<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10 - QSB
X Quarterly report under Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For the quarterly period ended: March 31, 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 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
------------ ------------
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
As of May 14, 1997, Common Stock, Par Value $0.01-26,020,376
------------------------------------------------------------
Transitional Small Business Disclosure Format:
YES NO X
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<PAGE> 2
AMERICAN COMMUNICATIONS SERVICES, INC.
FORM 10 - QSB
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
NUMBER
------
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - December 31, 1996
and March 31, 1997 3
Condensed Consolidated Statements of Operations - Three
months ended March 31, 1996 and 1997 5
Condensed Consolidated Statements of Cash Flows - Three
months ended March 31, 1996 and 1997 6
Notes to Unaudited Condensed Consolidated Interim
Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Part II Other Information 16
Item 2. Changes in Securities 16
Item 5. Other Information 17
Item 6. Exhibits and reports on Form 8-K 18
Signatures 19
</TABLE>
PAGE 2
<PAGE> 3
Part I
Financial Information
Item 1 - Financial Statements
American Communications Services, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1996 March 31, 1997
(UNAUDITED)
<S> <C> <C>
Assets
Current Assets
Cash and Cash equivalents $ 78,618,544 $ 18,152,765
Restricted cash 2,342,152 4,370,277
Accounts receivable, net 2,429,077 4,162,591
Other current assets 1,202,711 975,642
------------ ------------
Total current assets 84,592,484 27,661,275
------------ ------------
Networks, furniture and equipment, gross 144,403,123 185,994,973
(less: Accumulated depreciation) ( 8,320,372) ( 11,919,902)
------------ ------------
136,082,751 174,075,071
Deferred financing fees 8,380,283 10,665,474
Goodwill (net of accumulated amortization) - 7,964,128
Other assets 982,649 584,752
------------ ------------
Total assets $230,038,167 $220,950,700
------------ ------------
Liabilities, Redeemable Stock, Options and
Warrants and Stockholders' Equity
Current Liabilities
Accounts payable $ 33,587,407 $ 28,107,999
Accrued liabilities 4,132,132 6,258,832
Notes payable - current portion 872,031 169,362
------------ ------------
Total current liabilities 38,591,570 34,536,193
------------ ------------
Long Term Liabilities
Notes payable 209,538,226 217,213,259
Other Long Term Liabilities - 896,390
Dividends payable 6,945,943 7,934,581
------------ ------------
Total liabilities 255,075,739 260,580,423
------------ ------------
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements
PAGE 3
<PAGE> 4
American Communications Services, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1996 March 31, 1997
(UNAUDITED)
<S> <C> <C>
Liabilities, Redeemable Stock, Options
and Warrants and Stockholders' Equity (continued)
Redeemable stock, options and warrants 2,000,000 2,000,000
------------ ------------
Stockholders' Equity
Preferred stock, $1.00 par value, 186,664
shares authorized and designated as 9% Series A-1
Convertible Preferred Stock, 186,664 and 183,754
shares, respectively, issued and outstanding 186,664 183,754
Preferred stock, $1.00 par value, 277,500
shares designated as 9%
Series B Convertible Preferred Stock, authorized,
issued and outstanding 277,500 277,500
Common Stock, $0.01 par value,
75,000,000 shares authorized, 6,784,996
and 8,193,109 shares, respectively, issued
and outstanding 67,850 81,931
Additional paid-in-capital 54,870,194 64,290,447
Accumulated deficit (82,439,780) (106,463,355)
------------ ------------
Total stockholders' equity/(deficit) (27,037,572) (41,629,723)
------------ ------------
Total Liabilities, Redeemable Stock,
Options and Warrants and
Stockholders' Equity/(deficit) $230,038,167 $220,950,700
------------ ------------
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statement
PAGE 4
<PAGE> 5
American Communications Services, Inc.
Condensed Consolidated Statements of Operations
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
March 31, March 31,
1996 1997
---- ----
<S> <C> <C>
Revenues $ 816,639 $ 8,176,675
Operating Expenses
Network, development and operations 1,954,514 8,669,113
Selling, general and administrative 2,650,263 13,924,867
Non-cash compensation expense 1,985,765 239,544
Depreciation and amortization 630,004 4,117,654
----------- -----------
Total Operating Expenses 7,220,546 26,951,178
Non-operating income/expenses
Interest and other income (661,313) ( 884,071)
Interest and other expense 3,500,624 6,133,142
----------- -----------
Net loss before minority interest 9,243,218 24,023,574
Minority interest (102,074) -
----------- -----------
Net loss 9,141,144 24,023,574
----------- -----------
Preferred stock dividends/accretion 955,489 988,638
----------- -----------
Net loss to common stockholders 10,096,633 25,012,212
----------- -----------
Net loss per common/common ($1.54) ($3.19)
equivalent share ----------- -----------
Average number of common/common
equivalent shares outstanding 6,536,722 7,852,467
----------- -----------
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements
PAGE 5
<PAGE> 6
American Communications Services, Inc.
