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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1997 [ ] TRANSITION
REPORT UNDER SECTION 13 OR 15(D) OF
THE EXCHANGE ACT For the transition period from
__________ to __________
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.)
131 National Business Parkway, Annapolis Junction, MD 20701
(Address of principal 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 [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of November 10, 1997,
Common Stock, Par Value $0.01 -- 36,959,978
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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<PAGE>
AMERICAN COMMUNICATIONS SERVICES, INC.
FORM 10 -- QSB
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets --
September 30, 1997 (unaudited) and December 31, 1996 3
Condensed Consolidated Statements of Operations --
Three and Nine Months Ended
September 30, 1997 and 1996 (unaudited) 4
Condensed Consolidated Statements of Cash Flows --
Nine Months Ended September 30, 1997 and 1996 (unaudited) 5
Notes to Unaudited Condensed Consolidated Interim
Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 6. Exhibits and reports on Form 8-K 15
Signatures............................................................... 16
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1 -- Financial Statements
AMERICAN COMMUNICATIONS SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in thousands, except share data)
September 30, December 31,
1997 1996
-------------- --------------
(Unaudited)
ASSETS
Current Assets
Cash and Cash equivalents $149,874 $ 78,619
Restricted cash 74,945 2,342
Accounts receivable, net 10,703 2,429
Other current assets 3,742 1,203
------- -------
Total current assets 239,264 84,593
Networks, furniture and equipment, gross 250,363 144,403
(less: Accumulated depreciation) (23,358) (8,320)
------- -------
227,005 136,083
Deferred financing fees 26,034 8,380
Goodwill (net of accumulated amortization) 7,546 --
Other assets 756 982
------- ------
Total assets $500,605 $230,038
LIABILITIES, REDEEMABLE STOCK, OPTIONS AND
WARRANTS AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 8,589 $ 33,587
Accrued liabilities 14,586 4,132
Notes payable -- current portion 1,446 872
----- --------
Total current liabilities 24,621 38,591
Long Term Liabilities
Notes payable 449,507 209,538
Other Long Term Liabilities 267 --
Dividends payable -- 6,946
------- -------
Total liabilities 474,395 255,075
Redeemable stock, options and
warrants 53,793 2,000
------- -------
Stockholders' Equity
Preferred stock, $1.00 par value,
186,664 shares authorized and
designated as 9% Series A-1
Convertible Preferred Stock
0 and 186,664 shares,
respectively, issued
and outstanding 0 187
Preferred stock, $1.00 par value,
277,500 shares designated as 9%
Series B Convertible Preferred Stock,
authorized, 0 and 277,500,
respectively, issued
and outstanding 0 278
Common Stock, $0.01 par value,
75,000,000 shares authorized,
36,386,323 and 6,784,996 shares,
respectively, issued and
outstanding 364 68
Additional paid-in-capital 134,133 54,870
Accumulated deficit (162,080) (82,440)
-------- --------
Total stockholders' equity/(deficit) (27,583) (27,037)
Total Liabilities, Redeemable Stock,
Options and Warrants and
Stockholders' Equity/(deficit) $500,605 $230,038
======== ========
See accompanying notes to unaudited condensed consolidated
interim financial statements.
<PAGE>
AMERICAN COMMUNICATIONS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except share data)
For the three For the nine
months ended months ended
September 30, September 30,
1997 1996 1997 1996
(Unaudited)
Revenues $16,055 $2,812 $35,847 $5,239
Operating Expenses
Network, development and operations 10,642 3,709 28,668 6,052
Selling, general and administrative 18,156 5,674 47,975 16,060
Non-cash compensation expense 500 174 1,324 1,706
Depreciation and amortization 6,621 2,401 16,077 4,717
----- ----- ------ -----
Total Operating Expenses 35,919 11,958 94,044 28,535
Loss from operations (19,864) (9,146) (58,197) (23,296)
Non-operating income/expenses
Interest and other income (2,815) (1,460) (3,893) (5,093)
Interest and other expense 12,915 6,011 25,336 13,653
------ ----- ------ ------
Net loss before minority interest (29,964) (13,697) (79,640) (31,856)
Minority interest 0 96 0 353
------ ------ ------- ------
Net loss (29,964) (13,601) (79,640) (31,503)
Preferred stock dividends/accretion 2,489 1,007 3,584 3,024
----- ----- ----- -----
Net loss to common stockholders $(32,453)$(14,608) $(83,224) $(34,527)
--------- ------- -------- ---------
Net loss per common/common
equivalent share $(0.90) $(2.18) $(3.45) $(5.22)
------ ------ ------- -------
Average number of common/common
equivalent shares outstanding 36,228,568 6,703,579 24,139,630 6,613,543
---------- --------- --------- ---------
See accompanying notes to unaudited condensed consolidated
interim financial statements.
