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: March 31, 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 MARCH 31, 1996
Common Stock, Par Value $0.01 6,555,455
Transitional Small Business Disclosure Format (check one):
YES___________ NO _____X_____
<PAGE>
AMERICAN COMMUNICATIONS SERVICES, INC.
FORM 10 - QSB
INDEX
PART I. FINANCIAL INFORMATION PAGE
NUMBER
Item 1. Financial (Unaudited)
Condensed Consolidated Balance Sheets
- June 30, 1995 and March 31, 1996 3
Condensed Consolidated Statements of
Operations - Three months and nine
months ended March 31, 1995 and 1996 5
Condensed Consolidated Statements of
Cash Flows - Three months and nine months
ended March 31, 1995 and 1996 6
Notes to Unaudited Condensed Consolidated Interim
Financial Statements 7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 11
Part II Other Information 17
Item 2. Changes in Securities 17
Item 4. Submission of Matters to a Vote
of Security Holders 19
Item 6. Exhibits and reports on Form 8-K 24
Signatures 25
PAGE 2
<PAGE>
Part 1
Financial Information
Item 1 - Financial Statements
American Communications Services, Inc.
Condensed Consolidated Balance Sheet
June 30, 1995 March 31, 1996
(UNAUDITED)
Assets
Current Assets
Cash and Short Term Investments $ 20,350,791 $154,454,550
Restricted cash 752,000 1,452,000
Accounts receivable, net 350,436 598,799
Other current assets 92,325 729,719
Total current assets 21,545,552 157,235,068
Networks, furniture and equipment,
net 15,567,290 42,737,680
Deferred financing fees and
other assets 514,123 8,005,863
Total assets $ 37,626,965 $207,978,611
Liabilities, Redeemable Stock, Options and
Warrants, Minority Interest and Stockholders' Equity
Current Liabilities
Accounts payable $ 3,843,167 $ 1,749,314
Accrued liabilities 3,648,248 1,801,145
Notes payable 146,083 103,169
Total current liabilities 7,637,498 3,653,628
Long Term Liabilities
Notes payable 3,652,085 14,054,484
Senior Discount Notes (due 2005) - 64,571,366
Senior Discount Notes (due 2006) - 100,452,832
Other Long Term Liabilities - 670,633
Dividends payable 1,070,985 3,918,681
Total liabilities $ 12,360,568 $187,321,624
See accompanying notes to unaudited condensed interim financial
statement
PAGE 3
<PAGE>
American Communications Services, Inc.
Condensed Consolidated Balance Sheet
June 30, 1995 March 31, 1996
(UNAUDITED)
Liabilities, Redeemable Stock, Options
and Warrants, Minority Interest and
Stockholders' Equity (continued)
<TABLE>
<CAPTION>
<S> <C> <C>
Redeemable stock, options and warrants 2,930,778 2,457,337
Minority Interest 194,402 384,515
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 authorized and designated as 9%
Series B Convertible Preferred Stock,
227,500 and 277,500 shares, respectively
issued and outstanding 227,500 277,500
Common Stock, $0.01 par value,
75,000,000 shares authorized, 5,744,782
and 6,555,455 shares, respectively issued
and outstanding 56,827 64,934
Additional paid-in-capital 42,411,448 56,213,198
Accumulated deficit (20,741,222) (38,927,161)
Total stockholders' equity 22,141,217 17,815,135
Total Liabilities, Redeemable Stock,
Options and Warrants, Minority Interest
and Stockholders' Equity $ 37,626,965 $207,978,611
</TABLE>
See accompanying notes to unaudited condensed interim financial
statement
PAGE 4
<PAGE>
American Communications Services, Inc.
Condensed Consolidated Statement of Operations
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For the three months ended For the nine months ended
March 31 March 31, March 31, March 31,
1995 1996 1995 1996
Revenues $ 87,385 $816,639 $ 95,631 $1,895,812
Operating Expenses
Network, development
and operations 585,431 1,954,514 1,220,125 4,796,067
Selling, general and
administrative 1,373,368 2,650,263 2,615,921 5,929,996
Non-cash compensation
expense 4,257,464 1,985,765 4,866,095 3,190,184
Depreciation and amortization 118,093 630,004 140,172 1,413,861
Total Operating Expenses 6,334,356 7,220,546 8,842,313 15,330,108
Non-operating expenses/(income)
Interest and other income (93,664) (661,313) (189,474) (1,438,817)
Interest and other expense 85,897 3,500,624 214,900 6,374,884
Debt conversion expense 5,000 0 584,985 0
Net loss before minority interest 6,244,204 9,243,218 9,357,093 18,370,363
Minority interest (4,495) (102,074) (16,155) (190,668)
Net loss 6,239,709 9,141,144 9,340,938 18,179,695
Preferred stock dividends/accretion 628,644 955,489 628,644 2,847,696
Net loss to common stockholders $6,868,353 $10,096,633 $9,969,582 $21,027,391
Net loss per common/common ($1.31) ($1.54) ($2.17) ($3.48)
equivalent share
Average number of common/common
equivalent shares outstanding 5,245,104 6,536,722 4,590,182 6,046,136
</TABLE>
See accompanying notes to unaudited condensed interim financial
statements
PAGE 5
<PAGE>
AMERICAN COMMUNICATIONS SERVICES, INC.