Condensed Consolidated Statements of Cash Flows
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
March 31 March 31,
1996 1997
---- ----
<S> <C> <C>
Cash Flow from Operating Activities
Net Loss $ (9,141,144) $ (24,023,574)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 630,004 4,117,654
Interest deferral and accretion 3,500,624 6,133,142
Provision for doubtful accounts 30,691 637,545
Loss attributable to minority interest (102,074) -
Noncash compensation 1,985,765 239,544
Changes in operating assets and liabilities
Restricted cash related to
operating activities - (2,028,125)
Trade accounts receivable (72,826) (2,371,059)
Other current assets (184,526) 227,069
Other assets - 397,897
Accounts payable (3,296,545) (4,593,494)
Other accrued liabilities (1,526,443) 2,126,700
------------ -------------
Net cash used in operating activities (8,176,474) (19,136,701)
------------ -------------
Cash flows from investing activities
Purchase of furniture and equipment (282,320) (1,892,651)
Network development costs (10,297,369) (37,382,199)
------------ -------------
Net cash used in investing activities (10,579,689) (39,274,850)
------------ -------------
Cash flows from financing activities
Issuance of notes payable 2,997,811 100,000
Issuance of Senior discount notes and warrants 65,565,429
Payment of deferred financing fees (2,588,305) (3,000,000)
Warrant and stock option exercises 60,674 845,772
------------ -------------
Net cash flow from financing activities 66,035,609 (2,054,228)
------------ -------------
Net increase/(decrease) in cash and cash equivalents 47,279,446 (60,465,779)
Cash and cash equivalents - beginning of period 107,175,104 78,618,544
------------ -------------
Cash and cash equivalents - end of period 154,454,550 18,152,765
------------ -------------
Supplemental disclosure of cash flow information
Dividends declared with preferred stock 955,489 988,638
------------ -------------
(Decrease) in accrued redeemable warrant cost - -
------------ -------------
(Increase) in goodwill - (8,131,116)
------------ -------------
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements
PAGE 6
<PAGE> 7
AMERICAN COMMUNICATIONS SERVICES, INC.
Notes to Unaudited Condensed Consolidated Interim
Financial Statements
(1) BASIS OF PRESENTATION AND RELATED MATTERS
BASIS OF PRESENTATION
As of the end of and for the three month period ended March 31, 1997 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 Company has a 92.75 percent ownership interest in these
subsidiaries. Such statements, including comparative information for the three
month period ended March 31 1996, where applicable, have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and item 310(b) of
Regulation S-B. The unaudited condensed consolidated interim financial
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 December 31, 1996 filed with the Securities and Exchange
Commission (the "SEC") on March 28, 1997, as amended. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. All material
intercompany accounts and transactions have been eliminated in consolidation.
Results of the interim periods are not indicative of the results to be expected
for the full year.
BUSINESS
American Communications Services, Inc. ("ACSI" or the "Company") is a provider
of integrated local voice and data communications services to commercial
customers primarily in mid-size metropolitan markets in the southern United
States. The Company is a rapidly growing competitive local exchange carrier
("CLEC"), supplying businesses with advanced telecommunications services
through its digital SONET-based fiber optic local networks. To date, the
Company has derived the majority of its revenues from the sale of dedicated
services, generally at a discount to the price of the ILECs. The Company's
dedicated services include special access, switched transport and private line
services.
As a supplement to its dedicated services, in late 1996 and January 1997 the
Company introduced local switched voice services in two of its markets and
began offering local switched voice services in two additional markets before
March 31, 1997. The Company's local switched services include; local exchange
services (dial tone), advanced ISDN and enhanced voice services. Beginning
April 1997, the Company began providing local switched services on a resale
basis in 15 markets and will continue to expand the number of markets in which
it is reselling local switched services throughout 1997 and the first quarter
of 1998. In late 1996, the Company also deployed ACSINet, a coast-to-coast,
leased broadband data communications network through which the Company offers
frame relay, ATM and Internet access services to both Internet service
providers ("ISPs") and local businesses. As of March 31, 1997, the Company had
ACSINet data POPs in 42 markets, including all but one of the markets in which
the Company has operational local networks. Additionally, principally through
the Company's January 1997 acquisition of Cybergate, Inc., a Florida-based ISP,
the Company has begun providing Internet services. The Cybergate acquisition
provides a foundation to support the Company's Internet service offerings to
ISPs in existing ACSI markets and to end users in targeted ACSI markets.
