<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 27, 1998
REGISTRATION NO. 333-47155
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AMERICAN COMMUNICATIONS SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 52-1947746
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
131 NATIONAL BUSINESS PARKWAY
ANNAPOLIS JUNCTION, MARYLAND 20701
(301) 617-4200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
RILEY M. MURPHY, ESQ.
AMERICAN COMMUNICATIONS SERVICES, INC.
131 NATIONAL BUSINESS PARKWAY
ANNAPOLIS JUNCTION, MARYLAND 20701
(301) 617-4200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
WITH COPIES TO:
<TABLE>
<S> <C>
MARIO A. PONCE, ESQ. MATTHEW J. MALLOW, ESQ.
SIMPSON THACHER & BARTLETT SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
425 LEXINGTON AVENUE 919 THIRD AVENUE
NEW YORK, NEW YORK 10017-3954 NEW YORK, NEW YORK 10022
(212) 455-2000 (212) 735-3000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective. [ ]
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment, check the following box. [ ]
------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration number for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
TITLE OF SHARES PROPOSED MAXIMUM AMOUNT OF
TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE(2)
<S> <C> <C>
<CAPTION>
- ------------------------------------------------------
<S> <C> <C>
Common Stock, par value $.01 per share................ $174,656,250.00 $51,524.00
=========================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) under the Securities Act of 1933 based on $18.75, the average
of the high and low market prices on March 26, 1998.
(2) $37,340.00 previously paid in connection with the initial filing of the
Registration Statement on March 2, 1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MARCH 27, 1998
LOGO
8,100,000 SHARES
AMERICAN COMMUNICATIONS SERVICES, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
------------------------
Of the 8,100,000 shares of Common Stock offered hereby, 7,501,640 shares
are being sold by American Communications Services, Inc. and 598,360 shares are
being sold by the Selling Stockholders. See "Principal and Selling
Stockholders". The Company will not receive any of the proceeds from the sale of
shares by the Selling Stockholders.
The last reported sale price of the Common Stock, which is quoted under the
symbol "ACNS" on The Nasdaq National Market, was $18.94 per share. See "Price
Range of Common Stock".
SEE "RISK FACTORS" ON PAGE 8 FOR A DISCUSSION OF CERTAIN CONSIDERATIONS
RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDERS
-------------- ------------ ----------- -------------------
<S> <C> <C> <C> <C>
Per Share............ $ $ $ $
Total(3)............. $ $ $ $
</TABLE>
- ---------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
(2) Before deducting estimated expenses of $1,000,000 payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 1,215,000 shares of Common Stock at the public offering
price per share, less the underwriting discount, solely to cover
over-allotments. If such option is exercised in full, the total initial
public offering price, underwriting discount and proceeds to the Company
will be $ , $ and $ , respectively. See
"Underwriting".
------------------------
The shares of Common Stock offered hereby are offered severally by the
Underwriters, as specified herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part. It is expected
that the certificates for the shares will be ready for delivery in New York, New
York, on or about , 1998, against payment therefor in immediately
available funds.
GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.
MERRILL LYNCH & CO.
------------------------
The date of this Prospectus is , 1998.
<PAGE> 3
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH SECURITIES
AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE OFFERING. IN
ADDITION, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS, IF ANY) ALSO MAY
ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE SECURITIES ON THE NASDAQ
NATIONAL MARKET, IN ACCORDANCE WITH RULE 103 UNDER THE SECURITIES EXCHANGE ACT
OF 1934. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
ADDITIONAL INFORMATION
American Communications Services, Inc. ("ACSI" or the "Company") is subject
to the informational reporting requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy and information statements and other information with the
Securities and Exchange Commission (the "SEC"). Such reports, proxy and
information statements and other information may be inspected and copied at the
public reference facilities of the SEC at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, or at its regional offices located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material can be obtained from the SEC by mail at prescribed rates, or in certain
cases by accessing the SEC's World Wide Web site at http://www.sec.gov. Requests
should be directed to the SEC's Public Reference Section, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Company's common
stock, par value $.01 per share (the "Common Stock"), is quoted on The Nasdaq
National Market ("Nasdaq") and material filed by the Company can be inspected at
the offices of the National Association of Securities Dealers, Inc., 1735 K
Street N.W., Washington, D.C. 20006.
The Company has filed with the SEC a registration statement on Form S-3
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act") with respect to the shares of Common Stock offered hereby.
This Prospectus, which forms a part of the Registration Statement, does not
contain all of the information set forth or incorporated by reference in the
Registration Statement and the exhibits and schedules thereto, certain parts of
which are omitted in accordance with the rules and regulations of the SEC. For
further information with respect to the Company and the shares of Common Stock
offered hereby, reference is made to the Registration Statement. This Prospectus
contains summaries of the material terms and provisions of certain documents
and, in each instance, reference is made to the copy of such document filed as
an exhibit to the Registration Statement. Copies of the Registration Statement
and the exhibits thereto may be inspected, without charge, at the offices of the
SEC at the address set forth above.
FORWARD LOOKING STATEMENTS
Certain statements contained in "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," including statements regarding the development of
the Company's businesses, the markets for the Company's services and products,
the Company's anticipated capital expenditures, regulatory reform and other
statements contained herein regarding matters that are not historical facts, are
forward-looking statements (as such term is defined in the Private Securities
Litigation Reform Act of 1995). Because such statements include risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, those discussed
under "Risk Factors." The Company expressly disclaims any obligation or
undertaking to release publicly any
i
<PAGE> 4
updates or revisions to any forward-looking statements contained herein to
reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any statement is based.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents previously filed with the SEC (File No. 0-25314)
are hereby incorporated by reference into this Prospectus:
(i) the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1997;
(ii) the Company's Current Reports on Form 8-K dated October 24, 1997,
November 7, 1997, December 30, 1997, January 8, 1998, January 20, 1998,
January 26, 1998, January 28, 1998, February 3, 1998 and March 17, 1998;
and
(iii) the description of the Common Stock contained in its
registration statement on Form 8-A filed with the SEC on December 23, 1994,
including any amendments or reports filed for the purpose of updating such
description.
All documents subsequently filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the termination of the offering
to which this Prospectus relates (the "Offering") shall be deemed to be
incorporated by reference into this Prospectus and to be part hereof from the
date of filing thereof.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein or in any other subsequently filed
document which also is incorporated herein modifies or replaces such statement.
Any statement so modified or superseded shall not be deemed, in its unmodified
form, to constitute a part of this Prospectus. The Company will provide without
charge to each person to whom a copy of the Prospectus has been delivered, and
who makes a written or oral request, a copy of any and all of the foregoing
documents incorporated by reference in the Prospectus (other than exhibits
unless such exhibits are specifically incorporated by reference into such
documents). Requests should be submitted in writing or by telephone to Investor
Relations, American Communications Services, Inc., at the Company's executive
offices located at 131 National Business Parkway, Suite 100, Annapolis Junction,
MD 20701, telephone (301) 617-4200.
ii
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and Notes thereto appearing
elsewhere or incorporated by reference in this Prospectus. Except as set forth
in the Consolidated Financial Statements and Notes thereto or as otherwise
specified herein, all information contained in this Prospectus assumes no
exercise of the Underwriters' overallotment option. Subsequent to June 30, 1996,
the Company changed its fiscal year-end from June 30 to December 31.
Accordingly, all data for the fiscal period ended December 31, 1996 are for the
six-month period then ended. Please refer to the "Glossary" for the definitions
of certain capitalized terms used herein and elsewhere in this Prospectus. As
used in this Prospectus, unless the context otherwise requires, "ACSI" or the
"Company" refers to American Communications Services, Inc. and its subsidiaries.
THE COMPANY
American Communications Services, Inc., 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 (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 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
1
<PAGE> 6
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.
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, an increase of over 250% 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, Inc. (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. E.spire includes the following services:
*e.spire INTERNET ACCESS SERVICE: provides customers access to the
ACSI Internet data backbone which provides high-quality dedicated and
dial-up Internet connection and IP transport.
*e.spire FRAME RELAY SERVICE: provides capabilities to customers with
varying bandwidth needs and interconnects geographically dispersed networks
and equipment.
*e.spire ATM SERVICE: provides a solution to local, regional and
national businesses with high bandwidth, delay-sensitive data
communications applications.
*e.spire BUNDLED INTERNET SOLUTIONS: provides turnkey solutions,
including dedicated Internet access, web site hosting, news feeds and other
services.
2
<PAGE> 7
*e.spire CUSTOM NETWORK SERVICES: includes design, installation,
hardware (such as switches, routers and modems) and configuration of a
customer's network.
*e.spire MANAGED NETWORK SERVICE: provides complete management and
monitoring of all customer equipment and network elements needed to operate
dedicated Internet or frame relay services.
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.
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.
3
<PAGE> 8
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.
RECENT DEVELOPMENTS
NEW AT&T CREDIT FACILITY. On December 30, 1997, the Company entered into a
Loan and Security Agreement with AT&T Commercial Finance Corporation (the "New
AT&T Credit Facility") pursuant to which AT&T Commercial Finance Corporation has
provided $35.0 million (i) to refinance (the "Refinancing") then outstanding
loans made to certain of the Company's subsidiaries under a $31.2 million credit
facility (the "Old AT&T Credit Facility") and (ii) for general corporate
purposes. See "Description of Certain Indebtedness -- New AT&T Credit Facility".
HIRING OF RONALD E. SPEARS. Effective February 2, 1998, Ronald E. Spears
joined the Company as Chief Operating Officer. Mr. Spears has over 20 years of
experience in the telecommunications industry. Mr. Spears served as Corporate
Vice President -- Telecommunications for Citizens Utilities from 1995 until
joining the Company. Prior thereto, he served as Chairman and Chief Executive
Officer of Videocart Inc. for two years and as President of MCI Communications
Corporation's Midwest operating division for six years.
AMENDMENT OF EXISTING INDENTURES. On February 26, 1998, the Company
effected amendments (the "Amendments") to the indentures under which three
classes of its outstanding debt securities were issued. The Amendments revised
certain covenants in the indentures which significantly limited the ability of
the Company and its subsidiaries to incur additional indebtedness or make
certain investments or acquisitions. The limitations on indebtedness contained
in the indentures were amended to provide an alternative test permitting the
incurrence of additional indebtedness based on a debt to capital ratio test, and
increased the amount of unrestricted indebtedness that the Company can incur.
The Amendments also permit the incurrence of indebtedness solely for the
construction, acquisition, and improvement of telecommunications assets, subject
to certain limitations. See "Description of Certain Indebtedness -- The Existing
Notes".
4
<PAGE> 9
THE OFFERING
Common Stock Offered by:
The Company....................... 7,501,640 shares
The Selling Stockholders.......... 598,360 shares
Common Stock to be Outstanding after
the Offering........................ 45,898,929 shares(a).
Nasdaq Symbol....................... ACNS
Dividend Policy..................... The Company has never paid dividends on
its Common Stock and does not expect to
declare any dividends on its Common
Stock in the foreseeable future. See
"Dividend Policy".