Condensed Consolidated Statements of Cash Flows
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For the three For the three For the nine For the nine
month period month period month period month period
ended ended ended ended
MARCH 31, 1995 MARCH 31, 1996 MARCH 31, 1995 MARCH 31, 1996
Cash flows from operating activities:
Net loss $ (6,239,709) $ (9,141,144) $ (9,340,938) $ (18,179,695)
Adjustments to reconcile net loss to net
cash provided by (used in)
operating activities:
Depreciation and amortization 118,093 630,004 140,172 1,413,861
Noncash debt conversion expense 5,000 584,985
Noncash interest expense 3,500,624 6,374,884
Provision for doubtful accounts 30,691 59,697
Loss attributable to minority interest (4,495) (102,074) (16,155) (190,668)
Noncash compensation 4,257,464 1,985,765 4,866,095 3,190,184
Changes in operating assets and liabilities:
Restricted cash related to
operating activities 104,069
Trade accounts receivable (76,003) (72,826) (83,499) (308,060)
Other current assets (184,526) (637,394)
Other assets (55,139) (238,893)
Accounts payable 538,415 (3,296,545) 1,389,375 (2,093,853)
Other accrued liabilities 292,335 (1,526,443) 528,051 (1,847,103)
Net cash provided by (used in)
operating activities (1,059,970) (8,176,474) (2,170,807) (12,218,147)
Cash flows from investing activities:
Purchase of net assets of Piedmont Teleport (20,000)
Investment in office equipment (14,812) (282,320) (73,492) (1,710,364)
Investment in network, equipment
and software (4,047,986) (10,297,369) (10,059,373) (26,526,520)
Investment in Marketable Securities - available for sale
Restricted cash related to network activities (475,000) (700,000)
Net cash used in investment activities (4,062,798) (10,579,689) (10,627,865) (28,936,884)
Cash flows from financing activities
Issuance of preferred stock, net of offering costs and
conversion of bridge financing 11,371,912 4,725,318
Deferred financing fees (2,588,305) (7,839,110)
Issuance of Senior discount notes and warrants 65,565,429 166,884,179
Issuance of notes payable 752,501 2,997,811 1,640,784 11,176,201
Warrant or stock option exercises 41,763 60,674 346,326 79,811
Proceeds from sale of minority interest
in subsidiaries 109,475 378,474
Issuance of stockholder notes payable 250,000
Payment of notes payable (1,633,973) (146,083)
Payments of capital lease obligation (3,617) (17,448) 0
Net cash flow from financing activities 790,647 66,035,609 12,067,076 175,258,790
Net increase/(decrease) in cash and
cash equivalents (4,332,121) 47,279,446 (731,596) 134,103,759
Cash and cash equivalents -
beginning of period 6,870,922 107,175,104 3,270,397 20,350,791
Cash and cash equivalents - end of period 2,538,801 154,454,550 2,538,801 154,454,550
Supplemental disclosure of cash flow information:
Interest paid on all indebtedness
Supplemental disclosure of noncash investing
and financing activities:
Excludes furniture acquired under capital leases $ 50,785
Dividends accrued in connection with
preferred stock $ 628,644 $ 955,489 $ 628,644 $ 2,847,696
Increase (decrease) in redeemable stock option
and warrants costs
Bridge financing converted to equity in connection with
private placement $4,080,079
</TABLE>
See accompanying notes to unaudited condensed consolidated interim
financial statements
PAGE 6
<PAGE>
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 and nine month periods ended March
31, 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 March 31, 1995). The Company has a
92.75 percent ownership interest in these subsidiaries. Such
statements, including comparative information for the three and nine
month periods ended March 31, 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 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, 1995
filed with the Securities and Exchange Commission (the "SEC") on
October 13, 1995, 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 for 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
PAGE 7
<PAGE>
AMERICAN COMMUNICATIONS SERVICES, INC.
Notes to Unaudited Condensed Consolidated Interim
Financial Statements
(1) BASIS OF PRESENTATION AND RELATED MATTERS (CONTINUED)
network reliability. The Company also offers high speed data
services including ATM, high speed Local Area Network ("LAN") to LAN
applications and multiple internet 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 also with an expanded end user customer base and relevant
marketing experience that can be leveraged into the offering of
local switched services.
As of March 31, 1996, ACSI had eleven operational networks and an
additional nine networks under construction, most of which are
expected to be operational by mid - 1996. As of March 31, 1996,
ACSI had applied for authority to provide switched local exchange
telecommunications services in Alabama, Arizona, Arkansas, Georgia,
Maryland, Nevada and New Mexico. Since March 31, 1996, the Company
has filed for switched services authority in Texas. As of March
31, 1996, ACSI had received authority to provide intrastate
dedicated services in Alabama, Arkansas, Georgia, Kentucky, New
Mexico, Nevada, South Carolina and Texas and had an application
pending in Mississippi. Since March 31, 1996, the Company has filed
for intrastate dedicated services in Louisiana. In Tennessee, ACSI
has received authority to provide intrastate telecommunications
services including both switched local exchange and dedicated
telecommunications services. The Company intends to have 30
networks in service or under construction during the third calendar
quarter of 1996, with all 30 networks operational by mid - 1997. 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")
PAGE 8
AMERICAN COMMUNICATIONS SERVICES, INC.
