in
writing of its determination of the Prevailing Market Rate for the Renewal Term
as reasonably determined by Landlord. Within twenty (20) days of Tenant's
receipt of Landlord's notification of such rate determined by Landlord, Tenant
shall notify Landlord in writing of Tenant's acceptance or rejection of such
rate. If by Tenant's written notice to Landlord given within the aforesaid
twenty (20) day period, Tenant shall accept such Prevailing Market Rate, the
Landlord and Tenant shall enter into an amendment to this Lease acknowledging
such renewal and setting forth any terms at variance with the terms of this
Lease. If by Tenant's written notice to Landlord given within the aforesaid
twenty (20) day period, Tenant shall reject such Prevailing Market Rate as
determined by Landlord the for the Renewal Term, then within twenty (20) days
thereafter, Landlord and Tenant shall each appoint an independent commercial
leasing broker licensed in the Maryland area (the "Brokers") within ten (10)
days after the expiration of the twenty (20) day period and such brokers shall
deliver their respective estimates of the Prevailing Market Rate within ten (10)
days after being appointed. If the estimates of the Prevailing Market Rate as
quoted by the Brokers are within ten percent (10%) of each other, the Prevailing
Market Rate shall be deemed to be the average of the estimates presented by the
Brokers. If the estimates of the Prevailing Market Rate as quoted by the Brokers
differ by more than ten percent (10%), then the Brokers shall appoint a third
independent commercial leasing broker licensed in the Maryland area within ten
(10) days after the delivery of their estimates (the "Third Broker") who shall
deliver its estimate of the Prevailing Market Rate within ten (10) days after
being appointed and such estimate shall be deemed to be the Prevailing Market
Rate. Tenant shall notify Landlord within ten (10) days after receipt of the
estimate of the Prevailing Market Rate (whether as resulting from the average of
the Brokers or from the Third Broker, as applicable), whether Tenant shall
accept such Prevailing Market Rate, whereupon Landlord and Tenant shall enter
into an amendment to this Lease acknowledging such renewal and setting forth any
terms at variance with the terms of this Lease. If Tenant does not accept such
Prevailing Market Rate within the aforesaid ten (10) day period, then Tenant's
option to extend the Lease for the Renewal Term shall be void and inoperable.
Landlord and Tenant shall each pay the fee of the broker designated by them
originally and shall split the fees of the Third Broker.
Further, the option to extend the Term shall be void and inoperable if
Tenant (or its
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permitted assignee) is not in occupancy and possession of the Premises under
this Lease at the time of giving such notice, if Tenant shall be in default
under any of the terms of this Lease beyond the expiration of any applicable
cure period at the time of exercising its option to renew, if Tenant does not
deliver the requisite notice exercising its option to renew within the time
period specified above, and/or if Tenant shall fail to respond to Landlord's
initial notice of the Prevailing Market Rate within the time period specified
above. The option granted herein shall not be severed from this Lease, or
separately sold, assigned or transferred.
2.4 Definition of "Term". As used herein, the word "Term" shall refer
to the Initial Term and the Renewal Terms, if any.
3. Advance Rent. Within ten (10) days after the execution of this Lease,
Tenant shall pay Landlord the sum of Eighty-Nine Thousand Seven Hundred Fifty
Dollars ($89,750.00) to be held as Advance Rent and security and which Landlord
shall be entitled to retain, without limitation of other remedies, for any
defaults of this Lease by Tenant occurring prior to the commencement of the
Term. If no such defaults occur, the Advance Rent shall be applied by Landlord
against the first monthly installment(s) of Base Rent payable by Tenant
hereunder.
4. Use. Tenant shall use and occupy the Premises continuously during the
Term of this Lease solely for general office purposes and for a
telecommunications facility providing for Tenant's operation, installation,
maintenance, repair and replacement of telecommunications equipment and directly
related facilities subject to and in accordance with all applicable laws,
ordinances, rules and regulations of Federal, State and local governmental
authorities having jurisdiction ("Applicable Laws"), and for no other purpose.
Tenant acknowledges that violation of the foregoing continuous occupancy and use
covenant shall be a material breach of this Lease.
5. Rent.
5.1 Base Rent. As rent for the Premises during each year of the Term,
subject to adjustments pursuant to Section 34.2, Tenant shall pay to Landlord an
annual base rent ("Base Rent") in equal monthly installments of each, in advance
on the first day of each calendar month during the Term, and without deduction,
setoff or demand in accordance with the following schedule:
<TABLE>
<CAPTION>
Annual Base Rent (as computed Monthly Installment
Rental Year on an annualized basis) of Annual Base Rent
- ------------ ----------------------------- -------------------
<S> <C> <C>
1 $1,068,832.80 $89,069.40
2 $1,092,399.36 $91,033.28
3 $1,116,686.16 $93,057.18
4 $1,141,701.60 $95,141.80
5 $1,167,467.52 $97,288.96
</TABLE>
In addition to the Base Rent, if the Term should commence on a day other than
the first day of a calendar month, Tenant shall pay to Landlord upon the
Commencement Date, a sum equaling that percentage of the monthly rent
installment which equals the percentage of such calendar month falling within
the Term.
5.2 Definitions. For the purposes hereof, the following definitions
shall apply:
5.2.1 "Property" shall mean the Building, the land upon which
same is situated and all fixtures and equipment thereon or therein, all commonly
owned or shared appurtenances, including but not limited to, parking areas,
walkways, landscaping and utilities, whether located on the land upon which the
Building is situated or elsewhere within the immediate proximity of the
Building.
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<PAGE> 4
5.2.2 "Building Expenses" shall be all those expenses paid or
incurred by Landlord in connection with the owning, maintaining, operating and
repairing of the Property or any part thereof, in a manner deemed reasonable and
appropriate by Landlord in accordance with generally accepted accounting
principles and shall include, without limitation, the following:
5.2.2.1 All costs and expenses of operating, repairing,
lighting, cleaning, and insuring (including liability for personal injury, death
and property damage and workers' compensation insurance covering personnel
directly related to the Building) the Property or any part thereof, as well as
all costs incurred in removing snow, ice and debris therefrom and of policing
and regulating traffic with respect thereto, replacing or repairing of pavement,
parking areas, curbs, walkways, drainage, lighting facilities, landscaping
(including replanting and replacing flowers and other planting) and to the
extent any of such items is a capital item, such item shall be amortized in
accordance with generally accepted accounting principles (provided that the need
for such capital item is not the result of Landlord's negligence or willful
misconduct);
5.2.2.2 Electricity, steam and fuel used in lighting,
heating, ventilating and air conditioning in the Common Areas only to be
separately metered;
5.2.2.3 Maintenance and repair of mechanical and
electrical equipment including heating, ventilating and air conditioning
equipment;
5.2.2.4 Window cleaning and janitor service,
substantially in accordance with Exhibit "F" attached hereto, including
equipment, uniforms, and supplies and sundries, provided that Landlord shall
have the right to modify the janitorial service in accordance with the then
current standards for operating a first class office building as long as such
change does not materially and adversely affect Tenant's business in the
Premises;
5.2.2.5 Maintenance of elevators, stairways, rest rooms,
lobbies, hallways and other Common Areas;
5.2.2.6 Repainting and redecoration of all Common Areas;
5.2.2.7 Sales or use taxes on supplies or services;
5.2.2.8 Reasonable management fees,wages, salaries and
compensation of all persons engaged in the maintenance, operation or repair of
the Property (including Landlord's share of all payroll taxes);
5.2.2.9 Legal, accounting and engineering fees and
expenses, except for those related to disputes with tenants or which are a
result of and/or are based on Landlord's negligence or other tortious conduct or
to the defense of Landlord's title to the Building;
5.2.2.10 All other expenses which under generally
accepted accounting principles would be considered as an expense of owning,
maintaining, operating, or repairing the Property; excluding, however, those
expenses which would be considered capital in nature under generally accepted
accounting principles.
Notwithstanding anything in this Lease to the contrary, the following
items shall be excluded from the definition of Building Expenses:
a. Repairs or other work occasioned by
fire, windstorm or other casualty of an insurable nature or by the exercise of
eminent domain or any such expenditures for which Landlord is reimbursed from
any source;
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<PAGE> 5
b. Leasing commissions and attorneys' fees
in connection with the negotiation and preparation of letters, deal memos,
letters of intent, leases, subleases and/or assignments, space planning costs,
and other costs and expenses incurred in connection with lease, sublease and/or
assignment negotiations and transactions with present or prospective tenants or
other occupants of the Building;
c. Renovating or otherwise improving or
decorating, painting or redecorating leasable space for tenants or other
occupants of the Building;
d. Landlord's cost of electricity and
other services that are sold to tenants for their exclusive use for which
Landlord is entitled to be reimbursed by such tenants as an additional charge or
rental, or for Landlord's exclusive use in the operation of commercial
concessions at the Building and;
e. Depreciation;
f. Expenses in connection with services or
other benefits which are not offered to Tenant or for which Tenant is charged
for directly but which are provided to another tenant or occupant of the
Building, the cost of which is included as Building Expenses;
g. Legal fees and related legal costs,
together with any damages awarded Tenant or any other tenants, incurred by
Landlord due to the violation by Landlord or any tenant of the terms and
conditions of any lease of space in the Building, including but not limited to
the costs incurred in removing and storing the property of former tenants or
occupants of the Building and Property;
h. Other than as set forth in Section
5.2.2.8 above, overhead and profit increment paid to subsidiaries or affiliates
of Landlord for services on or to the real property, to the extent only that the
costs of such services exceed competitive costs of such services were they not
rendered by a subsidiary or affiliate;
i. Interest, principal, points, fees and
costs (including attorneys' fees, investigations and reports) and other lender
costs and closing costs on debts or amortization of any mortgage or any other
debt instrument encumbering the Building or Property or any part thereof;
j. Landlord's general overhead except as
it directly relates to the operation and management of the Building;
k. Any compensation paid to clerks,
attendants or other persons in commercial concessions operated by Landlord;
l. All items and services for which Tenant
reimburses Landlord or pays third persons;
m. All advertising and promotional
expenditures;
n. Any costs, fines or penalties incurred
due to violations by Landlord of any governmental rule or authority;
o. Costs for sculpture, paintings or other
objects of art;
p. Wages, salaries or other compensation
paid to any executive employees above the grade level of building manager;
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<PAGE> 6
q. Except for making repairs or keeping
permanent systems in operation while repairs are being made, rentals and other
related expenses incurred in leasing air conditioning systems, elevators or
other equipment ordinarily considered to be of a capital nature, except
equipment which is used in providing janitorial services and which is not
affixed to the Building;
r. The value or lost income to Landlord of
any office space in the Building or the Project which is utilized for the
management of the Building;
s. Costs which are reimbursed Landlord
under any contractor, manufacturer or supplier warranty;
t. Costs incurred by Landlord to remedy
any defects in the design of or materials used in, or the defective installation
of the structural steel framing, foundation and underground utility lines
forming a part of or servicing the Building or the Property;
u. Costs incurred to test, survey, clean
up, contain, abate, remove or otherwise remedy hazardous or toxic materials or
asbestos-containing materials or the cost of any environmental audit;
v. Costs arising from Landlord's
charitable or political contribution; and/or
w. Insurance premiums to the extent any
tenant's permitted use causes Landlord's existing insurance premiums to increase
or requires Landlord to purchase additional insurance.
5.2.3 "Taxes" shall mean all real property taxes including
currently due installments of assessments, sewer rents, ad valorem charges,
water rates, rents and charges, front foot benefit charges, and all other
governmental impositions in the nature of any of the foregoing. Excluded from
Taxes are (i) federal, state or local income taxes, (ii) franchise, gift,
transfer, excise, capital stock, estate or inheritance taxes, and (iii)
penalties or interest charged for late payment of Taxes. If at any time during
the Term the method of taxation prevailing at the commencement of the Term shall
be altered so as to cause the whole or any part of the items listed in the first
sentence of this subparagraph 5.2.3 to be levied, assessed or imposed, wholly or
partly as a capital levy, or otherwise, on the rents received from the Building,
wholly or partly in lieu of imposition of or in addition to the increase of
taxes in the nature of real estate taxes issued against the Property, then the
charge to the Landlord resulting from such altered additional method of taxation
shall be deemed to be within the definition of "Taxes."
5.2.4 "Base Building Expenses" shall mean $4.00 per rentable
square foot, as described as of the date of this Lease on Exhibit "G" attached
hereto and made a part hereof, provided that Landlord shall have the right to
change the amounts allocated to the categories of Building Expenses in order to
operate the Building consistently with the operation of a first-class office
building.
5.2.5 "Base Taxes" shall mean $0.75 per rentable square foot.
5.2.6 "Common Areas" shall mean those areas and facilities
which may be from time to time furnished to the Building by Landlord for the
non-exclusive general common use of tenants and other occupants of the Building,
their officers, employees, and invitees, including (without limitation) the
hallways, stairs, parking facilities, washrooms, and elevators.
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<PAGE> 7
5.3 Rent Adjustments for Taxes.
5.3.1 At or after the time that Taxes are due and payable,
Landlord shall total the Taxes and shall allocate such Taxes to the rentable
area within the Building in the following manner: Taxes shall be totaled and
such total shall be divided by the total rentable square feet in the Building
thereby deriving the "Cost of Taxes Per Square Foot" of rentable area.
5.3.2 In the event that the Cost of Taxes Per Square Foot
assessed for any tax year which is wholly or partly within the Term are greater
than the Base Taxes, Tenant shall pay to Landlord, as additional rent at the
time such Taxes are due and payable, the amount of such excess times the number
of rentable square feet in the Premises. Any additional rent due Landlord under
this Section 5.3 shall be due and payable within thirty (30) days after Landlord
shall have submitted a written statement to Tenant showing the amount due. For
Tenant's obligation for such additional rent at the beginning or end of the
Lease, see Section 5.5. Landlord may, in its discretion, make a reasonable
estimate of such additional rent with respect to Taxes, and require Tenant to
pay each month during such year 1/12 of such amount, at the time of payment of
monthly installments of Base Rent. In such event, Tenant shall pay, or Landlord
shall refund or credit to Tenant's account, any underpayment or overpayment of
such additional rent within thirty (30) days of Landlord's annual written
statement of Taxes due. Tenant shall have the right to examine, at Tenant's sole
expense, Landlord's records with respect to any such increases in rent;
provided, however, that unless Tenant shall have given Landlord written notice
of exception to any such statement within forty-five (45) days after delivery
thereof, the same shall be conclusive and binding on Tenant.
As of the date of this Lease, the tax year is a fiscal year commencing
July 1. If the appropriate authorities shall hereafter change the tax year to a
calendar year, or to a fiscal year commencing on a date other than July 1,
appropriate adjustments shall be made in the computation of any additional rent
due hereunder.
All reasonable expenses incurred by Landlord (including attorneys',
appraisers' and consultants' fees, and other costs) in contesting any increase
in Taxes or any increase in the assessment of the Property shall be included as
an item of Taxes for the purpose of computing additional rent due hereunder.
5.4 Rent Adjustments for Building Expenses.
5.4.1 After the end of each calendar year, Landlord shall
compute the Building Expenses for such year and shall allocate such costs to the
rentable area within the Building in the following manner: Building Expenses
shall be totaled and such total shall be divided by the total rentable square
feet in the Building thereby deriving the "Cost of Building Expenses Per Square
Foot" of rentable area.