During the 1st quarter of 1997, the Company and MCImetro entered into an
agreement in which MCI names ACSI as its preferred local provider for dedicated
and transport services in 21 ACSI markets for at least a five year period.
Pursuant to this preferred provider agreement, MCI will migrate current
dedicated transport circuits in these markets to ACSI and ACSI will be listed
as the first choice provider in MCI's provisioning system for all new dedicated
access circuits in the designated markets. In connection with these agreements
(collectively, the "MCI Transaction"), ACSI issues MCI warrants to purchase up
to 620,000 shares of ACSI's Common Stock at $9.86 per share, subject to number
and price adjustment in certain circumstances. ACSI has also agreed to issue
warrants to purchase up to an aggregate of approximately 2.3 million additional
shares of ACSI's Common Stock at fair market value on the date of grant in
tranches every six months after execution of the preferred provider agreement,
subject to, and a based upon, certain increases in revenues to ACSI generated
under that agreement.
On January 17, 1997, the Company acquired 100% of the outstanding capital stock
of Cybergate, Inc., A Florida based ISP, in exchange for 1,030,000 shares of
Common Stock plus up to an additional 150,000 shares if certain performance
goals are achieved.
PAGE 7
<PAGE> 8
AMERICAN COMMUNICATIONS SERVICES, INC.
Notes to Unaudited Condensed Consolidated Interim
Financial Statements
(1) BASIS OF PRESENTATION AND RELATED MATTERS (CONTINUED)
As of March 31, 1997, ACSI had twenty-eight operational networks and an
additional eight networks under construction, all of which are expected to be
operational by the end of calendar 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. In an attempt to improve financial performance and
conserve capital, the Company is reassessing the optimum number of local
networks needed to achieve its objectives.
RECENT FINANCING ACTIVITIES
On April 15, 1997, the Company completed an underwritten public offering
of 4,400,000 shares of its Common Stock plus an additional 660,000 shares
sold on May 14, 1997 upon exercise of the underwriters' over-allotment
option (the "Public Offering") and a direct sale of 3,600,000 shares of its
Common Stock to certain principal stockholders. The Company received net
proceeds of approximately $40.0 million from the sale of these 8,660,000
shares.
The Company will use the proceeds from its recent sale of its Common Stock
towards continued development and construction of fiber optic networks, the
further development and introduction of new services, including high-speed
data, enhanced voice messaging and local switched services, for expenses of the
Company's existing networks and to fund negative operating cash flow. The
Company anticipates that without infusion of additional cash, it will exhaust
its cash resources during the third quarter of 1997. As a result, the Company
is currently considering additional debt and equity financing arrangements.
On March 26, 1996, the Company completed the private placement of $120,000,000
of 12-3/4% Senior Discount Notes due 2006 (the "2006 Notes"). The Company
received net proceeds of approximately $61,800,000 from the sale of the 2006
Notes. On June 25, 1996, all outstanding 2006 Notes were exchanged by the
Company, in an exchange offer registered with the SEC, for identical 2006 Notes
which with certain exceptions, are freely transferable under the Securities
Act of 1933, as amended (the "Act"). The 2006 Notes will accrete at a rate of
12-3/4% compounded semi-annually, to an aggregate principal amount of
$120,000,000 by April 1, 2001. Thereafter, interest on the 2006 Notes will
accrue at the annual rate of 12-3/4% and will be payable in cash semi-annually
on April 1 and October 1, commencing on October 1, 2001. The Notes will mature
on April 1, 2006.
PAGE 8
<PAGE> 9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
ACSI is a provider of integrated local voice and data communications services
to commercial customers primarily in mid-size metropolitan markets in the
southern United States. The Company is a rapidly growing CLEC, supplying
businesses with advanced telecommunications services on its digital
SONET-based fiber optic local networks and through resale of incumbent local
exchange carrier services. To date, the Company has derived the
majority of its revenues from the sale of dedicated services, generally at a
discount to the price of the ILECs. The Company's dedicated services include
special access, switched transport and private line services.
As a supplement to its dedicated services, in January 1997, the Company
introduced local switched voice services in two of its markets and began
offering local switched voice services in two additional markets before March
31, 1997. The Company's local switched services include; local exchange
services (dial tone), advanced ISDN and enhanced voice services. In late 1996,
the Company also deployed ACSINet, a coast-to-coast, leased broadband data
communications network through which the Company offers frame relay, ATM and
Internet access services to both ISPs and local businesses. As of March 31,
1997, the Company had ACSINet data POPs in 42 markets, including all but one of
the markets in which the Company has operational local networks. Additionally,
primarily through the Cybergate Acquisition, the Company has begun providing
Internet services. The Cybergate Acquisition provides a foundation to support
the Company's Internet service offerings to ISPs in existing ACSI markets and
to end users in targeted ACSI markets.
