<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10 - QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1996
Commission File number 0 - 25314
AMERICAN COMMUNICATIONS SERVICES, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-1947746
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
(formerly 05-0440761)
131 NATIONAL BUSINESS PARKWAY
ANNAPOLIS JUNCTION, MD 20701
(Address of Principle Executive Offices)
(301) 617-4200
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the last
90 days.
YES X NO
-------- -------
Indicate the Number of shares of the issuer's classes of common stock
outstanding as of the latest practicable date.
Class of Common Stock Outstanding as of November 8, 1996
---------------------- ----------------------------------
Common Stock, Par Value $0.01 6,771,729
Transitional Small Business Disclosure Format (check one):
YES NO X
----------- -----------
<PAGE> 2
AMERICAN COMMUNICATIONS SERVICES, INC.
FORM 10 - QSB
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
NUMBER
------
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - June 30, 1996
and September 30, 1996 3
Condensed Consolidated Statements of Operations - Three
months ended September 30, 1995 and 1996 5
Condensed Consolidated Statements of Cash Flows - Three
months ended September 30, 1995 and 1996 6
Notes to Unaudited Condensed Consolidated Interim
Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Part II Other Information 18
Item 2. Changes in Securities 18
Item 6. Exhibits and reports on Form 8-K 18
Signatures 19
</TABLE>
PAGE 2
<PAGE> 3
Part I
Financial Information
Item 1 - Financial Statements
American Communications Services, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, 1996 September 30, 1996
(UNAUDITED)
<S> <C> <C>
Assets
Current Assets
Cash and Cash equivalents $132,706,427 $102,819,308
Restricted cash 3,751,706 2,392,152
Accounts receivable, net 735,260 1,870,947
Other current assets 1,003.465 2,195,729
------------- -------------
Total current assets 138,196,858 109,278,136
------------- -------------
Networks, furniture and equipment, gross 80,147,964 101,881,877
(less: Accumulated depreciation) ( 3,408,698) (5,404,390)
------------ ------------
76,739,266 96,477,487
Deferred financing fees 8,334,183 8,235,262
Other assets 329,584 549,264
------------- -------------
Total assets $223,599,891 $214,540,149
------------- -------------
Liabilities, Redeemable Stock, Options and
Warrants, Minority Interest and Stockholders' Equity
Current Liabilities
Accounts payable $ 21,317,346 $ 10,703,168
Accrued liabilities 1,660,954 2,473,656
Notes payable - stockholders 252,809 103,169
------------- -------------
Total current liabilities 23,231,109 13,279,993
------------- -------------
Long Term Liabilities
Notes payable 184,129,361 198,357,465
Other Long Term Liabilities - 413,954
Dividends payable 4,942,313 5,949,183
------------- -------------
Total liabilities 212,302,783 218,000,595
------------- -------------
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements
PAGE 3
<PAGE> 4
American Communications Services, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, 1996 September 30, 1996
(UNAUDITED)
<S> <C> <C>
Liabilities, Redeemable Stock, Options
and Warrants, Minority Interest and
Stockholders' Equity (continued)
Redeemable stock, options and warrants 2,155,025 2,155,025
------------ ------------
Minority Interest 160,270 64,514
------------ ------------
Stockholders' Equity
Preferred stock, $1.00 par value, 186,664
shares designated as 9% Series A-1
Convertible Preferred Stock, authorized,
issued and outstanding 186,664 186,664
Preferred stock, $1.00 par value, 277,500
shares designated as 9%
Series B Convertible Preferred Stock, authorized,
issued and outstanding 277,500 277,500
Common Stock, $0.01 par value,
30,000,000 shares authorized, 6,645,691
and 6,761,466 shares, respectively, issued
and outstanding 65,837 66,994
Additional paid-in-capital 55,975,078 55,079,732
Accumulated deficit (47,523,266) (61,290,875)
----------- -----------
Total stockholders' equity/(deficit) 8,981,813 (5,679,985)
------------ ------------
Total Liabilities, Redeemable Stock,
Options and Warrants, Minority Interest
and Stockholders' Equity/(deficit) $223,599,891 $214,540,149
------------ ------------
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statement
PAGE 4
<PAGE> 5
American Communications Services, Inc.
Condensed Consolidated Statements of Operations
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
September 30 September 30,
1995 1996
---- ----
<S> <C> <C>
Revenues $ 399,034 $ 2,812,465
Operating Expenses
Network, development and operations 1,584,872 3,709,449
Selling, general and administrative 1,170,472 5,674,138
Non-cash compensation expense 793,869 174,099
Depreciation and amortization 263,988 2,401,188
------------- -----------
Total Operating Expenses 3,813,201 11,958,874
Non-operating income/expenses
Interest and other income (97,370) (1,460,669)
Interest and other expense 140,021 6,011,315
------------- -----------
Net loss before minority interest 3,456,818 13,697,055
Minority interest (67,267) (95,757)
------------- ----------
Net loss 3,389,551 13,601,298
------------- -----------
Preferred stock dividends/accretion 898,133 1,006,870
------------- -----------
Net loss to common stockholders 4,287,684 14,608,168
------------- -----------
Net loss per common/common equivalent share ($0.74) ($2.18)
------------- -----------
Average number of common/common
equivalent shares outstanding 5,798,916 6,703,579
------------- -----------
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements
PAGE 5
<PAGE> 6
American Communications Services, Inc.