5.4.2 In the event that the cost of Building Expenses Per
Square Foot of rentable area for any year which is wholly or partly within the
Term are greater than the Base Building Expenses, Tenant shall pay to Landlord,
as additional rent, the amount of such excess times the number of rentable
square feet in the Premises, as set forth in Section 1 above. Any such
additional rent shall be due within forty-five (45) days after the Landlord has
submitted a written statement to Tenant showing the amount due. Landlord may, in
its discretion, make a reasonable estimate of such additional rent with respect
to any calendar year, and require Tenant to pay each month during such year 1/12
of such amount, at the time of payment of monthly installments of Base Rent. In
such event, Tenant shall pay, or Landlord shall refund or credit to Tenant's
account, any underpayment or overpayment of such additional rent within
forty-five (45) days of Landlord's written statement of actual Building Expenses
for the Calendar year. Tenant shall have the right to examine and audit, at
Tenant's sole expense, Landlord's records with respect to any such increases in
rent; provided, however, that unless Tenant shall have given Landlord
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<PAGE> 8
written notice of exception to any such statement within forty-five (45) days
after delivery thereof, the same shall be conclusive and binding on Tenant.
Notwithstanding anything to the contrary contained herein Landlord shall use
diligent efforts to keep Building Expenses at reasonable amounts, while
maintaining the Building as a first class office building.
5.4.3. Notwithstanding anything in this Section 5.4 to the
contrary, in no event shall Tenant's share of increase in Building Expenses for
those items within Landlord's discretion and control (which specifically
excludes Building Expenses relating to utilities, snow removal, insurance
premiums, and Taxes), exceed in any given year, the increase in the Index (as
defined below) from the Base Year Index (as defined herein).
5.4.3.1 The term "Index" shall mean the
Consumer Price Index (U.S., All Urban Consumers, All Items, 1982-84=100, from
the U.S. Department of Labor, Bureau of Labor Statistics, Washington, D.C.).
5.4.3.2 The "Base Year Index" shall be the
Index for January, 1997, for the purposes of all Building Expense adjustments.
5.4.3.3 The "Adjustment Period Index" shall be
the Index for the month of January of each succeeding year.
5.4.3.4 To determine the maximum amount of the
increase of Tenant's share of the increases in the Building Expenses, the Base
Year Index shall be subtracted from the Adjustment Period Index; the difference
shall then be divided by the Base Year Index.
5.4.3.5 If the Index is, at any time during the
term of this Lease, discontinued by the government, then the most nearly
comparable index of inflation published by the government shall be substituted
for the purpose of this calculation.
5.5 Additional Rent Payments. Tenant's obligation to pay any
additional rent accruing during the Term pursuant to Sections 5.3 and 5.4 hereof
shall apply pro rata to the proportionate part of a tax year as to Taxes, and
calendar year, as to Building Expenses, in which this Lease begins or ends, for
the portion of each such year during which this Lease is in effect. Such
obligation to make payments of such additional rent shall survive the expiration
or sooner termination of the Term.
5.6 Payments. All payments or installments of any rent hereunder and
all sums whatsoever due under this Lease (including but not limited to court
costs and attorneys fees) shall be deemed rent, shall be paid to Landlord at the
address designated by Landlord, and if not paid when due, shall be subject to a
late charge of $35.00 for each late payment and shall bear interest at the rate
of 15% per annum (but not more than the maximum allowable legal rate applicable
to Tenant) until paid. Additionally, if any of Tenant's checks for payment of
rent or additional rent are returned to Landlord for insufficient funds, Tenant
shall pay to Landlord as additional rent $50.00 for each such check returned for
insufficient funds, and if two or more of Tenant's checks in payment of rent or
additional rent due hereunder are returned for insufficient funds in any
calendar year, Landlord reserves the right upon ten (10) days advance written
notice to Tenant to thereafter require Tenant to pay all rent and additional
rent and other sums whatsoever due under this Lease in cash, by money order or
by certified check or cashier's check. If an attorney is employed to enforce
Landlord's rights under this Lease, Tenant shall pay all fees and expenses of
such attorney whether or not legal proceedings are instituted by Landlord.
6. Requirements of Applicable Law. Landlord warrants that on the
Commencement Date, the Premises will comply with all applicable laws,
ordinances, rules and regulations of governmental authorities having
jurisdiction over the Property ("Applicable Laws"). Tenant, at
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<PAGE> 9
its sole cost and expense, shall thereafter comply promptly with all Applicable
Laws now in force or which may hereafter be in force, which impose any duty upon
Landlord or Tenant with respect to the use, occupancy or alteration of the
Premises or any part thereof and for the prevention of fires; provided, however,
that Landlord and not Tenant shall correct all structural defects in the
Building necessary to comply with Applicable Laws, and make all repairs, changes
or alterations necessary because the Building was not constructed in compliance
with any of said Applicable Laws.
7. Certificate of Occupancy. Tenant will not use or occupy the Premises in
violation of any certificate of occupancy, permit, or other governmental consent
issued for the Building. If any governmental authority, after the commencement
of the Term, shall contend or declare that the Premises are being used for a
purpose which is in violation of such certificate of occupancy, permit, or
consent, then Tenant shall, upon five (5) days' notice from Landlord,
immediately discontinue such use of the Premises. If thereafter the governmental
authority asserting such violation threatens, commences or continues criminal or
civil proceedings against Landlord for Tenant's failure to discontinue such use,
in addition to any and all rights, privileges and remedies given to Landlord
under this Lease for default therein, Landlord shall have the right to terminate
this Lease forthwith. Tenant shall indemnify and hold Landlord harmless of and
from any and all liability for any such violation or violations.
8. Contest-Statute, Ordinance, Etc. Tenant may, after notice to Landlord,
by appropriate proceedings conducted promptly at Tenant's own expense in
Tenant's name and whenever necessary in Landlord's name, contest in good faith
the validity or enforcement of any such statute, ordinance, law, order,
regulation or requirement and may similarly contest any assertion of violation
of any certificate of occupancy, permit, or any consent issued for the Building.
Tenant may, pending such contest, defer compliance therewith if, in the opinion
of counsel for Landlord, such deferral will not subject either the Landlord or
the Premises or the Property (or any part thereof) to any penalty, fine or
forfeiture, and if Tenant shall post a bond with corporate surety approved by
Landlord sufficient, in Landlord's opinion, fully to indemnify Landlord from
loss.
9. Tenant's Improvements. Except to the extent that Landlord is
responsible for making improvements to the Premises pursuant to Section 34 of
this Lease, Tenant agrees that it will make such improvements to the Premises as
it may deem necessary at its sole cost and expense. Tenant shall not make any
alterations, decorations, installations, additions or improvements to the
Premises, including but not limited to, the installation of any fixtures,
amenities, equipment, appliances, or other apparatus (excluding interior
decorations), without Landlord's prior written consent, which shall not be
unreasonably withheld or delayed, and then only by contractors or mechanics
employed or reasonably approved by Landlord. All such work, alterations,
decorations, installations, additions or improvements shall be done at Tenant's
sole expense and at such times and in such manner as Landlord may from time to
time reasonably designate. Landlord's consent to and/or approval of Tenant's
plans and specifications for the aforesaid improvements shall create no
responsibility or liability on the part of Landlord for their completeness,
design sufficiency, or compliance with all laws, rules and regulations of
governmental agencies or authorities. Simultaneously with its approval of all
alterations, decorations, installations, additions or improvements made by
Tenant, Landlord shall advise Tenant whether Landlord shall be required to
remove such improvements at the expiration of the Term.
10. Repairs and Maintenance.
10.1 Tenant's Care of the Premises and Building. During the Term
Tenant shall:
10.1.1 keep the Premises and the fixtures, appurtenances and
improvements therein in good order and condition;
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<PAGE> 10
10.1.2 make repairs and replacements to the Premises required
because of Tenant's misuse or primary negligence, except to the extent that the
repairs or replacements are covered by Landlord's insurance as required
hereunder;
10.1.3 repair and replace special equipment or decorative
treatments installed by or at Tenant's request and that serve the Premises only,
except to the extent the repairs or replacements are needed because of
Landlord's misuse or primary negligence, and are not covered by Tenant's
insurance as required hereunder; and
10.1.4 pay for all damage to the Building, its fixtures and
appurtenances, as well as all damages sustained by Tenant or occupants of the
Building due to any waste, misuse or neglect of the Premises, its fixtures and
appurtenances by Tenant, except to the extent that the repair of such damage is
covered by Landlord's insurance as required hereunder.
In addition Tenant shall not place a load upon any floor of the
Premises exceeding 100 lbs per square foot. Landlord reserves the right to
prescribe the weight and position of all heavy equipment brought onto the
Premises and prescribe any reinforcing required under the circumstances, all
such reinforcing to be at Tenant's expense.
10.2 Landlord's Repairs. Except for the repairs and replacements that
Tenant is required to make pursuant to Section 10.1 above, Landlord shall make
all other repairs and replacements to the Premises, Common Areas and Building
(including Building fixtures and equipment) as shall be reasonably deemed
necessary to maintain the Building in a condition comparable to other first
class suburban office buildings in the Baltimore-Washington corridor area. This
maintenance shall include the roof, foundation, exterior walls, interior
structural walls, all structural components, and all systems such as mechanical,
electrical, multi-tenant HVAC, and plumbing. The costs associated with such
repairs shall be deemed a part of Building Expenses; provided, however, that
costs of all of such repairs which would be considered capital in nature under
generally accepted accounting principles shall be paid by Landlord. There shall
be no allowance to Tenant for a diminution of rental value, no abatement of
rent, and no liability on the part of Landlord by reason of inconvenience,
annoyance or injury to business arising from Landlord, except in the case of
Landlord's gross negligence, Tenant or others making any repairs or performing
maintenance as provided for herein.
10.3 Time for Repairs. Repairs or replacements required pursuant to
Section 10.1 and 10.2 above shall be made within a reasonable time using due
diligence (depending on the nature of the repair or replacement needed -
generally no more than fifteen (15) days in non-emergency situations) after
receiving notice or having actual knowledge of the need for a repair or
replacement.
10.4 Surrender of the Premises. Upon the termination of this Lease,
Tenant shall surrender the Premises to Landlord in the same broom clean
condition that the Premises were in on the Commencement Date except for:
10.4.1 ordinary wear and tear;
10.4.2 damage by the elements, fire, and other casualty unless
Tenant would be required to repair under the provisions of this Lease;
10.4.3 damage arising from any cause not required to be repaired
or replaced by Tenant; and
10.4.4 alterations as permitted by this Lease unless consent was
conditioned on their removal.
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On surrender Tenant shall remove from the Premises its personal
property, trade fixtures and any alterations required to be removed pursuant to
the terms of this Lease and repair any damage to the Premises caused by this
removal. Any items not removed by Tenant as required above shall be considered
abandoned. Landlord may dispose of abandoned items as Landlord chooses and bill
Tenant for the reasonable cost of their disposal.
11. Conduct on Premises. Tenant shall not do, or permit anything to be done
in the Premises, or bring or keep anything therein which will, in any way,
increase the rate of fire insurance on the Building, or invalidate or conflict
with the fire insurance policies on the Building, fixtures or on property kept
therein, or obstruct or interfere with the rights of the Landlord or of other
tenants, or in any other way injure or annoy Landlord or the other tenants, or
subject Landlord to any liability for injury to persons or damage to property,
or interfere with the good order of the Building, or conflict with Applicable
Laws, or the Maryland Fire Underwriters Rating Bureau. Tenant agrees that any
increase of fire insurance premiums on the Building or contents caused by the
occupancy of Tenant and any expense or cost incurred in consequence of
negligence or carelessness or the willful action of Tenant, Tenant's employees,
agents, servants, or invitees (provided that such increase in costs does not
result of actions by other tenants in the Building) shall, as they accrue be
added to the rent heretofore reserved and be paid as a part thereof; and
Landlord shall have all the rights and remedies for the collection of same as
are conferred upon the Landlord for the collection of rent provided to be paid
pursuant to the terms of this Lease.
12. Insurance.
12.1 Tenant's Insurance. Tenant will keep in force at its own expense,
so long as this Lease remains in effect, (a) public liability insurance,
including insurance against assumed or contractual liability under this Lease,
with respect to the Premises, to afford protection with limits, per person and
for each occurrence, of not less than One Million Dollars ($1,000,000), combined
single limit, with respect to personal injury and death and property damage,
such insurance to provide for only a reasonable deductible, (b) all-risk
property and casualty insurance, including theft, written at replacement cost
value and with replacement cost endorsement, covering all of Tenant's personal
property in the Premises and all improvements and installed in the Premises by
or on behalf of Tenant whether pursuant to the terms of Section 34, Section 9,
or otherwise, such insurance to provide for only a reasonable deductible, (c)
if, and to the extent, required by law, workmen's compensation or similar
insurance offering statutory coverage and containing statutory limits, and (d)
shall insure all plate and other interior glass in the Premises Such policies
will be maintained in companies and in form reasonably acceptable to Landlord
and will be written as primary policy coverage and not contributing with, or in
excess of, any coverage which Landlord shall carry. Tenant will deposit the
policy or policies of such required insurance or certificates thereof with
Landlord prior to the Commencement Date, which policies shall name Landlord or
its designee and, at the request of Landlord, its mortgagees, as additional
named insured and shall also contain a provision stating that such policy or
policies shall not be canceled except after thirty (30) day's written notice to
Landlord or its designees. All such policies of insurance shall be effective as
of the date Tenant occupies the Premises and shall be maintained in force at all
times during the Term of this Lease and all other times during which Tenant
shall occupy the Premises. In addition to the foregoing insurance coverage,
Tenant shall require any contractor retained by it to perform work on the
Premises to carry and maintain, at no expense to Landlord, during such times as
contractor is working in the Premises, a non-deductible (i) comprehensive
general liability insurance policy, including, but not limited to, contractor's
liability coverage, contractual liability coverage, completed operations
coverage, broad form property damage endorsement and contractor's protective
liability coverage, to afford protection with limits per person and for each
occurrence, of not less than Two Hundred Thousand Dollars ($200,000.00),
combined single limit, with respect to personal injury and death and property
damage, such insurance to provide for no deductible, and (ii) workmen's
compensation insurance or similar insurance in form and amounts as required by
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law. In the event of damage to or destruction of the Premises and the
termination of this Lease by Landlord pursuant to Section 17 herein, Tenant
agrees that it will pay Landlord all of its insurance proceeds relating to
improvements made in the Premises by or on behalf of Tenant whether pursuant to
the terms of Section 34, Section 9, or otherwise. If Tenant fails to comply with
its covenants made in this Section, if such insurance would terminate or if
Landlord has reason to believe such insurance is about to be terminated,
Landlord may at its option cause such insurance as it in its sole judgment deems
necessary to be issued, and in such event Tenant agrees to pay promptly upon
Landlord's demand, as additional rent the premiums for such insurance.