As of March 31, 1997, the Company had 28 operational local networks and had 8
additional local networks under construction. In an attempt to improve
financial performance and conserve capital, the Company is reassessing the
optimum number of local networks needed to achieve its objectives.
PAGE 9
<PAGE> 10
The Company provides dedicated services to IXCs and to those business and
government end users whose volumes of voice and data traffic are large enough
to warrant paying a fixed monthly charge for a specific capacity requirement
rather than a usage-based variable charge. These monthly charges vary according
to the capacity of each circuit, the volume of individual circuits ordered by
the customer, the mileage of the circuits, the need for any ancillary services
and the term of the service contract, but are typically less than the rates
charged by the ILECs for similar services, volumes and terms. For the fiscal
period ended December 31, 1996, 40% of the Company's revenues were generated by
four of the largest IXCs. As of March 31, 1997, the Company had long-term
operating leases for nine Lucent 5ESS switches. The use of operating leases,
rather than the acquisition of such equipment reduces the Company's capital
requirements but negatively impacts its EBITDA.
Beginning in the fiscal quarter ended December 31, 1996, the Company began
providing and plans to continue to provide, local switched voice services, such
as local dial tone, termination of local calling, Centrex services, PBX
trunking, switched access and enhanced voice services, initially to existing
and new corporate customers in buildings already connected to the Company's
local networks. Revenues from the Company's local switched voice services will
be generated from fixed and usage-based charges billed directly to the end user
at rates below those charged by ILECs for similar services. The Company began
generating revenues from its local switched voice services beginning in the
three months ending March 31, 1997.
In December 1996, the Company began providing high-speed data services to ISPs
and corporate, institutional and government customers. ACSI's data services
revenues are generated from either flat rate or usage-based recurring charges
based on network access speed and the data throughput rate requested by the end
user as well as from non-recurring charges for installation and provisioning.
Principally through the Cybergate Acquisition, ACSI has begun to offer direct
Internet access to commercial and consumer end users as well as provide private
label Internet services for the Company's strategic distribution partners
throughout all of the Company's markets. Revenues from the Company's Internet
services will be generated from usage-based variable rates charged directly to
the end user by the Company.
The Company believes that integration of its SONET-based fiber optic local
networks and its coast-to-coast, leased broadband data communications network
will provide a platform for the provision of a wide variety of voice,
high-speed data and other communications services at a reduced cost. While the
Company may offer its services to customers that are not directly connected to
its integrated network through resale of the ILEC's network, the Company
believes that it can gradually migrate many of these off-net customers to
higher margin on-net accounts as it increases penetration of all its services
within a given building. As a result, the capital investment of connecting
additional buildings and customers to ACSI's integrated network should become
more cost-effective. Over time, the Company believes it can increase its market
share of all of its service offerings as a result of the reliability and
quality of its integrated network, prompt customer service, competitive
pricing, cross marketing/bundling synergies and new service offerings
throughout the markets it serves.
PAGE 10
<PAGE> 11
ACSI is operating its coast-to-coast, leased broadband data communications
network via high bandwidth (DS-3) longhaul circuits pursuant to multi-year
operating leases with various IXCs. Network connectivity within each node will
be via OC-3 bandwidth, enabling the transparent migration of longhaul circuits
to OC-3 capacity as needed. Ultimately, the platform technology is capable of
upgrading the backbone to OC-12 without further modification.
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.
CAPITAL EXPENDITURES; OPERATING CASH FLOW
As of March 31, 1997 the Company is operating 28 digital fiber optic
networks, with an additional 8 networks under construction. The costs
associated with the initial construction and operation of a network may vary
greatly, primarily due to market variations in geographic and demographic
characteristics, and the types of construction technologies which can be
used to deploy the network. Management estimates that construction of the
initial one-to-three mile fiber optic backbone and installation of related
network transmission equipment for dedicated services for each market will
generally cost between $3.5 million and $6.0 million depending on the size of
the market served. Including planned expansion routes, total capital
expenditures per network are estimated to average $6.0 million. In addition to
capital expenditure requirements, the Company incurs sales and marketing
(including sales commissions) and operating expenses and other expenses
such as property taxes and, in certain markets, franchise fees. Prior to the
completion of network construction, certain of these expenses, to the
extent they are related to pre-service construction, are capitalized. These
additional capitalized expenses, estimated by management to be between
approximately $500,000 and $1.0 million per network, are amortized over the
anticipated life of the network. These costs vary depending on the size of the
market, the length of time required to build-out the network and the rate of
growth of the customer base.