Use of Proceeds..................... The net proceeds of the Offering
received by the Company will be used
for expansion of its voice and data
network infrastructure, enhancement of
its operational support systems and
sales and marketing activities,
deployment of switching equipment,
potential future acquisitions and
general corporate purposes. See "Use of
Proceeds" and "Management's Discussion
and Analysis of Financial Condition and
Results of Operations -- Liquidity and
Capital Resources". The Company will
not receive any proceeds from the sale
of Common Stock by the Selling
Stockholders.
Risk Factors........................ See "Risk Factors" beginning on page 8
for a description of certain risks
relevant to an investment in the Common
Stock.
- ---------------
(a) Excludes 19,094,683 shares reserved for issuance upon exercise of
options and warrants outstanding at December 31, 1997, at a weighted
average exercise price of $5.65.
ACSI is a Delaware corporation. The Company's principal executive offices
are located at 131 National Business Parkway, Suite 100, Annapolis Junction,
Maryland 20701, and its telephone number is (301) 617-4200.
5
<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
YEAR
FISCAL YEAR ENDED SIX MONTHS ENDED YEAR
JUNE 30, ENDED DECEMBER 31, ENDED
------------------- DECEMBER 31, 1996(1) DECEMBER 31,
1995 1996 1996(1) (UNAUDITED) 1997(1)
-------- -------- ------------ ------------ ------------
(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)
-------- -------- -------- -------- --------
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)
======== ======== ======== ======== ========
Basic and diluted 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
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
JUNE 30, AS ADJUSTED
------------------- DECEMBER 31, FOR THE
1995 1996 1996 ACTUAL OFFERING(4)
-------- -------- ------------ -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents..................... $20,351 $134,116 $ 78,619 $260,837 382,418
Total assets.................................. 37,627 223,600 230,038 638,895 760,476
Working capital............................... 13,908 114,966 46,001 272,234 393,815
Property, plant and equipment, net............ 15,567 76,739 136,083 250,477 250,477
Long-term debt, including current portion..... 3,798 184,382 210,410 461,285 461,285
Long-term liabilities......................... 4,723 189,072 216,484 461,321 461,321
Redeemable stock and options.................. 2,931 2,155 2,000 206,160 206,160
Stockholders' equity (deficit)................ 22,141 8,982 (27,038) (65,356) 56,225
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1995 1996 1996 1997
-------- -------- ------------ ------------
<S> <C> <C> <C> <C>
NETWORK AND SELECTED STATISTICAL DATA (5):
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>
(see footnotes on following page)
6
<PAGE> 11
(footnotes to previous page)
- ---------------
(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
generally accepted accounting principles ("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 the
Company's Consolidated Financial Statements.
(4) As adjusted for (i) the Offering, the net proceeds to the Company of which
are estimated to be approximately $117.5 million, and (ii) proceeds of
approximately $4.1 million to be received by the Company upon the exercise
of options and warrants by certain Selling Stockholders in connection with
the Offering. See "Principal and Selling Stockholders".
(5) Network and Selected Statistical Data are derived from the Company's
records.
7
<PAGE> 12
RISK FACTORS
Prospective investors should consider carefully the following information
in conjunction with the other information contained in this Prospectus before
purchasing the Common Stock offered hereby. Except for historical information
contained herein, the matters discussed in this Prospectus are forward-looking
statements that are subject to certain risks and uncertainties 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. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
SUBSTANTIAL LEVERAGE; RECENT DEFAULT; FUTURE CASH OBLIGATIONS
Since inception, 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> 13
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" and "Description of Certain Indebtedness".
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 Unit Offering and Junior Preferred
Stock 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> 14
CERTAIN FINANCIAL AND OPERATING RESTRICTIONS
The Existing Indentures, 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. See "Description
of Certain Indebtedness". In addition, the terms of any debt or equity
financings undertaken by the Company to meet its future cash requirements could
restrict the Company's operational flexibility and thereby adversely affect the
Company's business, results of operations and financial condition.
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".
10
<PAGE> 15
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," "Business -- Competition" and "-- Regulation".
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. See "Business -- Regulation".
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,
11
<PAGE> 16
may affect the Company's ability to acquire or develop that network. See
"Business -- Implementation of Integrated Network -- Rights-of-Way" and
"-- Regulation".
EFFECT OF REGULATION
As a common carrier, the Company is subject to substantial federal, state
and local regulation. The Company's local networks do not require authorization
from the Federal Communications Commission (the "FCC") for construction or
installation. However, the Company 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 FTA, 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
12
<PAGE> 17
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.
13
<PAGE> 18
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. See
"Business -- Regulation".
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. See "Business -- Competition".
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<PAGE> 19
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
15
<PAGE> 20
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.
See "Management".
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. See "Management," "Principal Stockholders,"
and "Description of Certain Indebtedness -- The Existing Notes".
LIMITED TRADING MARKET AND POSSIBLE VOLATILITY OF PRICE OF THE COMMON STOCK
The Common Stock has been listed on Nasdaq since May 22, 1996, is thinly
traded and has experienced significant price volatility. There can be no
assurance that, after the completion of the Offering, the Common Stock will be
traded more actively or that its price fluctuations will be less volatile. From
March 3, 1995 through May 21, 1996, the Common Stock was quoted on the Nasdaq
SmallCap Market. The market price of the Common Stock could be subject to wide
fluctuations in response to quarterly variations in the Company's results of
operations, changes in earnings estimates by analysts, conditions in the
telecommunications industry or general market or economic conditions. In
addition, in recent years, the stock market has experienced price and volume
fluctuations. These fluctuations often have had a particularly substantial
effect on the market prices for many emerging growth companies, often unrelated
to their specific operating performances. Such market fluctuations could
adversely affect the market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
As of December 31, 1997, the Company had 37,219,419 shares of Common Stock
outstanding and, after giving effect to the Offering (excluding exercise of the
over-allotment option granted to the Underwriters by the Company), would have
had 45,318,641 shares of Common Stock outstanding. The 8,100,000 shares of
Common Stock offered hereby will be freely transferable without restriction
under the Securities Act, assuming such shares are held by non-affiliates of the
Company. Substantially all of the remaining shares outstanding, other than the
5,060,000 shares
16
<PAGE> 21
sold by the Company in a registered offering in April 1997, are "restricted
securities" as that term is defined in Rule 144 under the Securities Act. As of
December 31, 1997, approximately 850,000 of such restricted securities were
freely transferable under Rule 144(k) and over 3,200,000 of such restricted
securities could be sold subject to certain volume and manner of sale
restrictions under Rule 144. In addition, in April 1998, over 20,000,000
additional restricted securities will become eligible for sale pursuant to such
volume and manner of sale restrictions. Of such restricted securities, over
23,500,000 are subject to the Lock-Up Agreements described below.
Of the 19,504,332 shares reserved for issuance upon exercise of options and
warrants outstanding on December 31, 1997 and in connection with the Company's
Employee Stock Purchase Plan, 2,066,808 shares and 500,000 shares have been
registered under the Securities Act on Form S-3 and Form S-8 registration
statements, respectively. Accordingly, the shares issued upon exercise of such
options or warrants or in connection with the Employee Stock Purchase Plan, will
be freely transferable unless held by affiliates of the Company.
The future sale pursuant to Rule 144 or pursuant to a registration
statement for the outstanding restricted shares of Common Stock or the Common
Stock underlying the options and warrants, the future sale of Common Stock for
the Company's own account, or the exercise of registration rights by any
security holder or the perception that such sales or exercise could occur, could
have an adverse effect on the market price of the Common Stock and could impair
the Company's ability to raise capital through an offering of Common Stock. In
December 1997, 3,726,584 shares of Common Stock held by stockholders of the
Company entitled to the aforementioned registration rights were registered under
the Securities Act on a Form S-3 registration statement filed pursuant to Rule
415 under the Securities Act (the "Selling Stockholder Shelf") for sale by such
stockholders from time to time, whether through block trades, market sales or
underwritten offerings.
The holders of over 28,500,000 shares of Common Stock (including shares
issued or issuable upon exercise of options and warrants) have executed or have
agreed to execute an agreement not to sell or otherwise dispose of any shares of
Common Stock or shares of Common Stock acquired in this Offering for a period of
120 days from the date of this Prospectus without the prior written consent of
Goldman, Sachs & Co. (the "Lock-up Agreements"). Holders of approximately
24,000,000 outstanding shares and approximately 4,300,000 shares issuable upon
exercise of options and warrants have also waived or agreed to waive their
"piggyback" registration rights with respect to this Offering. There can be no
assurance that persons with piggyback and demand registration rights who have
not waived or agreed to waive those rights and/or who have not agreed to the 120
day lock-up period referred to above (holding over 1,500,000 shares of
outstanding Common Stock and over 1,400,000 shares of Common Stock issuable upon
exercise of options and warrants) will not request the Company to file a
registration statement for their shares or otherwise dispose of such shares
prior to 120 days after this Offering or that such securityholders will not seek
damages from the Company for any alleged breach of such securityholders'
registration rights in connection with this Offering.
USE OF PROCEEDS
The net proceeds of the Offering received by the Company will be used for
expansion of its voice and data network infrastructure, enhancement of its
operational support systems and sales and marketing services, deployment of
switching equipment, potential future acquisitions and general corporate
purposes. The Company will not receive any proceeds from the sale of Common
Stock by the Selling Stockholders.
17
<PAGE> 22
PRICE RANGE OF COMMON STOCK
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 Nasdaq.
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 Nasdaq 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
---------- ---------
<S> <C> <C>
Fiscal Year Ended June 30, 1995
First Quarter............................................. $ 4.50 $ 2.50
Second Quarter............................................ 4.25 3.50
Third Quarter............................................. 3.75 3.50
Fourth Quarter............................................ 4.38 3.25
Fiscal Year Ended June 30, 1996
First Quarter............................................. $ 7.50 $ 3.63
Second Quarter............................................ 6.75 5.00
Third Quarter............................................. 9.00 5.00
Fourth Quarter............................................ 15.38 8.00
Fiscal Period Ended December 31, 1996
First Quarter............................................. $13.25 $ 8.50
Second Quarter............................................ 12.38 9.88
Fiscal Year 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
Fiscal Year Ended December 31, 1998
First Quarter (through March 26, 1998).................... 19.00 11.63
</TABLE>
On March 26, 1998, the last reported sales price for the Common Stock as
reported on Nasdaq was $18.94. 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 Existing Indentures and the New AT&T Credit Facility contain certain
covenants that restrict the Company's ability to declare or pay dividends on the
Common Stock. See "Description of Certain Indebtedness" and "Description of
Capital Stock".