12.2 Landlord's Insurance. Landlord will keep in force at its own
expense (a) contractual and comprehensive general liability insurance, including
public liability and property damage, with a minimum combined single limit of
liability of Two Million Dollars ($2,000,000.00) for personal injuries or death
of persons occurring in or about the Building and Premises, and (b) all-risk
property and casualty insurance written at replacement cost value covering the
Building and all of Landlord's improvements in and about same.
12.3 Waiver of Subrogation. Each party hereto waives claims arising in
any manner in its favor and against the other party and agrees that neither
party hereto shall be liable to the other party or to any insurance company (by
way of subrogation or otherwise) insuring the other party for any loss or damage
to the Building, the Premises or other tangible property, or any resulting loss
of income, r against liability on or about the Building, even though such loss
or damage might have been occasioned by the negligence of such party, its agents
or employees if any such loss or damage is covered by insurance benefiting the
party suffering such loss or damage as was required to be covered by insurance
carried pursuant to this Lease. Landlord shall cause each insurance policy
carried by it insuring against liability on or about the Building or insuring
the Premises and the Building or income resulting therefrom against loss by fire
or any of the casualties covered by the all-risk insurance carried by it
hereunder to be written in such a manner as to provide that the insurer waives
all right of recovery by way of subrogation against Tenant in connection with
any loss or damage covered by such policies. Tenant will cause each insurance
policy carried by it insuring against liability or insuring the Premises
(including the contents thereof and Tenant's Improvements installed therein by
Tenant or on its behalf) against loss by fire or any of the casualties covered
by the all-risk insurance required hereunder to be written in such a manner as
to provide that the insurer waives all right of recovery by way of subrogation
against Landlord in connection with any loss or damage covered by such policies.
13. Rules and Regulations. Tenant agrees to be bound by the rules and
regulations set forth on the schedule attached hereto as Exhibit "B" and made a
part hereof. Landlord shall have the right, from time to time, to issue
additional or amended rules and regulations regarding the use of the Building,
so long as said rules shall be reasonable and non-discriminatory between
tenants. When so issued the same shall be considered a part of this Lease and
Tenant covenants that said additional or amended rules and regulations shall
likewise be faithfully observed by Tenant, the employees of Tenant and all
persons invited by Tenant into the Building, provided, that said additional or
amended rules are made applicable to all office tenants similarly situated as
Tenant. Landlord shall not be liable to Tenant for the violation of any of the
said rules and regulations, or the breach of any covenant or condition in any
lease, by any other tenant in the Building; however, Landlord shall use its
reasonable efforts to rectify the situation. If there is a conflict between the
terms of the rules and regulations now in place or hereinafter enacted and the
terms of the Lease, the terms of the Lease shall control.
14. Mechanics' Liens. Tenant shall not do or suffer to be done any act,
matter or thing whereby Tenant's interest in the Premises, or any part thereof,
may be encumbered by any mechanics' lien. Tenant shall discharge, within ten
(10) days after the date of filing, any mechanics' liens filed against Tenant's
interest in the Premises, or any part thereof, purporting to be for labor or
material furnished or to be furnished to Tenant other than Tenant's Improvements
pursuant to Section 34. Landlord shall not be liable for any labor or materials
furnished or to be
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furnished to Tenant upon credit, and no mechanics' or other lien for labor or
materials shall attach to or affect the reversionary or other estate or interest
of Landlord in and to the Premises, or the Property.
15. Tenant's Failure to Repair. In the event that Tenant fails after
reasonable prior written notice from Landlord, to keep the Premises in a good
state of condition and repair pursuant to Section 10 above, or to do any act or
make any payment required under this Lease or otherwise fails to comply
herewith, Landlord may, at its option (but without being obliged to do so)
immediately, or at any time thereafter and without notice, perform the same for
the account of Tenant, including the right to enter upon the Premises at all
reasonable hours to make such repairs, or do any act or make any payment or
compliance which Tenant has failed to do, and upon demand, Tenant shall
reimburse Landlord for any such expense incurred by Landlord including but not
limited to any costs, damages and counsel fees. Any moneys expended by Landlord,
as aforesaid, shall be deemed additional rent, collectible as such by Landlord.
All rights given to Landlord in this Section shall be in addition to any other
right or remedy of Landlord herein contained.
16. Property -- Loss, Damage. Landlord, its agents and employees shall not
be liable to Tenant for (i) any damage or loss of property of the Tenant placed
in the custody of persons employed to provide services for or stored in or about
the Premises and/or the Building, unless such damage or loss is the result of
the negligence of Landlord, (ii) any injury or damage to persons, property or
the business of Tenant resulting from a latent defect in or material change in
the condition of the Building, and (iii) interference with the light, air, or
other incorporeal hereditaments of the Premises.
17. Destruction -- Fire or Other Casualty. In case of partial damage to the
Premises by fire or other casualty insured against by Landlord, Tenant shall
give immediate notice thereof to Landlord, who shall thereupon cause damage to
all property owned by it to be repaired with reasonable speed at expense of
Landlord, due allowance being made for reasonable delay which may arise by
reason of adjustment of loss under insurance policies on the part of Landlord
and/or Tenant, and for reasonable delay on account of "labor troubles" or any
other cause beyond Landlord's control, and to the extent that the Premises are
rendered untenantable the rent shall proportionately abate from the date of such
casualty, provided the damage above mentioned occurred without the fault or
neglect of Tenant, Tenant's servants, employees, agents or visitors. If such
partial damage is due to the fault or neglect of Tenant, or Tenant's servants,
employees, agents, or invitees, the damage shall be repaired by Landlord to the
extent of Landlord's insurance coverage, but there shall be no apportionment or
abatement of rent. In the event the damage shall be so extensive to the whole
Building as to render it uneconomical, in Landlord's opinion, to restore for its
present uses and Landlord shall decide not to repair or rebuild the Building,
this Lease, at the option of Landlord, shall be terminated upon written notice
to Tenant and the rent shall, in such event, be paid to or adjusted as of the
date of such damage, and the terms of this Lease shall expire by lapse of time
and conditional limitation upon the third day after such notice is mailed, and
Tenant shall thereupon vacate the Premises and surrender the same to Landlord,
but no such termination shall release Tenant from any liability to Landlord
arising from such damage or from any breach of the obligations imposed on Tenant
hereunder, or from any obligations accrued hereunder prior to such termination.
18. Eminent Domain. If (1) the whole or more than fifty percent (50%) of
the floor area of the Premises shall be taken or condemned by Eminent Domain for
any public or quasi-public use or purpose, and either party shall elect, by
giving written notice to the other, or (2) more than twenty-five percent (25%)
of the floor area of the Building shall be so taken, and Landlord shall elect,
in its sole discretion, by giving written notice to the Tenant, any said written
notice to be given not more than sixty (60) days after the date on which title
shall vest in such condemnation proceeding, to terminate this Lease, then, in
either such event, the Term of this Lease shall cease and terminate as of the
date of title vesting. In case of any taking or condemnation, whether or
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not the Term of this Lease shall cease and terminate, the entire award shall be
the property of Landlord, and Tenant hereby assigns to Landlord all its right,
title and interest in and to any such award, except that Tenant shall be
entitled to claim, prove and receive in the proceedings such awards as may be
allowed for moving expenses, loss of profit and fixtures and other equipment
installed by it which shall not, under the terms of this Lease, be or become the
property of Landlord at the termination hereof, but only if such awards shall be
made by the condemnation, court or other authority in addition to, and be stated
separately from, the award made by it for the Property or part thereof so taken.
Landlord shall advise Tenant of any pending condemnation proceeding in writing
within five (5) days after Landlord learns of such proceeding.
19. Assignment. So long as Tenant is not in default of any of the terms and
conditions hereof, and further provided that Tenant has fully and faithfully
performed all of the terms and conditions of this Lease, Landlord will not
unreasonably withhold its consent to an assignment of this Lease or sublease of
the Premises for any of the then remaining portion of the unexpired Term
provided: (i) in the event of an assignment, such assignee shall assume in
writing all of Tenant's obligations under this Lease; (ii) in the event of a
sublease, such sublease shall in all respects be subject to and in conformance
with the terms of this Lease; and (iii) in all events Tenant continues to remain
liable on this Lease for the performance of all terms, including but not limited
to, payment of all rent due hereunder. Landlord and Tenant acknowledge and agree
that it shall not be unreasonable for Landlord to withhold its consent to an
assignment if in Landlord's reasonable business judgment, the assignee lacks
sufficient business experience or net worth to successfully operate its business
within the Premises in accordance with the terms, covenants and conditions of
this Lease. If this Lease be assigned, or if the Premises or any part thereof be
underlet or occupied by anybody other than Tenant, Landlord may, after default
by Tenant, collect rent from the assignee, undertenant or occupant and apply the
net amount collected to the rent herein reserved, but no such collection shall
be deemed a waiver of this covenant, or the acceptance of the assignee,
undertenant or occupant as tenant, or a release of Tenant from the further
observance and performance by Tenant of the covenants herein contained. For
purposes of the foregoing, a transfer by operation of law or transfer of a
controlling interest in Tenant as same exists as of the date hereof, shall be
deemed to be an assignment of this Lease. No assignment or sublease, regardless
of whether Landlord's consent has been granted or withheld, shall be deemed to
release Tenant from any of its obligations nor shall the same be deemed to
release any person guaranteeing the obligations of Tenant hereunder from their
obligations as guarantor.
20. Default; Remedies; Bankruptcy of Tenant. Any one or more of the
following events shall constitute an "Event of Default" hereunder, at Landlord's
election: (a) the sale of Tenant's interest in the Premises under attachment,
execution or similar legal process or, the adjudication of Tenant as a bankrupt
or insolvent, unless such adjudication is vacated within forty-five (45) days;
(b) the filing of a voluntary petition proposing the adjudication of Tenant (or
any guarantor of Tenant's obligations hereunder) as a bankrupt or insolvent, or
the reorganization of Tenant (or any such guarantor), or an arrangement by
Tenant (or any such guarantor) with its creditors, whether pursuant to the
Federal Bankruptcy Code or any similar federal or state proceeding, unless such
petition is filed by a party other than Tenant (or any such guarantor) and is
withdrawn or dismissed within sixty (60) days after the date of its filing; (c)
the admission, in writing, by Tenant (or any such guarantor) of its inability to
pay its debts when due; (d) the appointment of a receiver or trustee for the
business or property of Tenant (or any such guarantor), unless such appointment
is vacated within sixty (60) days of its entry; (e) the making by Tenant (or any
such guarantor) of an assignment for the benefit of its creditors, or if, in any
other manner, Tenant's interest in this Lease shall pass to another by operation
of law; (f) the failure of Tenant to pay any rent, additional rent or other sum
of money when due and such failure continues for a period of seven (7) days
after receipt of written notice that the same is past due hereunder; (g) the
Tenant shall fail to move into or take possession of the Premises within thirty
(30) days after commencement of the Term or having taken possession shall
thereafter abandon and/or vacate the Premises unless such vacation is due to a
transfer, assignment or sublease of this Lease
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permitted by Tenant and the Premises are occupied within thirty (30) days
thereafter, (h) the default by Tenant in the performance or observance of any
covenant or agreement of this Lease (other than a default involving the payment
of money), which default is not cured within thirty (30) days after the giving
of notice thereof by Landlord, unless such default is of such nature that it
cannot be cured within such thirty (30) day period, in which case no Event of
Default shall occur so long as Tenant shall commence the curing of the default
within such thirty (30) day period and shall thereafter diligently prosecute the
curing of same, and (i) an Event of Default exists beyond any applicable cure
period under any lease between Landlord and Tenant in National Business Park.
Upon the occurrence and continuance of an Event of Default, Landlord,
with such notice to Tenant as provided for by law or as expressly provided for
herein, may do any one or more of the following: (a) sell, at public or private
sale, all or any part of the goods, chattels, fixtures and other personal
property belonging to Tenant which are or may be put into the Premises during
the Term, whether or not exempt from sale under execution or attachment and
apply the proceeds of such sale, first, to the payment of all costs and expenses
of conducting the sale or caring for or storing said property; second, toward
the payment of any indebtedness, including, without limitation, indebtedness for
rent, which may be or may become due from Tenant to Landlord; and third, to pay
the Tenant, on demand in writing, any surplus remaining after all indebtedness
of Tenant to Landlord has been fully paid; (b) perform, on behalf and at the
expense of Tenant, any obligation of Tenant under this Lease which Tenant has
failed to perform and of which Landlord shall have given Tenant notice, the cost
of which performance by Landlord, together, with interest thereon at the rate of
fifteen percent (15%) per annum, from the date of such expenditure, shall be
deemed additional rent and shall be payable by Tenant to Landlord upon demand;
(c) elect to terminate this Lease and the tenancy created hereby by giving
notice of such election to Tenant, in which event Tenant shall be liable for
Base Rent, additional rent, and other indebtedness that otherwise would have
been payable by Tenant during the remainder of the Term had there been no Event
of Default, with such amount being discounting to present value using a discount
rate of ten percent (10%), and on notice reenter the Premises, by summary
proceedings or otherwise, and remove Tenant and all other persons and property
from the Premises, and store such property in a public warehouse or elsewhere at
the cost and for the account of Tenant, without resort to legal process and
without Landlord being deemed guilty of trespass or becoming liable for any loss
or damage occasioned thereby; and also the right, but not the obligation, to
re-let the Premises for any unexpired balance of the Term, and collect the rent
therefor. In the event of such re-letting by Landlord, the re-letting shall be
on such terms, conditions and rental as Landlord may deem proper, and the
proceeds that may be collected from the same, less the expense of re-letting
(including reasonable leasing fees and commissions and reasonable costs of
renovating the Premises), shall be applied upon the Tenant's rental obligation
as set forth in this Lease for the unexpired portion of the Term. Tenant shall
be liable for any balance that may be due under this Lease, although Tenant
shall have no further right of possession of the Premises; and (d) exercise any
other legal or equitable right or remedy which it may have at law or in equity.
Notwithstanding the provisions of clause (b) above and regardless of whether an
Event of Default shall have occurred, Landlord may exercise the remedy described
in clause (b) without any notice to Tenant if Landlord, in its good faith
judgment, believes it would be materially injured by the failure to take rapid
action, or if the unperformed obligation of Tenant constitutes an emergency;
provided, however, that if Tenant cures the default during the applicable cure
period, Tenant shall not owe any interest on the amount due.
To the extent permitted by law, Tenant hereby expressly waives any and
all rights of redemption, granted by or under any present or future laws in the
event of Tenant's being evicted or dispossessed for any cause, or in the event
of Landlord's obtaining possession of the Premises, by reason of the violation
by Tenant of any of the covenants and conditions of this Lease, or otherwise.
Landlord and Tenant hereby expressly waive trial by jury in any action or
proceeding or counterclaim brought by either party hereto against the other
party on any and every matter, directly or indirectly arising out of or with
respect to this Lease, including, without limitation, the
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relationship of Landlord and Tenant, the use and occupancy by Tenant of the
Premises, any statutory remedy and/or claim of injury or damage regarding this
Lease.
Any costs and expenses incurred by Landlord (including, without
limitation, reasonable attorneys' fees) in enforcing any of its rights or
remedies under this Lease shall be deemed to be additional rent and shall be
repaid to Landlord by Tenant upon demand.