As the Company develops, introduces and rolls out its high-speed data,
enhanced voice messaging and local switched services in each of its target
markets, additional capital expenditures and net operating costs will be
incurred. The amount of these costs will vary, based on the number of
customers served and the actual services provided to the customers.
Although the Company is now generating revenues from 28 of its fiber optic
networks, on a consolidated basis, it is still incurring negative cash flows
due, in part, to the funding requirements for the networks the Company
has under construction or development and due, in part, to the roll-out of its
new data and switched voice services. The Company expects it will continue to
incur a negative cash flow for at least two years. The Company anticipates
that without infusion of additional cash, it will exhaust its cash resources
during the third quarter of 1997. As a result, the Company is currently
considering additional debt and equity financing.
PAGE 11
<PAGE> 12
RESULTS OF OPERATIONS
Three Month Period Ended March 31, 1997 Compared to Three Month Period Ended
March 31, 1996
REVENUES
During the three month period ended March 31, 1997, the Company recorded
revenues of $8,176,675 as compared to revenues of $816,639 during the three
month period ended March 31, 1996. Four of the largest IXCs accounted for
approximately $2,159,993, or 26.4%, of revenues for the quarter ended March 31,
1997.
Other network information is as follows:
<TABLE>
<CAPTION>
Network Network Voice
Route Fiber Buildings Grade Full Time
Miles Miles Connected Equivalents Employees
----- ----- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
As of the period ended:
- -----------------------
March 31, 1996 200 9,466 133 125,208 142
March 31, 1997 908 75,867 858 554,883 502
</TABLE>
The terms "Voice Grade Equivalents ('VGEs')" or "Voice Grade Equivalent
Circuits" are commonly used measures of telephone service equivalent to one
telephone line (64 kilobits of bandwidth) actually billed to a customer.
TOTAL OPERATING EXPENSES
Network development and operating expenses for the three month period ended
March 31, 1997 increased to $8,669,113 from $1,954,514 in the three month
period ended March 31, 1996, reflecting significant increases in personnel,
network development and non-payroll operating expenses. Related personnel
costs increased to $3,167,884 in the quarter ended March 31, 1997, from
approximately $597,842 in the quarter ended March 31, 1996. Other operating
expenses related to the development of prospective new markets, which include
expenses such as contract labor and legal expenses, travel expenses, rent,
utilities, charges and taxes increased to $5,501,229 in the quarter ended March
31, 1997 from approximately $1,356,672 in the quarter ended March 31, 1996.
In the three month period ended March 31, 1997, selling, general and
administrative expenses increased to $13,924,867 from $2,650,263 in the three
month period ended March 31, 1996. Related personnel costs increased to
$5,364,035 in the quarter ended March 31, 1997 from $1,463,682 in the quarter
ended March 31, 1996, and corresponding operating costs increased to $8,560,832
in the quarter ended March 31, 1997 from $1,186,581 in the quarter ended March
31, 1996. This increase reflected costs associated with the Company's efforts
to expand significantly 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.
Depreciation and amortization expenses increased to $4,117,654 in the three
month period ended March 31, 1997 from $630,004 in the three month period ended
March 31, 1996. During the quarter ended March 31, 1997 the Company increased
its capital assets to $185,994,973 as of March 31, 1997, from the $42,727,680
in capital assets as of March 31, 1996. Non-cash stock compensation expense
decreased to $239,544 for the quarter ended March 31, 1997 from $1,985,765 for
the quarter ended
PAGE 12
<PAGE> 13
March 31, 1996. This expense reflects the Company's accrual of non-cash
costs for options and warrants granted to key executives, employees and
others arising from the difference between the exercise price and the
valuation prices used by the Company to record such costs and from the
vesting of those options and warrants. Certain of these options had put rights
and other factors that required variable plan accounting in both 1996 and
1995 but, at the end of fiscal 1995, the Company renegotiated contracts with
certain of its officers, establishing a limit of $2,500,000 on the Company's
"put right" obligations with respect to those contracts. During fiscal period
ended December 31, 1996, the limit was further reduced to $2,000,000.