Condensed Consolidated Statements of Operations
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
September 30 September 30,
1995 1996
---- ----
<S> <C> <C>
Cash Flow from Operating Activities
Net Loss $ (3,389,551) $ (13,601,298)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 263,988 1,995,692
Interest deferral and accretion - 5,541,118
Amortization of deferred financing fees - 405,496
Provision for doubtful accounts 10,572 25,944
Loss attributable to minority interest (67,267) (95,757)
Noncash compensation 793,869 174,099
Changes in operating assets and liabilities
Restricted cash related to
operating activities - 1,359,554
Trade accounts receivable 96,007 (1,161,631)
Other current assets (191,195) (1,192,264)
Other assets (73,388) (219,680)
Accounts payable (1,871,121) (10,614,178)
Other accrued liabilities (1,314,086) 1,226,656
------------ -----------
Net cash used in operating activities (5,742,172) (16,156,249)
------------ -----------
Cash flows from investing activities
Purchase of furniture and equipment (610,128) (1,095,079)
Network development costs (4,669,793) (20,638,834)
------------ -----------
Net cash used in investing activities (5,279,921) (21,733,913)
------------ -----------
Cash flows from financing activities
Issuance of notes payable 4,483,286 8,198,094
Payment of deferred financing fees - (306,575)
Warrant and stock option exercises 1,082 111,524
Proceeds from sale of minority interest in
subsidiaries 378,385 -
Payment of stockholder notes payable (146,083) -
------------ -----------
Net cash flow from financing activities 4,716,670 8,003,043
------------ -----------
Net increase/(decrease) in cash and cash equivalents (6,305,423) (29,887,119)
Cash and cash equivalents - beginning of period 20,350,791 132,706,427
------------ -----------
Cash and cash equivalents - end of period 14,045,368 102,819,308
------------ -----------
Supplemental disclosure of cash flow information
Dividends declared on preferred stock 898,133 1,006,870
------------ -----------
(Decrease) in accrued redeemable warrant cost (496,679) -
------------ -----------
Increase in right-of-way for option discount 130,250 -
------------ -----------
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements
PAGE 6
<PAGE> 7
AMERICAN COMMUNICATIONS SERVICES, INC.
Notes to Unaudited Condensed Consolidated Interim
Financial Statements
(1) BASIS OF PRESENTATION AND RELATED MATTERS
BASIS OF PRESENTATION
As of the end of and for the three month period ended September 30, 1996, the
accompanying unaudited condensed consolidated interim financial statements
include the accounts of American Communications Services, Inc. and its
subsidiaries, all of which, excluding the Louisville, Kentucky, Fort Worth and
El Paso, Texas, and Columbia and Greenville, South Carolina subsidiaries, are
wholly owned (the Louisville, Kentucky subsidiary was also not wholly owned
for the three month period ending September 30, 1995). The Company has a 92.75
percent ownership interest in these subsidiaries. Such statements, including
comparative information for the three month period ended September 30, 1995,
where applicable, have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and item 310(b) of Regulation S-B. The unaudited
condensed consolidated interim finanical statements should be read in
conjunction with the financial statements and footnotes thereto included in the
Company's annual report on Form 10-KSB for the fiscal year ended June 30, 1996
filed with the Securities and Exchange Commission (the "SEC") on September 30,
1996, as amended. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. All material intercompany accounts and transactions have been
eliminated in consolidation. Results of the interim periods are not indicative
of the results to be expected for the full year.
BUSINESS
American Communications Services, Inc. ("ACSI" or the "Company") is a
competitive local exchange carrier ("CLEC") that constructs and operates
digital fiber optic networks and offers local telecommunications services to
long distance companies (interexchange carriers or "IXCs") and business and
government end users in the southern US.
The Company currently provides non-switched dedicated services including
special access, switched transport and private line services. These services
generally are offered by the Company in competition with incumbent local
exchange telephone companies ("ILEC's") and are delivered with a high level of
network reliability. The Company also offers high speed data services
including high speed LAN to LAN applications and multiple internet access
services. In addition to the data and non-switched dedicated services, the
Company has begun offering on a limited basis, enhanced voice messaging
services to small and mid-size business and government end users. Successful
marketing of these enhanced voice messaging and high-speed data services will
not only provide the Company with increased revenues, but will also provide an
expanded end user customer base and relevant marketing experience that can be
leveraged into the offering of local switched services, which the Company plans
to begin offering during the next quarter.
PAGE 7
<PAGE> 8
AMERICAN COMMUNICATIONS SERVICES, INC.