18
<PAGE> 23
CAPITALIZATION
The following table sets forth the total cash and cash equivalents and
capitalization of the Company (i) as of December 31, 1997, and (ii) as adjusted
for (A) the Offering, the net proceeds to the Company of which are estimated to
be approximately $117.5 million, and (B) proceeds of approximately $4.1 million
to be received by the Company upon the exercise of options and warrants by
certain Selling Stockholders in connection with the Offering. See "Principal and
Selling Stockholders". This table should be read in conjunction with the
Consolidated Financial Statements and related notes thereto included in this
Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 260,837 $ 382,418
Restricted cash and assets invested in marketable
securities(1)............................................. 71,901 71,901
--------- ---------
Total cash and restricted assets............................ $ 332,738 $ 454,319
========= =========
Long term debt
2005 Notes................................................ $ 126,043 $ 126,043
2006 Notes................................................ 80,242 80,242
2007 Notes................................................ 220,000 220,000
Notes payable(2).......................................... 35,000 35,000
--------- ---------
Total long-term debt................................... 461,285 461,285
Redeemable stock and options................................ 206,160 206,160
Stockholders' equity (deficit):
Common Stock, par value $0.01 per share, 75,000,000 shares
authorized, 37,219,419 shares issued and outstanding at
December 31, 1997(45,318,641 as adjusted for the
Offering)(3)........................................... 372 453
Additional paid-in capital................................ 131,728 253,228
Accumulated deficit....................................... (197,456) (197,456)
--------- ---------
Total stockholders' equity (deficit)................... (65,356) 56,225
--------- ---------
Total capitalization.............................. 602,089 $ 723,670
========= =========
</TABLE>
- ---------------
(1) Primarily represents cash and investments in marketable securities
sufficient to make the first five interest payments on the 2007 Notes. The
Company placed approximately $70.0 million of the net proceeds realized from
the Debt offering of the 2007 Notes, representing funds, together with
interest thereon, sufficient to pay the first five interest payments on the
2007 Notes, into an escrow account.
(2) Consists of the New AT&T Credit Facility, including current portion.
(3) Excludes 19,094,683 shares reserved for issuance upon exercise of options
and warrants, outstanding at December 31, 1997, at a weighted average
exercise price of $5.65. The aggregate proceeds from the exercise of all
warrants and options outstanding at December 31, 1997, would be
approximately $108 million.
19
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
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. The consolidated
financial data of the Company as of and 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.
20
<PAGE> 25
<TABLE>
<CAPTION>
YEAR
FISCAL YEAR ENDED SIX MONTHS ENDED YEAR
JUNE 30, ENDED DECEMBER 31, ENDED
------------------- DECEMBER 31, 1996(1) DECEMBER 31,
1995 1996 1996(1) (UNAUDITED) 1997(1)
-------- -------- ------------ ------------ ------------
(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)
======== ======== ======== ======== =========
Basic and diluted 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
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
JUNE 30, AS ADJUSTED
------------------- DECEMBER 31, FOR THE
1995 1996 1996 ACTUAL OFFERING(4)
---- ---- ------------ ------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents................... $ 20,351 $134,116 $ 78,619 $260,837 382,418
Total assets................................ 37,627 223,600 230,038 638,895 760,447
Working capital............................. 13,908 114,966 46,001 272,234 393,815
Property, plant and equipment, net.......... 15,567 76,739 136,083 250,477 250,477
Long-term debt, including current portion... 3,798 184,382 210,410 461,285 461,285
Long-term liabilities....................... 4,723 189,072 216,484 461,321 461,321
Redeemable stock and options................ 2,931 2,155 2,000 206,160 206,160
Stockholders' equity (deficit).............. 22,141 8,982 (27,038) (65,356) 56,225
</TABLE>
<TABLE>
<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>
(see footnotes on following page)
21
<PAGE> 26
(footnotes to previous page)
- ---------------
(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.
(4) As adjusted for the Offering, the net proceeds to the Company of which are
estimated to be approximately $117.5 million, and (ii) proceeds of
approximately $4.1 million to be received by the Company upon the exercise
of options and warrants by certain Selling Stockholders in connection with
the Offering. See "Principal and Selling Stockholders".
22
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Prospective investors are cautioned that such
statements are only predictions and that actual events or results may differ
materially. In evaluating such statements, prospective investors should
specifically consider the various factors identified in this Prospectus,
including the matters set forth under the caption "Risk Factors," which could
cause actual results to differ materially from those indicated by such forward-
looking statements. The following discussion should be read in conjunction with
the consolidated financial statements and the related notes thereto included
elsewhere or incorporated by reference in this Prospectus.
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 longhaul
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.
23
<PAGE> 28
The following table presents key operating statistics for the Company for
the reporting periods.
<TABLE>
<CAPTION>
ACCESS
OPERATIONAL ROUTE FIBER LINES VOICE
AS OF DATE EMPLOYEES NETWORKS MILES MILES BLDGS VGES* 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
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
24
<PAGE> 29
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.
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 2007 Notes, the 14 3/4%
Preferred Stock and 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 Old AT&T Credit Facility.
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.
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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.
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<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 Old AT&T Credit Facility.
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 million, 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 million 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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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 Old AT&T Credit Facility.
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.
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.
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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 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.
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<PAGE> 34
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 Unit Offering 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
Existing Notes, the 14 3/4% Preferred Stock and the 12 3/4% Preferred Stock
towards expansion and construction of local fiber optic networks, the further
expansion and introduction of services and to fund negative operating cash flow.
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 million 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. See "Description of Certain Indebtedness -- New
AT&T Credit Facility".
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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 the Existing
Indentures in order to improve the ability of the Company and its subsidiaries
to incur additional indebtedness or make certain investments or acquisitions.
See "Description of Certain Indebtedness".
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 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.
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BUSINESS
THE COMPANY
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 longhaul
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 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 ISP capabilities
and ATM, frame relay, and 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.
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, an increase of over 250% from December 31, 1996.
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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 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.
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.
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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 POPs of the same IXC; (ii) between
POPs of different IXCs; (iii) between large business and government end-users
and their selected IXCs; (iv) between an IXC POP and an ILEC central office or
between two ILEC central offices; and (v) between different locations of
business or government end-users.
- SPECIAL ACCESS SERVICES. Special access services provide a link between
an end-user location and the POP of its IXC, or links between IXC POPs,
thus bypassing the facilities of the ILEC. These services, which may be
ordered by either the long distance customer or directly by its IXC,
typically provide the customer better reliability, shorter installation
intervals, and lower costs than similar services offered by the ILEC.
Customer charges are based on the number of channel terminations, fixed
and mileage-sensitive transport charges, and costs for any services
required to multiplex circuits.
- SWITCHED TRANSPORT SERVICES. Switched transport services are offered to
IXCs that have large volumes of long distance traffic aggregated by a
ILEC switch at a central office where the 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
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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 PBX and routing local, intraLATA and interLATA phone calls
according to the customers' specific requirements; providing local dial tone
services with functionality such as free internal communications, call
forwarding, call transfer, conference call and speed dialing; ISDN data
services; and origination and termination of long distance traffic between a
customer premises and interexchange carrier via shared trunks utilizing the
Company's local switch.
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 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
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 ranging 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
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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 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,
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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 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
telecommunciations-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
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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. 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 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.
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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 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 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. 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
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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, 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'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 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 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.
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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 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.
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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. See "Risk Factors -- Competition".
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 or its affiliates and must be provided on rates, terms and
conditions that are just, reasonable and nondiscriminatory.
- ACCESS TO UNBUNDLED ELEMENTS. ILECs are required to provide requesting
telecommunications carriers with nondiscriminatory access to network
elements on an unbundled basis at any technically feasible point on
rates, terms, and conditions that are just, reasonable and
nondiscriminatory. At a minimum, ILECs must unbundle and provide access
to network interface devices, local loops, local and tandem switches
(including all software features provided by such switches), interoffice
transmission facilities, signaling and call-related database facilities,
operations support systems and information and operator and directory
assistance facilities. Further, ILECs may not impose restrictions,
limitations or requirements upon the use of any unbundled network
elements by other carriers.
- METHODS OF OBTAINING INTERCONNECTION AND ACCESS TO UNBUNDLED
ELEMENTS. ILECs are required to provide physical collocation of
equipment necessary for interconnection or access to unbundled network
elements at the ILEC's premises, except that the ILEC may provide virtual
collocation if it demonstrates to the PSC that physical collocation is
not practical for technical reasons or because of space limitations.
- 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
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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.
- 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,
1997, the FCC released an order implementing these requirements by
reforming its existing access charge and universal service rules. See
"-- Other Regulation -- Universal Service Reform" below.
Most provisions of the Interconnection Orders were appealed. Numerous
appeals were consolidated for consideration by the 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.
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- 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
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 Eight 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
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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,
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
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economically efficient rate levels and structures. The following is a
nonexclusive list of actions announced by the FCC:
SUBSCRIBER LINE CHARGE ("SLC"). The maximum permitted amount which an
ILEC may charge for SLC's on certain lines was increased. Specifically,
the ceiling was increased significantly for second and additional
residential lines, and for multi-line business customers. SLC ceiling
increases began in July 1997 and will be phased-in over a two-year
period.
PRESUBSCRIBED 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
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.
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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 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 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 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 to the extent it expands into other
states or seeks additional services from the above-named PSCs. See "Risk
Factors -- Rapid Expansion of Operations." In most states, the Company is
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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 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.
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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, are expected to have a material adverse effect on the Company.
The Company and its subsidiaries are parties to various court appeals and
regulatory arbitration proceedings relating to certain of the Company's
interconnection agreements and continue to participate in regulatory proceedings
before the FCC and state regulatory agencies concerning the authorization of
services and the adoption of new regulations. See "-- Regulation".
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as of the date of this
Prospectus regarding the directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
---- --- -------------------------
<S> <C> <C>
Anthony J. Pompliano...................... 59 Chairman of the Board of Directors
Jack E. Reich............................. 47 President and Chief Executive Officer and Director
Ronald E. Spears.......................... 49 Chief Operating Officer
Riley M. Murphy........................... 42 Executive Vice President -- Legal and Regulatory
Affairs, General Counsel and Secretary
David L. Piazza........................... 43 Chief Financial Officer
George M. Middlemas(1).................... 51 Director
Edwin M. Banks(2)......................... 35 Director
Christopher L. Rafferty(1)................ 49 Director
Benjamin P. Giess......................... 35 Director
Olivier L. Trouveroy(1)(2)................ 42 Director
Peter C. Bentz............................ 32 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Anthony J. Pompliano, Chairman of the Board of Directors, has more than 30
years of experience in the telecommunications industry. Mr. Pompliano was
elected a director of the Company in November 1993. He was co-founder and
President of Metropolitan Fiber Systems, the predecessor organization to MFS
Communications, a publicly-traded CLEC that was acquired by WorldCom, Inc. in
December 1996. Mr. Pompliano served as President, CEO and Vice Chairman of MFS
Communications from April 1988 until March 1991. He joined ACSI in August 1993
after the expiration of his non-competition agreement with MFS Communications.
Before his association with MFS Communications and its predecessor, he was Vice
President -- Operations and Sales for MCI Telecommunications International from
1981 to 1987, and prior thereto, was Vice President -- National Operations for
Western Union International, Inc. from 1960 to 1981.
Jack E. Reich, President and Chief Executive Officer, had 22 years of
telecommunications industry and management experience before joining ACSI in
December 1996. Mr. Reich was elected to the Board of Directors in October 1997.
For two and one-half years prior to joining ACSI, Mr. Reich was employed by
Ameritech, Inc. as President of its Custom Business Service Organization, where
Mr. Reich was responsible for full business marketing to Ameritech's largest
customers for telecommunications services, advanced data services, electronic
commerce and managed services/outsource initiatives. Prior thereto, he served as
President of MCI's Multinational Accounts organization, and also served as MCI's
Vice President of Products Marketing. Mr. Reich has also held sales and
marketing positions at AT&T and ROLM Corp. Mr. Reich has a B.S. degree from St.