<PAGE>
AMERICAN COMMUNICATIONS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
For the nine months ended
September 30, September 30,
1997 1996
---------- ---------
(Unaudited)
Cash Flow from Operating Activities
Net Loss................................................. $ (79,640) $ (31,503)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization.......................... 15,610 4,311
Interest deferral and accretion........................ 19,268 13,182
Amortization of deferred financing fees................ 1,767 1,074
Provision for doubtful accounts........................ 1,236 177
Loss attributable to minority interest................. -- (353)
Noncash compensation................................... 1,324 1,706
Changes in operating assets and liabilities:
Restricted cash related to operating
activities..................................... (2,603) 1,360
Trade accounts receivable........................... (9,509) (1,491)
Other current assets................................ (2,540) (1,651)
Other assets........................................ 226 246
Accounts payable.................................... (24,998) 5,657
Accrued financing fees.............................. -- (1,542)
Other accrued liabilities........................... 10,455 1,337
--------- ---------
Net cash used in operating activities.................... (69,404) (7,490)
--------- ---------
Cash flows from investing activities
Restricted cash related to network activities -- (2,300)
Purchase of furniture and equipment.................... (8,216) 13,595
Investment in marketable securities - available for
sale......................... -- 49,827
Network development costs.............................. (95,635) (78,528)
--------- --------
Net cash used in investing activities.................... (103,851) (17,406)
--------- --------
Cash flows from financing activities
Issuance of notes payable.............................. 1,492 73,913
Issuance of common stock............................... 40,702 --
Issuance of Redeemable Preferred Stock
and warrants.......................... 70,855 --
Issuance of Senior Notes............................... 220,000 --
Issuance of Series B Preferred Stock................... -- 275
Payment of notes payable............................... (1,134) --
Payment of deferred financing fees..................... (19,421) (4,211)
Restricted cash related to financing activities (70,000) --
Warrant and stock option exercises..................... 2,016 390
--------- --------
Net cash flow provided by financing activities........... 244,510 70,367
---------- --------
Net increase in cash and cash equivalents................ 71,255 45,471
Cash and cash equivalents-- beginning of period.......... 78,619 57,348
-------- --------
Cash and cash equivalents-- end of period................ $ 149,874 $102,819
======== ========
Supplemental disclosure of cash flow information
Dividends declared with preferred stock................ $ 3,584 $ 3,024
Decrease in accrued redeemable warrant cost............ $ -- $ 505
Increase in goodwill................................... $ 8,119 $ --
========= ==========
See accompanying notes to unaudited condensed consolidated
interim financial statements.
<PAGE>
AMERICAN COMMUNICATIONS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS
Note 1: Basis of Presentation
Effective December 31, 1996, the Company changed its fiscal year from a
twelve month period ended June 30, to a twelve month period ended December 31.
The consolidated financial statements include the accounts of American
Communications Services, Inc. ("ACSI" or the "Company") and its majority-owned
subsidiaries. All of the Company's subsidiaries are wholly owned with the
exception of the Louisville, Fort Worth, El Paso, Greenville and Columbia
subsidiaries, in which the Company has a 92.75% ownership interest. All material
intercompany accounts and transactions have been eliminated in consolidation.
The consolidated balance sheet as of September 30, 1997, the consolidated
statements of earnings for the three and nine months ended September 30, 1997
and 1996, and the consolidated statements of cash flows for the nine months
ended September 30, 1997 and 1996 have been prepared by the Company, without
audit. In the opinion of management, all adjustments, which include normal
recurring adjustments necessary to present fairly the financial position,
results of operations and cash flows at September 30, 1997, and for all periods
presented, have been made. Certain amounts in the consolidated statements have
been reclassified to conform to the 1997 presentation. Operating results for the
three and nine months ended September 30, 1997 are not necessarily indicative of
the operating results for the full year.
Certain information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The Company believes that the disclosures
provided are adequate to make the information presented not misleading. These
financial statements should be read in conjunction with the audited financial
statements and the related notes included in the Company's 1996 annual report to
shareholders.
Note 2: Significant Accounting Policies
Cash Equivalents and Restricted Cash
Pursuant to Statement of Financial Accounting Standard No. 115 (FAS 115),
"Accounting for Certain Investments in Debt and Equity Securities", the
Company's short- and long-term debt securities and marketable equity securities
are accounted for at market value. The fair market value of short- and long-term
investments is determined based on quoted market prices for those investments.
The Company's marketable securities have been classified as available for sale
and are recorded at current market value with an offsetting adjustment to
stockholders' equity (deficit).
The Company's investments consist of commercial paper, U.S. Government
Securities and money market instruments. Commercial paper has maturities of 90
days or less. The fair market value of such securities approximates amortized
cost. At December 31, 1996 and September 30, 1997, cash equivalents consists of
government securities and overnight investments.
The Company has provided performance bonds and letters of credit in various
cities in connection with its operations, resulting in a restriction of cash
amounting to $2.3 million and $4.9 million at December 31, 1996 and September
30, 1997, respectively. In addition, at September 30, 1997, the Company has
approximately $70 million of cash restricted to fund the first five interest
payments of its 13 3/4% Senior Notes due 2007 issued in July 1997 (the "2007
Notes"). The face amount of all bonds and letters of credits was approximately
$6.2 million as of December 31, 1996, and $8.3 million as of September 30, 1997.
<PAGE>
Networks, Equipment and Furniture
Networks, equipment and furniture are stated at cost less accumulated
depreciation and amortization. Costs capitalized include expenses associated
with network engineering, design and construction, negotiation of rights-of-way,
obtaining legal and regulatory authorizations and the amount of interest costs
associated with the network development.
Provision for depreciation of networks, equipment and furniture is computed
using the straight-line method over the estimated useful lives of the assets
beginning in the month a network is substantially complete and available for use
and equipment and furniture are acquired.
The estimated useful lives of the Company's principal classes of assets are
as follows:
Networks:
Fiber optic cables and installation costs 20 years
Telecommunications equipment 3-7 years
Interconnection and collocation costs 3-10 years
Leasehold improvements Life of lease
Furniture and fixtures 5 years
Capitalized network development costs 3-20 years
Deferred Financing Fees
Deferred financing fees include commitment fees and other costs related to
certain debt financing transactions and are being amortized using the effective
interest method over the initial term of the related debt.