Notes to Unaudited Condensed Consolidated Interim
Financial Statements
(1) BASIS OF PRESENTATION AND RELATED MATTERS (CONTINUED)
under Rule 144A of the Securities Act of 1933, as amended (the
"Act"). The Company received net proceeds of approximately
$61,800,000 from the sale of the 2006 Notes. The Company has
commenced an exchange offer pursuant to a registration statement on
Form S-4 filed by the Company with the SEC pursuant to which the
holders of the original 2006 Notes are entitled to exchange such
2006 Notes for newly-issued notes which are identical to the
original 2006 Notes and which, with certain exceptions, are freely
transferable under the Act. The exchange offer expires June 25,
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. 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.
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 (the "Warrants"). On March 27, 1996,
the Company completed an exchange offer of newly-issued 2005 Notes
for all of the original 2005 Notes pursuant to a registration
statement on Form S-4 filed with the SEC. The new 2005 Notes are
identical to the original 2005 Notes and, 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 on a registration statement on Form S-3 filed with
the SEC. The 2005 Notes will accrete to an aggregate principal
amount of $190,000,000 by November 1, 2000, after which cash
interest will be due on a semi-annual basis. The Company received
net proceeds of approximately $96,826,000 from the sale of the
Units. At the time of the 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 (the "Series B-4
Preferred Stock) and the exercise by ING of warrants to purchase
214,286 shares of 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
PAGE 9
AMERICAN COMMUNICATIONS SERVICES, INC.
Notes to Unaudited Condensed Consolidated Interim
Financial Statements
(1) BASIS OF PRESENTATION AND RELATED MATTERS (CONTINUED)
Preferred Stock and the proceeds of the 2006 Notes to complete its 30
city business plan, as discussed below , and to fund negative
operating cash flow until break-even.
Other Information
In February, 1996, the President signed into law comprehensive
telecommunications reform legislation, The Telecommunications Act of
1996 ("1996 Act"). The new law requires all ILECs to unbundle their
local network elements. Moreover, the 1996 Act requires all local
exchange carriers ("LECs") to interconnect their facilities and
equipment. Such provisions enable the Company to obtain critical
connections to ILEC facilities. In addition, LECs are obligated to
provide local telephone number portability and dialing parity upon
request and make their local services available for resale by
competitors. Under the legislation, LECs also have to allow
competitors nondiscriminatory access to pole attachments, conduit
space and other rights-of-way. Moreover, states are prohibited from
disallowing local competition, although they are allowed to regulate
such competition.
The Company believes that each of these requirements is likely to
enhance competition in the local telecommunications marketplace, and
simplify the process of switching from ILEC services to those
offered by CLECs. However, the legislation also offers important
benefits to the ILECs. The ILECs are granted substantial new
pricing flexibility and Regional Bell Operating Companies ("RBOCs" )
regain the ability to provide long distance services and obtain new
rights to provide certain cable TV services. These changes enhance
the competitive position of the ILECs.
(2) SUBSEQUENT EVENTS
On April 11, 1996, AT&T announced agreements with ACSI and four
other companies allowing business customers in 70 cities to connect with
AT&T's network for some services as an alternative to access provided by ILECs.
Terms of the agreements were not disclosed, including the assignment of cities
for service to the companies. ACSI expects to have networks in 22 of the 70
cities covered by the AT&T announcement.
PAGE 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
During 1995, ACSI undertook an aggressive plan to build networks in mid-
size markets across the Southern and Southwestern United States. As of
March 31, 1996, the Company had eleven operational networks and an
additional nine networks under construction, most of which are expected
to be operational by mid - 1996. The Company intends to have a total of
30 networks in service or under construction during the third calendar
quarter of 1996, with all 30 networks operational by mid 1997. The
preceding statements are forward looking in nature and the Company's
ability to construct and operate its networks within such time frames may
be affected by circumstances which the Company may not control, such as
an inability to secure or maintain necessary franchises or rights of way,
or an inability to attract a customer base sufficient to justify
constructing or operating in a market.
ACSI NETWORKS
CURRENTLY
OPERATIONAL UNDER CONSTRUCTION
Albuquerque, NM Amarillo, TX
Columbia, SC Baton Rouge, LA
El Paso, TX Birmingham, AL
Fort Worth, TX Charleston, SC
Greenville, SC Columbus, GA
Lexington, KY Irving, TX
Little Rock, AR Jackson, MS
Louisville, KY Las Vegas, NV
Mobile, AL Spartanburg, SC
Montgomery, AL
Tucson, AZ
The costs associated with the initial construction and operation of a
network may vary greatly, in large part because of market variations in
geographic and demographic characteristics. 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. In
addition to capital expenditure requirements, the Company incurs sales
and marketing expenses (including sales commissions), operating and
right-of-way costs and property taxes and, in certain markets, franchise
fees. Certain of these direct pre-operating costs, to the extent they are
related to the construction of networks, are
PAGE 11
capitalized until the networks are substantially complete, at which time
they are then expensed as incurred thereafter. 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.
The Company is introducing enhanced voice messaging and high-speed data
services and plans to roll out local switched services in its target
markets during the fourth calendar quarter of 1996. The preceding
sentence is forward looking in nature and the introduction of local
switched services in the Company's markets may be affected by, among
other things, the time required to conclude reasonable economically-
efficient interconnection agreements with incumbent ILEC's that operate
in the Company's markets and to obtain state public utility commission
("PUC") approvals.