Louis University and an MBA from the University of Chicago.
Ronald E. Spears, Chief Operating Officer, joined the Company on February
2, 1998. Mr. Spears has over 20 years of experience in the telecommunications
industry. For two years prior to joining the Company, Mr. Spears served as
Corporate Vice President -- Telecommunications for Citizens Utilities where he
was responsible for the development and execution of communications for its
Citizens Communications subsidiary. While employed by Citizens Utilities, Mr.
Spears managed over 3500 employees, helped build a 5-market CLEC business and
developed and launched their long distance business. Prior thereto he served as
Chairman and Chief Executive Officer of Videocart Inc. and from 1984 until 1990,
as President of MCI Communications Corporation's Midwest operating
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division. He also serves on the Board of Directors of Hungarian Telephone and
Cable Corp. Mr. Spears has a B.S. degree in Electrical Engineering from the
United States Military Academy and a Masters degree in Public Service from
Western Kentucky University.
Riley M. Murphy, Executive Vice President -- Legal and Regulatory Affairs
and Secretary, had twelve years of experience in the private practice of
telecommunications regulatory law for interexchange, cellular, paging and other
competitive telecommunication services prior to joining the Company in 1994.
From February 1995 through 1997, she served as an officer and director of The
Association for Local Telecommunications Services. Ms. Murphy was senior counsel
to Locke Purnell Rain Harrell, a Dallas-based law firm, from 1993 to 1994. From
1987 to 1992, Ms. Murphy was a partner of Wirpel and Murphy, a
telecommunications law firm she co-founded, and from 1992 to 1993 she was a sole
practitioner. She holds a B.A. degree from the University of Colorado and a J.D.
from the Catholic University of America and is admitted to practice law in the
District of Columbia and Louisiana.
David L. Piazza, Chief Financial Officer, joined the Company on March 24,
1997. For ten years prior to joining the Company, Mr. Piazza was employed by MFS
Communications in a variety of finance and senior management positions, most
recently as the Senior Vice President and Chief Financial Officer of MFS
Telecom, Inc., a subsidiary of MFS Communications. Prior to his employment with
MFS Communications, Mr. Piazza was employed by AT&T for four years in its
finance and regulatory support divisions. He spent the first five years of his
career with Arthur Andersen & Co. in its regulated industries and public utility
practice. Mr. Piazza received his B.S. degree in Accountancy from the University
of Illinois and holds a CPA.
George M. Middlemas, Director, was elected a director of the Company in
December 1993. Mr. Middlemas is a general partner of Apex Management
Partnership, which is the general partner of Apex Investment Fund I, L.P. and
Apex Investment Fund II, L.P., both of which are venture capital funds, and
affiliates of First Analysis Corporation, a principal stockholder of the
Company. See "Principal Stockholders." From March 1991 to December 1991, Mr.
Middlemas acted as an independent consultant providing fund raising and other
advisory services. From 1985 until March 1991, Mr. Middlemas was a Senior Vice
President and Principal of Inco Venture Capital Management, a venture capital
firm. He also serves on the Board of Directors of PureCycle Corporation,
Security Dynamics Technologies, Inc. and several privately held companies.
Edwin M. Banks, Director, was elected a director of the Company in October
1994. Since 1988, Mr. Banks has been employed by W. R. Huff Asset Management
Co., L.L.C. and currently serves as a portfolio manager concentrating in the
healthcare, communications, food and food services industries. From 1985 until
he joined W.R. Huff Asset Management Co., L.L.C., Mr. Banks was employed by
Merrill Lynch & Co. Mr. Banks received his B.A. degree from Rutgers College and
his MBA degree from Rutgers University. Mr. Banks also serves as a director of
Magellan Health Services.
Christopher L. Rafferty, Director, was elected a director of the Company in
October 1994. Mr. Rafferty has been employed by WRH Partners, L.L.C., the
general partner of Huff since June 1994. From January 1993 to February 1994, Mr.
Rafferty was Vice President -- Acquisitions for Windsor Pet Care, Inc., a
venture capital-backed firm focusing on consolidating the pet care services
industry. From October 1990 to January 1993, Mr. Rafferty was a consultant
specializing in merchant banking, leveraged acquisitions and venture capital
transactions. From June 1987 to the time he started his consulting business, Mr.
Rafferty was a Managing Director of Chase Manhattan Capital Corporation, the
merchant banking and private equity investment affiliate of Chase Manhattan
Corporation. Mr. Rafferty received his undergraduate degree from Stanford
University and his law degree from Georgetown University.
Benjamin P. Giess, Director, was elected a director of the Company in June
1995. Since 1992, Mr. Giess has been employed by ING and its predecessors and
affiliates and currently serves as a Partner responsible for originating,
structuring and managing equity and debt investments. From
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1991 to 1992, Mr. Giess worked in the Corporate Finance Group of ING Capital.
From 1990 to 1991, Mr. Giess was employed by the Corporate Finance Group of
General Electric Capital Corporation where he worked in the media and
entertainment group. Prior to attending business school, from 1986 to 1988, Mr.
Giess was the Credit Department Manager of the Boston Branch of ABN Amro North
America, Inc. From 1984 to 1986, Mr. Giess was employed at the Shawmut Bank of
Boston. Mr. Giess also serves as a director of Matthews Studio Equipment Group,
CMI Holding Corp. and TransCare Corporation. Mr. Giess received his
undergraduate degree from Dartmouth College and his MBA from the Wharton School
of the University of Pennsylvania.
Olivier L. Trouveroy, Director, was elected a director of the Company in
June 1995. Since 1992, Mr. Trouveroy has been employed by ING and its
predecessors and affiliates and currently serves as a Managing Partner
responsible for originating, structuring and managing equity and debt
investments. From 1990 to 1992, Mr. Trouveroy was a Managing Director in the
Corporate Finance Group ("CFG") of General Electric Capital Corporation in
charge of CFG's office in Paris, France. From 1984 to 1990, Mr. Trouveroy held
various positions in the Mergers and Acquisitions department of Drexel Burnham
Lambert in New York. Mr. Trouveroy also serves as a director of AccessLine
Technologies, Inc., Cost Plus, Inc., Kasper A.S.L., Ltd. and TransCare
Corporation. Mr. Trouveroy holds B.S. and Masters degrees in Economics from the
University of Louvain in Belgium, as well as an MBA from the University of
Chicago.
Peter C. Bentz, Director, was elected a director of the Company in June
1995. Since 1992, Mr. Bentz has been employed by W. R. Huff Asset Management
Co., L.L.C. as a research analyst specializing in telecommunications, media and
healthcare. Mr. Bentz received his Bachelor of Science degree from Boston
College in 1987 and his MBA from the Wharton School of the University of
Pennsylvania in 1992.
The Board is comprised of seven members who were elected by the holders of
the Common Stock. All directors of the Company hold office until the next annual
meeting of stockholders and until their successors are duly elected and
qualified.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth as of December 31, 1997, certain information
regarding the beneficial ownership of the Common Stock outstanding (assuming the
exercise of options and warrants exercisable on or within 60 days of such date)
by (i) each person who is known to the Company to own 5% or more of the Common
Stock, (ii) each director of the Company, (iii) each executive officer of the
Company, (iv) all executive officers and directors of the Company as a group and
(v) each Selling Stockholder.
For purposes of the Offering, "Selling Stockholders" is defined to include
Anthony J. Pompliano, MCIMetro Access Transmission Services, Inc. and American
Transit Insurance Company.
Unless otherwise indicated, the named persons exercise sole voting and
investment power over the shares that are shown as beneficially owned by them.
<TABLE>
<CAPTION>
SHARES OWNED SHARES OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING
------------------------ SHARES BEING SOLD ------------------------
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENT(2) IN THE OFFERING NUMBER PERCENT(2)
--------------------------- ------ ---------- ----------------- ------ ----------
<S> <C> <C> <C> <C> <C>
Anthony J. Pompliano.................................. 1,724,999(3) 4.4% 200,000 1,524,999(3) 3.3%
Jack E. Reich......................................... 301,330(4) * -- 301,330(4) *
Ronald E. Spears...................................... 20,000(5) * -- 20,000(5) *
Riley M. Murphy....................................... 208,942(6) * -- 208,942(6) *
David L. Piazza....................................... -- * -- -- *
George M. Middlemas................................... 1,699,499(7) 4.6 -- 1,699,499(7) 3.7
Christopher Rafferty(8)............................... 8,000 * -- 8,000 *
Edwin M. Banks(8)..................................... -- -- -- -- --
Peter C. Bentz(8)..................................... -- -- -- -- --
Olivier L. Trouveroy(9)............................... -- -- -- -- --
Benjamin P. Giess(9).................................. -- -- -- -- --
The Huff Alternative Income Fund, L.P................. 15,090,140(10) 39.5 -- 15,090,140(10) 33.1
ING Equity Partners, L.P. I........................... 7,946,828(11) 21.3 -- 7,946,828(11) 17.5
First Analysis........................................ 3,202,237(12) 8.6 -- 3,202,237(12) 7.1
West Highland Capital, Inc.(13)....................... 2,000,000 5.4 -- 2,000,000 4.4
MCIMetro Access Transmission Services, Inc............ 397,582(14) 1.1 397,582 -- --
American Transit Insurance Company(15)................ 778 * 778 -- --
All executive officers and directors as a group (11
persons)............................................ 3,962,770 10.0 200,000 3,762,770 7.9
</TABLE>
- ---------------
* Less than one percent.
(1) The addresses of all officers and directors listed above are in the care of
the Company.
(2) The percentage of total outstanding for each stockholder prior to the
Offering is calculated by dividing (i) the number of shares of Common Stock
deemed to be beneficially owned by such stockholder as of December 31, 1997
by (ii) the sum of (A) the number of shares of Common Stock outstanding as
of December 31, 1997 plus (B) the number of shares of Common Stock issuable
upon the exercise of options or warrants held by such stockholder which
were exercisable as of December 31, 1997 or will become exercisable within
60 days thereafter ("currently exercisable"). The percentage of total
outstanding stock for each stockholder after the Offering is based on the
number of shares outstanding as of December 31, 1997 plus the shares being
offered hereby by the Company, Mr. Pompliano and MCIMetro Access
Transmission Services, Inc.
(3) Includes currently exercisable options to purchase 1,724,899 shares prior
to the Offering and 1,524,899 shares after the Offering.
(4) Includes currently exercisable options to purchase 300,000 shares and 1,330
shares of Common Stock purchased through the 1996 Employee Stock Purchase
Plan.
(5) Mr. Spears joined the Company in February 1998 and was granted 20,000
options in December 1997 in connection with consulting services rendered to
the Company. Such options vested in February 1998.
(6) Includes currently exercisable options to purchase 206,252 shares and 2,690
shares of Common Stock purchased through the 1996 Employee Stock Purchase
Plan.