Notwithstanding any of the other provisions of this Lease, in the event
Tenant shall voluntarily or involuntarily come under the jurisdiction of the
Federal Bankruptcy Code and thereafter Tenant or its trustee in bankruptcy,
under the authority of and pursuant to applicable provisions thereof, shall have
the power and so using same determine to assign this Lease, Tenant agrees that
(i) Tenant or its trustee will provide to Landlord sufficient information
enabling it to independently determine whether Landlord will incur actual and
substantial detriment by reason of such assignment and (ii) "adequate assurance
of future performance" under this Lease, as that term is generally defined under
the Federal Bankruptcy Code, will be provided to Landlord by Tenant and its
assignee as a condition of said assignment.
21. Damages. If this Lease is terminated by Landlord pursuant to Section
20, Tenant shall, nevertheless, remain liable for all rent and damages which may
be due or sustained prior to such termination, and all reasonable costs, fees
and expenses including, but not limited to, attorneys' fees, costs and expenses
incurred by Landlord in pursuit of its remedies hereunder, or in renting the
Premises to others from time to time and additional damages (the "Liquidated
Damages"), which shall be an amount equal to the total rent which, but for
termination of this Lease, would have become due during the remainder of the
Term, less the amount of rent, if any, which Landlord shall receive during such
period from others to whom the Premises may be rented (other than any additional
rent received by Landlord as a result of any failure of such other person to
perform any of its obligations to Landlord), in which case such Liquidated
Damages shall be computed and payable in monthly installments, in advance on the
first day of each calendar month following termination of the Lease and
continuing until the date on which the Term would have expired but for such
termination, and any suit or action brought to collect any such Liquidated
Damages for any month shall not in any manner prejudice the right of Landlord to
collect any Liquidated Damages for any subsequent month by a similar proceeding.
If this Lease is terminated pursuant to Section 20, Landlord may relet
the Premises or any part thereof, alone or together with other premises, for
such term(s) which may be greater or less than the period which otherwise would
have constituted the balance of the Term and on such terms and conditions (which
may include concessions, free rent and/or alterations of the Premises) as
Landlord, in its reasonable discretion, may determine, but Landlord shall not be
liable for, nor shall Tenant's obligations hereunder be diminished by reason of,
any failure by Landlord to relet the Premises or any failure by Landlord to
collect any rent due upon such reletting.
22. Services and Utilities. Landlord shall provide the following listed
services and utilities, namely:
22.1 heating, ventilation, and air conditioning ("HVAC") for the
Premises during "Normal Business Hours" (as defined below) to maintain
temperatures for comfortable use and occupancy;
22.2 electric energy in accordance with Section 23 following;
22.3 automatic passenger elevators providing adequate service leading
to the floor on which the Premises are located;
22.4 evening, unescorted janitorial services to the Premises including
removal of trash;
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22.5 hot and cold water sufficient for drinking, lavatory toilet and
ordinary cleaning purposes from fixtures either within the Premises (if provided
pursuant to this Lease) or on the floor on which the Premises are located;
22.6 replacement of lighting tubes, lamp ballasts and bulbs;
22.7 extermination and pest control when and if necessary; and
22.8 maintenance of Common Areas in a manner comparable to other first
class suburban office buildings in the Baltimore-Washington corridor.
Notwithstanding the foregoing, if at any time during the Term and any
extension or renewal thereof, Landlord shall, after reasonable investigation
determine that trash and similar waste generated by Tenant and/or emanating from
the Premises is in excess of that of other standard office tenants within the
Building leasing a premises of the same or similar size to that of the Premises,
Landlord shall bill Tenant and Tenant shall pay to Landlord as additional rent
hereunder within thirty (30) days of the date of Landlord's invoice for the
same, those costs and expenses of trash removal which are reasonably
attributable to such excess trash and similar waste generated by Tenant and/or
emanating from the Premises. "Normal Business Hours" as used herein is defined
from 7:00 a.m. to 7:00 p.m. on business days and from 8:00 a.m. to 1:00 p.m. on
Saturdays. Landlord shall have no responsibility to provide any services under
Section 22.1 above except during Normal Business Hours unless arrangements for
after-hours services have been made pursuant to terms and conditions acceptable
to Landlord and embodied in a separate written agreement between Landlord and
Tenant. During non-business hours (except when impractical or in the event of an
emergency), Landlord reserves the right to stop service of the HVAC, elevator,
plumbing and electric systems, when necessary, by reason of accident, or
emergency, or for repairs, alterations, replacements, or improvements, which in
the judgment of Landlord are desirable or necessary to be made, until said
repairs, alterations, replacements, or improvements shall have been completed.
Landlord shall have no responsibility or liability for failure to supply HVAC,
elevator, plumbing, cleaning, and electric service, during said period or when
prevented from so doing by laws, orders, or regulations of any Federal, State,
County or Municipal authority or by strikes, accidents or by any other cause
whatsoever beyond Landlord's control. Landlord's obligations to supply HVAC are
subject to applicable laws and regulations as to energy conservation and other
such restrictions. Landlord shall use its reasonable efforts to restore HVAC and
electric power as expeditiously as possibly. In the event that Tenant should
require supplemental HVAC for the Premises, any maintenance repair and/or
replacement required for such supplemental service shall be performed by
Landlord but the cost of such maintenance repair and/or replacement (including
labor and materials) shall be paid by Tenant as additional rent.
23. Electric Current. Landlord has supplied or will supply the Premises
with the necessary lines to provide electric service to the Premises for normal
office operations, as well as separate meters so that Tenant's consumption of
electric power can be separately measured and charged to Tenant. Tenant shall
pay all charges (including meter installation and adjustment) for electric and
similar utilities or services so supplied directly to the utility company
supplying same when due and before penalties or late charges on same shall
accrue. Tenant shall not at any time overburden or exceed the capacity of the
mains, feeders, ducts, conduits, or other facilities by which electric and
similar utilities are supplied to, distributed in or serve the Premises. If
Tenant desires to install any equipment which shall require additional electric
or similar facilities of a greater capacity than as provided by Landlord, such
installation shall be subject to Landlord's prior written approval of Tenant's
plans and specifications therefor. If such installation is approved by Landlord,
all costs for providing such additional electrical and similar facilities shall
be paid by Tenant.
24. Telephone. Landlord has arranged for the installation of telephone
service within the
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Building. Tenant shall be responsible for contacting the utility company
supplying said telephone service and arranging to have such telephone facilities
as it may desire to be extended and put into operation in the Premises. Tenant
acknowledges and agrees that all telephone and
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telecommunications services desired by Tenant shall be ordered and utilized at
the sole expense of Tenant. All costs related to installation and the provision
of such service shall be borne and paid for directly by Tenant.
In the event Tenant wishes to utilize the services of a telephone or
telecommunications provider whose equipment is not servicing the Building at
such time Tenant wishes to install its telecommunications equipment serving the
Premises ("Provider"), no such Provider shall be permitted to install its lines
or other equipment without first securing the prior written consent of Landlord,
which consent shall not be unreasonably withheld. Prior to the commencement of
any work in or about the Building by the Provider, the Provider shall agree to
abide by such rules and regulations, job site rules, and such other requirements
as reasonably determined by Landlord to be necessary to protect the interest of
the Building and Property, the other tenants and occupants of the Building and
the Landlord, including, without limitation, providing security in such form and
amount as reasonable determined by Landlord. Each Provider must be duly
licensed, insured and reputable. Landlord shall incur no expense whatsoever with
respect to any aspect of Provider's provision of its services, including without
limitation, the costs of installation, materials and service. Landlord
recognizes Tenant's right to install communications conduit (including fiber
optic cable) into the Premises to service other tenants in the Building.
25. Acceptance of Premises. Tenant shall have reasonable opportunity prior
to occupancy and upon notice of Substantial Completion, provided it does not
thereby interfere with Landlord's Work, to examine the Premises to determine the
condition thereof. Upon taking possession of the Premises, Tenant shall be
deemed to have accepted same as being satisfactory and in the condition called
for hereunder, except for latent defects and punch list items previously noted
to Landlord. Prior to Substantial Completion of the Premises, Tenant shall have
access to the Premises for the installation of its wiring, equipment,
furnishings and trade fixtures, provided that Tenant shall have the insurance
required to be maintained hereunder in full force and effect and provided
further, that Tenant shall not interfere with the completion of Landlord's Work
in the Premises. Within ten (10) days after written request from Landlord,
Tenant shall deliver to Landlord a copy of the Acceptance of Premises
Acknowledgment in substantially the form attached hereto and made a part hereof
as Exhibit E.
26. Inability to Perform. Except to the extent expressly provided to the
contrary in this Lease and the obligation of Tenant to pay rent hereunder and
perform all of the other covenants and agreements hereunder on the part of
Tenant to be performed shall in no way be affected, impaired or excused because
Landlord is unable to fulfill any of its obligations under this Lease or to
supply, or is delayed in supplying, any service to be supplied by it under the
terms of this Lease or is unable to make, or is delayed in making any repairs,
additions, alterations, or decorations or is unable to supply, or is delayed in
supplying, any equipment or fixtures if Landlord is prevented or delayed from so
doing by reason of strikes or labor troubles or any outside cause whatsoever
(except for Landlord's negligence) including, but not limited to, governmental
preemption in connection with a National Emergency, or by reason of any rule,
order or regulation of any department or subdivision of any government agency or
by reason of the conditions of supply and demand which have been or are affected
by war or other emergency. Similarly, Landlord shall not be liable for any
interference with any services supplied to Tenant by others if such interference
is caused by any of the reasons listed in this Section. Nothing contained in
this Section shall be deemed to impose any obligation on Landlord not expressly
imposed by other sections of this Lease.
27. No Waivers. The failure of either party to insist, in any one or more
instances, upon a strict performance of any of the covenants of this Lease, or
to exercise any option herein contained, shall not be construed as a waiver, or
a relinquishment for the future, of such covenant or option, but the same shall
continue and remain in full force and effect. The receipt by Landlord of rent,
with knowledge of the breach of any covenant hereof, shall not be deemed a
waiver of such breach, and no waiver by either party of any provision hereof
shall be deemed to
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have been made unless expressed in writing and signed by the requested party.
28. Access to Premises and Change in Services. Landlord shall have the
right, without abatement of rent, to enter the Premises at any hour to examine
the same or to make such repairs and alterations as Landlord shall deem
necessary for the safety and preservation of the Building, and also to exhibit
the Premises to be let during the last sixty (60) days of the Term; provided,
however, that except in the case of emergency, such entry shall only be after
reasonable notice (taking into account the emergency nature of the situation)
first given to Tenant. If, during the last month of the Term, Tenant shall have
removed all or substantially all of Tenant's property therefrom, Landlord may
immediately enter and alter, renovate and redecorate the Premises, without
elimination or abatement of rent, or incurring liability to Tenant for any
compensation, and such acts shall have no effect upon this Lease. Nothing herein
contained, however, shall be deemed or construed to impose upon Landlord any
obligation, responsibility or liability whatsoever, for the care, supervision or
repair, of the Building or any part thereof, other than as herein elsewhere
expressly provided. Landlord shall also have the right at any time, without the
same constituting an actual or constructive eviction and without incurring any
liability to Tenant therefor, to change the arrangement and/or location of
entrances or passageways, doors and doorways, and corridors, stairs, toilets,
elevators, or other public parts of the Building, and to change the name by
which the Building is commonly known and/or its mailing address, provided that
in all events such changes shall not affect the performance of the Building as a
first-class office building. If Landlord's entry is not a result of Tenant's
negligence or willful misconduct, Landlord shall pay the associated repair
costs, if any. Prior to entering the Premises (except in the event of an
emergency, when Landlord shall use its reasonable efforts to comply with the
provisions of this sentence), Landlord shall supply Tenant in writing its reason
for entry, the anticipated time of entry and the names of the personnel
involved.
29. Estoppel Certificates. Tenant agrees at any time and from time to time
upon not less than fourteen (14) written days' prior notice by Landlord to
execute, acknowledge and deliver to Landlord a statement in writing certifying
that this Lease is unmodified and in full force (or if there have been
modifications, that the same is in full force and effect as modified and stating
the modifications) and the dates to which the rent and other charges have been
paid in advance, if any, and stating whether or not to the best knowledge of the
signer of such certificate Landlord is in default in performance of any
covenant, agreement or condition contained in this Lease and, if so, specifying
each such default of which the signer may have knowledge, it being intended that
any such statement delivered hereunder may be relied upon by third parties not a
party to this Lease.
Tenant agrees to execute the Estoppel Certificate in the form attached
hereto as Exhibit "D" upon acceptance of the Premises.
30. Subordination. Tenant accepts this Lease, and the tenancy created
hereunder, subject and subordinate to any mortgages, overleases, leasehold
mortgages or other security interests now or hereafter a lien upon or affecting
the Building or the Property or any part thereof. Tenant shall, at any time
hereafter, on written request, execute any reasonable instruments or leases or
other documents that may be required by any mortgage or mortgagee or
overlandlord (herein a "Mortgagee") for the purpose of subjecting or
subordinating this Lease and the tenancy created hereunder to the lien of any
such mortgage or mortgages or underlying lease, and the failure of Tenant to
execute any such instruments, releases or documents shall constitute a default
hereunder.
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31. Attornment. Tenant agrees that upon any termination of Landlord's
interest in the Premises, Tenant will, upon request, attorn to the person or
organization then holding title to the reversion of the Premises (the
"Successor") and to all subsequent Successors, and will pay to the Successor all
of the rents and other monies required to be paid by the Tenant hereunder and
perform all of the other terms, covenants, conditions and obligations in this
Lease contained; provided, however, that if in connection with such attornment
Tenant shall so request from such Successor in writing, such Successor will
execute and deliver to Tenant an instrument wherein such Successor agrees that
as long as Tenant performs all of the terms, covenants and conditions of this
Lease, on Tenant's part to be performed, Tenant's possession under the
provisions of this Lease shall not be disturbed by such Successor. Landlord
shall use its reasonable efforts to obtain a non-disturbance agreement from all
Mortgagees.
32. Notices. All notices, demands and requests required under this Lease
shall be in writing. All such notices, demands and requests shall be deemed to
have been properly given if either sent by United States registered or certified
mail, or overnight by any nationally recognized overnight delivery service,
postage prepaid, addressed (i) if to the Landlord at 8815 Centre Park Drive,
Suite 400, Columbia, Maryland 21045, with copies sent to John Harris Gurley,
Esquire, 8815 Centre Park Drive, Suite 400, Columbia, Maryland 21045 or (ii) if
to Tenant at 133 National Business Parkway, Annapolis Junction, Maryland 20701,
Attn: ACSI Real Estate.
Any party may designate a change of address by written notice to the
above parties, given at least ten (10) days before such change of address is to
become effective.
33. Installation of Additional Building Access, Parking Ratio and
Connecting Sidewalk.
33.1 Additional Building Access. As of the date of this Lease, there
is one (1) pedestrian walkway connecting the parking facility which is located
adjacent to the Building. Landlord shall construct a second pedestrian walkway
connecting the rear parking lot to the second floor which substantially similar
to the existing pedestrian walkway and Tenant shall share the construction costs
of the second pedestrian walkway equally with Landlord, with Tenant's share of
the costs not exceeded Sixty Thousand Dollars ($60,000.00) and Tenant's share
being paid from the Allowance as described in Section 34.2.