Revenue Recognition
Revenue is recognized as services are provided. Billings to customers for
services in advance of providing such services are deferred and recognized as
revenue when earned. The Company also enters into managed services agreements
with certain customers. Under such agreements the Company provides use of
Company owned equipment, collocation and network access services. Revenue is
recognized on a monthly basis as these services are provided to the customer.
Earnings (Loss) Per Common Share
The computation of earnings (loss) per common share is based upon the
weighted average number of common shares outstanding. The effect of including
common stock options and warrants as common stock equivalents would be
anti-dilutive and is excluded from the calculation of loss per common share.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results may differ from those estimates.
Concentration of Credit Risk
The Company receives a significant portion of its revenues from a small
number of major customers, particularly the long distance telecommunications
companies that service the Company's markets. The Company provides managed
services to certain Internet service providers. Such companies operate in a
highly competitive and uncertain environment.
<PAGE>
Note 3: Financing Activities
To date, the Company has funded the construction of its networks and its
operations with external financings, as described in the Liquidity and Capital
Resources section of Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Note 4: New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128 (FAS 128), "Earnings Per
Share," which is required to be adopted for annual financial statement periods
ending after December 15, 1997. Earlier application is not permitted. FAS 128
requires companies to change the method currently used to compute earnings per
share and to restate all prior periods. While the Company does not know
precisely the impact of adopting FAS No. 128, the Company does not expect that
the adoption will have a material effect on the Company's consolidated financial
statements.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 129 (FAS 129), "Disclosure of
Information about Capital Structure." The Company is required to adopt the
provisions of this Statement for fiscal years ending after December 15, 1997.
This Statement continues the previous requirement to disclose certain
information about an entity's capital structure found in APB Opinions No. 10,
"Omnibus Opinion - 1966," No. 15, "Earnings per Share," and FASB Statement No.
47, "Disclosure of Long-Term Obligations," for entities that were subject to the
requirements of those standards. As the Company has been subject to the
requirements of each of those standards, adoption of FAS No. 129 will have no
impact on the Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 (FAS No. 130), "Reporting
Comprehensive Income." FAS No. 130 established standards for the reporting and
display of comprehensive income and its components in the financial statements.
The Company is required to adopt the provisions of the Statement for fiscal
years beginning after December 15, 1997. Earlier application is permitted;
however, upon adoption the Company will be required to reclassify previously
reported annual and interim financial statements. The Company believes that the
disclosure of comprehensive income in accordance with the provisions of FAS No.
130 will not impact the manner of presentation of its financial statements as
currently and previously reported.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 (FAS No. 131), "Disclosure about
Segments of an Enterprise and Related Information." FAS No. 131 requires the
Company to present certain information about operating segments and related
information, including geographic and major customer data, in its annual
financial statements and in condensed financial statements for interim periods.
The Company is required to adopt the provisions of the Statement for fiscal
years beginning after December 15, 1997. Earlier application is permitted;
however, upon adoption the Company will be required to restate previously
reported annual segment and related information in accordance with the
provisions of FAS No. 131. The Company has not completed its analysis of the
impact on the financial statements that will be caused by the adoption of this
Statement.
<PAGE>
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's condensed Consolidated Financial Statements and Notes thereto included
herewith, and with the Company's Management Discussion and Analysis of Financial
Condition and Results of Operations and audited consolidated financial
statements and notes thereto for the years ended June 30, 1995 and 1996 included
in the Company's Form 10-KSB for the fiscal year ended June 30, 1996 and for the
six months ended December 31, 1996 included in the Company's Form 10-KSB for the
six months ended December 31, 1996.
OVERVIEW
American Communications Services, Inc. ("ACSI" or the "Company") provides a
broad range of integrated local voice and data communications services primarily
to commercial customers in mid-sized markets in the southern United States. As a
competitive local exchange carrier ("CLEC"), the Company has constructed its own
local fiber optic networks in 32 markets, is now evaluating additional markets
in which it may construct local networks and expects to offer services on its
own networks or on a resale basis in up to 50 markets by the end of 1998. The
Company uses its owned facilities and leases network capacity from others to
provide long distance carriers, Internet service providers ("ISPs") and
business, government and institutional end-users with an alternative to the
incumbent local phone companies for high quality voice, data, video transport
and other telecommunications services. The Company believes that its customers
choose ACSI's telecommunications services because of the reliability and breadth
of the Company's services, discounted pricing relative to the incumbent local
exchange carrier ("ILEC") and a high level of customer service.
From the formation of the Company through 1996, the Company derived
substantially all of its revenues from the sale of dedicated services to
interexchange carriers ("IXCs") and ISPs. Since the passage of the
Telecommunications Act of 1996 (the "Federal Telecommunications Act"), however,
the Company has enhanced its product offerings to meet the needs of commercial
end-users, and is aggressively expanding the sales and marketing capabilities
necessary to deliver these products to such customers. Specifically, the Company
introduced local switched voice services, including local exchange services
(dial tone) in late 1996, and has also added capabilities to provide other
enhanced services such as high speed video conferencing, frame relay,
asynchronous transfer mode ("ATM") and Internet access.