Notes to Unaudited Condensed Consolidated Interim
Financial Statements
(1) BASIS OF PRESENTATION AND RELATED MATTERS (CONTINUED)
As of September 30, 1996, ACSI had eighteen operational networks and an
additional twelve networks under construction, half of which are expected to be
operational by the end of calendar 1996. As of September 30, 1996, the Company
had obtained intrastate authority for the provision of dedicated services in
Alabama, Arkansas, Florida, Georgia, Kentucky, Maryland, Nevada, New Mexico,
South Carolina, Tennessee and Texas and had applications pending before the
Public Service Commission ("PSC") in Arizona, Colorado, Louisiana, Missouri,
Oklahoma and Virginia. To the extent the Company expands the scope of its
intrastate services in these states to include the full range of local switch
services, the Company is required to seek additional authorization from such
PSCs. As of September 30, 1996, the Company had applied for authorization to
provide local switched services in Arizona, Arkansas, Colorado, Kentucky,
Louisiana, Mississippi, Missouri, New Mexico, Oklahoma, and Virginia and had
been granted such authority in Alabama, Florida, Georgia, Maryland, Nevada,
South Carolina, Tennessee, and Texas. As of September 30, 1996, the Company
had negotiated partial agreements with BellSouth for local interconnection and
access to unbundled elements in South Carolina, Georgia, Florida, Kentucky,
Tennessee, Alabama and Mississippi, with Southwestern Bell for Arkansas and
Texas, with US West for New Mexico and Arizona and with GTE for Texas, Kentucky
and Florida. In all instances, the Company was forced to seek state PSC
arbitration for some material issues. As of September 30, 1996, PSC
arbitrations for interconnection were underway in the states listed above. In
addition, the Company has initiated formal interconnection negotiations with
Bell Atlantic and Sprint/Central Telephone. Subject to receipt of necessary
additional financing the Company intends to have 50 networks in service or
under construction by the middle of calendar year 1998. To date, management
believes that it has been able to deploy its capital most efficiently by
constructing, rather than acquiring, fiber optic networks. By constructing all
of its networks, ACSI believes it has realized significant cost savings,
created considerable networking efficiencies and ensured quality, reliability
and high operating standards.
FINANCING ACTIVITIES
On March 26, 1996, the Company completed the private placement of $120,000,000
of 12-3/4% Senior Discount Notes due 2006 (the "2006 Notes"). The Company
received net proceeds of approximately $61,800,000 from the sale of the 2006
Notes. On June 25, 1996, all outstanding 2006 Notes were exchanged by the
Company, in an exchange offer registered with the SEC, for identical 2006 Notes
which with certain exceptions, are freely transferable under the Securities
Act of 1933, as amended (the "Act"). The 2006 Notes will accrete at a rate of
12-3/4% compounded semi-annually, to an aggregate principal amount of
$120,000,000 by April 1, 2001. Thereafter, interest on the 2006 Notes will
accrue at the annual rate of 12-3/4% and will be payable in cash semi-annually
on April 1 and October 1, commencing on October 1, 2001. The Notes will mature
on April 1, 2006.
PAGE 8
<PAGE> 9
AMERICAN COMMUNICATIONS SERVICES, INC.
Notes to Unaudited Condensed Consolidated Interim
Financial Statements
On November 14, 1995, the Company completed a private 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
("Warrants").
On March 27, 1996, all outstanding 2005 Notes were exchanged by the Company, in
an exchange offer registered with the SEC, for identical 2005 Notes which with
certain exceptions, are freely transferable under the Act. Resale of the
Warrants, and the issuance of common stock upon exercise of the Warrants, have
been registered with the SEC. 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 an
annual rate of 13% and be payable semi-annually in cash.
The Company received net proceeds of approximately $96,826,000 from the sale
of the Units. At the time of such closing of the Units, the Company also
received net proceeds of approximately $4,725,000 from the private sale to ING
Equity Partners, L.P.I. ("ING") of 50,000 shares of its 9% Series B-4
Convertible Preferred Stock and the exercise by ING of warrants to purchase
214,286 shares of its common stock pursuant to the June 1995 Series B
Convertible Preferred Stock private placement.
The Company will continue to use the proceeds from the sale of the 2005 Notes
and Warrants, and the Series B-4 Preferred Stock and the 2006 Notes towards
implementation of its 50 city business plan, including the development and
construction of fiber optic networks, the further development and introduction
of new services, including high-speed data, enhanced voice messaging and local
switched services, for expenses of the Company's existing networks and to fund
negative operating cash flow until break-even.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
ACSI provides or plans to provide a variety of telecommunications services to
IXCs, business and government end users in Tier II and Tier III markets located
principally in the southern United States. The Company began construction of
its first fiber optic network in Louisville in February 1994 and began to
provide commercial service on that network in November 1994. As of September
30, 1996 the Company had 18 operational networks (including Louisville) and 12
additional networks under construction.