33.2 Parking Ratio. As of the Commencement Date, Landlord represents
that the parking ratio in the parking facility serving the Premises shall be at
least 3.8 spaces per 1,000 square feet of area in the Building and that there
shall be no charge for the use of such parking facility.
33.3 Connecting Sidewalk. Landlord, at Landlord's expense, shall
construct and maintain a pedestrian sidewalk connecting 131 National Business
Park and 133 National Business Park.
34. Tenant's Space and Allowance.
34.1 Tenant's Space. Attached hereto as Exhibit "C" is a copy of
Landlord's "Tenant Improvements" which include the preliminary plans and
specifications for the materials and manner in which, at Landlord's expense,
Landlord will finish the Premises. Such preliminary plans are subject to mutual
approval of Landlord and Tenant. The following improvements shall be made by
Landlord, at Landlord's expense, and shall not be included within the definition
of Tenant Improvements for the purposes of applying the Allowance as described
in Section 34.2: shell building construction which includes the ceiling grid,
tile, sprinklers, lights and finished perimeter walls and columns ready for
painting, HVAC medium pressure duct work and VAV boxes installed. Landlord will
cause all work necessary to complete the Premises in accordance with Exhibit "C"
to be commenced with reasonable promptness after the signing of the Lease and
thereafter duly completed. The cost of such work shall include all costs of
labor and materials incurred by Landlord in the performance of such work, plus
ten percent (10%) for overhead and
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five percent (5%) for profit. At Tenant's request, Landlord shall fully
cooperate with Tenant to establish such costs or estimates thereof in advance of
performing the work. Landlord shall use its reasonable efforts to achieve the
Target Date to solicit competitive bids for such work. Any changes to the
approved plans and specifications shall be approved in writing by either Paul W.
McCullagh or Diane E. Bengele, or any other individual authorized in writing to
approve such changes by Paul W. McCullough or Diane E. Bengele
34.2 Tenant's Allowance. Landlord shall grant Tenant a tenant
improvement allowance in the amount of Seventeen Dollars ($17.00) per square
foot (the "Allowance") of rentable area in the Premises, which may be used for
improving the Premises with Tenant Improvements and Tenant's moving costs. At
Tenant's election, Landlord shall adjust the Base Rent due hereunder at the rate
of Twenty-Five Cents ($.25) per square foot for each One Dollar ($1.00) per
square foot of Allowance which Tenant over or under utilizes. By way of example,
but without limitation, if Tenant uses its Allowance to the extent of $16.50 per
square foot, the annual Base Rent shall be reduced by $.125. Within sixty (60)
days after the Commencement Date, Landlord and Tenant shall use their reasonable
efforts to reconcile their accounting with respect to the costs relating to
Tenant Improvements and adjust Base Rent accordingly and shall enter into a
written amendment to this Lease which confirms the Base Rent due hereunder.
35. Quiet Enjoyment. Tenant, upon the payment of rent and the performance
of all the terms of this Lease, shall at all times during the Term and during
any extension or renewal term peaceably and quietly enjoy the Premises without
any disturbance from the Landlord or any other person claiming through the
Landlord.
36. Vacation of Premises. Tenant shall vacate the Premises at the end of
the Term of this Lease or any extension or renewal thereof. If Tenant fails to
vacate at such time there shall be payable to Landlord an amount equal to one
hundred fifty percent (150%) the monthly rent stated in paragraph 5 for each
month or part of a month that Tenant holds over (unless Landlord and Tenant are
actively negotiating in good faith the renewal of the Lease in which case rent
shall be due at the rate in effect immediately prior to the holdover period),
plus all other payments provided for herein, and the payment and acceptance of
such payments shall not constitute an extension or renewal of this Lease. In
event of any such holdover, Landlord shall also be entitled to all remedies
provided by law for the speedy eviction of tenants, and to the payment of all
attorneys' fees and expenses incurred in connection therewith.
37. Partners' Liability. It is understood that the Owner of the Building is
NBP-II Limited Partnership, a Maryland limited partnership. All obligations of
said Owner hereunder are limited to the net assets of the Owner from time to
time. No general or limited partner of Owner, or of any successor partnership,
whether now or hereafter a partner, shall have any personal responsibility or
liability for the obligations of Owner hereunder.
38. Separability. If any term or provision of this Lease or the application
thereof to any person or circumstances shall, to any extent, be invalid or
unenforceable, the remainder of this Lease or the application of such term or
provision of such term or provision to persons or circumstances other than those
as to which it is held invalid or unenforceable, shall not be affected thereby,
and each term and provision of this Lease shall be valid and be enforced to the
fullest extent permitted by law.
39. Tenant's Indemnification. Tenant shall indemnify and hold harmless
Landlord and all of its and their respective partners, directors, officers,
agents and employees from any and all liability, loss, cost or expense arising
from all third-party claims resulting from or in connection with:
39.1 the conduct or management of the Premises or of any business
therein, or any work or thing whatsoever done, or any condition created in or
about the Premises during the
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Term of this Lease or during the period of time, if any, prior to the
Commencement Date that Tenant may have been given access to the Premises;
39.2 any act, omission or negligence of Tenant or any of its
subtenants or licensees or its or their partners, directors, officers, agents,
employees, invitees or contractors;
39.3 any accident, injury or damage whatever occurring in, at or upon
the Premises; and
39.4 any breach or default by Tenant in the full and prompt payment
and performance of Tenant's obligations under this Lease;
together with all costs and expenses reasonably incurred or paid in connection
with each such claim or action or proceeding brought thereon, including, without
limitation, all reasonable attorney's fees and expenses.
In case any action or proceeding is brought against Landlord and/or any
of its and their respective partners, directors, officers, agents or employees
and such claim is a claim from which Tenant is obligated to indemnify Landlord
pursuant to this Section, Tenant, upon notice from Landlord shall resist and
defend such action or proceeding (by counsel reasonably satisfactory to
Landlord). The obligations of Tenant under this Section shall survive
termination of this Lease.
39A. Landlord's Indemnification. Landlord shall indemnify and hold harmless
Tenant and all of its and their respective partners, directors, officers, agents
and employees from any and all liability, loss, cost or expense arising from all
third-party claims resulting from or in connection with:
39A.1 the conduct or management of the Building (other than the
Premises or of any business therein), or any work or thing whatsoever done, or
any condition created in or about the Premises during the Term of this Lease;
39A.2 any act, omission or negligence of Landlord or any of its
subtenants or licensees or its or their partners, directors, officers, agents,
employees, invitees or contractors;
39A.3 any breach or default by Landlord in the full and prompt payment
and performance of Landlord's obligations under this Lease;
together with all costs and expenses reasonably incurred or paid in connection
with each such claim or action or proceeding brought thereon, including, without
limitation, all reasonable attorney's fees and expenses.
In case any action or proceeding is brought against Tenant and/or any
of its and their respective partners, directors, officers, agents or employees
and such claim is a claim from which Landlord is obligated to indemnify Tenant
pursuant to this Section, Landlord, upon notice from Tenant shall resist and
defend such action or proceeding (by counsel reasonably satisfactory to Tenant).
The obligations of Landlord under this Section shall survive termination of this
Lease.
40. Captions. All headings anywhere contained in this Lease are intended
for convenience or reference only and are not to be deemed or taken as a summary
of the provisions to which they pertain or as a construction thereof.
41. Brokers. Tenant represents that Tenant has dealt directly with, only
with Manekin Corporation, as broker (the "Broker") in connection with this
Lease, and Tenant warrants that no other broker negotiated this Lease or is
entitled to any commissions in connection with this Lease. Landlord shall pay
Broker pursuant to the terms of a separate written agreement between
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the parties.
42. Recordation. Tenant covenants that it will not, without Landlord's
prior written consent, record this Lease or any memorandum of this Lease or
offer this Lease or any memorandum of this Lease for recordation. If at any time
Landlord or any mortgagee of Landlord's interest in the Premises shall require
the recordation of this Lease or any memorandum of this Lease, such recordation
shall be at Landlord's expense. If at any time Tenant shall require the
recordation of this Lease or any memorandum of this Lease, such recordation
shall be at Tenant's expense. If the recordation of this Lease or any memorandum
of this Lease shall be required by any valid governmental order, or if any
government authority having jurisdiction in the matter shall assess and be
entitled to collect transfer taxes or documentary stamp taxes, or both transfer
taxes and documentary stamp taxes on this Lease or any memorandum of this Lease,
Tenant will execute such acknowledgments as may be necessary to effect such
recordations and pay, upon request of Landlord, one half of all recording fees,
transfer taxes and documentary stamp taxes payable on, or in connection with
this Lease or any memorandum of this Lease or such recordation.
43. Successors and Assigns. The covenants, conditions and agreements
contained in this Lease shall bind and inure to the benefit of Landlord and
Tenant, and their respective heirs, personal representatives, successors and
assigns (subject, however, to the terms of Article 19 hereof).
44. Integration of Agreements. This writing is intended by the Parties as a
final expression of their agreement and is a complete and exclusive statement of
its terms, and all negotiations, considerations and representations between the
Parties are incorporated. No course of prior dealings between the Parties or
their affiliates shall be relevant or admissible to supplement, explain, or vary
any of the terms of this Lease. Acceptance of, or acquiescence to, a course of
performance rendered under this Lease or any prior agreement between the Parties
or their affiliates shall not be relevant or admissible to determine the meaning
of any of the terms or covenants of this Lease. Other than as specifically set
forth in this Lease, no representations, understandings, or agreements have been
made or relied upon in the making of this Lease.
45. Hazardous Material; Indemnity. Landlord represents that to the best of
its knowledge, the Premises are free of Hazardous Material. Tenant shall not
cause or permit any Hazardous Material (as hereinafter defined) to be brought
upon, kept, or used in or about the Premises by Tenant, its agents, employees,
contractors or invitees, without the prior written consent of Landlord (which
Landlord shall not unreasonably withhold as long as Tenant demonstrates to
Landlord's reasonable satisfaction that such Hazardous Material is necessary or
useful to Tenant's business and will be used, kept and stored in a manner that
complies with all laws regulating any such Hazardous Material so brought upon or
used or kept in or about the Premises). If Tenant breaches the obligations
stated in the preceding sentence, or if the presence of Hazardous Material on
the Premises caused or permitted by Tenant results in contamination of the
Premises, the Building and/or the Property, or if contamination of the Premises,
the Building and/or the Property by Hazardous Material otherwise occurs, for
which Tenant is legally liable to Landlord for damage resulting therefrom, then
Tenant shall indemnify, defend and hold Landlord and its Mortgagee(s) harmless
from any and all claims, judgments, damages, penalties, fines, costs,
liabilities or losses (including, without limitation, diminution in value of the
Premises, the Building and/or the Property, damages for the loss or restriction
on use of rentable or usable space or of any amenity of the Premises, the
Building and/or the Property, damages arising from any adverse impact on
marketing of space, and sums paid in settlement of claims, attorneys' fees,
consultant fees and expert fees) which arise during or after the Term as a
result of such contamination. This indemnification of Landlord and its
Mortgagee(s) by Tenant includes, without limitation, costs incurred in
connection with any investigation of site conditions or any cleanup, remedial,
removal, or restoration work required by any federal, state or local
governmental agency or political subdivision because of Hazardous Material
present in the soil or ground water on or under the Building. Without limiting
the foregoing, if the presence of any Hazardous Material on the Premises, the
Building and/or the Property caused or permitted by
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Tenant results in any contamination of the Premises, the Building and/or the
Property, Tenant shall promptly take all actions at its sole expense as are
necessary to return the Premises, the Building and/or the Property to the
condition existing prior to the introduction of any such Hazardous Material to
the Premises, the Building and/or the Property; provided that Landlord's
approval of such actions shall first be obtained, which approval shall not be
unreasonably withheld so long as such actions would not potentially have any
material adverse long-term or short-term effect on the Premises or the Building.
Landlord shall indemnify, defend and hold Tenant harmless from any and all
claims, judgments, damages, penalties, fines, costs, liabilities or losses
(including, without limitation, diminution in value of the Premises, damages for
the loss or restriction on use of rentable or usable space or of any amenity of
the Premises, and sums paid in settlement of claims, attorneys' fees, consultant
fees and expert fees) which arise during or after the Term as a result of
Hazardous Materials located in, on or around the Premises prior to the
commencement of the Term.
As used herein, the term "Hazardous Material" means any hazardous or
toxic substance, material or waste which is or becomes regulated by any local
governmental authority, the State of Maryland or the United States Government.
The term "Hazardous Material" includes, without limitation, any material or
substance that is (i) defined as a "hazardous substance" under the laws of the
State of Maryland, (ii) petroleum, (iii) asbestos, (iv) designated as a
"hazardous substance" pursuant to Section 311 of the Federal Water Pollution
Control Act (33 U.S.C. Section 1321), (v) defined as a "hazardous waste"
pursuant to Section 1004 of the Federal Resource Conservation and Recovery Act,
42 U.S.C. Section 6901 et seq. (42 U.S.C. Section 6903), (vi) defined as a
"hazardous substance" pursuant to Section 101 of the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq. (42
U.S.C. Section 9601), or (vii) defined as a "regulated substance" pursuant to
Subchapter IX, Solid Waste Disposal Act (Regulation of Underground Storage
Tanks), 42 U.S.C. Section 6991 et seq. Notwithstanding anything herein to the
contrary, Hazardous Materials shall not be deemed to include ordinary cleaning
materials used for the purposes intended and in accordance with all applicable
rules, laws and regulations.
46. Americans With Disabilities Act. Notwithstanding any other provisions
contained in this Lease and with the purpose of superseding any such provisions
herein that might be construed to the contrary, it is the intent of the Landlord
and Tenant that at all times while this Lease shall be in effect that the
following provisions shall be deemed their specific agreement as to how the
responsibility for compliance (and cost) with the Americans With Disabilities
Act and amendments to same ("ADA"), both as to the Premises and the Property,
shall be allocated between them, namely:
46.1 Landlord and Tenant agree to cooperate together in the initial
design, planning and preparation of specifications for construction of the
Premises so that same shall be in compliance with the ADA. As of the
Commencement Date, Landlord shall deliver the Building in full compliance with
ADA.
46.2 Modifications, alterations and/or other changes required to and
within the Common Areas which are not capital in nature shall be the
responsibility of Landlord to perform and the cost of same shall be considered a
part of the Building Expenses and treated as such.
46.3 Modifications, alterations and/or other changes required to and
within the Common Areas which are capital in nature shall be the responsibility
of Landlord and at its cost and expense.
46.4 Modifications, alterations and/or other changes required to and
within the Premises (after the initial construction of same), whether capital in
nature or non-capital in nature, shall be the responsibility of Tenant and at
its cost and expense; unless said changes are structural in nature and result
from the original design of the Building, in which instance they shall be the
responsibility of Landlord and at its cost and expense.
Each party hereto shall indemnify and hold harmless the other party
from any and all
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liability, loss, cost or expense arising as a result of a party not fulfilling
its obligations as to compliance with the ADA as set forth in this Section.
47. Several Liability. If Tenant and/or Landlord shall be one or more
individuals, corporations or other entities, whether or not operating as a
partnership or joint venture, then each such individual, corporation, entity,
joint venturer or partner shall be deemed to be both jointly and severally
liable for the payment of the entire rent and other payments specified herein.