The Company currently provides a wide range of local telecommunications
services including dedicated and private line, local switched voice services,
high-speed data services and Internet services. The Company's SONET-based local
fiber optic networks and its coast-to-coast leased high broadband backbone data
network ("ACSINet") are designed to support this wide range of enhanced
communications services, provide increased network reliability and reduce costs
for its customers.
Initially, the Company expects to experience negative cash flow from
operations in each of its operating local networks. The Company estimates that
because of the reduced operating costs associated with its smaller local
networks and its single point of service sales force, it can achieve operating
cash flow breakeven (i.e., positive EBITDA before overhead allocations) on
dedicated access services provided on its local networks within ten to 15 months
from the start of those services. Thereafter, the Company anticipates that its
profit margins will increase as each local network is expanded to connect
additional customers directly to its network backbone and as off-net customers
migrate to on-net status (thus allowing the Company to retain the portion of
customer charges previously paid out to the ILEC for resale of ILEC facilities).
The Company will also experience initial negative cash flow from operations as
its data, local switched voice and Internet services are introduced and until
networks providing those services reach operating cash flow breakeven.
The Company's objective is to become a full-service alternative to the ILEC
primarily for business, government and institutional end-users in its markets by
offering superior products with excellent customer service at competitive
prices. In order to achieve this objective, the Company seeks to leverage its
existing infrastructure, develop direct and indirect sales channels to
commercial end-users, market the Company's services under the ACSI brand name,
provide superior customer service, expand the resale of exchanged local voice
services and accelerate financial return on incremental expenditures.
<PAGE>
RESULTS OF OPERATIONS
Network Statistics
The following table presents key operating statistics for the Company for
the reporting periods.
Operational Route Fiber
As of Date Employees Networks Miles Miles
September 30, 1997 669 32 977 85,976
June 30, 1997 559 31 957 82,693
March 31, 1997 502 28 908 75,867
December 31, 1996 322 21 697 48,792
September 30, 1996 269 18 543 32,774
June 30, 1996 199 15 386 28,476
March 31, 1996 142 10 200 9,466
Access 5ESS
As of Date Bldgs VGE Lines Switches
September 30, 1997 1,239 989,285 28,394 9
June 30, 1997 1,083 886,375 9,177 8
March 31, 1997 858 554,883 360 5
December 31, 1996 595 384,134 0 1
September 30, 1996 532 267,894 0 0
June 30, 1996 216 137,431 0 0
March 31, 1996 133 125,208 0 0
Employees represent full-time employees of the Company. Operational networks
represent networks that are in service and have revenue generating customers.
VGE represents voice grade equivalent circuits, a measure of service equivalent
to one telephone line actually billed to a customer. Access lines represent
business lines providing switched voice services.
Revenues
The Company reported an increase in revenues to $16.1 million for the three
months ended September 30, 1997 compared with revenues of $2.8 million for the
three months ended September 30, 1996. For the nine months ended September 30,
1997, revenues increased to $35.8 million compared with $5.2 million for the
same period of 1996. The increase in revenues is due to an increase in the
networks in operation and expanded service offerings in each market. The 1997
revenues continue to be derived from significant growth in dedicated services,
data services, Internet services and local switched voice services. For 1996,
substantially all of the revenues were derived from the provision of dedicated
services.
Total Operating Expenses
Network development and operating expenses for the three months ended
September 30, 1997 increased to $10.6 million from $3.7 million for the same
period of 1996. The increase is due to significant increases in personnel,
network development and non-payroll operating expenses. Related personnel costs
increased to $4.0 million in the quarter ended September 30, 1997, from
approximately $2.8 million in the quarter ended September 30, 1996. Other
operating expenses, which include expenses such as contract labor and legal
expenses, travel expenses, rent, utilities, charges and taxes increased to $6.6
million for the quarter ended September 30, 1997 from approximately $0.9 million
for the quarter ended September 30, 1996.
For the nine months ended September 30, 1997, network development and
operating expenses increased to $28.7 million from $6.1 million for the nine
months ended September 30, 1996. This increase is due to significant increases
in personnel, network development and non-payroll operating expenses. Related
personnel costs increased to $10.5 million for the nine months ended September
30, 1997, from approximately $5.8 million for the same period of 1996. Other
operating expenses, increased to $18.2 million for the nine months ended
September 30, 1997 from approximately $0.3 million for the nine months ended
September 30, 1996.
For the three months ended September 30, 1997, selling, general and
administrative expenses increased to $18.2 million from $5.7 million for the
same period of 1996. Related personnel costs increased to $7.6 million for the
quarter ended September 30, 1997 from $1.5 million for the quarter ended
September 30, 1996. Corresponding operating costs increased to $10.6 million for
the quarter ended September 30, 1997 from $4.2 million for the quarter ended
September 30, 1996. This increase reflected costs associated with the Company's
efforts to significantly expand its national and local city sales and its
marketing and administrative staffs, as well as increased legal and other
consulting expenses associated with its aggressive programs for obtaining
regulatory approvals and certifications and providing quality network services.
<PAGE>
In the nine months ended September 30, 1997, selling, general and
administrative expenses increased to $48.0 million from $16.1 million for the
nine months ended September 30, 1996. Related personnel costs increased to $19.7
million for the nine months ended September 30, 1997 from $3.2 million for the
nine months ended September 30, 1996. Corresponding operating costs increased to
$28.3 million for the nine months ended September 30, 1997 from $12.9 million
for the same period of 1996.