INTEREST AND OTHER EXPENSES
Interest and other income increased to $884,071 for the three month period
ended March 31, 1997 from $661,313 in the three month period ended March 31,
1996. Interest and other expense increased to $6,133,142 in the quarter ended
March 31, 1997 from $3,500,624 in the quarter ended March 31, 1996. The
increase in interest and other income reflects the significant increase in
available funds from the Company's sale of its 9% Series B Preferred Stock in
June and November 1995, the 2005 Notes in November 1995 and the 2006 Notes
in March 1996. The increase in interest and other expenses reflected the
accrual of interest related to the 2005 Notes and 2006 Notes and the Company's
increased borrowings under its secured financing facility with AT&T Credit
Corporation (the "AT&T Credit Facility"). Payments of principal and
interest on the AT&T Credit Facility began in the first quarter 1997,
payments of interest on the 2005 Notes will not begin until November 2000
and payments of interest on the 2006 Notes will not begin until October 2001.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has funded the construction of its networks and
its operations with external financing. Prior to November 1995, the primary
sources of funds used to finance the building of existing networks and the
completion of new targeted networks were two private offerings of preferred
stock completed in October 1994 and June 1995, through which the Company raised
approximately $39.6 million, and the AT&T Credit Facility, through which the
Company has financing commitments for $31.2 million. On November 14, 1995,
the Company completed a private offering of 190,000 Units consisting of
$190.0 million in principal amount of the 2005 Notes and the Warrants to
purchase an aggregate of 2,432,000 shares of common stock at a price of $7.15
per share (as may be adjusted) from which the Company received approximately
$96.8 million in net proceeds. The 2005 Notes will accrete to an aggregate
principal amount of $190.0 million by November 1, 2000, after which cash
interest will accrue and be payable on a semi-annual basis. In November 1995,
the Company also received net proceeds of approximately $5.0 million from the
private sale of an additional 50,000 shares of its Preferred Stock to a
principal stockholder and the exercise by that stockholder of warrants to
purchase 214,286 shares of Common Stock acquired in the Company's June 1995
private placement. On March 21, 1996, the Company completed a private offering
of $120.0 million in principal amount of the 2006 Notes. The 2006 Notes will
accrete to an aggregate principal amount of $120.0 million by April 1, 2001,
after which cash interest will accrue and be payable on a semi-annual basis.
The Company received net proceeds of approximately $61.8 million from the sale
of the 2006 Notes. On April 15, 1997, the Company completed an underwritten
public offering of 4,400,000 shares of its Common Stock plus an additional
660,000 shares sold on May 14, 1997 upon exercise of the underwriters'
over-allotment option (the "Public Offering") and a direct sale of 3,600,000
shares of its Common Stock to certain principal stockholders. The Company
received net proceeds of approximately $40.0 million from the sale of these
8,660,000 shares. The Company intends to continue to use these funds towards
the development and construction of fiber optic networks, the further
development and introduction of new services, including high-speed data,
enhanced voice messaging and local switched services, for expansion of the
Company's existing networks and to fund negative operating cash flow.
PAGE 13
<PAGE> 14
To meet ongoing operating expenses and to continue network construction, ACSI
will be required to sell additional debt or equity securities or increase its
existing credit facility or acquire additional credit facilities. The Company
may also need to seek such additional equity financing to maintain balance
sheet and liquidity ratios required under certain of its debt instruments. The
Company anticipates that without infusion of additional cash, it will exhaust
its cash resources during the third quarter of 1997. As a result, the Company
is currently considering additional debt and equity financing. In addition, the
Company in the past has considered and expects to continue to consider
potential acquisitions or other strategic arrangements that may fit the
Company's strategic plan. Although the Company has had discussions concerning
such potential acquisitions or arrangements, to date, no agreements have been
reached with regard to any particular transaction. Any such acquisitions or
strategic arrangements that the Company might consider are likely to require
additional equity or debt financing, which the Company will seek to obtain as
required. The Company's expectations of required future capital expenditures
are based on the Company's current estimates and the current state and federal
regulatory environment. There can be no assurance that actual expenditures
will not be significantly higher or lower. In addition, there can be no
assurance that the Company will be able to meet its strategic objectives or
that such funds, if available at all, will be available on a timely basis or on
terms that are acceptable to the Company.
In October 1994, the Company completed the private placement of 186,664 shares
of its 9% Series A Convertible Preferred Stock, par value $1.00 per share
(which was later exchanged for Series A-1 Preferred Stock) 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. As part of the Public
Offering, all of the Series A Preferred Stock was converted into 7,466,560
shares of Common 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 $22,750,000. In addition, in November 1995, the Company completed a private
placement of 50,000 shares of its Series B Preferred Stock together with the
exercise of accompanying warrants to purchase 214,286 shares of Common Stock to
a principal stockholder for an aggregate consideration of $5,000,000. As part
of the Public Offering completed, all of the Series B Preferred Stock was
converted into 9,910,718 shares of Common Stock, and 1,649,057 shares of
Common Stock were issued in lieu of payment of accrued dividends to certain
holders of Series A-1 and B Preferred Stock and $290,193 of accrued dividends
were paid in cash.