(7) Includes 20,000 shares owned directly, 8,000 shares owned through an
individual retirement account and currently exercisable options to purchase
30,000 shares. Also includes 1,222,702 shares of Common Stock owned by Apex
II and 418,797 shares of Common Stock owned by Apex I. Mr. Middlemas is a
general partner of Apex Management Partnership which is the general partner
of Apex I and Apex II. Mr. Middlemas disclaims beneficial ownership of the
shares owned by Apex I and Apex II, except to the extent of his ownership
in the general partner of Apex I and in the general partner of Apex II.
(8) Messrs. Banks and Bentz are employees of W.R. Huff Asset Management Co.,
L.L.C., an affiliate of Huff. Mr. Rafferty is an employee of WRH Partners,
L.L.C., the general partner of Huff. Messrs. Rafferty, Bentz and Banks
disclaim beneficial ownership of all shares held by Huff.
(9) Mr. Trouveroy is a Managing Partner of ING and Mr. Giess is a Partner of
ING. Messrs. Trouveroy and Giess disclaim beneficial ownership of all
shares held by ING.
(10) Includes currently exercisable warrants to purchase 200,000 shares. The
address for Huff is 1776 On the Green, 67 Park Place, Morristown, NJ 07960.
(11) Includes currently exercisable warrants to purchase 100,000 shares. The
address for ING is 135 East 57th Street, 16th Floor, New York, NY 10022.
(12) Includes 1,222,702 shares of Common Stock owned by Apex II. Includes
418,797 shares of Common Stock owned by Apex I. Includes 780,883 shares of
Common Stock owned by The Productivity Fund II, L.P. ("Productivity").
Includes 779,855 shares of Common Stock owned by Environmental Private
Equity Fund II, L.P. ("EPEF"). First Analysis Corporation ("FAC") is an
ultimate general partner of Apex I, Apex II, Productivity and EPEF and may
be deemed to be the beneficial owner of the shares owned by them. FAC
disclaims beneficial ownership of these shares. This information was
obtained from a Schedule 13D filed with the SEC on May 6, 1997, as amended
from time to time. The address for FAC is 233 South Wacker Drive, Suite
9600, Chicago, IL 60093.
(13) This information was obtained from a Schedule 13D filed with the SEC on
December 31, 1997, as amended from time to time. The address for West
Highland Capital, Inc. is 300 Drakes Landing Road, Suite 290, Greenbrae,
CA, 94904.
(14) Includes currently exercisable warrants to purchase 397,582 shares. The
address for MCIMetro Access Transmission Services, Inc. is 8521 Leesburg
Pike, Vienna, VA 22182.
(15) The address for American Transit Insurance Company is 11 Penn Plaza, 3rd
Floor, New York, NY 10001.
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<PAGE> 58
DESCRIPTION OF CAPITAL STOCK
ACSI's authorized capital stock consists of 76,500,000 shares of capital
stock, consisting of 75,000,000 shares of Common Stock, par value $.01 per
share, and 1,500,000 shares of Preferred Stock, par value $1.00 per share. On
December 31, 1997, there were 37,219,419 shares of Common Stock issued and
outstanding and held of record by approximately 280 persons, including 116,400
shares issued in February 1997 in connection with conversion of 2,910 shares of
Preferred Stock and 17,260,864 shares issued in April 1997 in connection with
the conversion of 461,254 shares of Preferred Stock.
JUNIOR PREFERRED STOCK OFFERING. On October 16, 1997, the Company
consummated the sale of 150,000 shares (the "Junior Preferred Stock Offering"
and, together with the Unit Offering and the Debt Offering, each as defined
below, the "Recent Offerings"), consisting of its 12 3/4% Junior Redeemable
Preferred Stock due 2009 (the "12 3/4% Preferred Stock"). Total net proceeds to
the Company from the Junior Preferred Stock Offering were approximately $146.0
million.
UNIT OFFERING. On July 10, 1997, the Company consummated the issuance and
sale of 75,000 units (the "Unit Offering"), consisting of its 14 3/4% Redeemable
Preferred Stock due 2008 (the "14 3/4% Preferred Stock" and, together with the
12 3/4% Preferred Stock, the "Preferred Stock") and warrants (the "Unit
Warrants" and together with the 14 3/4% Preferred Stock, the "Units") to
purchase approximately 6,023,800 shares (subject to adjustment) of its Common
Stock). Total net proceeds to the Company from the Unit Offering were
approximately $70 million.
COMMON STOCK OFFERING. On April 15, 1997, the Company consummated (i) the
issuance and sale of 5,060,000 shares of Common Stock (inclusive of the May 14,
1997 exercise by the underwriters of their over-allotment option) at a price per
share of $5.00 in an underwritten public offering and (ii) the issuance and sale
directly to certain of its principal stockholders of 3,600,000 shares of Common
Stock at a purchase price of $4.70 per share (together, the "Common Stock
Offering"). Total net proceeds to the Company from the Common Stock Offering
were approximately $40 million.
PREFERRED STOCK
The authorized but unissued Preferred Stock may be issued by the Board of
Directors of the Company from time to time in one or more series with such
preferences, terms and rights as the Board of Director may determine without
further action by the stockholders of the Company. Accordingly, the Board of
Directors has the power to fix the dividend rate and to establish the
provisions, if any, relating to dividends, voting rights, redemption rates,
sinking funds, liquidation preferences and conversion rights for any series of
Preferred Stock issued in the future.
It is not possible to state the actual effect of the authorization of any
particular series of Preferred Stock upon the rights of holders of the Common
Stock until the Board of Directors determines the specific rights of the holder
of Preferred Stock of any further series. The issuance of Preferred Stock may
have the effect of delaying, deferring or preventing a change in control of the
Company without further action by the stockholders.
COMMON STOCK
ACSI is authorized to issue 75,000,000 shares of Common Stock. Under the
Company's By-Laws, at least a majority of the issued and outstanding voting
securities of the Company present at a duly called stockholders' meeting
constitutes a quorum. Generally, if a quorum is present the affirmative vote of
the majority of the voting securities represented at the meeting constitutes an
act of the stockholders.
Subject to the rights of holders of the Preferred Stock, certain covenants
contained in the Indentures which restrict the Company's ability to declare
dividends on its Common Stock, and the restrictions on dividends contained in
the New AT&T Credit Facility, holders of the Common Stock
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<PAGE> 59
are entitled to receive dividends, on a pro rata basis, as may from time to time
be declared by the Board of Directors. The holders of Common Stock are entitled
to one vote per share, voting together with the holders of Preferred Stock
(voting on an as-converted basis) as a single class (except with respect to the
election of directors and certain transactions and matters), on every question
submitted to them at a meeting of shareholders. In the event of liquidation,
dissolution or winding up, the holders of Common Stock are, subject to the
liquidation, dissolution or winding up, the holders of Common Stock are, subject
to the liquidation preference of the holders of Preferred Stock, entitled to
share ratably in all assets of the Company available for distribution to
stockholders along with the holders of the Preferred Stock.
SHARES ELIGIBLE FOR FUTURE SALE
The Company had 37,219,419 shares of Common Stock outstanding as of
December 31, 1997 and, after giving effect to the Offering (excluding exercise
of the over-allotment option granted to the Underwriters by the Company), would
have had 45,318,641 shares of Common Stock outstanding. The 8,100,000 shares of
Common Stock offered hereby when sold pursuant to this Registration Statement
will be freely transferable without restriction under the Securities Act,
assuming such shares are held by non-affiliates of the Company. Substantially
all of the remaining shares outstanding, other than the 5,060,000 shares sold by
the Company in a registered offering in April 1997, are "restricted securities"
as that term is defined in Rule 144 under the Securities Act. As of December 31,
1997, approximately 850,000 of such restricted securities were freely
transferable under Rule 144(k) and over 3,200,000 of such restricted securities
could be sold subject to certain volume and manner of sale restrictions under
Rule 144. In addition, in April 1998, over 20,000,000 additional restricted
securities will become eligible for sale pursuant to such volume and manner of
sale restrictions. Of such restricted securities, over 23,500,000 are subject to
Lock-up Agreements.
Of the 19,504,332 shares reserved for issuance upon exercise of options and
warrants outstanding on December 31, 1997 and in connection with the Company's
Employee Stock Purchase Plan, 2,066,808 shares and 500,000 shares have been
registered under the Securities Act on Form S-3 and Form S-8 registration
statements, respectively. Accordingly, the shares issued upon exercise of such
options or warrants or in connection with the Employee Stock Purchase Plan, will
be freely transferable unless held by affiliates of the Company.
The future sale pursuant to Rule 144 or pursuant to a registration
statement for the outstanding restricted shares of Common Stock or the Common
Stock underlying the options and warrants, the future sale of Common Stock for
the Company's own account, or the exercise of registration rights by any
security holder or the perception that such sales or exercise could occur, could
have an adverse effect on the market price of the Common Stock and could impair
the Company's ability to raise capital through an offering of Common Stock. In
December 1997, 3,726,584 shares of Common Stock held by stockholders of the
Company entitled to registration rights were registered under the Selling
Stockholder Shelf for sale from time to time, whether through block trades,
market sales or underwritten offerings.
In general, under Rule 144, a stockholder (or stockholders whose securities
are aggregated) who (together with predecessor holders who are not affiliates of
the Company) has beneficially owned shares of Common Stock which are treated as
restricted securities for at least one year from the date such shares were
acquired from the Company or an affiliate thereof, is entitled to sell, within
any three-month period, a number of shares that does not exceed the greater of
(i) 1% of the then outstanding shares of Common Stock or (ii) the average weekly
trading volume of the then outstanding shares of Common Stock during the four
calendar weeks preceding the date on which notice of such sale was filed with
the Commission under Rule 144. Sales under Rule 144 are also subject to certain
provisions relating to the manner and notice of sale and the availability of
current
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<PAGE> 60
public information about the Company. In addition, affiliates of the Company
must comply with the restrictions and requirements of Rule 144 (other than the
one-year holding period requirement) in order to sell shares of Common Stock
that are not restricted securities (such as shares acquired by affiliates of the
Company in the public market). Furthermore, commencing two years after the
acquisition of restricted securities from the Company or an affiliate of the
Company, a holder of such restricted securities who is not an affiliate of the
Company at the time of the sale and has not been an affiliate for at least three
months prior to such sale would be entitled to sell such securities immediately
without regard to the volume limitations and other conditions described above.
Pursuant to the Lock-up Agreements, the holders of over 28,500,000 shares
of Common Stock (including shares issued or issuable upon exercise of options
and warrants) have executed or have agreed to execute an agreement not to sell
or otherwise dispose of any shares of Common Stock for a period of 120 days from
the date of this Prospectus without the prior written consent of Goldman, Sachs
& Co. Holders of approximately 24,000,000 outstanding shares and approximately
4,300,000 shares issuable upon exercise of options and warrants have also waived
or agreed to waive their "piggyback" registration rights with respect to this
Offering pursuant to the Lock-up Agreements. There can be no assurance that
persons with piggyback and demand registration rights who have not waived or
agreed to waive those rights and/or who have not agreed to the 120 day lock-up
period referred to above (holding over 1,500,000 shares of outstanding Common
stock and over 1,400,000 shares of Common Stock issuable upon exercise of
options and warrants) will not request the Company to file a registration
statement for their shares or otherwise dispose of such shares prior to 120 days
after this Offering or that such securityholders will not seek damages from the
Company for any alleged breach of such securityholders' registration rights in
connection with this Offering.