Depreciation and amortization expenses increased to $6.6 million for the
three months ended September 30, 1997 from $2.4 million for the three months
ended September 30, 1996. For the nine months ended September 30, 1997,
depreciation and amortization increased to $16.1 million from $4.7 million for
the same period of 1996. As of September 30, 1997, the Company increased its
capital assets to $250.4 million compared to $144.4 million at December 31, 1996
and $101.9 million as of September 30, 1996. Non-cash stock compensation expense
increased to $0.5 million for the quarter ended September 30, 1997 from $0.2
million for the quarter ended September 30, 1996. For the nine months ended
September 30, 1997, non-cash compensation expense decreased to $1.3 million from
$1.7 for the same period of 1996.
Interest and Other Expenses
Interest and other income increased to $2.8 million for the three months
ended September 30, 1997 compared with $1.5 million for the same period of 1996.
For the nine months ended September 30, 1997 interest and other income decreased
to $3.9 million from $5.1 million for the same period ended 1996. Interest and
other expense increased to $12.9 million from $6.0 million for the quarters
ended September 30, 1997 and 1996, respectively. For the nine months ended
September 30, 1997 and 1996, interest and other expense increased to $25.3
million from $13.7 million. The increase in interest and other income for the
quarter reflects the increase in earnings from the proceeds received from the
2007 Notes and the 14 3/4% Redeemable Preferred Stock due 2008 ("Redeemable
Preferred Stock") which have been invested. The increase in interest and other
expenses reflected the accrual of interest related to the 2005, 2006 and 2007
Notes and the Company's increased borrowings under AT&T Credit Facility.
Payments of principal and interest on the AT&T Credit Facility began in the
first quarter 1997. Payments of interest on the 2005, 2006 and 2007 Notes will
not begin until May 2001, October 2001 and January 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has funded the construction of its local networks and
its operations with external financing as described below.
AT&T Credit Facility
In October 1994, the Company entered into the AT&T Credit Facility pursuant
to which AT&T Credit Corporation has agreed to provide up to $31.2 million in
financing for the development and construction of fiber optic local networks by
five of the Company's subsidiaries. In connection with each loan made under the
AT&T Credit Facility, AT&T Credit Corporation purchased 7.25% of the capital
stock of the funded subsidiary, and ACSI pledged the other shares and the assets
of the subsidiary to AT&T Credit Corporation as security for the loan. As of
September 30, 1997, an aggregate of $31.2 million had been borrowed under these
agreements.
The Company has entered into negotiations with AT&T Capital Corporation to
roll-up the five existing loan agreements comprising the AT&T Credit Facility
into one loan agreement to be entered into with the Company, and to be secured
by the existing assets of the Company (including the stock, but not the assets,
of certain of the Company's subsidiaries) (the "New AT&T Facility"). The Company
expects the New AT&T Facility to otherwise be on terms substantially similar to
those of the existing AT&T Credit Facility. The maximum aggregate amount of
credit available under the proposed New AT&T Facility will not exceed $35.0
million as defined by the Company's existing indentures. Each of the Company's
Subsidiaries that are parties to the AT&T Credit Facility entered into an
agreement with AT&T Credit Corporation to waive compliance by such subsidiaries
with certain covenants contained therein until November 30, 1997. Such covenants
are not expected to be included in the New AT&T Facility.
<PAGE>
9% Series A Convertible Preferred Stock
In October 1994, the Company completed the private placement of 186,664
shares of its 9% Series A Convertible Preferred Stock, par value $1.00 per share
(which was later exchanged for Series A-1 Preferred Stock that was converted
into 7,466,560 shares of Common Stock simultaneous with the completion of the
Offering) with accompanying warrants to purchase an aggregate of 2,674,506
shares of Common Stock, for an aggregate consideration of $16.8 million (before
deduction of estimated offering expenses), including the conversion of $4.3
million of outstanding debt. Of the warrants sold in October 1994, warrants to
acquire 1,491,222 shares of Common Stock were exercised by a principal
stockholder for an aggregate exercise price of approximately $100,000. The
Series A Preferred Stock was converted into an aggregate of 7,350,160 shares of
common stock simultaneous with the completion of the April Offering discussed
below.
9% Series B Convertible Preferred Stock
In June 1995, the Company completed a private placement of 227,500 shares of
its Series B Preferred Stock with accompanying warrants to purchase an aggregate
of 1,584,303 shares of Common Stock, for an aggregate consideration of $22.8
million. In addition, in November 1995, the Company completed a private
placement of 50,000 shares of its Series B Preferred Stock together with the
exercise of accompanying warrants to purchase 214,286 shares of Common Stock to
a principal stockholder for an aggregate consideration of $4.7 million. The
Series B Preferred Stock was converted into an aggregate of 9,910,704 shares of
Common Stock simultaneous with the completion of the April Offering discussed
below.
2005 Senior Discount Notes (2005 Notes)
On November 14, 1995, the Company completed an offering of 190,000 Units
(the "Units") consisting of $190,000,000 principal amount of 13% Senior Discount
Notes due 2005 (the "2005 Notes") and warrants to purchase 2,432,000 shares of
the Company's common stock at a price of $7.15 per share (the "2005 Warrants").
The 2005 Notes will accrete at a rate of 13% compounded semi-annually to an
aggregate principal amount of $190,000,000 by November 1, 2000. Thereafter,
interest on the 2005 Notes will accrue at the annual rate of 13% and will be
payable in cash semi-annually on November 1 and May 1, commencing May 1, 2001.
The Company received net proceeds of approximately $96,105,000 from the sale of
the Units. The value ascribed to the 2005 Warrants was $8,684,000.