PAGE 9
<PAGE> 10
ACSI NETWORKS
<TABLE>
<CAPTION>
TARGETED TO BE
OPERATIONAL BY
OPERATIONAL AS OF SEPTEMBER 30, 1996 DECEMBER 31, 1996
- ------------------------------------ -----------------
<S> <C> <C>
Albuquerque, NM Las Vegas, NV Amarillo, TX
Birmingham, AL Lexington, KY Baton Rouge, LA
Charleston, SC Little Rock, AR Central Maryland
Columbia, SC Louisville, KY Chattanooga, TN
Columbus, GA Mobile, AL Colorado Springs, CO
El Paso, TX Montgomery, AL Corpus Christi, TX
Fort Worth, TX Spartanburg, SC
Greenville, SC Tucson, AZ TARGETED TO BE
Irving, TX OPERATIONAL BY
Jackson, MS MARCH 31, 1997
--------------
Dallas, TX
Jacksonville, FL
Kansas City, MO
New Orleans, LA
Shreveport, LA
Tulsa, OK
</TABLE>
The Company expects to provide commercial service in the Amarillo, Baton Rouge,
Central Maryland, Chattanooga, Colorado Springs, and Corpus Christi markets by
December 31, 1996, and in the Dallas, Jacksonville, Kansas City, New Orleans,
Shreveport and Tulsa markets by March 31, 1997. The Company is actively
developing necessary marketing and engineering plans and pursuing required
municipal authorizations to begin construction of additional markets during
1996 and 1997 and plans to have, subject to receipt of additional necessary
financing, a total of 50 networks in service or under construction by June 30,
1998. The Company provides dedicated services to IXCs and to those business
and government end users whose volumes of voice and data traffic are large
enough to warrant paying a fixed monthly charge for a specific capacity
requirement rather than a usage-based variable charge. These monthly charges
vary according to the capacity of each circuit, the volume of individual
circuits ordered by the customer, the mileage of the circuits, the need for
any ancillary services and the term of the service contract, but are typically
less than the rates charged by the LECs for similar services, volumes and
terms. The Company focuses its sales efforts on the largest IXCs, with whom it
believes it has good customer relationships. Sales of dedicated services are
typically coordinated with the end user's IXC account team and billed by the
IXC rather than by the Company, thus providing the end user a single point of
contact for its entire long distance account and reducing the Company's
back-office overhead requirements. Currently, the Company offers these services
in all of its operational markets and plans to offer these services in all
markets where it constructs and operates networks. At the end of September the
Company's local network accesss business had annualized monthly revenues
including backlog of $12,397,000.
The Company is developing and has begun offering high-speed data services,
including ATM, Internet services and frame relay services. Internet services
facilitate the connectivity of local service provides, corporate,
institutional and governmental customers to the Internet, a collection of
data networks that communicate with one another using common protocols. Frame
relay is a cost-effective data transport solution for LAN-to-LAN connectivity,
PAGE 10
<PAGE> 11
legacy networks and client-server applications. Asynchronous Transfer
Mode ("ATM") is a high-bandwidth service offering virtual networking for data
and multimedia (video, data, voice) traffic allowing a customer to use a single
network for all three services. Customer charges include nonrecurring charges
for installation and provisioning and either flat rate or usage-based recurring
charges based on network access speed and the statistically guaranteed
throughput rate of data for the particular service order. The Company is
deploying and has begun carrying traffic on a broadband inter-city backbone
data network using leased lines and ATM switches that will connect the
Company's service markets, major data markets and Internet access points. The
same backbone network architecture can be utilized by the Company's enhanced
voice and local switched voice services for its inter-market connectivity and
networking requirements, which the Company believes will result in operational
efficiencies and lower costs, while further enhancing opportunities for cross
marketing and bundling services to ACSI's customers.
ACSI is implementing its data communications network via high bandwidth (DS-3)
longhaul circuits leased from various interexchange carriers. Network
connectivity within each node will be via OC-3 bandwidth, enabling the
transparent migration of longhaul circuits to OC-3 capacity as needed.
Ultimately, the platform technology is capable of upgrading the backbone
to OC-12, without further modification. The Company's initial network
phase established data Points of Presence (POP's) in seven markets plus a link
to ACSI's network management center in Maryland, where the data network is
monitored on a 24-hour-a-day basis. The Company currently has 25 POPs in
operation and plans to have 40 POPs by December 31, 1996.
As a part of its service offering the Company has attained national internet
service provider status. The Company has entered into agreements to
interconnect at three major Network Access Points ("NAPs") where national
Internet service providers ("ISPs") interconnect their networks, allowing
the multitude of local and regional ISPs to exchange data and access the
Internet globally. In addition to these initial NAP agreements at MAE-East
(Vienna, Virginia) MAE-West (San Jose, California) and Ameritch (Chicago,
Illinois), ACSI is currently negotiating for interconnection at two additional
NAPs, as well as finalizing the negotiations of its internet peering agreements.
To date the Company has signed interconnecton agreements with Bell Atlantic and
Bell South and is negotiating with other LEC's for frame relay network-to-
network interfares (NNIS). Additionally, the Company is negotiating with IXC's
to initiate at least one NNI for services within the U.S. where the Company has
not deployed an active offering. As the Company deploys additional data POPs
(including POPs in all markets where ACSI has local infrastructure), it intends
to negotiate additional NNIs to facilitate the exchange of data among other
carriers' networks both domestically and abroad. As of September 30, 1996 the
Company's advanced data business had orders for $11,523,960 of services over a
three year period.
In addition, with a limited capital investment, the Company is developing and
during May 1996 began offering to small and mid-sized business and government
end users in its first eight markets, enhanced voice messaging services. As of
September 30, 1996, the Company was offering these services in eight markets.
These customers will be billed by the Company. The range of services includes
a voice messaging service for a flat monthly charge that may be bundled with
one or more additional features (such as automated attendant/call screening,
follow-me calling, remote fax and paging and e-mail notification) in order to
meet the customer's specific communications requirements. The additional
features will be offered for incremental fixed charges and/or usage based
charges. Management believes that successful marketing of these enhanced voice
messaging services will allow it to develop relationships with end users that
may be potential customers for either dedicated services or switched voice
services. Additionally, unlike traditional telephone service, customers have
not yet become fully accustomed to use of voice messaging services, and the
demand for these services cannot be predicted at this time.