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<PAGE> 61
DESCRIPTION OF CERTAIN INDEBTEDNESS
NEW AT&T CREDIT FACILITY
On December 30, 1997, the Company entered into the New AT&T Credit Facility
pursuant to which AT&T Commercial Finance Corporation has provided up to $35.0
million in financing in order to effect the Refinancing and for general
corporate purposes.
The loans under the New AT&T Credit Facility are secured by the capital
stock of the material subsidiaries of the Company and the promissory notes (the
"Intercompany Notes") of certain subsidiaries of the Company evidencing debt
provided by the Company pursuant to the Refinancing. The aggregate outstanding
principal balance of the loans is payable in twenty-four (24) consecutive
quarterly installments beginning on December 31, 1998 and continuing on each of
the last calendar days (or the next succeeding business day if such date is not
a business day) of March, June, September and December in each calendar year
thereafter through and including September 30, 2004. The principal of borrowed
amounts may be prepaid in certain circumstances and must be prepaid, without
premium or penalty, in other circumstances. Interest is due quarterly. Interest
is variable based on the three-month Commercial Paper Rate or LIBOR Rate plus
4.5% per annum, at the Company's option, and is compounded quarterly. Upon
certain events of default, additional interest at a rate of 2% will become
payable. In addition, the New AT&T Credit Facility includes covenants, some of
which impose certain restrictions on the Company and its material subsidiaries
including restrictions on the declaration or payment of dividends, the conduct
of certain activities, certain investments, the creation of additional liens or
indebtedness, the disposition of assets, transactions with affiliates and
extraordinary corporate transactions.
In connection with the New AT&T Credit Facility, the Company issued to AT&T
Credit Corporation 207,964 shares of its common stock in exchange for AT&T
Credit Corporation conveying to the Company (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. The Company was required to pledge to AT&T Commercial Finance
Corporation (i) all of its shares (present and future) of capital stock in its
material subsidiaries, along with all options and warrants therein, (ii) the
Intercompany Notes and (iii) any proceeds of any of the foregoing. Under certain
circumstances, the pledge agreement governing such pledge also restricts the
Company's ability to receive and retain dividends in respect of the pledged
collateral.
THE EXISTING NOTES
The terms of the Existing Notes include those stated in the applicable
indenture and those made a part of the applicable indenture by reference to the
Trust Indenture Act of 1939, as in effect on the date of such indenture. The
terms of the Existing Notes are substantially similar. The following summaries
of certain provisions of those indentures do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all of the
provisions of the indentures.
The Existing Notes are general unsubordinated and unsecured senior
obligations of ACSI and rank pari passu with all other unsubordinated and
unsecured indebtedness of ACSI. As a holding company that conducts virtually all
of its business through subsidiaries, ACSI currently has no source of operating
cash flow other than from dividends and distributions from its subsidiaries.
ACSI's subsidiaries have no obligation to pay amounts due on the Existing Notes
and do not guarantee the Existing Notes. Therefore, the rights of the holders of
the Existing notes are effectively subordinated to all liabilities of ACSI's
subsidiaries, including trade payables. Any rights of ACSI and its creditors,
including the holders of the Existing Notes, to participate in the assets of
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<PAGE> 62
any of ACSI's subsidiaries upon any liquidation or reorganization of any such
subsidiary are subject to the prior claims of that subsidiary's creditors
(including trade creditors).
Upon a Change of Control (as defined in the indentures), each holder of the
Existing Notes will have the right to require ACSI to repurchase all or any part
of such holder's Existing Notes at 101% of the respective Accreted Value (as
defined in the indentures) thereof, or, in the case of any such repurchase on or
after November 1, 2000 in the case of the 2005 Notes, on or after April 1, 2001
in the case of the 2006 Notes and on or after January 15, 2002 in the case of
the 2007 Notes, 101% of the respective principal amount thereof, plus accrued
and unpaid interest, if any, thereon, to the date of repurchase. A Change of
Control would occur if, among other things, any person or group, other than Mr.
Pompliano, certain affiliates of FAC, ING or Huff and, in the case of the 2005
Indenture and 2006 Indenture, Mr. Kozak, acquires more than 35% of the total
voting power of the Company.
Each of the indentures contains certain covenants which, among other
things, restrict the ability of ACSI and certain of its subsidiaries to incur
additional indebtedness, pay dividends or make distributions in respect of
ACSI's capital stock or make certain other restricted payments, create
restrictions on the ability of certain subsidiaries to make distributions on
their capital stock, create liens, enter into transactions with affiliates or
related persons, sell assets, or consolidate, merge or sell all or substantially
all of their assets.
On June 11, 1997, the Company notified the trustee under each of the
indentures governing the 2005 Notes and 2006 Notes that, as of June 10, 1997, it
had approximately $13.0 million in the aggregate of ordinary course trade
accounts payable that were more than 60 days overdue. As of June 30, 1997, the
Company had approximately $17.4 million in the aggregate of ordinary course
trade accounts payable that were more than 60 days overdue. These overdue
amounts constituted Indebtedness of the Company, as that term is defined in each
such indenture governing the 2005 Notes and 2006 Notes. The incurrence by the
Company of such Indebtedness was not permitted under the 2005 Indenture and 2006
Indenture and, therefore, constituted an Event of Default (as defined under each
of those indentures). The Company used a portion of the proceeds of the Unit
Offering to pay in full all ordinary course trade accounts payable that were
more than 60 days overdue to cure such Event of Default.
AMENDMENT OF EXISTING INDENTURES
The Company effected the Amendments on February 26, 1998. The Amendments
amended certain covenants which significantly limited the ability of the Company
and its subsidiaries to incur additional indebtedness, issue disqualified stock
or make investments or acquisitions. The previous limitations on indebtedness
(the "Previous Debt Covenants") prohibited the incurrence of indebtedness (with
certain exceptions) unless, after giving effect to such incurrence, the Debt to
EBITDA Ratio of the Company was no more than 5.5x until November 1, 1998 or 5.0x
thereafter. The Amendments provide an alternative test which, when combined with
existing provisions, permits the incurrence of additional indebtedness if the
Company satisfies either the Debt to EBITDA Ratio test in the Previous Debt
Covenants or a new test whereby the Debt to Capital Ratio does not exceed 2.0x;
provided, that in determining the amount of indebtedness the Company may incur
in reliance on the new Debt to Capital Ratio test, $100,000,000 shall be
subtracted from the amount that may be incurred, which will have the effect of
reducing the amount of indebtedness that could otherwise have been incurred.
Debt to Capital Ratio is, as of 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 to (ii) the capital of the Company and its
restricted subsidiaries on a consolidated basis. For purposes of this
calculation, "capital" means stockholders' equity (deficit), except that all
Preferred Stock is included and retained earnings (deficit) is excluded, each as
determined in accordance with GAAP.
The Previous Debt Covenants also contained, among other exceptions, an
allowance for new indebtedness not subject to restriction in an aggregate amount
not to exceed $428,634. The
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<PAGE> 63
Amendments increased this allowance to $10,000,000. The Amendments also permit,
subject to the limitations described below, the incurrence of purchase money
debt which is issued for the construction, acquisition and improvement of
telecommunications assets; 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.
Purchase money debt may only be incurred under this exemption so long as
all purchase money debt does not exceed 50% of the amount of accreted unsecured
indebtedness of the Company and its restricted subsidiaries on a consolidated
basis as of such date; provided, that in calculating the 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) up to $35,000,000 of indebtedness incurred
pursuant to the New AT&T Credit Facility shall not be counted.
The existing definitions of "Permitted Investments" and "Permitted Liens"
were amended to permit investments in telecommunications assets and the creation
of liens in connection with the purchase money debt exemption.
THE 2005 NOTES
The 2005 Notes mature on November 1, 2005. The yield on the 2005 Notes
equals 13% per annum, computed on a semi-annual bond equivalent basis and
calculated from November 9, 1995. The 2005 Notes will accrete at a rate of 13%,
compounded semi-annually, to an aggregate principal amount of $190,000,000 by
November 1, 2000. Cash interest will not accrue on the 2005 Notes prior to
November 1, 2000. Thereafter, interest on the 2005 Notes will accrue at the rate
of 13% per annum and will be payable in cash semi-annually on May 1 and November
1, commencing May 1, 2001. The 2005 Notes will be redeemable, at the option of
ACSI at any time, in whole or in part, on or after November 1, 2000, at 110%,
106 2/3% and 103 1/3% of the principal amount for the twelve months following
November 1, 2000, 2001 and 2002, respectively, plus accrued and unpaid interest,
if any, to the date of redemption.
THE 2006 NOTES
The 2006 Notes mature on April 1, 2006. The yield on the 2006 Notes equals
12 3/4% per annum, computed on a semi-annual bond equivalent basis and
calculated from March 21, 1996. The 2006 Notes will accrete at a rate of
12 3/4%, compounded semi-annually, to an aggregate principal amount of
$120,000,000 by April 1, 2001. Cash interest will not accrue on the 2006 Notes
prior to April 1, 2001. Thereafter, interest on the 2006 Notes will accrue at
the rate of 12 3/4% per annum and will be payable in cash semi-annually on April
1 and October 1, commencing October 1, 2001. The 2006 Notes will be redeemable,
at the option of ACSI at any time, in whole or in part, on or after April 1,
2001 at 106 3/8%, 104 1/4% and 102 1/8% of the principal amount for the twelve
months following April 1, 2001, 2002 and 2003, respectively, plus accrued and
unpaid interest, if any, thereon, to the date of repurchase.
THE 2007 NOTES
Debt Offering. On July 23, 1997, the Company consummated the sale of $220
million aggregate principal amount (the "Debt Offering") of the 2007 Notes. Of
the total net proceeds of $204 million, the Company placed approximately $70
million representing funds sufficient to pay the first five semi-annual interest
payments on the 2007 Notes, into an escrow account for the benefit of the
holders thereof.
The 2007 Notes mature on July 15, 2007. The 2007 Notes bear interest at a
rate of 13 3/4% per annum from July 23, 1997 payable semi-annually in cash on
January 15, and July 15, commencing January 15, 1998. The Company placed
approximately $70.0 million of the proceeds from the sale of the 2007 Notes,
representing funds, together with interest thereon, sufficient to pay the first
five
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<PAGE> 64
semi-annual interest payments on the 2007 Notes, into an escrow account to be
held by the escrow agent for the benefit of the holders of the 2007 Notes. The
2007 Notes are redeemable, at the option of the ACSI, in whole or in part, on or
after July 15, 2002 at 106.875%, 105.156%, 103.438%, 101.719% and 100% of their
principal amount for the twelve months following July 15, 2002, 2003, 2004, 2005
and 2006, respectively, plus accrued and unpaid interest, if any, thereon, to
the date of repurchase. In addition, at any time on or prior to July 15, 2000,
the Company may, at its option, redeem up to 35% of the aggregate principal
amount at maturity of the 2007 Notes with the net cash proceeds of one or more
Equity Offerings (as defined in the related indenture), at a redemption price
equal to 113.75% of the principal amount thereof; provided, however, that after
giving effect to any such redemption, at least $143.0 million aggregate
principal amount of the 2007 Notes remains outstanding.