2006 Senior Discount Notes (2006 Notes)
On March 21, 1996, the Company completed an offering of $120,000,000 of 12
3/4% Senior Discount Notes due 2006 (the "2006 Notes") resulting in net proceeds
of approximately $61,800,000. The 2006 Notes will accrete at a rate of 12 3/4%
compounded semi-annually, to an aggregate principal amount of $120,000,000 by
April 1, 2001. Thereafter, interest on the 2006 Notes will accrue at the annual
rate of 12 3/4% and will be payable in cash semi-annually on April 1 and October
1, commencing on October 1, 2001. The 2006 Notes will mature on April 1, 2006.
Common Equity (April Offering)
On April 15, 1997, the Company consummated the issuance and sale of
5,060,000 shares of Common Stock (inclusive of the May 14, 1997 exercise by the
underwriters of their overallotment option) at a price per share of $5.00 in an
underwritten public offering, and the issuance and sale directly to certain of
its principal stockholders of 3,600,000 shares of Common Stock at a purchase
price of $4.70 per share (together, the "April Offering"). Total net proceeds to
the Company from the April Offering were approximately $40 million.
14 3/4% Redeemable Preferred Stock (Unit Offering)
On July 10, 1997, the Company consummated the private placement of 75,000
units, (the "Unit Offering"), consisting of its Redeemable Preferred Stock and
warrants to purchase shares of common stock. The Company received net proceeds
of approximately $67 million from the sale of these units. Each unit includes a
warrant to purchase 80.318 shares of ACSI common stock subject to an increase of
22.645 additional shares of common stock in the event that the Company fails to
raise net proceeds of at least $50 million through the issuance and sale of its
qualified capital stock on or before December 31, 1998. Dividends on the
Redeemable Preferred Stock will accrue from the date of issuance, are cumulative
and will be payable in arrears on March 31, June 30, September 30 and December
31, commencing September 30, 1997. On September 30, 1997, the Company issued
2,489 shares of its Redeemable Preferred Stock as dividends. Dividends may be
paid, at the Company's option, on any dividend payment date either in cash or by
the issuance of additional shares of preferred stock, provided however, that
after June 30, 2002, to the extent and for so long as the Company is not
precluded from paying cash dividends on the Redeemable Preferred Stock by the
terms of any then outstanding indebtedness or any other agreement or instrument
to which the Company is subject, the Company shall pay the dividends in cash.
The Company is required to redeem all the Redeemable Preferred Stock outstanding
on June 30, 2008 at a redemption price equal to 100.00% of the liquidation
preference thereof, plus, without duplication, accrued and unpaid dividends to
the date of redemption.
2007 Senior Notes (2007 Notes)
On July 18, 1997, the Company completed the private placement of $220
million of 13 3/4% Senior Notes due 2007. The Company received net proceeds of
approximately $209 million from the sale of the 2007 Notes, of which,
approximately $70 million has been placed in escrow solely to fund the first
five interest payments or otherwise for the benefit of the holders of the 2007
Notes. The 2007 Notes bear interest at 13 3/4% compounded semi-annually in
arrears, payable on January 15 and July 15 each year, commencing on January 15,
1998. The notes mature on July 15, 2007. The 2007 Notes will not be redeemable
at the option of the Company prior to July 15, 2002, except that any time prior
to July 15, 2000, the Company may redeem up to 35% of the aggregate principal
amount of the 2007 Notes with the net proceeds from one or more equity offerings
of the Company, at a redemption price equal to 113.75% of the aggregate
principal amount thereof on the date of the redemption, subject to other
conditions.
12 3/4% Junior Redeemable Preferred Stock
On October 16, 1997, the Company completed the private placement of $150
million of 12 3/4% Junior Redeemable Preferred Stock due 2009 ("Junior
Redeemable Preferred Stock"). The Company received net proceeds of approximately
$145.6 million. Dividends on the Junior Redeemable Preferred Stock will accrue
from the date of issuance, are cumulative and will be payable quarterly, in
arrears, on January 15, April 15, July 15 and October 15 of each year commencing
January 15, 1998. Dividends may be paid, at the Company's option, on any
dividend payment date, either in cash or by the issuance of additional shares of
Junior Redeemable Preferred Stock with an aggregate liquidation preference equal
to the amount of such dividends; provided; however, that after October 15, 2002,
to the extent and for so long as the Company is not precluded from paying cash
dividends on the Junior Redeemable Preferred Stock by the terms of any agreement
or instrument governing any of its then outstanding indebtedness, the Company
shall pay dividends in cash. The Company is required to redeem all the Junior
Redeemable Preferred Stock outstanding on October 15, 2009 at a redemption price
equal to 100% of the liquidation preference thereof, plus, without duplication,
accrued and unpaid dividends to the date of redemption.
Management anticipates that the Company's current cash resources are
sufficient to fund the Company's continuing negative cash flow and required
capital expenditures into the first quarter of 2000. Without an infusion of
additional cash, the Company will exhaust its cash resources during the first
quarter of 2000. To meet its additional remaining capital requirements and to
successfully implement its growth strategy, the Company will be required to sell
additional equity securities, increase its existing credit facility, enter into
additional credit facilities or sell additional debt securities, certain of
which would require the consent of the Company's debtholders. Furthermore,
before incurring additional indebtedness, the Company may be required to seek
additional equity financing to maintain balance sheet and liquidity ratios
required under certain of its debt instruments and , as a result of the
registration rights of certain of the Company's security holders, the Company's
ability to raise capital through a public offering of equity securities may be
limited. Accordingly, there can be no assurance that the Company will be able to
obtain the additional financing necessary to satisfy its cash requirements or to
successfully implement its growth strategy, in which event the Company will be
forced to curtail its planned network expansion and may be unable to fund its
ongoing operations.