48. Perpetual Right of First Refusal/First Option. Provided Tenant is not
in default of any of the terms, covenants and conditions of this Lease, Tenant
shall have the perpetual right-of-first refusal to lease from Landlord all or
any portion of rentable office space located anywhere in the Building, subject
to rights of first offer and/or refusal that are in force as of the date of this
Lease (the "Option Area"). At such time as Landlord shall enter into meaningful
negotiations with a third party to lease all or any portion of the Option Area,
Landlord shall notify Tenant in writing ("Landlord's Option Notice"). Tenant's
rental of the Option Area shall be based on the following terms and conditions:
(i) Tenant shall lease the Option Area for a term running coterminous with the
Term, but no less than three (3) years; (ii) the base rent payable by Tenant for
the Option Area shall equal the Prevailing Market Rental hereafter defined; and
(iii) such other terms and conditions set forth herein as applicable.
For purposes of this Section 48, the term "Prevailing Market Rental"
shall mean the annual per rentable square foot rental rate then being charged in
new leases consummated within six (6) months prior to the date of Landlord's
Option Notice, which such leases are for Class A office premises comparable to
the Premises and located in office buildings comparable to the Building within a
ten (10) mile radius of the Building (excluding the Town Center, Columbia). In
the determination of the "Prevailing Market Rental," the following factors shall
be used in making any such determination (i) consideration of annual rental
rates per rentable square foot; (ii) total rentable square feet leased; (iii)
types of escalation clauses (including without limitation operation expense
stops, real estate tax stops, and Consumer Price Index adjustments); (iv) length
of relevant term; (viii) utilities or services included within the base rent for
the comparable premises (including by way of example and not by way of
limitation electricity); and (v) the brokerage commissions with respect to such
comparable premises. Notwithstanding the foregoing, the comparable leases shall
(i) have at least a five (5) or three (3) year term depending on the length of
the Renewal Term elected by Tenant, (ii) contain at least 10,000 square feet of
space, and (iii) be in a building which is not newer than the Building.
Tenant shall exercise the foregoing right of first option by delivering
written notice thereof to Landlord within ten (10) business days of Tenant's
receipt of Landlord's Option Notice. In the event Tenant shall exercise its
right of first option granted herein, Landlord and Tenant shall enter into an
amendment to this Lease within forty-five (45) days of Landlord's Option Notice,
which amendment shall set forth the base rent payable by Tenant for the Option
Area, and such other agreements, if any, with respect to the Option Area. In the
event (a) Tenant is then in default under the terms of this Lease beyond the
expiration of any applicable cure period at the time of exercising such right,
or (b) Tenant fails to deliver the requisite notice to Landlord exercising such
right within the ten (10) day period above-provided, or (c) Tenant fails to
execute an amendment to this Lease for the Option Area within the aforesaid
forty-five (45) day calendar period, or (d) Tenant declines to exercise its
right of first option as to all or any portion of the Option Area, then Tenant's
right of first option for the specified space shall terminate without affecting
Tenant's future rights of expansion which remain perpetual in nature. The right
of first option granted herein shall not be severed from this Lease, or
separately sold, assigned or transferred, but may only be assigned or
transferred as a part of this Lease.
49. Building Signage. Tenant, at Tenant's expense, shall have the right to
install an exterior sign on the Building, subject to Landlord's prior approval,
such approval not to be unreasonably withheld, with regard to the size,
location, aesthetics and method of installation of the signage. Landlord shall
use its reasonable efforts to coordinate the placement of Tenant's rooftop
signage with other tenants in the Building so that any rooftop signs are located
at opposite ends of the Building. Tenant, at Tenant's expense, shall maintain
the signage. At the expiration or sooner termination of the Term, Tenant shall
remove the exterior signage on the Building and restore the
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Building's surface to that condition which existed immediately prior to the
installation of the signage.
50. Termination of Existing Lease for 133 National Business Park. Effective
as of the date of this Lease, all right title and interest of Tenant in and to
that certain lease dated September 9, 1996, by and between Landlord and Tenant
relating to space in the Building (the "Existing Lease") shall be terminated and
the Existing Lease (including all rights of renewal or expansion) shall be
terminated, void and inoperable without the requirement of further
documentation.
IN WITNESS WHEREOF, Landlord and Tenant have respectively affixed their
hands and seals to this Lease as of the day and year first above written.
WITNESS: LANDLORD:
CONSTELLATION REAL ESTATE, INC.,
Agent for Owner
By: (SEAL)
- ------------------------- --------------------------
Dwight S. Taylor
Vice President
WITNESS: TENANT:
AMERICAN COMMUNICATIONS SERVICES, INC.
By: (SEAL)
- ------------------------- --------------------------
George M. Tronsrue, III
President and Chief Operating Officer
27
<PAGE> 28
STATE OF MARYLAND, COUNTY OF ________________, TO WIT:
I HEREBY CERTIFY, that on this ______ day of ______________, 1997,
before me, the undersigned Notary Public of said State, personally appeared
Dwight S. Taylor, who acknowledged himself to be Vice President of CONSTELLATION
REAL ESTATE, INC., Agent for Owner, a Maryland corporation, known to me (or
satisfactorily proven) to be the person whose name is subscribed to the within
instrument, and acknowledged that he executed the same for the purposes therein
contained as the duly authorized Agent by signing the name of the corporation by
himself as Agent.
WITNESS my hand and Notarial Seal.
--------------------------------
Notary Public
My Commission Expires:
-------------------
STATE OF _______________, CITY/COUNTY OF _______________, TO WIT:
I HEREBY CERTIFY, that on this ______ day of ______________, 199____,
before me, the undersigned Notary Public of said State, personally appeared
GEORGE M. TRONSRUE, III, who acknowledged himself to be the President and Chief
Operating Officer of AMERICAN COMMUNICATIONS SERVICES, INC., a Delaware
corporation, known to me (or satisfactorily proven) to be the person whose name
is subscribed to the within instrument, and acknowledged that he/she executed
the same for the purposes therein contained as the duly authorized President and
Chief Operating Officer of said corporation by signing the name of the
corporation by himself as President and Chief Operating Officer.
WITNESS my hand and Notarial Seal.
---------------------------------
Notary Public
My Commission Expires:
-------------------
28
<PAGE> 29
EXHIBIT "A"
LEASE
BY AND BETWEEN
CONSTELLATION REAL ESTATE, INC., AS LANDLORD
AND
AMERICAN COMMUNICATIONS SERVICES, INC., AS TENANT
DESCRIPTION OF PREMISES
<PAGE> 30
EXHIBIT "A-1"
LEASE
BY AND BETWEEN
CONSTELLATION REAL ESTATE, INC., AS LANDLORD
AND
AMERICAN COMMUNICATIONS SERVICES, INC., AS TENANT
DESCRIPTION OF COMMON AREA OF BUILDING
<PAGE> 31
EXHIBIT "B"
LEASE
BY AND BETWEEN
CONSTELLATION REAL ESTATE, INC., AS LANDLORD
AND
AMERICAN COMMUNICATIONS SERVICES, INC., AS TENANT
RULES AND REGULATIONS
1. Tenant shall not obstruct or permit its agents, clerks or servants
to obstruct, in any way, the sidewalks, entry passages, corridors, halls,
stairways or elevators of the Building, or use the same in any other way than as
a means of passage to and from the offices of Tenant; bring in, store, test or
use any materials in the Building which could cause a fire or an explosion or
produce any fumes or vapor; make or permit any improper noises in the Building;
smoke in the elevators; throw substances of any kind out of the windows or
doors, or down the passages of the Building, in the halls or passageways; sit on
or place anything upon the window sills; or clean the windows.
2. Waterclosets and urinals shall not be used for any purpose other
than those for which they were constructed; and no sweepings, rubbish, ashes,
newspaper or any other substances of any kind shall be thrown into them. Waste
and excessive or unusual use of electricity or water is prohibited.
3. Tenant shall not (i) obstruct the windows, doors, partitions and
lights that reflect or admit light into the halls or other places in the
Building, or (ii) inscribe, paint, affix, or otherwise display signs,
advertisements or notices in, on, upon or behind any windows or on any door,
partition or other part of the interior or exterior of the Building without the
prior written consent of Landlord which shall not be unreasonably withheld. If
such consent be given by Landlord, any such sign, advertisement, or notice shall
be inscribed, painted or affixed by Landlord, or a company approved by Landlord,
but the cost of the same shall be charged to and be paid by Tenant, and Tenant
agrees to pay the same promptly, on demand.
4. No contract of any kind with any supplier of towels, water, ice,
toilet articles, waxing, rug shampooing, venetian blind washing, furniture
polishing, lamp servicing, cleaning of electrical fixtures, removal of waste
paper, rubbish or garbage, or other like service shall be entered into by
Tenant, nor shall any vending machine of any kind be installed in the Building,
without the prior written consent of Landlord, which consent of Landlord shall
not be unreasonably withheld.
5. When electric wiring of any kind is introduced, it must be
connected as directed by Landlord, and no stringing or cutting of wires will be
allowed, except with the prior written consent of Landlord which shall not be
unreasonably withheld, and shall be done only by contractors approved by
Landlord. The number and location of public telephones, telegraph instruments,
electric appliances, call boxes, etc., shall be subject to Landlord's approval.
No tenants shall lay linoleum or other similar floor covering so that the same
shall be in direct contact with the floor of the Premises; and if linoleum or
other similar floor covering is desired to be used, an interlining of builder's
deadening felt shall be first affixed to the floor by a paste or other material,
the use of cement or other similar adhesive material being expressly prohibited.
6. No additional lock or locks shall be placed by Tenant on any door
in the Building, without prior written consent of Landlord. Two keys will be
furnished Tenant by Landlord; two additional keys will be supplied to Tenant by
Landlord, upon request, without charge; any additional keys requested by Tenant
shall be paid for by Tenant. Tenant, its agents and employees, shall not have
any duplicate keys made and shall not change any locks. All keys to doors and
washrooms shall be returned to Landlord at the termination of the tenancy, and
in the event of any loss of any keys furnished, Tenant shall pay Landlord the
cost thereof. Landlord, at Landlord's expense, shall install a building access
and security system consistent and
Exhibit "B" - Page 1
<PAGE> 32
comparable with Tenant's existing "swipe" system in 131 National Business Park,
which system shall be accessible by both employees of 131 and 133 National
Business Park..
7. Tenant shall not employ any person or persons other than
Landlord's janitors for the purpose of cleaning the Premises, without prior
written consent of Landlord which shall not be unreasonably withheld. Landlord
shall not be responsible to Tenant for any loss of property from the Premises
however occurring, or for any damage done to the effects of Tenant by such
janitors or any of its employees, or by any other person or any other cause.
8. No bicycles, vehicles or animals of any kind shall be brought into
or kept in or about the Premises.
9. Tenant shall not conduct, or permit any other person to conduct,
any auction upon the Premises; manufacture or store goods, wares or merchandise
upon the Premises, without the prior written approval of Landlord, except the
storage of usual supplies and inventory to be used by Tenant in the conduct of
its business; permit the Premises to be used for gambling; make any unusual
noises in the Building; permit to be played any musical instrument in the
Premises; permit to be played any radio, television, recorded or wired music in
such a loud manner as to disturb or annoy other tenants; or permit any unusual
odors to be produced upon the Premises. Tenant shall not permit any portion of
the Premises to be used for the storage, manufacture, or sale of intoxicating
beverages, narcotics, tobacco in any form, or as a barber or manicure shop.
10. No awnings or other projections shall be attached to the outside
walls of the Building. No curtains, blinds, shades or screens shall be attached
to or hung in, or used in connection with, any window or door of the Premises,
without the prior written consent of Landlord which consent shall not be
unreasonably withheld. Such curtains, blinds and shades must be of a quality,
type, design, and color, and attached in a manner reasonably approved by
Landlord.
11. Canvassing, soliciting and peddling in the Building are
prohibited, and Tenant shall cooperate to prevent the same.
12. There shall not be used in the Premises or in the Building, either
by Tenant or by others in the delivery or receipt of merchandise, any hand
trucks except those equipped with rubber tires and side guards, and no hand
trucks will be allowed in passenger elevators.
13. Tenant, before closing and leaving its Premises, shall ensure that
all entrance doors to same are locked.
14. Landlord shall have the right to prohibit any advertising by
Tenant which in Landlord's opinion tends to impair the reputation of the
Building or its desirability as a building for offices, and upon written notice
from Landlord, Tenant shall refrain from or discontinue such advertising.
15. Landlord hereby reserves to itself any and all rights not granted
to Tenant hereunder, including, but not limited to, the following rights which
are reserved to Landlord for its purposes in operating the Building:
(a) the exclusive right to the use of the name of the Building for all
purposes, except that Tenant may use the name as its business address
and for no other purpose;
(b) the right to change the name or address of the Building, without
incurring any liability to Tenant for so doing;
(c) the right to install and maintain a sign or signs on the exterior
of the Building;
(d) the exclusive right to use or dispose of the use of the roof of
the Building (except for the right to install a satellite dish on the
roof of the Building, subject to the mutually
Exhibit "B" - Page 2
<PAGE> 33
acceptable agreements to be reached by Landlord and Tenant);
(e) the right to limit the space on the directory of the Building to
be allotted to Tenant;
(f) the right to grant to anyone the right to conduct any particular
business or undertaking in the Building.
16. Tenant shall not operate space heaters or other heating or
ventilating equipment without the express written consent of Landlord in each
instance first obtained. Tenant shall not install or operate any electrical
equipment, appliances or lighting fixtures in the Premises which are not listed
and labeled by Underwriter's Laboratories or other testing organization
acceptable to Landlord.
Exhibit "B" - Page 3
<PAGE> 34
EXHIBIT "C"
LEASE
BY AND BETWEEN
CONSTELLATION REAL ESTATE, INC., AS LANDLORD
AND
AMERICAN COMMUNICATIONS SERVICES, INC., AS TENANT
SCHEDULE OF TENANT IMPROVEMENTS
Schedule "C" - Page 1
<PAGE> 35
EXHIBIT "D"
LEASE
BY AND BETWEEN
CONSTELLATION REAL ESTATE, INC., AS LANDLORD
AND
AMERICAN COMMUNICATIONS SERVICES, INC., AS TENANT
ESTOPPEL CERTIFICATE
Premises: 133 National Business Parkway
National Business Park
Annapolis Junction, Maryland 20701
Lease dated: ______________________________, 1997, between
CONSTELLATION REAL ESTATE, INC., Agent for Owner, Landlord, and AMERICAN
COMMUNICATIONS SERVICES, INC., Tenant.
The undersigned, the Tenant under the above Lease, hereby certifies to
______________________________, to induce __________________________________ to
loan certain funds to Landlord/ ___________________________________ to invest
certain funds in the Landlord pursuant to Landlord's Limited Partnership
Agreement, that said Lease is presently in full force and effect and unmodified;
that the term thereof commenced on ___________________________________ and full
rental is now accruing thereunder; in addition to the minimum rent payable under
the Lease, Tenant is paying the additional rents as required thereby; that the
undersigned accepted possession of said premises on __________________________,
and that any improvements required by the terms of said Lease to be made by the
Landlord have been completed to the satisfaction of the undersigned; that no
rent under said Lease has been paid beyond ____________________________, and
that the undersigned, as of this date, has no charge, lien or claim of offset
under said Lease or otherwise, against rents or other charges due or to become
due thereunder, except as to the security deposits, if any, listed below and to
the knowledge of the undersigned, there is no default by the Landlord under the
Lease.