As of March 31, 1996, ACSI had applied for authority to provide switched
local exchange telecommunications services in seven states, and had been
granted authority in one. The Company plans to complete filings for
switched services authority during the calendar quarter ended June 30,
1996 in all states in which it has networks in operation or under
construction.
The Company began its interconnection negotiations in March, 1996 with
ILECs in states in which it then had networks in operation or under
construction. The 1996 Act requires that interconnection between
incumbent ILECs and new entrants like the Company initially be resolved
through private negotiation. If agreement is reached, it must be
submitted to the state PUC for approval and the PUC has 90 days to act.
If negotiations are not successful, the parties have a statutory right to
seek arbitration by PUCs of outstanding disputes during the 135-160 days
following the initial request for interconnection and the PUC must
resolve all disputes within nine months of the initial interconnection
requests, and then approve the arbitrated agreement within 30 days.
Thus, the Company may begin seeking arbitration of interconnection
disputes in the July-August time frame. In this regard, FCC rules
interpreting the interconnection obligations of the 1996 Act are expected
by August 8, 1996, which will establish national guidelines. PUC
resolution of outstanding disputes involving the Company's initial
interconnection requests should be completed by the end of January 1997.
In rolling out its new services, the Company will incur additional
capital expenditures and operating costs. The amount of these costs will
vary based on the number of customers served and the actual services
provided to the customers. The Company has reorganized into three
business units (Network Services, Advanced Data Services and Switched
Services) in order to provide specific focus to each service and maximize
cross-marketing opportunities. Although the Company has generated
revenues from eleven of its fiber optic networks, on a consolidated basis
it is still incurring negative operating and investing cash flows due, in
large part, to the funding requirements for its networks currently under
construction and to initiate operations for its enhanced voice, data
services and other operations.
PAGE 12
RESULTS OF OPERATIONS
REVENUES
During the three months ended March 31, 1996 (third quarter fiscal 1996) and
the nine months ended March 31, 1996 (the "first three quarters of fiscal
1996"), the Company recorded revenues and had operational networks compared
to the three months ended March 31, 1995 (third quarter fiscal 1995) and the
nine months ended March 31, 1995 (the "first three quarters of fiscal
1995") and to other prior periods as follows:
Revenues Operational
Networks
Three months ended March, 1995 $ 87,385 4
Three months ended March, 1996 $ 816,639 11
Nine months ended March, 1995 $ 95,631 4
Nine months ended March, 1996 $1,895,812 11
These revenues were substantially derived from the Company's provision of
dedicated special access services. The recurring monthly run-rate
revenue at the end of March 1996 was $408,959.
Other network information is as follows:
Network Network Buildings Voice
Route Fiber on the Grade Full Time
MILES MILES NETWORK EQUIVALENTS EMPLOYEES
AS OF THE PERIOD ENDED:
March 31, 1995 11 1,031 24 16,512 59
March 31, 1996 200 9,466 133 125,208 143
The terms "Voice Grade Equivalents (`VGEs')" or "Voice Grade Equivalent
Circuits" are commonly used measures of telephone service equivalent to one
telephone line (64 kilobits of bandwidth) actually billed to a customer.
TOTAL OPERATING EXPENSES
Network development and operations expenses for the first three quarters
of fiscal 1996 increased to $4,796,067 from $1,220,125 in the first
three quarters of fiscal 1995, reflecting the Company's 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 the performance of market feasibility,
engineering, rights-of-way and regulatory evaluations in additional
target cities. Related personnel costs
PAGE 13
increased to $1,501,959 in the first three quarters of fiscal 1996 from
approximately $791,900 in the first three quarters of fiscal 1995, when
the Company was operating primarily as a development stage company. For
the third quarter of fiscal 1996, network development and operations
expenses increased to $1,954,514 from $ 585,431 in the third quarter of
fiscal 1995; related personnel costs increased to $597,842 from
approximately $352,900 and other operating costs increased to $1,186,581
from approximately $232,500 for the corresponding periods, as the Company
expanded its programs for rights-of-way and indefeasible rights-of use
("IRU's") with significant partners.
In the first three quarters of fiscal 1996, selling, general and
administrative expenses increased to $5,929,996 from $2,615,921 in the
first three quarters of fiscal 1995. Related personnel costs increased to
$3,622,229 in the first three quarters of fiscal 1996 from $1,909,800 in
the first three quarters of fiscal 1995, and corresponding operating
costs increased to $2,307,767 in the first three quarters of fiscal 1996
from $483,300 the first three quarters of 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. Reflecting these
increased activities, third quarter fiscal 1996 selling, general and
administrative expenses increased to $2,650,263 from $1,373,368 in the
third quarter fiscal 1995. Related personnel costs increased to
$1,463,682 in the third quarter fiscal 1996 from $1,079,100 in the third
quarter fiscal 1995, and corresponding operating costs increased to
$1,186,581 in the third quarter fiscal 1996 from $249,800 in the third
quarter fiscal 1995.