The Company expects to actively pursue over the next several months one or
more acquisitions of companies engaged in business similar or related to the
business of the Company. If any such acquisition is consummated, it is likely to
require the issuance by the Company of capital stock in an amount that could be
material. There can be no assurance that the Company will identify any suitable
candidate for acquisition or that any such acquisition will be consummated. At
this time, however, the Company has no agreements, understandings or
arrangements for any such acquisitions or alliances. Future acquisitions or
alliances may require additional equity or debt financing, which the Company
will seek to obtain, as required, and may also require that the Company obtain
the consent of the holders of its Existing Notes and the holders of certain
other debt instruments.
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 period ended December 31, 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.
PART II
OTHER INFORMATION
ITEM 1 -- Legal Proceedings
On July 24, 1996, the Company was notified that a complaint against a
subsidiary had been filed in the District Court of El Paso County, Texas wherein
the plaintiff alleged permanent paraplegia resulting from his fall into a
concealed basement during construction of the Company's El Paso network. At the
time of the incident giving rise to the lawsuit, the plaintiff was an employee
of the subcontractor hired by the Company's general contractor for this project.
The parties have agreed on a settlement of the case for $6 million. The entire
settlement amount is covered by insurance for the general contractor and the
Company. The settlement agreement has been approved by the Court.
The Company and its subsidiaries are currently parties to routine litigation
incidental to their business, none of which, individually or in the aggregate,
are expected to have a material adverse effect on the Company. The Company and
its subsidiaries are parties to various court appeals and regulatory arbitration
proceedings relating to certain of the Company's interconnection agreements and
continue to participate in regulatory proceedings before the FCC and state
regulatory agencies concerning the authorization of services and the adoption of
new regulations.
ITEM 2 -- Changes in Securities
On July 10, 1997, the Company consummated the private offering pursuant to
Rule 144A under the Securities Act of 1933, as amended, (the "Securities Act")
of 75,000 units, (the "Unit Offering"), consisting of its 14 3/4% Redeemable
Preferred Stock due 2008 and warrants to purchase shares of common stock. The
Units were resold by the initial purchasers to certain "qualified institutional
buyers" (as such term is defined under Rule 144A) and to a limited number of
institutional "accredited investors" (as defined in Rule 501(a)(1),(2),(3) or
(7) of Regulation D under the Securities Act). The Company received net proceeds
of approximately $67 million from the sale of these units. Each unit includes a
warrant to purchase 80.318 shares of ACSI common stock subject to an increase of
22.645 additional shares of common stock in the event that the Company fails to
raise net proceeds of at least $50 million through the issuance and sale of its
qualified capital stock on or before December 31, 1998. Dividends on the
Redeemable Preferred Stock will accrue from the date of issuance, are cumulative
and will be payable in arrears on March 31, June 30, September 30 and December
31, commencing September 30, 1997. On September 30, 1997, the Company issued
2,489 shares of its Redeemable Preferred Stock as dividends. Dividends may be
paid, at the Company's option, on any dividend payment date either in cash or by
the issuance of additional shares of preferred stock, provided however, that
after June 30, 2002, to the extent and for so long as the Company is not
precluded from paying cash dividends on the Redeemable Preferred Stock by the
terms of any then outstanding indebtedness or any other agreement or instrument
to which the Company is subject, the Company shall pay the dividends in cash.
The company is required to redeem all the Redeemable Preferred Stock outstanding
on June 30, 2008 at a redemption price equal to 100.00% of the liquidation
preference thereof, plus, without duplication, accrued and unpaid dividends to
the date of redemption.
<PAGE>
On October 16, 1997, the Company completed the private placement of $150
million of 12 3/4% Junior Redeemable Preferred Stock due 2009 pursuant to Rule
144A under the Securities Act. The Company received net proceeds of
approximately $145.6 million. Dividends on the Preferred Stock will accrue from
the date of issuance, are cumulative and will be payable quarterly, in arrears,
on January 15, April 15, July 15 and October 15 of each year commencing January
15, 1998. Dividends may be paid, at the Company's option, on any Dividend
Payment Date, either in cash or by the issuance of additional shares of
Preferred Stock with an aggregate Liquidation Preference equal to the amount of
such dividends; provided; however, that after October 15, 2002, to the extent
and for so long as the Company is not precluded from paying cash dividends on
the Preferred Stock by the terms of any agreement or instrument governing any of
its then outstanding indebtedness, the Company shall pay dividends in cash. The
Company is required to redeem all the Preferred Stock outstanding on October 15,
2009 at a redemption price equal to 100% of the Liquidation Preference thereof,
plus, without duplication, accrued and unpaid dividends to the date of
redemption.
On October 30, 1997, in accordance with the agreement dated March 6, 1997,
the Company issued 37,582 additional performance warrants to MCI to purchase the
Company's Common Stock at $9.86 per share. This transaction was consummated as a
private sale under Rule 4(2) of the Securities Act.