In October 1994, the Company entered into the AT&T Credit Facility pursuant to
which AT&T Credit Corporation has agreed to provide up to $31.2 million in
financing for the development and construction of fiber optic networks by the
Company's subsidiaries. In connection with each loan made under the AT&T
Credit Facility, AT&T Credit Corporation purchased 7.25% of the capital stock
of the funded subsidiary, and ACSI pledged the other shares and the assets of
the subsidiary to AT&T Credit Corporation as security for the loan. During
fiscal 1995, the Company's subsidiaries in Louisville, Fort Worth,
Greenville and Columbia entered into loan agreements under the AT&T
Credit Facility providing for AT&T Credit Corporation funding of up to
$19.8 million in the aggregate, and in September 1995, the Company's
PAGE 14
<PAGE> 15
subsidiary in El Paso entered into a loan agreement under the AT&T Credit
Facility providing for up to $5.5 million of AT&T Credit Corporation funding.
As of March 31, 1997, an aggregate of $30.8 million had been borrowed under
these agreements and the existing loan agreements had been amended to increase
the aggregate credit available under such agreements to $31.2 million.
EFFECTS OF NEW ACCOUNTING STANDARDS
During early 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, Accounting for EPS, which will become effective December 15, 1997, and
will thereafter require the Company to disclose basic earnings (loss) per share
in addition to the common stock equivalent disclosure information already
required. Early adoption of SFAS No. 128 is not permitted.
While the Company does not know precisely the impact of adopting SFAS No.
128, the Company does not expect that the adoption of SFAS No. 128 will have
a material effect on the Company's consolidated financial statements.
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.
PAGE 15
<PAGE> 16
PART II OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES
On April 15, 1997, as part of the Public Offering, all of the outstanding
Series A-1 and Series B Preferred Stock was converted into shares of Common
Stock. The outstanding shares of Series A-1 Preferred Stock were converted
into 7,466,560 of Common Stock. The outstanding shares of Series B Preferred
Stock were converted into 9,910,718 of Common Stock and 1,649,057 shares of
Common Stock were issued in lieu of payment of accrued dividends to certain
holders of Series A-1 and B Preferred Stock.
On April 15, 1997, the Company determined that no shares of Series A-1 or
Series B stock were outstanding and executed a Certificate of Elimination which
had the effect of eliminating from the Company's Certificate of Incorporation
all references to Series A-1 and Series B Convertible Preferred Stock.
Effective March 6, 1997, the Company and MCImetro entered into an agreement in
which MCI names ACSI as its preferred local provider for dedicated and
transport services in 21 ACSI markets for at least a five year period.
Pursuant to this preferred provider agreement, MCI will migrate current
dedicated transport circuits in these markets to ACSI and ACSI will be listed
as the first choice provider in MCI's provisioning system for all new dedicated
access circuits in the designated markets. The preferred provider agreement
contemplates that the parties will execute an agreement giving MCI the opinion
to purchase loop transport services from ACSI where ACSI has collocations with
the ILEC and MCI has deployed its own local switch. If this loop transport
agreement is not executed prior to June 1, 1997, MCI can terminate ACSI's
preferred provider status and ACSI's right of first refusal under the preferred
provider agreement. The parties also have agreed to use their best efforts to
execute an agreement pursuant to which MCI will resell local switched services
in at least 10 of the 21 identified markets on a wholesale basis by July 23,
1997. In connection with these agreements (collectively, the "MCI
Transaction"), ACSI issued MCI warrants to purchase up to 620,000 shares of
ACSI's Common Stock at $9.86 per share, subject to number and price adjustment
in certain circumstances. ACSI has also agreed to issue warrants to purchase
up to an aggregate of approximately 1.7 million additional shares of ACSI's
Common Stock at fair market value on the date of grant in tranches every six
months after execution of the preferred provider agreement, subject to, and
based upon, certain increases in revenues to ACSI generated under that
agreement. Of the 620,000 warrants issued to MCI on March 6, 1997, 360,000
warrants will vest only when the loop transport agreement is executed or MCI
has agreed in writing not to terminate ACSI's preferred provider status or
right of first refusal under the preferred provider agreement (the "Waiver")
and the remaining 260,000 warrants will vest only upon execution of the
switched services resale agreement and the loop transport agreement or when MCI
has executed the Waiver. Subject to certain exceptions, including the Public
Offering, MCI has the right to purchase additional shares of ACSI's Common
Stock at a 10% discount to fair market value so MCI can maintain its equity
ownership interest in the Company after giving effect to warrants issued in
connection with the MCI Transaction and shares issued upon exercise of such
warrants. MCI has certain registration rights with respect to any shares of
Common Stock issued to MCI in connection with the MCI Transaction. If MCI
terminates ACSI's status as a preferred provider or ACSI's right of first
refusal under the preferred provider agreement for any reason (other than
ACSI's default under such agreement or a related agreement or a change in
control of ACSI) or MCI fails to deliver to ACSI the Waiver, in each case, on
or before June 15, 1997, the warrants, to the extent issued and not previously
exercised, ACSI's obligation to issue additional warrants, MCI's right to
purchase additional shares of ACSI in order to maintain its equity ownership
interest and ACSI's obligation to register shares of ACSI common stock issuable
to MCI in connection with the MCI Transaction will terminate.