PAGE 11
<PAGE> 12
Beginning in the quarter ending December 31, 1996 and as requisite
interconnection agreements and regulatory approvals are obtained on a
state-by-state basis, the Company plans to provide local switched voice
services, such as local dial tone, termination of local calling, Centex
services, PBX trunking and switched access services. These services will be
offered for appropriate fixed and usage-based charges at rates below those
charged by LECs for similar services.
Where technically feasible and economically practicable, the Company
intends to deploy a hubbed switching strategy by using Company-owned or leased
switch capacity, in a large centrally located market, to provide services
within that market and to serve several other smaller markets located within
the same geographical area via remote switching modules. The Company believes
that this strategy, if successfully implemented, could reduce the capital
expense associated with installing a fully configured switch in each market,
which market may otherwise be too small on its own to justify the
investment. By aggregating switched traffic from multiple small markets
through a central hub switch, the Company also can expect to realize reduced
operating expenses associated with switch engineering and maintenance. The
Company believes that providing dedicated and private line, high-speed data and
enhanced voice messaging services will enhance the Company's ability to
cross-market local switched voice services to its then existing customers at
a reduced cost. Finally, the Company is evaluating opportunities, on a
market-by-market basis, to establish mutually beneficial alliances with
certain entities that have local switching requirements, experience,
facilities and/or administrative back-office operations or a customer base.
Successful negotiation of switching alliances may further reduce the
Company's capital and operating expenses associated with the provision of
switched voice services as well as providing additional market opportunities
by utilizing embedded switching technology in those markets or deploying
incremental switches more efficiently.
The Company believes that its local digital fiber optic networks, coupled
with its inter-city broadband digital networks described herein, will provide
a platform for the provision of a wide variety of voice, data and
other communications services at a reduced cost. While the Company may
offer its services to customers that are not directly connected to its
network through resale of the LEC's network, the Company believes that it can
gradually migrate many of these off-net customers to higher margin on-net
accounts as it increases penetration of all its services within a given
building. As a result, the capital investment of connecting additional
buildings and customers to ACSI's network should become more cost-effective.
Over time, the Company believes it can increase its market share of all of its
service offerings as a result of the reliability and quality of its networks,
prompt customer service, competitive pricing, cross marketing/bundling
synergies and new service offerings over its target 50-city market area.
Initially, the Company expects to experience a negative cash flow from
operations in each of its operating networks. The Company estimates that
because of the reduced operating costs associated with its smaller markets and
IXC-focused sales force, it can achieve operating cash flow break-even (i.e.,
positive EBITDA before overhead allocations) results on its networks within 10
to 15 months from the start of commercial service. Thereafter, the Company
anticipates that its profit margins will increase as each network is expanded
to directly connect additional customers to its backbone, and as off-net
customers migrate to on-net status (thus allowing the Company to retain the
portion of customer charges previously paid out to the LEC for resale of LEC
facilities). The Company will also experience initial negative cash flow from
operations as additional value-added services such as high-speed data,
enhanced voice messaging and local switched voice services are offered and
until networks providing those services reach operating cash flow break-even.
PAGE 12
<PAGE> 13
CAPITAL EXPENDITURES; OPERATING CASH FLOW
As of September 30, 1996, the Company is operating 18 digital fiber optic
networks, with an additional 12 networks under construction, and intends to
have, subject to receipt of necessary additional financing, 50 networks
operating or under construction by June 30, 1998. The costs associated with the
initial construction and operation of a network may vary greatly, primarily due
to market variations in geographic and demographic characteristics, and
the types of construction technologies which can be used to deploy the
network. Management estimates that construction of the initial one-to-three
mile fiber optic backbone and installation of related network transmission
equipment for dedicated services for each market will generally cost between
$3.5 million and $6.0 million depending on the size of the market served.
Including planned expansion routes, total capital expenditures per network are
estimated to average $6.0 million. In addition to capital expenditure
requirements, the Company incurs sales and marketing (including sales
commissions) and operating expenses and other expenses such as property
taxes and, in certain markets, franchise fees. Prior to the completion of
network construction, certain of these expenses, to the extent they are
related to pre-service construction, are capitalized. These additional
capitalized expenses, estimated by management to be between approximately
$500,000 and $1.0 million per network, are amortized over the anticipated
life of the network. These costs vary depending on the size of the market, the
length of time required to build-out the network and the rate of growth of the
customer base.
As the Company develops, introduces and rolls out its high-speed data,
enhanced voice messaging and local switched services in each of its target
markets, additional capital expenditures and net operating costs will be
incurred. The amount of these costs will vary, based on the number of
customers served and the actual services provided to the customers.
Although the Company is now generating revenues from 18 of its fiber optic
networks, on a consolidated basis, it is still incurring negative cash flows
due, in part, to the funding requirements for the networks the Company
is now planning or has under construction or development and due, in part,
to the roll-out of its new data and switched voice services. The Company
expects it will continue to incur a negative cash flow for at least the next
several years.