Pursuant to a Customer Referral Agreement dated October 3, 1997, between
the Company and NetRunner, Inc. ("NetRunner") and a Consulting Agreement
dated October 3, 1997 between the Company and Mark Cole ("Consultant"),
the Company has issued a total of 181,871 shares of restricted Common Stock to
NetRunner and Consultant. The aggregate number of shares of Common Stock
issuable under both agreements is subject to adjustment if certain performance
goals are not met. This transaction was consummated as a private sale under
Rule 4(2) of the Securities Act.
ITEM 6 -- Exhibits and Reports On Form 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
11 Statement re computation of per share earnings
27 Financial Data Schedule
99.1 Supplemental Financial Information
(b) Reports on Form 8-K
(a) On November 6, 1997, the Company filed with the SEC a Current Report
on Form 8-K announcing financial results for the quarter ended
September 30, 1997.
(b) On October 24, 1997, the Company filed with the SEC a Current Report
on Form 8-K, announcing the pricing of its private offering
of 12-3/4% Junior Redeemable Preferred Stock due 2009.
(c) On July 29, 1997, the Company filed with the SEC a Current Report on
Form 8-K, to report the commencement and completion of its
private offering of units and certain other matters
and the commencement and completion of its private offering
of 13 3/4% Senior Notes due 2007.
<PAGE>
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)
/s/ JACK E. REICH
-----------------
Jack E. Reich,
November 14, 1997 President and Chief Executive Officer
/s/ DAVID L. PIAZZA
-------------------
David L. Piazza
November 14, 1997 Chief Financial Officer
EXHIBIT 11
AMERICAN COMMUNICATIONS SERVICES, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (LOSS)
($ in thousands, except per share data)
Three months Nine months
ended Sept. 30, ended Sept. 30,
NET LOSS 1997 1996 1997 1996
-------- ------ ------ ------ -------
1 Net Loss $ (29,964) $ (13,601) $(79,640) $(31,503)
2 Less: Preferred Stock
Accretion 2,489 1,007 3,584 3,024
--------- ---------- -------- ---------
3 Net Loss to
Common Stockholders (32,453) (14,608) (83,224) (34,527)
4 Add: Effect on Interest
Income & Expense 975 887 2,926 1,883
Add: Convertible Preferred
Dividends Saved 2,489 1,007 3,584 3,024
--------- ---------- --------- --------
5 Net Loss to Common
Stockholders,
Anti-Dilutive Basis $ (28,989) $ (12,714) $(76,714) $(29,620)
========== ========= ========== =========
AVERAGE SHARES OUTSTANDING
6 Weighted Average Number of
Common Shares Outstanding 36,228,568 6,703,579 24,139,630 6,613,543
7 Net additional shares
assuming stock options
and warrants exercised
and proceeds used
first to purchase
treasury shares up to 20%
of shares outstanding at
period end, the balance
to reduce long-term debt 7,277,265 7,227,188 7,277,265 7,227,188
Additional shares assuming
conversion of
preferred shares 0 17,377,278 0 17,377,278
---------- ---------- --------- ---------
8 Weighted average number
of common and common
equivalent shares
outstanding 43,505,833 31,308,045 31,416,895 31,218,009
=========== ========== ========== ==========
PER SHARE AMOUNTS
9 Net loss per common
share as presented
in statements of
operations (3/6) $ (0.90) $ (2.18) $ (3.45) $ (5.22)
========== ========= =========== ========
10 Net loss per share
as antidilutive
basis (5/8) $ (0.67) $ (0.41) $ (2.44) $ (0.95)
========== ========= =========== ========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
AMERICAN COMMUNICATIONS SERVICES, INC. FORM 10-Q FOR THE PERIOD ENDED
9/30/97 AND IS QUALIFIED IN ITS ENTIRTY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 224,819
<SECURITIES> 0
<RECEIVABLES> 12,371
<ALLOWANCES> (1,668)
<INVENTORY> 3,743
<CURRENT-ASSETS> 239,265
<PP&E> 250,363
<DEPRECIATION> (23,358)
<TOTAL-ASSETS> 500,605
<CURRENT-LIABILITIES> 24,621
<BONDS> 449,507
0
51,793
<COMMON> 364
<OTHER-SE> (27,947)
<TOTAL-LIABILITY-AND-EQUITY> 500,605
<SALES> 0
<TOTAL-REVENUES> 35,847
<CGS> 28,668
<TOTAL-COSTS> 47,363
<OTHER-EXPENSES> 13,508
<LOSS-PROVISION> 612
<INTEREST-EXPENSE> 25,336
<INCOME-PRETAX> (79,640)
<INCOME-TAX> 0
<INCOME-CONTINUING> (79,640)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (79,640)
<EPS-PRIMARY> (3.45)
<EPS-DILUTED> (3.45)
</TABLE>
AMERICAN COMMUNICATIONS SERVICES, INC.
SUPPLEMENTAL FINANCIAL INFORMATION (unaudited)
YEAR TO DATE - SEPTEMBER 30, 1997
($'s in thousands)
Networks Placed Networks Place Networks Placed
in Service in Service in Service
Prior to 12/31/95 During 1996 During 1997
----------------- ------------- --------------
Property, Plant
& Equipment $ 89,445 $ 74,569 $ 65,171
Revenues $ 18,919 $ 7,044 $ 1,977
EBITDA $(10,502) $ (5,067) $ (4,435)
EBIT $ (16,017) $ (8,919) $ (6,788)
Network Statistics (cumulative)
Access Lines 14,857 6,550 6,987
Fiber Miles 28,552 35,094 22,330
Route Miles 494 316 167
Buildings Connected 747 394 98
Voice Grade Equivalents 488,394 333,322 167,569