Tenant Deposit held by Landlord: $___________________.
WITNESS OR ATTEST: AMERICAN COMMUNICATIONS SERVICES, INC.
By
- ----------------------- ------------------------------------
Schedule "E" - Page 1
<PAGE> 36
EXHIBIT "E"
LEASE
BY AND BETWEEN
CONSTELLATION REAL ESTATE, INC., AS LANDLORD
AND
AMERICAN COMMUNICATIONS SERVICES, INC., AS TENANT
ACCEPTANCE OF PREMISES ACKNOWLEDGMENT
Re: Office Lease for space in 133 National Business Park, Annapolis
Junction, Maryland 20701, dated _______________, 1997, between CONSTELLATION
REAL ESTATE, INC., a Maryland corporation, Agent for Owner ("Landlord") and
AMERICAN COMMUNICATIONS SERVICES, INC., a Delaware corporation ("Tenant").
Landlord and Tenant hereby agree that:
1. Except for those items shown on the attached "punchlist," if any,
Landlord has fully completed any construction work required under the terms of
the Lease.
2. The Premises are tenantable, Landlord has no further obligation for the
construction except as specified above), and Tenant acknowledges that both the
Building and the Premises are satisfactory in all respects.
3. The Commencement Date of the Lease is ________________, 1997.
4. The Expiration Date of the Initial Term of the Lease is to be
____________________, 2002.
All other terms and conditions of the Lease are hereby ratified and acknowledged
to be unmodified and in full force and effect.
This Certificate is entered into by Landlord and Tenant as of the date written
below their respective signatures.
WITNESS: LANDLORD:
CONSTELLATION REAL ESTATE, INC.,
Agent for Owner
By: (SEAL)
- ----------------------- --------------------------
Dwight S. Taylor
Vice President
WITNESS: TENANT:
AMERICAN COMMUNICATIONS SERVICES, INC.
By: (SEAL)
- ----------------------- --------------------------
George M. Tronsrue, III
President and Chief Operating Officer
Schedule "E" - Page 1
<PAGE> 37
EXHIBIT "F"
LEASE
BY AND BETWEEN
CONSTELLATION REAL ESTATE, INC., AS LANDLORD
AND
AMERICAN COMMUNICATIONS SERVICES, INC., AS TENANT
JANITORIAL SPECIFICATIONS
Schedule "F" - Page 1
<PAGE> 38
EXHIBIT "G"
LEASE
BY AND BETWEEN
CONSTELLATION REAL ESTATE, INC., AS LANDLORD
AND
AMERICAN COMMUNICATIONS SERVICES, INC., AS TENANT
BASE BUILDING EXPENSES
(as of the date of this Lease)
Schedule "G" - Page 1
<PAGE> 1
EXHIBIT 11
AMERICAN COMMUNICATIONS SERVICES, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (LOSS)
($ in thousands, except per share data)
<TABLE>
<CAPTION>
For the six
For the year ended months ended For the year ended For the year ended
NET LOSS December 31, 1997 December 31, 1996 June 30, 1996 June 30, 1995
-------- ------------------ ----------------- ------------------ ------------------
<C> <C> <C> <C> <C>
1 Net Loss $ (115,016) $ (34,917) $ (26,782) $ (14,698)
2 Less: Preferred Stock Accretion 11,630 2,004 3,871 1,071
---------------- --------------- ------------- -----------
3 Net Loss to Common Stockholders (126,646) (36,921) (30,653) (15,769)
4 Add: Convertible Preferred
Dividends Saved 0 2,004 3,871 1,071
---------------- --------------- ------------- -----------
5 Net Loss to Common Stockholders,
Dilutive Basis $ (126,646) $ (34,917) $ (26,782) $ (14,698)
================ =============== ============= ===========
AVERAGE SHARES OUTSTANDING
--------------------------
6 Weighted Average Number of
Common Shares Outstanding 27,233,642 6,733,759 6,185,459 4,771,689
7 Net additional shares assuming stock
options and warrants exercised and
proceeds used to purchase treasury stock 7,147,462 7,391,964 6,317,067 4,255,551
Additional shares assuming conversion of
preferred shares 0 17,377,264 17,377,264 5,264,492
---------------- --------------- ------------- -----------
8 Weighted average number of common and
common equivalent shares outstanding 34,381,104 31,502,987 29,879,790 14,291,732
================ =============== ============= ===========
PER SHARE AMOUNTS
-----------------
9 Basic Earnings per Share (3/6) $ (4.65) $ (5.48) $ (4.96) $ (3.30)
================ =============== ============= ===========
10 Diluted Earnings per Share -
Antidilutive (5/8) $ (3.68) $ (1.11) $ (0.90) $ (1.03)
================ =============== ============= ===========
</TABLE>
<PAGE> 1
EXHIBIT 23.1
ACCOUNTANTS' CONSENT
The Board of Directors
American Communications Service's, Inc.:
We consent to incorporation by reference in the registration statements
(No. 333-35925, No. 333-40037, No. 333-41653 and No. 333-47155) on Form S-3 and
(No. 33-99964, No. 333-19089, No. 33-99964, No. 333-19089 and No. 333-43069)on
Form S-8 of American Communications Services, Inc. of our report dated
February 12, 1998, relating to the consolidated balance sheets of American
Communications Service, Inc. and subsidiaries as of June 30, 1996 and December
31, 1996 and 1997, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the years ended June 30, 1995
and 1996, the six months ended December 31, 1996, and the year ended December
31, 1997, which report appears in the December 31, 1997 annual report on Form
10-KSB of American Communications Services, Inc.
/S/ KPMG Peat Marwick LLP
Washington, DC
March 20, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AMERICAN
COMMUNICATIONS SERVICES, INC. FORM 10-K FOR THE PERIOD ENDED 12/31/97 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 287,363
<SECURITIES> 0
<RECEIVABLES> 17,435
<ALLOWANCES> (1,921)
<INVENTORY> 6,127
<CURRENT-ASSETS> 309,004
<PP&E> 282,153
<DEPRECIATION> (31,675)
<TOTAL-ASSETS> 638,895
<CURRENT-LIABILITIES> 36,770
<BONDS> 460,848
0
205,160
<COMMON> 372
<OTHER-SE> (65,728)
<TOTAL-LIABILITY-AND-EQUITY> 638,895
<SALES> 0
<TOTAL-REVENUES> 59,000
<CGS> 52,881
<TOTAL-COSTS> 59,849
<OTHER-EXPENSES> 19,720
<LOSS-PROVISION> 1,438
<INTEREST-EXPENSE> 41,566
<INCOME-PRETAX> (115,016)
<INCOME-TAX> 0
<INCOME-CONTINUING> (115,016)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (115,016)
<EPS-PRIMARY> (4.65)
<EPS-DILUTED> (4.65)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
AMERICAN COMMUNICATIONS SERVICES, INC.
SUPPLEMENTAL FINANCIAL INFORMATION (UNAUDITED)
YEAR ENDED - DECEMBER 31, 1997
($'S IN THOUSANDS)
<TABLE>
<CAPTION>
Networks Placed Networks Placed Networks Placed
in Service in Service in Service
Prior to 12/31/95 During 1996 During 1997 Total
----------------- ------------------ ------------------ -------------
<S> <C> <C> <C> <C>
Property, Plant & Equipment $ 104,496 $ 80,519 $ 77,134 $ 262,149
Revenues $ 30,915 $ 11,991 $ 5,908 $ 48,814
EBITDA $ (24,075) $ (9,430) $ (8,978) $ (42,483)
EBIT $ (31,284) $ (14,641) $ (12,790) $ (58,715)
Network Statistics (cumulative)
- -------------------------------
Access Lines Sold 18,070 7,774 17,737 43,581
Fiber Miles 29,898 39,618 23,012 92,528
Route Miles 497 379 185 1,061
Buildings Connected 821 597 186 1,604
Voice Grade Equivalents 524,703 344,387 183,608 1,052,698
</TABLE>
<PAGE> 1
EXHIBIT 99.2
RISK FACTORS
Prospective investors should consider carefully the following information
in conjunction with the other information contained in this Annual Report before
investing in the Company's securities. Except for historical information
contained in the Annual Report, the matters discussed in this Annual Report are
forward-looking statements that are subject to certain risks and uncertainties
(including those set forth below) that could cause actual results to differ
materially from those set forth in such forward-looking statements.
NEGATIVE CASH FLOW; ANTICIPATED FUTURE LOSSES; SIGNIFICANT FUTURE CAPITAL
REQUIREMENTS; NEED FOR ADDITIONAL CASH.
Since its inception, the Company has incurred significant net operating
losses and negative cash flow. As of December 31, 1997, the Company had an
accumulated deficit of $197.5 million. During the year ended December 31, 1997,
the Company incurred a net operating loss of $115.0 million and generated
negative cash flow from operations of $76.4 million. The Company will continue
to incur significant expenditures in the future in connection with the
acquisition, development and expansion of its networks, services and customer
base. There can be no assurance that the Company will achieve or sustain
profitability or generate positive cash flow in the future.
The Company's further development and enhancement of new services as well
as the continued development, construction, expansion, operation and potential
acquisition of networks, will require substantial capital expenditures. The
funding of these expenditures is dependent upon the Company's ability to raise
substantial financing. As of December 31, 1997, the Company had raised
approximately $625 million from debt and equity financings. The Company
estimates that for 1998, capital required for expansion of its infrastructure
and services and to fund negative cash flow will be approximately $200 million.
At December 31, 1997, the Company had approximately $261.0 million of cash and
cash equivalents available for such purposes. The Company continues to consider
potential acquisitions or other arrangements that may fit the Company's
strategic plan. Any such acquisitions or arrangements that the Company might
consider are likely to require additional equity or debt financing, which the
Company will seek to obtain as required and may also require that the Company
obtain the consent of its debt holders. See "-- Strategic Investments; Business
Combinations".
Management anticipates that the Company's current cash resources are
sufficient to fund the Company's continuing negative cash flow and required
capital expenditures in the near future. To meet its additional remaining
capital requirements and to successfully implement its strategy, the Company
will be required to sell additional equity securities, increase its existing
credit facility, acquire additional credit facilities or sell additional debt
securities, certain of which would require the consent of the Company's debt
holders. Accordingly, there can be no assurance that the Company will be able to
obtain the additional financing necessary to satisfy its cash requirements or to
implement its strategy successfully, in which event the Company will be unable
to fund its ongoing operations, which would have a material adverse effect on
its business, results of operations and financial condition.
SUBSTANTIAL LEVERAGE; RECENT DEFAULT; FUTURE CASH OBLIGATIONS
Since inception, other than for the year ended June 30, 1996, 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. Under the terms of its debt securities, 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 Company's 13% Senior Discount Notes due 2005 (the "2005 Notes") and 12 3/4%
Senior Discount Notes due 2006 (the "2006 Notes") will be payable semi-annually
at the rate of 13% per annum (approximately $24.7 million per year) and
8
<PAGE> 2
12 3/4% per annum (approximately $15.3 million per year), respectively. In
addition, the Company has substantial cash interest requirements with respect to
its 13 3/4% Senior Notes due 2007 (the "2007 Notes", and, together with the 2006
Notes and the 2005 Notes, the "Existing Notes"). As of December 31, 1997, the
Company had approximately $35.0 million in debt outstanding under the New AT&T
Credit Facility. As of December 31, 1997, the Company had approximately $461.3
million of consolidated outstanding long-term indebtedness. As of December 31,
1997, the total consolidated liabilities of the Company were approximately
$498.1 million. It is expected that the Company and its subsidiaries will incur
additional indebtedness. Many factors, some of which are beyond the Company's
control, will affect its performance and, therefore, its ability to meet its
ongoing obligations to repay the Existing Notes and its other debt. There can be
no assurance that the Company will be able to generate sufficient cash flow or
otherwise obtain funds in the future to cover interest and principal payments
associated with the Existing Notes and its other debt. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources".
On June 11, 1997, the Company notified the trustee under each of the
indentures governing the 2005 Notes (as amended as of February 26, 1998, the
"2005 Indenture") and the 2006 Notes (as amended as of February 26, 1998, the
"2006 Indenture", together with the 2005 Indenture and the indenture governing
the 2007 Notes (as amended as of February 26, 1998, the "2007 Indenture"), 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 the 2005 Indenture and 2006
Indenture. The incurrence by the Company of such Indebtedness was not permitted
under the 2005 Indenture and 2006 Indenture and, therefore, constituted an Event
of Default (as defined in the 2005 Indenture and 2006 Indenture) under the 2005
Indenture and 2006 Indenture. The Company used a portion of the proceeds of the
Unit Offering (as defined herein) 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 Junior Preferred Stock Offering and
Unit Offering (as defined herein), the Company issued the 14 3/4% Preferred
Stock and the 12 3/4% Preferred Stock (each, as defined herein), respectively,
dividends on which may be paid, at the Company's option, either in cash or by
the issuance of additional shares of Preferred Stock; 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 is required to pay dividends on such
Preferred Stock in cash.
The level of the Company's indebtedness and its other obligations could
have important consequences to holders of the Common Stock, including the
following: (i) the debt service requirements of the Company's existing
indebtedness and any additional indebtedness could make it difficult for the
Company to make payments on the Existing Notes and the Preferred Stock; (ii) the
ability of the Company to obtain any necessary financing in the future for
working capital, capital expenditures, debt service requirements or other
purposes may be limited; (iii) any cash flow from the operations of certain of
the Company's subsidiaries may need to be dedicated to debt service payments and
might not be available for other purposes; (iv) the Company's level of
indebtedness could limit its flexibility in planning for, or reacting to,
changes in its business; (v) the Company is more highly leveraged than most of
its competitors, which may place it at a competitive disadvantage; and (vi) the
Company's high degree of indebtedness will make it more vulnerable to a downturn
in its business.
9
<PAGE> 3
CERTAIN FINANCIAL AND OPERATING RESTRICTIONS
The Existing Indentures, the Company's new Credit Facility with AT&T
Commercial Finance Corporation established in December 1992 (the "New AT&T
Credit Facility") and the certificates of designation relating to the 14 3/4%
Preferred Stock and 12 3/4% Preferred Stock impose operating and financial
restrictions on the Company and its subsidiaries. These restrictions affect, and
in certain cases significantly limit or prohibit, among other things, the
ability of the Company and its subsidiaries to incur additional indebtedness or
create liens on their assets, pay dividends, sell assets, engage in mergers or
acquisitions or make investments. Failure to comply with any of these
restrictions could limit the availability of borrowings or result in a default
thereunder. 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.