RESULTS OF OPERATIONS
Three Month Period Ended September 30, 1996 Compared to Three Month Period
Ended September 30, 1995
REVENUES
During the three month period ended September 30, 1996, the Company recorded
revenues of $2,812,465 as compared to revenues of $399,034 during the three
month period ended September 30, 1995. Four of the largest IXCs accounted for
approximately $1,605,552, or 57%, of revenues for the quarter ended September
30, 1996.
PAGE 13
<PAGE> 14
Other network information is as follows:
<TABLE>
<CAPTION>
Network Network Voice
Route Fiber Buildings Grade Full Time
Miles Miles Connected Equivalents Employees
----- ----- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
As of the period ended:
- -----------------------
September 30, 1995 92 4,373 112 54,431 99
September 30, 1996 543 32,774 532 267,894 269
</TABLE>
The terms "Voice Grade Equivalents ('VGEs')" or "Voice Grade Equivalent
Circuits" are commonly used measures of telephone service equivalent to one
telephone line (64 kilobits of bandwidth) actually billed to a customer.
The average annualized revenue of three of ACSI's most mature networks which
began construction in 1994 more than tripled from September 30, 1995 to
September 30, 1996, rising from $531,160 to $1,656,284. The growth in route
miles for those three networks over the same period was from an average of 13
miles to an average of 49 miles per network.
Comparatively, four of ACSI's newer networks which began construction during
1995 experienced a more than 10-fold increase in average, annualized revenue
from $74,364 to $791,805 from September 30, 1995 to September 30, 1996. During
that same time frame, these four networks increased route miles from an average
of 3 miles to an average of 53 miles per network.
TOTAL OPERATING EXPENSES
Network development and operating expenses for the three month period ended
September 30, 1996 increased to $3,709,449 from $1,584,872 in the three month
period ended September 30, 1995, reflecting significant increases in
personnel, network development and non-payroll operating expenses.
Related personnel costs increased to $2,068,868 in the quarter ended
September 30, 1996, from approximately $956,214 in the quarter ended September
30, 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 $756,766 in the quarter ended September 30, 1996 from
approximately $105,344 in the quarter ended September 30, 1995.
In the three month period ended September 30, 1996, selling, general and
administrative expenses increased to $5,674,138 from $1,170,472 in the three
month period ended September 30, 1995. Related personnel costs increased to
$1,498,146 in the quarter ended September 30, 1996 from $936,015 in the quarter
ended September 30, 1995, and corresponding operating costs increased to
$4,175,992 in the quarter ended September 30, 1996 from $234,457 in the quarter
ended September 30, 1995. This increase reflected costs associated with the
Company's efforts in the rapid expansion of its lines of business,
network deployment and geographic coverage as well as significantly increasing
its national and local city sales, marketing and administrative staffs, as well
as increased legal and other consulting expenses associated with its aggressive
programs for obtaining regulatory approvals and certifications and providing
quality network services.
Depreciation and amortization expenses increased to $2,401,188 in the three
month period ended September 30, 1996 from $263,988 in the three month period
ended September 30, 1995. During the quarter ended September 30, 1996 the
Company increased its capital assets to $101,881,877 as of September 30, 1996,
from the $20,583,224 in capital assets as of September 30, 1995. Non-cash
stock
PAGE 14
<PAGE> 15
compensation expense decreased to $174,099 for the quarter ended September 30,
1996 from $793,869 for the quarter ended September 30, 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 both 1996 and 1995 but, at the end of
fiscal 1995, the Company renegotiated contracts with certain of its
officers, establishing a limit of $2,500,000 on the Company's "put right"
obligations with respect to those contracts. During fiscal 1996, the limit was
further reduced to $2,000,000.
INTEREST AND OTHER EXPENSES
Interest and other income increased to $1,460,669 for the three month period
ended September 30, 1996 from $97,370 in the three month period ended September
30, 1995. Interest and other expense increased to $6,011,315 in the quarter
ended September 30, 1996 from $140,021 in the quarter ended September 30,
1995. The increase in interest and other income reflects the significant
increase in available funds from the Company's sale of its 9% Series B
Preferred Stock in June and November 1995, the 2005 Notes in November 1995
and the 2006 Notes in March 1996. The increase in interest and other expenses
reflected the accrual of interest related to the 2005 Notes and 2006 Notes and
the Company's increased borrowings under its secured financing facility
with AT&T Credit Corporation (the "AT&T Credit Facility"). Payments of
principal and interest on the AT&T Credit Facility will begin in calendar
1997, payments of interest on the 2005 Notes will not begin until November
2000 and payments of interest on the 2006 Notes will not begin until October
2001.
AT&T Credit Corporation's minority interest in certain of the Company's
operating subsidiaries, reduced operating losses by approximately $95,757 for
the three month period ended September 30, 1996, and by $67,267 for the three
month period ended September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
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 used to finance the building of existing networks and the
completion of new targeted networks were two private offerings of preferred
stock completed in October 1994 and June 1995, through which the Company raised
approximately $39.6 million, and the AT&T Credit Facility, through which the
Company has financing commitments for $31.2 million. On November 14, 1995,
the Company completed a private offering of 190,000 Units consisting of
$190.0 million in principal amount of the 2005 Notes and the Warrants to
purchase an aggregate of 2,432,000 shares of common stock at a price of $7.15
per share (as may be adjusted) from which the Company received approximately
$96.8 million in net proceeds. The 2005 Notes will accrete 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. In November 1995
the Company also received net proceeds of approximately $5.0 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
private placement. On March 21, 1996, the Company completed a private offering
of $120.0 million in principal amount of the 2006 Notes. The 2006 Notes will
accrete 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.