Depreciation and amortization expenses increased to $1,413,861 in the
first three quarters of fiscal 1996 from $140,172 in the first three
quarters of fiscal 1995 and to $630,004 in the third quarter fiscal 1996
from $118,093 in the third quarter fiscal 1995. During the third quarter
of fiscal 1996 the Company increased its capital assets by approximately
$42,737,680, representing an increase of such assets of more than 293 %
over the end of the first three quarters of fiscal 1995. Non-cash stock
compensation expense decreased to $3,190,184 for the first three quarters
of fiscal 1996 from $4,866,095 for the first three quarters of fiscal
1995 and to $1,985,765 for the third quarter fiscal 1996 from $4,257,464
for the third quarter 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 $2,500,000 on the Company's put right obligations
with respect to those contracts. During the quarter ended September 30,
1995, this limitation was reduced further to $2,000,000.
PAGE 14
Interest and other income increased to $ 1,438,817 for the first three
quarters of fiscal 1996 from $ 189,474 in the first three quarters in
fiscal 1995 and to $661,313 for the third fiscal quarter of 1996 from $
93,664 in the third fiscal quarter of 1995. Interest expense and other
costs increased to $6,374,884 in the first three quarters of fiscal 1996
from $214,900 in the first three quarters of fiscal 1995 and increased
to $3,500,624 in the third quarter fiscal 1996 from $85,897 in the third
quarter fiscal 1995. These increases in interest income and expenses
reflected the significant increase in available funds from the Company's
sale of its 9% Series B Preferred Stock in June and November 1995 and its
13% Senior Discount Notes (the "2005 Notes") in November, 1995. The
increase in interest and other expenses reflected the accrual of interest
related to the 2005 Notes and the Company's increased borrowings under
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 do not begin until November, 2000 and payments of interest of the
Company's 12 3/4% Senior Discount Notes due 2006 (the "2006 Notes") do not
begin until October 2001.
Debt conversion expense in the first three quarters of fiscal 1995
totaled $5,000, reflecting expenses incurred in connection with the
conversion of certain of the Company's debt to equity in September 1994.
AT&T Credit Corporation's minority interest in the Company's operating
subsidiaries for which it provided funding, reduced operating losses by
approximately $190,668 and $102,074 for the first three quarters and
third quarter of fiscal 1996, respectively, and by $16,155 and $4,495
for the first three quarters and third quarter fiscal 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has been dependent upon external financing to fund its
operations. The primary sources of funds used to finance the building of
existing networks and the completion of new targeted networks have been
the Company's two Preferred Stock private placements completed in
October 1994 and June and November 1995, the AT&T Credit Facility, the
private offering in November 1995 of 190,000 Units (the "Units")
consisting of $190,000,000 principal amount of 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") and a private offering in March 1996 of
$120,000,000 of 2006 Notes. The Company obtained approximately (i)
$77,000,000 in financing and financing commitments from the Preferred
Stock private placements and the AT&T Credit Facility, (ii) $96,826,000
from the private offering of the 2005 Notes and (iii) $61,800,000 from
the private offering of the 2006 Notes. The 2005 Notes will accrete at a
rate of 13% to an aggregate principal amount of $190,000,000 by November
1, 2000 after which cash interest will be due on a semi-annual basis.
The 2006 Notes will accrete at a rate of 12-3/4% compounded semi-
annually, to an aggregate principal amount of $120 million by
PAGE 15
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. Payments of principal and interest on the AT&T
Credit Facility will begin in calendar 1997.
The Company intends to continue to use these funds towards the completion
of the Company's 30-city business plan including the development and
construction of a total of thirty fiber optic networks, the further
development and introduction of new services including enhanced voice
messaging, high-speed data and local switched services, for expansion of
the Company's existing networks and to fund negative operating cash flow
until break-even. The Company estimates the total capital requirements
for implementation of its 30-city business plan will aggregate between
$250 and $275 million through fiscal 2000. ACSI will consider the sale of
debt or equity securities or increases in existing credit facilities to
fund the completion of its plan. Any acquisitions that the Company might
consider are likely to require additional equity or debt financing, which
the Company will seek to obtain as required. Certain covenants in the
Indentures for the 2005 Notes and the 2006 Notes may restrict the
Company's ability to incur additional indebtedness.
PAGE 16
PART II OTHER INFORMATION
ITEM 2.CHANGES IN SECURITIES
(a) In response to voting rights issues raised by the Nasdaq Stock Market
staff concerning the Company's governance structure, the Company amended
its Certificate of Incorporation, which amendments were approved by the
stockholders of the Company at the annual meeting held on January 26,
1996 (the "Annual Meeting"), such that the Board generally will be
composed of seven members, four of whom will be elected by the holders of
the Company's Common Stock and three of whom will be elected by the
holders of the Company's Preferred Stock. Pursuant to the Governance
Agreement dated November 8, 1995 between the Company and certain holders
of its Preferred Stock (the "Governance Agreement"), until June 26, l996,
the Board was to consist of eleven members, four of whom were elected by
holders of the Common Stock and seven of whom were elected by holders of
the Preferred Stock. On February 26, 1996, the Company and the other
parties to the Governance Agreement signed the Supplemental Governance
Agreement pursuant to which the Board was reduced to seven members, four
of whom were elected by holders of the Common Stock and three of whom
were elected by holders of the Preferred Stock. When the Board was
reduced to seven members on February 26, 1996, Richard A. Kozak, Steven
G. Chrust, Frederick Galland and Cathy Markey, all of whom had been
elected by the holders of the Company's Preferred Stock, resigned.