LEGAL MATTERS
Certain legal matters with respect to the shares of Common Stock offered
hereby will be passed upon for the Company by Riley M. Murphy, Esq., Executive
Vice President, Legal and Regulatory Affairs, General Counsel and Secretary of
the Company, and by Simpson Thacher & Bartlett, New York, New York, and for the
Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York.
EXPERTS
The consolidated financial statements of American Communications Services,
Inc. as of June 30, 1996, December 31, 1996 and December 31, 1997, 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 included herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
60
<PAGE> 65
GLOSSARY
ACCESS CHARGES -- The fees paid by an interexchange carrier (IXC) to a LEC
for originating and terminating long distance calls on their local networks.
ATM (ASYNCHRONOUS TRANSFER MODE) -- A recently commercialized switching and
transmission technology that is one of a general class of packet technologies
that relay traffic by way of an address contained within the first five bits of
a standard fifty-three bit-long packet or cell. ATM switching was specifically
developed to allow switching and transmission of mixed voice, data and video
(sometimes referred to as "multi-media" information) at varying rates. The ATM
format can be used by many different information systems, including LANs.
BROADBAND -- Broadband communications systems can transmit large quantities
of voice, data and video by way of digital or analog signals. Examples of
broadband communication systems include DS-3 fiber optic systems, which can
transmit 672 simultaneous voice conversations, or a broadcast television station
that transmits high resolution audio and video signals into the home. Broadband
connectivity is also an essential element for interactive multimedia
applications.
CAP (COMPETITIVE ACCESS PROVIDER) -- A name for a category of local service
provider that appeared in the late 1980's, who competed with local telephone
companies by placing its own fiber optic cables in a city and sold various
private line telecommunications services in direct competition to the local
telephone company. CAPs are also referred to in the industry as alternative
local telecommunications service providers (ALTs) and metropolitan area network
providers (MANs) and were formerly referred to as alternative access vendors
(AAVs).
CATVS -- Cable television service providers.
CENTRAL OFFICES -- The switching centers or central switching facilities of
the LECs.
CENTREX -- Centrex is a service that offers features similar to those of a
Private Branch Exchange (PBX), except the equipment is located at the carrier's
premises and not at the premises of the customer. These features include direct
dialing within a given phone system, direct dialing of incoming calls, and
automatic identification of outbound calls. This is a value-added service that
carriers can provide to a wide range of customers who do not have the size or
the funds to support their own on-site PBX.
CLEC (COMPETITIVE LOCAL EXCHANGE CARRIER) -- A category of telephone
service provider (carrier) that offers services similar to the former monopoly
local telephone company, as recently allowed by changes in telecommunications
law and regulation. A CLEC may also provide other types of telecommunications
services (long distance, etc.).
CO-CARRIER STATUS -- A relationship between a CLEC and an ILEC that affords
the same access and rights to the other's network, and provides access and
services on an equal basis.
COLLOCATION -- The ability to connect a network to the ILEC's central
offices. Physical collocation occurs upon placement of network connection
equipment inside the ILEC's central offices. Virtual collocation is an
alternative to physical collocation pursuant to which the ILEC permits
connection to its network through the ILEC's central offices at competitive
prices, even though the network connection equipment is not physically located
inside the central offices of the ILEC.
DEDICATED LINES -- Telecommunications lines dedicated or reserved for use
exclusively by particular customers along predetermined routes (in contrast to
telecommunications lines within the LEC's public switched network).
DEDICATED SERVICES -- Special access, switched transport and private line
services generally offered by CAPs, including the Company.
DIGITAL -- A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary code digits 0 and 1. Digital transmission
G-1
<PAGE> 66
and switching technologies employ a sequence of these pulses to represent
information as opposed to the continuously variable analog signal. Digital
transmission and switching technologies offer a threefold improvement in speed
and capacity over analog techniques, allowing much more efficient and
cost-effective transmission of voice, video and data.
DS-0, DS-1, DS-3 -- Standard telecommunications industry digital signal
formats, which are distinguishable by bit rate (the number of binary digits (0
and 1) transmitted per second). DS-0 service has a bit rate of 64 kilobits per
second. DS-1 service has a bit rate of 1.544 megabits per second and DS-3
service has a bit rate of 45 megabits per second.
FCC (FEDERAL COMMUNICATIONS COMMISSION) -- The US Government organization
charged with the oversight of all public communications media.
FIBER MILES -- The number of route miles installed (excluding pending
installations) along a telecommunications path multiplied by the number of
fibers along that path. See the definition of "Route Miles" below.
FIBER OPTICS -- Fiber optic cable is the medium of choice for the
telecommunications and cable industries. Fiber is immune to electrical
interference and environmental factors that affect copper wiring and satellite
transmission. Fiber optic technology involves sending laser light pulses across
glass strands in order to transmit digital information. A strand of fiber optic
cable is as thick as a human hair yet has significantly greater bandwidth
capacity than copper cable, which is many times greater in size.
FIBER OPTIC RING NETWORK -- Most CAPs have built their networks in ring
configurations in order to ensure that, if one segment of a network is damaged
or cut, the traffic is simply re-routed and sent to its destination in the
opposite direction. The Company uses a "self-healing" optical fiber ring
architecture in its networks.
FRAME RELAY -- Frame relay is a high-speed data packet switching service
used to transmit data between computers. Frame Relay supports data units of
variable lengths at access speeds ranging from 56kbs to 1.5 mbs. This service is
ideal for connecting LANs, but is not appropriate for voice and video
applications due to the variable delays that can occur. Frame Relay was designed
to operate at higher speeds on modern fiber optic networks.
ICP (INTEGRATED COMMUNICATIONS PROVIDER) -- A telecommunications carrier
that provides packaged or integrated services from among a broad range of
categories, including local exchange service, long distance service, enhanced
data service, cable TV service, and other communications services.
ILEC (INCUMBENT LOCAL EXCHANGE CARRIER) -- The local exchange carrier that
was the monopoly carrier, prior to the opening of local exchange services to
competition.
INTERCONNECTION DECISIONS -- Rulings by the FCC announced in September 1992
and August 1993, which require the RBOCs and most other LECs to provide
interconnection in LEC central offices to any CAP, long distance carrier or
end-user seeking such interconnection for the provision of interstate special
access and switched access transport services.
INTERNET PROTOCOL (IP) -- A compilation of network- and transport-level
protocols that allow computers with different architectures and operating system
software to communicate with other computers on the Internet.
ISDN (INTEGRATED SERVICES DIGITAL NETWORK) -- An internationally agreed
upon standard which, through special equipment, allows two-way, simultaneous
voice and data transmission in digital formats over the same transmission line.
ISDN permits video-conferencing over a single line, for example, and also
supports a multitude of value-added networking capabilities, reducing costs for
end-users and results in more efficient use of available facilities. ISDN
combines standards for highly flexible customers to network signaling with both
voice and data within a common facility.
G-2
<PAGE> 67
ISP (INTERNET SERVICE PROVIDER) -- An Internet service provider provides
customers with access to the Internet, normally for dial access customers, by
linking its network directly or through other ISPs to the Internet backbone
network.
IXC (INTEREXCHANGE CARRIERS) -- See Long Distance Carrier.
LANS (LOCAL AREA NETWORKS) -- The interconnection of computers for the
purpose of sharing files, programs and various devices such as work stations,
printers and high-speed modems. LANs may include dedicated computers or file
servers that provide a centralized source of shared files and programs.
LATAS (LOCAL ACCESS AND TRANSPORT AREAS) -- The geographically defined
areas in which LECs are authorized to provide local switched services.
LEC (LOCAL EXCHANGE CARRIER) -- A company providing local telephone
services.
LOCAL EXCHANGE AREAS -- A geographic area determined by the appropriate
state regulatory authority in which local calls generally are transmitted
without toll charges to the calling or called party.
LONG DISTANCE CARRIERS OR IXCS (INTEREXCHANGE CARRIERS) -- Long distance
carriers provide services between local exchanges on an interstate or intrastate
basis. A long distance carrier may offer services over its own or another
carrier's facilities. Long distance carriers include, among others, AT&T, MCI,
Sprint, WorldCom and LCI, as well as resellers of long distance capacity.
NAP -- Network Access Points are points where the national ISPs
interconnect their networks, allowing a multitude of local and regional ISPs to
exchange data and access the Internet globally.
NODE -- An individual point of origination and termination of data on the
network transported using frame relay or similar technology.
OFF-NET -- A customer that is not physically connected to one of the
Company's networks but who is accessed through interconnection with a LEC
network.
ON-NET -- A customer that is physically connected to one of the Company's
networks.
PBX (PRIVATE BRANCH EXCHANGE) -- A switching system within an office
building which allows calls from outside to be routed directly to the individual
instead of through a central number. This PBX also allows for calling within an
office by way of four digit extensions. Centrex is a service which can simulate
this service from an outside switching source, thereby eliminating the need for
a large capital expenditure on a PBX.
PCS (PERSONAL COMMUNICATIONS SERVICE) -- A type of wireless telephone
system that uses light, inexpensive handheld sets and communicates via low power
antennas.
POPS (POINTS OF PRESENCE) -- Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long distance carrier.
PRIVATE LINE -- A private, dedicated telecommunications connection between
end-user locations (excluding long distance carrier POPs).
RBOCS (REGIONAL BELL OPERATING COMPANIES) -- The seven regional local
telephone holding companies established by the modification of final judgment in
U.S. v. AT&T. These RBOCs are prohibited from providing interLATA services and
from manufacturing telecommunications equipment.
ROUTE MILES -- The number of miles of the telecommunications path in which
fiber optic cables are installed as it would appear on a network map.
G-3
<PAGE> 68
SONET (SYNCHRONOUS OPTICAL NETWORK) -- A transmission technology that is
used by carriers in both local and long distance telecommunications networks to
provide efficient, highly reliable communications channels.
SPECIAL ACCESS SERVICES -- The lease of private, dedicated
telecommunications lines or "circuits" along the network of a ILEC or a CAP
(such as the Company), whose lines or circuit run to or from the long distance
carrier POPs. Examples of special access services are telecommunications lines
running between POPs of a single long distance carrier, from one long distance
carrier POP to the POP of another long distance carrier or from an end-user to
its long distance carrier POP. Special access services do not require the use of
switches.
SWITCH -- A sophisticated computer that accepts instructions from a caller
in the form of a telephone number. Like an address on an envelope, the numbers
tell the switch where to route the call. The switch opens or closes circuits or
selects the paths or circuits to be used for transmission of information.
Switching is a process of interconnecting circuits to form a transmission path
between users. Switches allow local telecommunications service providers to
connect calls directly to their destination, while providing advanced features
and recording connection information for future billing.
SWITCHED ACCESS SERVICES -- The origination or termination of long distance
traffic between a customer premise and an IXC POP via shared local trunks using
a local switch.
SWITCHED TRANSPORT SERVICES -- Transportation of switched traffic along
dedicated lines between the LEC central offices and IXC POPs.