MANAGEMENT OF RAPID GROWTH
Subject to the sufficiency of its cash resources, the Company intends to
continue to expand its business rapidly. The Company's future performance will
depend, in large part, upon its ability to implement and manage its growth
effectively. The Company's rapid growth has placed, and in the future will
continue to place, a significant strain on its administrative, operational and
financial resources. The Company anticipates that, if successful in expanding
its business, the Company will be required to integrate its newest senior
managers successfully and to recruit and hire a substantial number of new
managerial, finance, accounting and support personnel. Failure to retain and
attract additional management personnel who can manage the Company's growth
effectively would have a material adverse effect on the Company and its growth.
To manage its growth successfully, the Company will also have to continue to
improve and upgrade operational, financial, accounting and information systems,
controls and infrastructure as well as expand, train and manage its employee
base. In the event the Company is unable to upgrade its financial controls and
accounting and reporting systems adequately to support its anticipated growth,
the Company's business, results of operations and financial condition could be
materially adversely affected.
DEPENDENCE ON BILLING, CUSTOMER SERVICES AND INFORMATION SYSTEMS
Integrated management 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. As the Company transitions
to the provisioning of integrated communications services, the need for
sophisticated billing and information systems will increase significantly. The
Company's plans for the development and implementation of its billing systems
rely, for the most part, on the delivery of products and services by third party
vendors. Similarly, the Company is developing customer call centers to respond
to service orders. Information systems are vital to the success of the call
centers, and the information systems for these call centers are largely being
developed by third party vendors. Failure of these vendors to deliver these
systems solutions in a timely and effective manner and at acceptable costs,
failure of the Company to adequately identify and integrate 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.
While the Company believes that the majority of its software applications
are year 2000 compliant, there can be no assurance until the year 2000 occurs
that all systems will then function adequately. Further, if the hardware or
software comprising the Company's network elements acquired from third party
vendors or the software applications of the ILECs, long distance carriers or
others on whose services the Company depends or with whom the Company's systems
interface are not year 2000 compliant, it could affect the Company's systems,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
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DEPENDENCE ON A SMALL NUMBER OF MAJOR CUSTOMERS AND ISPS
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 year ended December 31, 1997, approximately 20% of the
Company's revenues were attributable to access services provided to five of the
largest IXCs, including services provided for the benefit of their customers. In
addition, the Company derived approximately 20% of its 1997 revenues from
services provided to ISPs, which operate in a highly competitive and uncertain
environment. The Company is, and expects to continue to be, dependent upon such
IXC and ISP customers, and the loss of any one of the IXCs or certain of the ISP
customers 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. See
"-- Competition".
DEPENDENCE UPON SUPPLIERS
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 and other carriers to provide
telecommunications services and facilities to the Company and its customers. The
Company has from time to time experienced delays or other problems in receiving
telecommunications services and facilities which it requests, 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 components, 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.
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 the 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
In order to acquire and develop its networks the Company must obtain local
franchises and other permits, as well as rights to utilize underground conduit
and aerial pole space and other rights-of-way and fiber capacity from entities
such as ILECs and other utilities, railroads, long distance companies, state
highway authorities, local governments and transit authorities. There can be no
assurance that the Company will be able to maintain its existing franchises,
permits and rights or to obtain and maintain the other franchises, permits and
rights needed to implement its business plan on acceptable terms. Although the
Company does not believe that any of the existing arrangements will be canceled
or will not be renewed as needed in the near future, cancellation or non-renewal
of certain of such arrangements could materially adversely affect the Company's
business in the affected metropolitan area. In addition, the failure to enter
into and maintain any such required arrangements for a particular network,
including a network which is already under development,
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may affect the Company's ability to acquire or develop that network.
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 currently must file FCC tariffs stating its
rates, terms and conditions of service for interstate access services and must
file tariffs covering its interstate and international long distance traffic.
State regulatory agencies regulate intrastate communications, while local
authorities control the Company's access to and use of municipal rights-of-way.
Under the state and local legal requirements which prohibit or have the effect
of prohibiting any entity from providing any intrastate telecommunications
service are preempted. 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 FTA 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. All local
interconnection agreements must be filed with state Public Service Commissions
("PSC") for approval. In the event that negotiations with the ILECs do not
succeed, the Company has a right to seek PSC arbitration of any unresolved
issues.
Although passage of the FTA should result in increased opportunities for
companies that are competing with the ILECs, no assurance can be given that
changes in current or future regulations adopted by the FCC or state regulators
or other legislative or judicial initiatives relating to the telecommunications
industry would not have a material adverse effect on the Company. In addition,
although the FTA makes RBOC entry into the in-region long distance market
conditional upon their offering of local interconnection arrangements to other
telecommunications service providers, there can be no assurance that these ILECs
will negotiate quickly with competitors such as the Company for the required
interconnection of the competitor's networks with those of the ILEC.
Internet-related information services are not currently subject to direct
regulation by the FCC or any other U.S. agency other than regulation applicable
to businesses generally. The FCC is considering whether additional regulations
should be applied to Internet services and whether Internet service providers
should pay interexchange access charges and universal service fees. Moreover, as
discussed hereafter, the FTA and similar state laws create civil and criminal
penalties for the knowing transmission of "indecent" material over the Internet.
Additionally, the FTA may permit telecommunications companies, RBOCs or others
to increase the scope or reduce the cost of their Internet access services.
These and other changes in the regulatory environment relating to the
telecommunications or Internet-related services industry could have an adverse
effect on the Company's Internet-related services business.
On December 31, 1997, a United States District Court judge in Texas held
unconstitutional certain sections of the FTA, including Section 271, which
prevents the RBOC subsidiaries from providing in-region long distance services
until certain conditions are met. This decision would permit the three RBOCs
that are parties in the case immediately to begin offering widespread in-region
long distance services. The judge stayed the effectiveness of his decision
pending appeal. Unless overturned on appeal, this decision could have a material
adverse effect on the Company. The FCC and certain IXCs have filed appeals of
the decision with the United States Court of Appeals for the Fifth Circuit.
Although there can be no assurance as to the outcome
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<PAGE> 6
of this litigation, the Company believes that significant parts of the District
Court decision may be reversed or vacated on appeal. In addition, the Company
cannot predict the effect that the FTA or any future legislation, regulation or
regulatory changes may have on its business.
The Company believes it is entitled to receive reciprocal compensation from
ILECs for the transport and termination of Internet traffic as local traffic
pursuant to various interconnection agreements. These ILECs have not paid and/or
have disputed these charges, arguing that ISP traffic is not local traffic as
defined by the various agreements.
COMPETITION
The Company operates in a highly competitive environment and currently does
not have a significant market share in any of its markets. Most of its actual
and potential competitors have substantially greater financial, technical,
marketing and other resources (including brand name recognition) than the
Company. Also, the continuing trend toward business alliances in the
telecommunications industry and the absence of substantial barriers to entry in
the data and Internet services markets, could give rise to significant new
competition.
In each of its markets, the Company's primary competitor is the ILEC
serving that geographic area. ILECs are established providers of dedicated and
local telephone services to all or virtually all telephone subscribers within
their respective service areas. ILECs also have long-standing relationships with
regulatory authorities at the federal and state levels. While recent FCC
administrative decisions and initiatives provide increased business
opportunities to voice, data and Internet-service providers such as the Company,
they also provide the ILECs with increased pricing flexibility for their private
line and special access and switched access services. In addition, with respect
to competitive access services (as opposed to switched local exchange services),
the FCC recently proposed a rule that would provide for increased ILEC pricing
flexibility and deregulation for such access services either automatically or
after certain competitive levels are reached. If the ILECs are allowed
additional flexibility by regulators to offer discounts to large customers
through contract tariffs, decide to engage in aggressive volume and term
discount pricing practices for their customers, and/or seek to charge
competitors excessive fees for interconnection to their networks, the revenue of
competitors to the ILECs, including the Company, could be materially adversely
affected. If future regulatory decisions afford the ILECs increased access
services pricing flexibility or other regulatory relief, such decisions could
also have a material adverse effect on competitors to the ILECs, including the
Company.
In the local exchange market, the Company also faces competition or
prospective competition from several other carriers, many of which have
significantly greater financial resources than the Company. For example, AT&T
Corp.'s, MCI Communications Corporation and Sprint Corporation, which
historically have been purely long distance carriers, have each begun to offer
local telecommunications services in major U.S. markets using their own
facilities or by resale of the ILECs' or other providers' services. In addition
to these long distance service providers, entities that currently offer or are
potentially capable of offering local switched services include companies that
have previously been known purely as competitive access providers ("CAPs"),
cable television companies, electric utilities, microwave carriers, wireless
telephone system operators and large customers who build private networks. These
entities, upon entering into appropriate interconnection agreements or resale
agreements with ILECs, including RBOCs, can offer single source local and long
distance services, like those offered by the Company. In addition, a continuing
trend towards business combinations and alliances in the telecommunications
industry may create significant new competitors to the Company. The proposed
merger of WorldCom, Inc. and MCI Communications Corporation or AT&T Corp.'s
proposed acquisition of Teleport Communications Group, Inc. are examples of some
of the alliances that are being formed. Many of these combined entities may have
resources far greater than those of the Company. These combined entities may
provide a bundled package of telecommunications products, including local and
long distance telephony, that is in direct competition with the products offered
by the Company.
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The Company will also face competition from fixed wireless services,
including MMDS, LMDS, 24 GHz and 38 GHz wireless communications systems, WCS,
FCC Part 15 unlicensed wireless radio devices, and other services that use
existing point-to-point wireless channels on other frequencies. See
"Business -- Regulation". In addition, the FCC has allocated a number of
spectrum blocks for use by wireless devices that do not require site or network
licensing. A number of vendors have developed such devices that may provide
competition to the Company, in particular for certain low data-rate transmission
services.
With respect to mobile wireless telephone system operators, the FCC has
authorized cellular, PCS, and other CMRS providers to offer wireless services to
fixed locations, rather than just to mobile customers, in whatever capacity such
CMRS providers choose. Previously, cellular providers could provide service to
fixed locations only on an ancillary or incidental basis. This authority to
provide fixed as well as mobile services will enable CMRS providers to offer
wireless local loop service and other services to fixed locations (e.g., office
and apartment buildings) in direct competition with the Company and other
providers of traditional wireless telephone service.
Section 271 of the FTA prohibits an RBOC from providing long-distance
service that originates (or in certain cases terminates) in one of its in-region
states until the RBOC has satisfied certain statutory conditions in that state
and has received the approval of the FCC. The FCC has denied the following
applications for such approval: SBC Communications Inc.'s Oklahoma application
in June 1997; Ameritech Inc.'s Michigan application in August 1997; and
BellSouth Corporation applications for South Carolina and Louisiana in December
1997 and February 1998, respectively. The Company anticipates that a number of
RBOCs will file additional applications for in-region long distance authority in
1998. The FCC will have 90 days from the date an application for in-region long
distance authority is filed to decide whether to grant or deny the application.
Once the RBOCs are allowed to offer widespread in-region long distance
services, both they and the largest IXCs will be in a position to offer
single-source local and long distance. On December 31, 1997, a United States
District Court judge in Texas held unconstitutional certain sections of the FTA,
including Section 271. This decision would permit the three RBOCs immediately to
begin offering widespread in-region long distance services. The decision,
however, was stayed on February 11, 1998 by the Court upon motion from the
defendants. Unless overturned on appeal, this decision could have a material
adverse effect on the Company. The FCC and certain IXCs have filed appeals of
the decision with the United States Court of Appeals for the Fifth Circuit.
Although there can be no assurance as to the outcome of this litigation, the
Company believes that significant parts of the District Court decision may be
reversed or vacated on appeal.
In addition new FCC rules went into effect in February 1998 which will make
it substantially easier for many non-U.S. telecommunications companies to enter
the U.S. market, thus potentially further increasing the number of competitors.
The market for data communications and Internet access services, including
IP switching, is extremely competitive. There are no substantial barriers to
entry, and the Company expects that competition will intensify in the future.
The Company believes that its ability to compete successfully depends on a
number of factors, including: market presence; the ability to execute a rapid
expansion strategy; the capacity, reliability and security of its network
infrastructure; ease of access to and navigation of the Internet; the pricing
policies of its competitors and suppliers; the timing of the introduction of new
services by the Company and its competitors; the Company's ability to support
industry standards; and industry and general economic trends. The Company's
success in this market will depend heavily upon its ability to provide high
quality Internet connections and value-added Internet services at competitive
prices.
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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'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 expects to actively pursue over the next several months one or
more acquisitions of companies engaged in businesses similar or related to the
business of the Company. As consideration for such acquisitions, the Company may
be required to incur additional indebtedness or issue capital. There can be no
assurance that the Company will be able to obtain such financing. In addition,
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 the Company.
Such acquisitions, combinations or alliances, if consummated, could divert the
resources and management time of the Company and would require integration with
the Company's existing networks and services. There can be no assurance that any
acquisitions, combinations or alliances will occur or, if consummated, would be
on terms favorable to the Company or would be successfully integrated into the
Company's operations. An investment, business combination or strategic alliance
could constitute a Change of Control (as defined in the Existing Indentures)
requiring the Company to offer to purchase all Existing Notes. In the event that
such a Change of Control occurs at a time when the Company does not have
sufficient available funds to purchase all Existing Notes tendered or at a time
when the Company is prohibited from purchasing the Existing Notes, an Event of
Default (as defined in the Existing Indentures) could occur under the relevant
indenture.
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 FTA, 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. Nonetheless, many states have
adopted or are considering adopting similar requirements, and the
constitutionality of such state requirements remains unsettled at this time.
Congress is also considering several bills addressing these issues. In addition,
several private lawsuits have been filed seeking to hold Internet access
providers accountable for information which they transmit. 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
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or even discontinue offering services altogether. Any such event could have a
material adverse effect on the Company's business, results of operations and
financial condition.
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, sales, 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.
CONTROL BY CERTAIN STOCKHOLDERS AND MANAGEMENT
As of December 31, 1997, the Company's directors and executive officers
beneficially owned approximately 10.0% of the outstanding Common Stock. In
addition, as of such date approximately 39.5% of the outstanding Common Stock
was beneficially owned by The Huff Alternative Income Fund, L.P. ("Huff"), the
designees of which occupy three positions on the Board of Directors,
approximately 21.3% was beneficially owned by ING Equity Partners, L.P. I
("ING"), the designees of which occupy two positions on the Board of Directors,
and approximately 8.6% was beneficially owned by affiliates of First Analysis
Corporation ("FAC"), a designee of which occupies one position on the Board of
Directors, respectively. In addition, at the date hereof Huff is the beneficial
owner of approximately 13.3% of the 14 3/4% Preferred Stock, which shares have
voting rights in certain circumstances, and ING Baring (U.S.) Securities, Inc.,
which is affiliated with the limited partner of ING, is the beneficial owner of
7.4% of such Preferred Stock. Accordingly, if they choose to act together, these
persons will be able to control the election of the Board of Directors and other
matters voted upon by the stockholders. A sale of Common Stock by one or more of
the principal stockholders to third parties could trigger the right of the
holders of the Existing Notes to require the Company to repurchase the Existing
Notes (a "Change of Control Offer"). In the event that a Change of Control Offer
occurs at a time when the Company does not have sufficient available funds to
pay the Change of Control Purchase Price (as defined in the Existing Indentures)
for all Existing Notes tendered, or at a time when the Company is prohibited
from purchasing the Existing Notes, an Event of Default (as defined in the
relevant indentures) could occur.
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