At the Annual Meeting, a number of resolutions were approved which
amended the Company's Certificate of Incorporation. First, the
stockholders approved a proposal to amend the Certificate of
Incorporation to allow the board of Directors to amend the
Company's by-laws, in addition to the stockholders, as provided
under Delaware law. Second, the stockholders approved a proposal to
amend the Company's Certificate of Incorporation to clarify that
the prohibition on cumulative voting did not apply to holders of
the Company's Preferred Stock. Third, the stockholders approved a
proposal to change the definition of "triggering events" which
cause the dividend rate to increase and the size of the Board of
Directors to increase upon the occurrence of certain events.
Fourth, the stockholders approved a proposal to amend the
Certificate of Incorporation to provide for voting by the holders
of the Preferred Stock as a separate class to approve certain matters,
such as the authorization or creation of a new class or
PAGE 17
<PAGE>
additional classes of stock on a par with or senior to the Preferred
Stock, the amendment of the Company's Certificate of Incorporation or
by-laws, a merger, consolidation or combination with another business
involving the Company, and the sale of substantially all the assets
of the Company. Finally, the stockholders approved an amendment to
the Company's Certificate of Incorporation to permit the Company to
reissue Preferred Stock acquired by the Company through the
conversion of Preferred Stock or by other means.
(b) Pursuant to the Indentures for the 2005 Notes and 2006 Notes, the
Company may not make certain Restricted Payments (as defined in the
Indentures) unless certain financial covenants are satisfied.
Accordingly, under this restriction, the Company may not pay
dividends on the Company's Stock unless certain financial ratios
are satisfied. A copy of the Indenture for the 2005
Notes was filed as an exhibit to a registration statement on Form
S-4 filed by the Company on December 12, 1995 (file No.33-80305),
and a copy of the Indenture for the 2006 Notes was filed as an
exhibit to the Company's Current Report on Form 8-K filed with the
SEC on April 11, 1996.
PAGE 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) An Annual Meeting of stockholders was held on January 26, 1996.
(b) The directors elected by the holders of the Company's Common Stock were
Anthony J. Pompliano, Benjamin R. Giess, Peter C. Bentz, and George M.
Middlemas. The directors elected by the holders of the Company's
Preferred Stock were Christopher L. Rafferty, Olivier L. Trouveroy,
Edwin M. Banks, Steven G. Chrust, Richard A. Kozak, Frederick
Galland and Cathy Markey.
(c) The matters voted upon at the annual meeting and the results of the
voting are set forth below. All of the proposals discussed below
were approved by the stockholders at the annual meeting. Brokers'
non-votes were not applicable.
(i) The stockholders voted 4,099,222 shares of Common Stock and 447,606
shares of Preferred Stock in favor, 215 shares of Common Stock and 0
shares of Preferred Stock against and 0 shares of Common Stock and 0
shares of Preferred Stock abstaining with respect to the proposal to the
Company's Certificate of Incorporation to increase the number of
authorized shares of Common Stock from 30,000,000 to 75,000,000;
(ii) The stockholders voted 4,007,050 shares of Common Stock and 447,606
shares of Preferred Stock in favor, 79,887 shares of Common Stock
and 0 shares of Preferred Stock against and 12,500 shares of Common
Stock and 0 shares of Preferred Stock abstaining with respect to
the proposal to amend the Company's Certificate of Incorporation
to confer the power to adopt, amend or repeal the by-laws on the
board of directors in addition to the stockholders;
(iii) The stockholders voted 4,085,702 shares of Common Stock and 447,606
shares of Preferred Stock in favor, 1035 shares of Common Stock and
0 shares of Preferred Stock against and 12,500 shares of Common
stock and 0 shares of Preferred Stock abstaining with respect to
the proposal to amend the Company's Certificate of Incorporation to
clarify that the prohibition on cumulative voting applies solely to
the Company's Common Stock;
(iv) The stockholders voted 4,085,702 shares of Common Stock and 447,606
shares of Preferred Stock in favor, 13,735 shares of Common Stock
and 0 shares of Preferred Stock against and 0 shares of Common
Stock and 0 shares of Preferred Stock abstaining with respect to
the proposal to amend the Company's Certificate of Incorporation to
further limit personal liability of directors and to provide
indemnification for the Company's officers, directors, employees
and agents;
PAGE 19
(v) The stockholders voted 4,081,544 shares of Common Stock and 447,606
shares of Preferred Stock in favor, 17,893 shares of Common Stock
and 0 shares of Preferred Stock against and 0 shares of Common
stock and 0 shares of Preferred Stock abstaining with respect to
the proposal to amend the Company's Certificate of Incorporation to
alter the size and voting of the Board;
(vi) The stockholders voted 4,085,702 shares of Common Stock and 447,606
shares of Preferred Stock in favor, 1235 shares of Common Stock and
0 shares of Preferred Stock against and 12,500 shares of Common
Stock and 0 shares of Preferred Stock abstaining with respect to
the proposal to amend the Company's Certificate of Incorporation to
alter the structure of the committees of the Boards of Directors of
the Company's subsidiaries and to amend the provision for payment
of certain expenses of Directors;
(vii) The stockholders voted 4,086,722 shares of Common Stock and 447,606
shares of Preferred Stock in favor, 215 shares of Common Stock and
0 shares of Preferred Stock against and 12,500 shares of Common
Stock and 0 shares of Preferred Stock abstaining with respect to