The Company received net proceeds of approximately $61.8 million from the sale
of the 2006 Notes.
PAGE 15
<PAGE> 16
The Company intends to continue to use these funds towards implementation of
its 50-city business plan, including the development and construction of fiber
optic networks, the further development and introduction of new services,
including high-speed data, enhanced voice messaging and local switched
services, for expansion of the Company's existing networks and to fund
negative operating cash flow until cash flow break even. The Company has
estimated that from October 1, 1996, through the end of the calendar year
1998, additional capital requirements for implementation of its 50-city
business plan will be approximately $389.2 million. At September 30, 1996, the
Company had approximately $102.8 million in cash and cash equivalents available
for this purpose. To meet additional capital requirements, ACSI will be
required to sell additional debt or equity securities or increase its existing
credit facility or acquire additional credit facilities. The Company may also
need to seek such additional equity financing to maintain balance sheet and
liquidity ratios required under certain of its debt instruments. In
addition, the Company in the past has considered and expects to continue to
consider potential acquisitions or other strategic arrangements that may fit
the Company's strategic plan. Although the Company has had discussions
concerning such potential acquisitions or arrangements, to date no agreements
have been reached with regard to any particular transaction. Any such
acquisitions or strategic arrangements that the Company might consider are
likely to require additional equity or debt financing, which the Company will
seek to obtain as required. The Company's expectations of required future
capital expenditures are based on the Company's current estimates and the
current state and federal regulatory environment. There can be no assurance
that actual expenditures will not be significantly higher or lower. In
addition, there can be no assurance that the Company will be able to meet its
strategic objectives or that such funds, if available at all, will be available
on a timely basis or on terms that are acceptable to the Company.
In October 1994, the Company completed the private placement of 186,664 shares
of its 9% Series A Convertible Preferred Stock, par value $1.00 per share
(which was later exchanged for Series A-1 Preferred Stock that is convertible
into 7,466,560 shares of Common Stock) with accompanying warrants to purchase
an aggregate of 2,674,506 shares of Common Stock, for an aggregate
consideration of $16.8 million (before deduction of estimated offering
expenses), including the conversion of $4.3 million of outstanding debt. Of the
warrants sold in October 1994, warrants to acquire 1,491,222 shares of Common
Stock were exercised by a principal stockholder for an aggregate exercise
price of approximately $100,000.
In June 1995, the Company completed a private placement of 227,500 shares of
its Series B Preferred Stock with accompanying warrants to purchase an
aggregate of 1,584,303 shares of Common Stock, for an aggregate
consideration of $22,750,000. In addition, in November 1995, the Company
completed a private placement of 50,000 shares of its Series B Preferred Stock
together with the exercise of accompanying warrants to purchase 214,286 shares
of Common Stock to a principal stockholder for an aggregate consideration of
$5,000,000. The Series B Preferred Stock is convertible into an aggregate of
9,910,718 shares of Common Stock.
Under the terms of the Preferred Stock, the Company is required to accrue
quarterly dividends at an annual rate of 9% of the face value of the Preferred
Stock outstanding. Such accrued dividends will be payable cumulatively
beginning January 1, 1998, or earlier upon conversion into Common Stock,
subject to certain covenants contained in the indentures relating to the
2005 Notes and the 2006 Notes.
In October 1994, the Company entered into the AT&T Credit Facility pursuant to
which AT&T Credit Corporation has agreed to provide up to $31.2 million in
financing for the development and construction of fiber optic networks by the
Company's subsidiaries. In connection with each loan made under the AT&T
Credit Facility, AT&T Credit Corporation purchased 7.25% of the capital stock
of the funded subsidiary, and ACSI pledged the other shares and the assets of
the subsidiary to AT&T Credit Corporation as security for
PAGE 16
<PAGE> 17
the loan. During fiscal 1995, the Company's subsidiaries in Louisville, Fort
Worth, Greenville and Columbia entered into loan agreements under the
AT&T Credit Facility providing for AT&T Credit Corporation funding of up
to $19.8 million in the aggregate, and in September 1995, the Company's.
subsidiary in El Paso entered into a loan agreement under the AT&T Credit
Facility providing for up to $5.5 million of AT&T Credit Corporation funding.
As of September 30, 1996, an aggregate of $23.2 million had been borrowed under
these agreements and the existing loan agreements had been amended to increase
the aggregate credit available under such agreements to the $31.2 million
aggregate credit availability under the AT&T Credit Facility.
EFFECTS OF NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to Be Disposed Of, which requires the Company to review for the
impairment of long-lived assets and certain identifiable intangibles to be
held and used by the Company whenever events or changes in circumstances
indicate that the carrying amount of any asset may not be recoverable.
Adoption of SFAS No. 121 had no impact on the Company's Consolidated Financial
Statements.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which establishes a fair value-based method for financial
accounting and reporting stock-based employee compensation plans. However, the
new standard allows compensation to continue to be measured by using the
intrinsic value based method accounting prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
but requires expanded disclosures. SFAS No. 123 is effective in fiscal year
1997. The Company has elected to continue to apply the intrinsic value-based
method of accounting for stock options.