SWITCHED TRAFFIC -- Telecommunications traffic along a switched network.
VGE (VOICE GRADE EQUIVALENT CIRCUITS) -- A measure of service equivalent to
one telephone line (64 kilobits of bandwidth) actually billed to a customer.
G-4
<PAGE> 69
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> 70
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> 71
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> 72
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> 73
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> 74
<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> 75
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> 76
<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> 77
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> 78
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> 79
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> 80
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> 81
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> 82
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> 83
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> 84
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> 85
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> 86
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> 87
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> 88
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> 89
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> 90
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> 91
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> 92
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> 93
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> 94
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company and the Selling Stockholders have agreed to sell to each
of the Underwriters named below, and each of such Underwriters for whom Goldman,
Sachs & Co., Bear, Stearns & Co. Inc. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated are acting as representatives (the "Representatives"), has
severally agreed to purchase from the Company and the Selling Stockholders, the
respective number of shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
----------- ---------
<S> <C>
Goldman, Sachs & Co.........................................
Bear, Stearns & Co. Inc. ...................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
---------
Total............................................. 8,100,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered through
them hereby, if any are taken.
The Underwriters propose to offer such shares of Common Stock in part
directly to the public at the public offering price set forth on the cover page
of this Prospectus and in part to certain securities dealers at such price less
a concession of $ per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time to
time be varied by the Representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 1,215,000
additional shares of Common Stock solely to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 8,100,000 shares of Common
Stock offered by the Underwriters to the public hereby.
The Company, the Selling Stockholders and certain other stockholders who
own in the aggregate approximately 23,500,000 shares of Common Stock have agreed
that, during the period beginning from the date of this Prospectus and
continuing to and including the date 120 days after the date of this Prospectus,
they will not offer, sell, contract to sell or otherwise dispose of any shares
of Common Stock or other securities of the Company which are substantially
similar to the shares of Common Stock or securities which are convertible or
exchangeable into Common Stock or securities which are substantially similar to
the shares of Common Stock without the prior written consent of the
Representative, except for the shares of Common Stock offered in connection with
the Offering.
The Company and the Selling Stockholders have agreed, jointly and not
severally, to indemnify the several Underwriters against certain liabilities
including liabilities under the Securities Act.
In connection with this offering, the Underwriters may purchase and sell
shares of Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with this offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or
U-1
<PAGE> 95
retarding a decline in the market price of the Common Stock; and syndicate short
positions involve the sale by the Underwriters of a greater number of shares of
Common Stock than they are required to purchase from the Company in the
Offering. The Underwriters also may impose a penalty bid, whereby selling
concessions allowed to syndicate members or other broker-dealers in respect of
the shares of Common Stock sold in the offering for their account may be
reclaimed by the syndicate if such shares are repurchased by the syndicate in
stabilizing or covering transactions. These activities may stabilize, maintain
or otherwise affect the market price of the Common Stock, which may be higher
than the price that might otherwise prevail in the open market; and these
activities, if commenced, may be discontinued at any time. These transactions
may be effected on Nasdaq, in the over-the-counter market or otherwise, and
these activities, if commenced, may be discontinued at any time.
As permitted by Rule 103 under the Exchange Act, certain Underwriters (and
selling group members, if any) that are market makers ("passive market makers")
in the Common Stock may make bids for or purchases of the Common Stock in the
Nasdaq National Market until such time, if any, when a stabilizing bid for such
securities has been made. Rule 103 generally provides that (1) a passive market
maker's net daily purchases of the Common Stock may not exceed 30% of its
average daily trading volume in such securities for the two full consecutive
calendar months (or any 60 consecutive days ending within the 10 days)
immediately preceding the filing date of the registration statement of which
this Prospectus forms a part, (2) a passive market maker may not effect
transactions or display bids for the Common Stock at a price that exceeds the
highest independent bid for the Common Stock by persons who are not passive
market makers and (3) bids made by passive market makers must be identified as
such.
Certain of the Underwriters have provided from time to time investment
banking services to the Company and certain of its affiliates, for which such
Underwriters have received customary fees and commissions. Certain of the
Underwriters expect to provide in the future investment banking services to the
Company and such affiliates, for which such Underwriters will receive customary
fees and commissions. In addition, Goldman, Sachs & Co. acted as Solicitation
Agent in connection with the consent solicitation relating to the Amendments.
U-2
<PAGE> 96
[SPIRE LOGO]
Internet Access Service
Frame Relay Service
ATM Service
Bundled Internet Solutions
Custom Network Services
Managed Network Service
[SPIRE LOGO]
<PAGE> 97
======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES OR IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information................ i
Forward Looking Statements............ i
Documents Incorporated by
Reference........................... ii
Prospectus Summary.................... 1
Risk Factors.......................... 8
Use of Proceeds....................... 17
Price Range of Common Stock........... 18
Dividend Policy....................... 18
Capitalization........................ 19
Selected Consolidated Financial and
Operating Data...................... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
Business.............................. 32
Management............................ 50
Principal and Selling Stockholders.... 53
Description of Capital Stock.......... 54
Shares Eligible for Future Sale....... 55
Description of Certain Indebtedness... 57
Legal Matters......................... 60
Experts............................... 60
Glossary.............................. G-1
Index to Consolidated Financial
Statements.......................... F-1
Underwriting.......................... U-1
</TABLE>
======================================================
======================================================
8,100,000 SHARES
AMERICAN COMMUNICATIONS SERVICES, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
------------------------
[ACSI LOGO]
------------------------
GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.
MERRILL LYNCH & CO.
REPRESENTATIVES OF THE UNDERWRITERS
======================================================
<PAGE> 98
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses to be paid by the
Registrant in connection with the sale and distribution of the securities being
registered, other than underwriting discounts and commissions. All of the
amounts shown are estimated except the Securities and Exchange Commission
registration fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 37,340
Legal fees and expenses..................................... 300,000
Accounting fees and expenses................................ 75,000
Printing fees and expenses.................................. 300,000
Miscellaneous expenses...................................... 62,660
--------
Total............................................. $700,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Second Restated Certificate of Incorporation provides that a director
of the Company will not be personally liable for monetary damages to the Company
or its stockholders for breach of fiduciary duty as a director, except for
liability, (i) for any breach of the director's duty of loyalty to such
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases or redemption as
provided in Section 174 of the DGCL or (iv) for any transaction from which the
director derived an improper personal benefit.
The Second Restated Certificate of Incorporation and the Amended and
Restated By-laws further provide that directors and officers of the Company (as
well as agents and employees of the Company at the discretion of the Board)
shall, to the fullest extent authorized by the DGCL or any other applicable laws
then in effect, be indemnified against liabilities arising from their service as
directors and officers. The Company has entered into indemnification agreements
with each of its executive officers and directors to reimburse them for certain
liabilities incurred in connection with the performance of their fiduciary
duties.
Section 145 of the DGCL empowers a corporation to indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Section 145 also empowers a corporation to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that such person acted in any of the
capacities set forth above, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted under similar standards, except
that no indemnification may be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the
II-1
<PAGE> 99
corporation unless, and only to the extent that, the Delaware Court of Chancery
or the court in which such action was brought shall determine that despite the
adjudication of liability such person is fairly and reasonably entitled to
indemnity for such expenses which the Delaware Court of Chancery or such other
court shall deem proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to above or in the defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith, that indemnification provided for by Section 145 shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled;
and that the corporation is empowered to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation against any liability asserted against him in any such capacity or
arising out of his status as such, whether or not the corporation would have the
power to indemnify him against such liability under Section 145.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
SEE EXHIBIT INDEX
II-2
<PAGE> 100
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made
hereunder, a post-effective amendment to this registration statement:
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of this registration statement (or the most recent
post-effective amendment hereto) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate
offering price set forth in the "Calculation of Registration Fee" table
in the effective registration statement;
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in this registration statement
or any material change to such information in this registration
statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) will not apply
if the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the registrant
pursuant to section 13 or section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration statement.
(2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(h) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions set forth in response to the foregoing
provisions, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-3
<PAGE> 101
(i) The undersigned registrant hereby undertakes that:
(1) for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this registration statement as of the time it was declared
effective; and
(2) for purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(l) For purposes of determining any liability under the Securities Act, the
registrant will treat the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant under rule 424(b)(1), or (4) or
497(h) under the Securities Act (sec.sec.230.424(b)(1), (4) or 230.497(h)) as
part of this registration statement as of the time the Commission declared it
effective.
(j) For purposes of determining any liability under the Securities Act,
treat each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
II-4
<PAGE> 102
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED AMENDMENT NO. 2 TO THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF ANNAPOLIS
JUNCTION, STATE OF MARYLAND, ON THIS 27TH DAY OF MARCH, 1998.
AMERICAN COMMUNICATIONS SERVICES,
INC.,
Registrant
By: /s/ JACK E. REICH
------------------------------------
Jack E. Reich
President, Chief Executive Officer
and Director
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AMENDMENT NO. 2
TO THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman of the Board of March 27, 1998
- --------------------------------------------------- Directors
Anthony J. Pompliano
/s/ JACK E. REICH President, Chief Executive March 27, 1998
- --------------------------------------------------- Officer and Director
Jack E. Reich (Principal Executive
Officer)
* Chief Financial Officer March 27, 1998
- --------------------------------------------------- (Principal Financial and
David L. Piazza Accounting Officer
* Director March 27, 1998
- ---------------------------------------------------
George M. Middlemas
* Director March 27, 1998
- ---------------------------------------------------
Edwin M. Banks
* Director March 27, 1998
- ---------------------------------------------------
Christopher L. Rafferty
* Director March 27, 1998
- ---------------------------------------------------
Benjamin P. Giess
* Director March 27, 1998
- ---------------------------------------------------
Olivier L. Trouveroy
* Director March 27, 1998
- ---------------------------------------------------
Peter C. Bentz
*By: /s/ JACK E. REICH
--------------------------------------------
Attorney-in-fact
</TABLE>
II-5
<PAGE> 103
EXHIBIT INDEX
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
----------- ----------- -------------
<C> <S> <C>
1 Form of Underwriting Agreement ***
4.1 Second Restated Certificate of Incorporation of the Company **
4.2 Amended and Restated By-Laws of the Company **
4.3 Specimen Certificate of the Company's Common Stock *
5.1 Opinion of Riley M. Murphy, Esq., Executive Vice President,
Legal and Regulatory Affairs, General Counsel and Secretary
of the Company ***
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Riley M. Murphy, Esq. (included in Exhibit 5.1)
24.1 Power of Attorney ***
</TABLE>
- ---------------
* Previously filed as an exhibit to the Company's Registration Statement on
Form SB-2 (File No. 33-87200) and incorporated herein by reference thereto.
** Previously filed as an exhibit to the Company's Quarterly Report on Form
10-QSB for the fiscal quarter ended June 30, 1997 and incorporated herein by
reference thereto.
*** Previously filed.
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
American Communications Services, Inc.:
We consent to the use of our report included herein and to the
reference to our firm under the headings "Experts" and "Selected Consolidated
Financial Data" in the prospectus.
KPMG Peat Marwick LLP
Washington, DC
March 27, 1998