the proposal to amend the Company's Certificate of Incorporation to
alter the definition of triggering events which cause the dividend
rate of the Preferred Stock and the size of the Board to increase;
(viii)The stockholders voted 4,082,555 shares of Common Stock and 447,606
shares of Preferred Stock in favor, 16,882 shares of Common Stock
and 0 shares of Preferred Stock against and 0 shares of Common
Stock and 0 shares of Preferred Stock abstaining with respect to
the proposal to amend the Company's Certificate of Incorporation to
alter the class voting rights of the Preferred Stock;
(ix) The stockholders voted 4,081,735 shares of Common Stock and 447,606
shares of Preferred Stock in favor, 17,702 shares of Common Stock
and 0 shares of Preferred Stock against and 0 shares of Common
Stock and 0 shares of Preferred Stock abstaining with respect to
the proposal to amend the Company's Certificate of Incorporation to
eliminate the provision prohibiting the Company from reissuing
Preferred Stock acquired by the Company;
(x) The stockholders voted 4,086,937 shares of Common Stock and 447,606
shares of Preferred Stock in favor, 0 shares of Common Stock and 0
shares of Preferred Stock against and 12,500 shares of Common Stock
and 0 shares of Preferred Stock abstaining with respect to the
proposal to amend the Company's by-laws to conform the by-laws to
the Certificate of Incorporation with respect to the calling of
special meetings of the stockholders;
PAGE 20
(xi) The stockholders voted 4,099,216 shares of Common stock and 447,606
shares of Preferred Stock in favor, 221 shares of Common Stock and
0 shares of Preferred Stock against and 0 shares of Common Stock
and 0 shares of Preferred Stock abstaining with respect to the
proposal to amend the Company's by-laws to conform the by-laws to
the Certificate of Incorporation with respect to voting with
respect to the Company's Preferred Stock and Directors;
(xii) The stockholders voted 4,099,216 shares of Common Stock and 447,606
shares of Preferred Stock in favor, 221 shares of Common Stock and
0 shares of Preferred Stock against and 0 shares of Common Stock
and 0 shares of Preferred Stock abstaining with respect to the
proposal to amend the Company's by-laws to conform the by-laws to
the Certificate of Incorporation, as amended, with respect to the
size and voting of the Board;
(xiii)The stockholders voted 4,099,437 shares of Common Stock and 447,606
shares of Preferred Stock in favor, 0 shares of Common Stock and 0
shares of Preferred Stock against and 0 shares of Common Stock and
0 shares of Preferred Stock abstaining with respect to the proposal
to amend the Company's by-laws to conform the by-laws to the
Certificate of Incorporation, as amended, with respect to class
voting in connection with board elections and to provide for the
removal and replacement of Directors in accordance therewith;
(xiv) The stockholders voted 4,099,216 shares of Common Stock and 447,606
shares of Preferred Stock in favor, 215 shares of Common Stock and
0 shares of Preferred Stock against and 6 shares of Common Stock
and 0 shares of Preferred Stock abstaining with respect to the
proposal to amend the Company's by-laws to conform the by-laws to
the Certificate of Incorporation, as amended, with respect to the
membership criteria of the Compensation and Audit Committees of the
Board;
(xv) The stockholders voted 4,070,064 shares of Common Stock and
447,606 shares of Preferred Stock in favor, 29,373 shares of Common
Stock and 0 shares of Preferred Stock against and 0 shares of
Common Stock and 0 shares of Preferred Stock abstaining with
respect to the proposal to amend the Company's by-laws to expand
indemnification of the officers, directors, employees and agents of
the Company;
(xvi)The stockholders voted 4,008,055 shares of Common Stock and 447,606
shares of Preferred Stock in favor, 91,367 shares of Common Stock
and 0 shares Preferred Stock against and 15 shares of Common Stock
and 0 shares of Preferred Stock abstaining with respect to the
proposal to amend the Company's by-laws to conform the by-laws to
the Certificate of Incorporation, as amended, with respect to
conferring the power to adopt, amend or repeal the by-laws on the
Board in addition to the stockholders;
PAGE 21
(xvii)The stockholders voted 4,073,217 shares of Common Stock and 447,606
shares of Preferred Stock in favor, 13,720 shares of Common Stock
and 0 shares Preferred Stock against and 12,500 shares of Common
Stock and 0 shares of Preferred Stock abstaining with respect to
the proposal to amend the Company's 1994 Stock Option Plan to
increase the number of shares of Common stock reserved for issuance
upon exercise of options granted under the 1994 Plan from 710,000
to 1,910,000 to permit discretionary grants of options to
independent directors to eliminate the provision which provides
that formula grants of options to independent directors become
exercisable one year from the date of grant;
(xviii) The stockholders voted 4,081,550 shares of Common Stock and 447,606
shares of Preferred Stock in favor, 17,887 shares of Common Stock and
0 shares of Preferred Stock against and 0 shares of Common Stock and 0
shares of Preferred Stock abstaining with respect to the proposal to
ratify the Indemnity Agreements with current officers and directors
of the Company; and
(xix) The stockholders voted 4,082,770 shares of Common Stock and 447,606 shares
of Preferred Stock in favor, 16,667 shares of Common Stock and 0 shares
of Preferred Stock against and 0 shares of Common Stock and 0 shares
of Preferred Stock abstaining with respect to the ratification of
the selection of KPMG Peat Marwick LLP, Independent Certified
Public Accountants, to audit the Consolidated Financial Statements
of the Company for the fiscal year ending June 30, 1996.