INFORMATION REGARDING FORWARD - LOOKING STATEMENTS
Information contained herein contains "forward-looking statements" (as such
term is defined in the Private Securities Litigation Reform Act of 1995) which
can be identified by the use of forward looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereon or comparable terminology , or by discussions of
strategy. Certain statements contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other sections
herein, including statements concerning the continued development of the
Company's businesses, the markets for the Company's services and products, the
Company's anticipated capital expenditures and regulatory reform, and other
statements contained herein regarding matters that are not historical facts,
are forward- looking statements. No assurance can be given that the future
results covered by the forward-looking statements will be achieved. The
matters set forth in Exhibit 99.1 to the Company's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1996 constitute cautionary statements
identifying important factors with respect to such forward-looking statements,
including risks and uncertainties, that could cause actual results to vary
materially from the future results indicated, expressed or implied, in such
forward-looking statements. Other factors could also cause actual results to
vary materially from the future results indicated in such forward-looking
statements.
PAGE 17
<PAGE> 18
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
The Company issued an aggregate of 25, 000 shares of common stock that were not
registered under the Act during the quarter ended September 30, 1996 for an
aggregate consideration of $21,875. These shares were issued pursuant to the
exemption from the registration requirements of the Act contained in Section
4(2) of the Act upon the exercise of warrants held by two private investors who
acquired such warrants from the Company in a private placement in September
1993.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-B)
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------ ----------- ------
<S> <C> <C>
11.1 Computation of Primary Net Income
Per Share E-1
11.2 Computation of Fully Diluted Net Income
Per Share E-2
27.0 Financial Data Schedule E-3
</TABLE>
(b) Reports on Form 8-K
(c) On July 12, 1996, the Company filed with the SEC a Current Report on Form
8-K dated July 12, 1996, to report the filing by the Company on June 17, 1996,
of a registration statement on Form SB-2 with the SEC relating to the
registration of $133,750,000 proposed maximum aggregate offering price of the
Company's common stock, par value $0.01 per share, and the filing by the
Company on July 2, 1996, of Amendment No.1 to such Registration Statement.
PAGE 18
<PAGE> 19
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
American Communications Services, Inc.
--------------------------------------
(Registrant)
November 14, 1996 /s/ RICHARD A KOZAK
- ----------------- --------------------------------------------
(Richard A. Kozak, President and CEO)
November 14, 1996 /s/ HARRY J. D'ANDREA
- ----------------- --------------------------------------------
(Harry J. D'Andrea, Chief Financial Officer)
PAGE 19
<PAGE> 1
EXHIBIT 11
AMERICAN COMMUNICATIONS SERVICES, INC.
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS (LOSS)
<TABLE>
<CAPTION>
Three month period ended
Net Loss Sept 30, 1995 Sept 30, 1996
- --------------------------------------------------------- --------------- --------------
<S> <C> <C>
1 Net Loss $ 3,389,551 $ 13,601,298
2 Less: Preferred Stock Accretion 898,133 1,006,870
------------- --------------
3 Net Loss to Common Stockholders 4,287,684 14,608,168
4 Add: Effect on Interest expense 229,286 887,034
Add: Convertible Preferred Dividends Saved 898,133 1,006,870
------------- --------------
5 Net Loss to Common Stockholders, Anti-Dilutive Basis $ 3,160,265 $ 12,714,264
============= ==============
Average Shares Outstanding
- ---------------------------------------------------------
6 Weighted Average Number of
Common Shares Outstanding 5,798,916 6,703,579
7 Net additional shares assuming stock options and
warrants exercised and proceeds used first to
purchase treasury shares to 20% of shares out-
standing at quarter end, the balance to reduce
long-term debt 4,231,358 7,227,188
Additional shares assuming conversion of
preferred shares 9,173,964 17,377,278
------------- --------------
8 Weighted average number of common
and common equivalent
shares outstanding 19,204,238 31,308,045
============= ==============
Per Share Amounts
- ---------------------------------------------------------
9 Net loss per common share as
presented in statement of
operations (3 / 6) $ 0.74 $ 2.18
============= ==============
10 Net loss per share as antidilutive basis (5 / 8) $ 0.16 $ 0.41
============= ==============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 105,211,460
<SECURITIES> 0
<RECEIVABLES> 2,086,401
<ALLOWANCES> (215,454)
<INVENTORY> 2,195,729
<CURRENT-ASSETS> 109,278,136
<PP&E> 101,881,877
<DEPRECIATION> (5,404,390)
<TOTAL-ASSETS> 214,540,149
<CURRENT-LIABILITIES> 13,279,993
<BONDS> 204,720,602
186,664
277,500
<COMMON> 66,994
<OTHER-SE> (3,991,604)
<TOTAL-LIABILITY-AND-EQUITY> 214,540,149
<SALES> 0
<TOTAL-REVENUES> 2,812,465
<CGS> 3,709,449
<TOTAL-COSTS> 5,648,194
<OTHER-EXPENSES> 1,114,618
<LOSS-PROVISION> 25,944
<INTEREST-EXPENSE> 6,011,315
<INCOME-PRETAX> (13,697,055)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,601,298)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,601,298)
<EPS-PRIMARY> (2.18)
<EPS-DILUTED> 0
</TABLE>