(xx) The stockholders voted for the nominees to the Board of Directors of the
Company as follows:
A) Anthony J. Pompliano, 4,080,260 shares of Common Stock in
favor, 19,177 shares withheld.
B) Benjamin P. Giess, 4,080,260 shares of Common Stock in favor,
19,177 shares withheld.
C) Peter C. Bentz, 4,080,260 shares of Common stock in favor,
19,177 shares withheld.
D) George M. Middlemas, 4,080,260 shares of Common Stock in favor,
19,177 shares withheld.
E) Christopher L. Rafferty, 447,606 shares of Preferred Stock in
favor, and 0 shares withheld.
PAGE 22
F) Olivier L. Trouveroy, 447,606 shares of Preferred Stock in
favor, and 0 shares withheld.
G) Edwin M. Banks, 447,606 shares of Preferred Stock in favor, and
0 shares withheld.
H) Steven G. Chrust, 447,606 shares of Preferred Stock in favor,
and 0 shares withheld.
I) Richard A. Kozak, 447,606 shares of Preferred Stock in favor,
and 0 shares withheld.
J) Frederick Galland, 447,606 shares of Preferred Stock in favor,
and 0 shares withheld.
K) Cathy Markey, 447,606 shares of Preferred Stock in favor, and 0
shares withheld.
PAGE 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (numbered in accordance with Item 601 of
Regulation S-K)
Exhibit Page
NUMBER DESCRIPTION NUMBER
11.1 Computation of Primary Net Income
Per Share E-1
27.0 Financial Data Schedule E-3
(b) Reports on Form 8-K
On March 11, 1996, the Company filed with the Commission a
Current Report on Form 8-K dated February 29, 1996, to announce the
possible underwritten public offering of 5 million shares of the
Company's Common Stock, the proceeds of which would be used to fund the
Company's 30-city network plan and implementation of its local and switched
services business.
On April 11, 1996, the Company filed with the Commission a Current
Report on Form 8-K dated March 26, 1996, to announce the completion of
the private placement of $120,000,000 of the Company's 12 3/4%
Senior Discount Notes due 2006.
PAGE 24
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
AMERICAN COMMUNICATIONS SERVICES, INC.
(Registrant)
MAY 14, 1996 /S/ RICHARD A. KOZAK
(Richard A. Kozak, President and CEO)
MAY 14, 1996 /S/ HARRY J. D'ANDREA
(Harry J. D'Andrea, Chief Financial Officer)
PAGE 25
AMERICAN COMMUNICATIONS SERVICES, INC.
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS (LOSS)
<TABLE>
<CAPTION>
<C> <C> <C> <C>
<S> Three Months ended March 31, Nine Months ended March 31,
NET LOSS 1995 1996 1995 1996
1 Net Loss $ 6,239,709 $ 9,141,144 $ 9,340,938 $ 18,179,695
2 Less: Preferred Stock Accretion 628,644 955,489 628,644 2,847,696
3 Net Loss to Common Stockholders 6,868,353 10,096,633 9,969,582 21,027,391
4 Add: Effect on Interest expense $85,897 $899,499 $214,900 $ 2,710,888
Add: Convertible Preferred
Dividends Saved 628,644 955,489 628,644 2,847,696
5 Net Loss to Common Stockholders,
Anti-Dilutive Basis $ 6,153,812 $ 8,241,645 $ 9,126,038 $ 15,468,807
AVERAGE SHARES OUTSTANDING
6 Weighted Average Number of
Common Shares Outstanding 5,245,104 6,536,722 4,590,182 6,046,136
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 year end, the balance
newly issued 5,599,419 9,275,515 5,599,419 7,928,513
Additional shares assuming conversion of
preferred shares 7,466,560 17,377,274 4,387,285 17,377,274
8 Weighted average number of common
and common equivalent
shares outstanding 18,311,083 33,189,511 14,576,886 31,351,923
PER SHARE AMOUNTS
9 Net loss per common share as
presented in statement of
operations (3 ( 6) $ (1.31) $ (1.54) $ (2.17) $ (3.48)
10 Net loss per share as
antidilutive basis (5 ( 8) $ (0.34) $ (0.25) $ (0.63) $ (0.49)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 155,906,550
<SECURITIES> 0
<RECEIVABLES> 688,209
<ALLOWANCES> (89,410)
<INVENTORY> 729,719
<CURRENT-ASSETS> 157,235,068
<PP&E> 52,463,469
<DEPRECIATION> (1,719,926)
<TOTAL-ASSETS> 207,978,611
<CURRENT-LIABILITIES> (3,653,628)
<BONDS> 183,667,996
186,664
277,500
<COMMON> 64,934
<OTHER-SE> 20,127,889
<TOTAL-LIABILITY-AND-EQUITY> 207,978,611
<SALES> 0
<TOTAL-REVENUES> 1,895,812
<CGS> 4,736,370
<TOTAL-COSTS> 5,929,996
<OTHER-EXPENSES> 3,165,228
<LOSS-PROVISION> 59,697
<INTEREST-EXPENSE> 6,374,884
<INCOME-PRETAX> (18,370,363)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,370,363)
<EPS-PRIMARY> (3.97)
<EPS-DILUTED> 0
</TABLE>