PAGE 16
<PAGE> 17
On January 17, 1997, the Company acquired 100% of the outstanding capital stock
of Cybergate, Inc. in exchange for 1,030,000 shares of Common Stock plus up to
an additional 150,000 shares if certain performance goals are achieved (the
"Cybergate Acquisition").
ITEM 5. OTHER INFORMATION
In early May, the Federal Communications Commission (the "FCC") announced the
following:
LEC Price Caps. The FCC reformed its price cap plan for incumbent LECs by
requiring LECs to reduce their price cap indices by 6.5 percent annually, less
an adjustment for inflation. The FCC also eliminated rules that require
incumbent LECs earning more than certain specified rates of return to "share"
portions of the excess with their access customers during the next year in the
form of lower access rates.
Access Charge Reform. The FCC adopted an order which makes various reforms to
the existing rate structure for interstate access that are designed to move
access charges, over time, to more economically efficient rate levels and
structures. The Commission revised its rules regarding Subscriber Line
Charges, Carrier Common Line Charges, the Local Switching rate element and
access Transport charges. The FCC also created a new Presubscribed
Interexchange Carrier Charge rate element. The FCC clarified that incumbent
LECs may not assess intrastate access charges on the purchasers of unbundled
network elements or information service providers, and decided not to adopt any
regulations governing the provision of terminating access by competitive LECs.
In addition, the Commission announced that it will, in a subsequent Report and
Order to be issued during summer 1997, provide detailed rules for implementing
a market-based approach to further access charge reform. That process will
give incumbent LECs progressively greater flexibility in setting rates as
competition develops, gradually replacing regulation with competition as the
primary means of setting prices. The FCC also adopted a "prescriptive
safeguard" to bring access rates to competitive levels in the absence of
competition. (The foregoing is a nonexhaustive summary of the actions taken by
the FCC with respect to access charge reform.)
Universal Service Reform. The FCC established a set of policies and rules
ensuring that through increased direct customer and universal service
subsidies, low-income consumers and consumers that live in rural, insular and
high cost areas receive a defined set of local telecommunications services at
affordable rates. The FCC also created new programs to subsidize connection of
eligible schools, libraries and rural health care providers to
telecommunications networks. These universal service programs will be funded
by assessment of end-user telecommunications revenues of nearly all providers
of interstate telecommunications carriers, including competitive LECs such as
the Company. However, the Company also is eligible to qualify as a recipient
of universal service support if it elects to serve areas designated for
universal service support over its own network.
PAGE 17
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-B)
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------ ----------- ------
<S> <C> <C>
11.1 Computation of Primary Net Income
Per Share E-1
11.2 Computation of Fully Diluted Net Income
Per Share E-2
27.0 Financial Data Schedule E-3
</TABLE>
(a) Reports on Form 8-K
(b) On January 9, 1997, the Company filed with the SEC a Current Report on
Form 8-K dated January 6, 1997, to report that the employment of Richard A.
Kozak, who was President and Chief Executive Officer - Corporate Services and
Acting Chief Financial Officer was terminated. Jack E. Reich joined the
Company as President and Chief Executive Officer of the Communications Services
Division.
(b) On January 7, 1997, the Company filed with the SEC a Current Report on
Form 8-K dated December 13, 1996, to report the Company acquired 100% of the
outstanding capital stock of Cybergate, Inc. in exchange for 1,030,000 shares
of Common Stock plus up to an additional 150,000 shares if certain performance
goals are achieved.
(b) On February 7, 1997, the Company filed with the SEC a Current Report on
Form 8-K dated February 7, 1997, to report the Company and MCImetro entered
into an agreement in which MCI names ACSI as its preferred local provider for
dedicated and transport services in 21 ACSI markets for at least a five year
period. Pursuant to this preferred provider agreement, MCI will migrate
current dedicated transport circuits in these markets to ACSI and ACSI will be
listed as the first choice provider in MCI's provisioning system for all new
dedicated access circuits in the designated markets. In connection with these
agreements (collectively, the "MCI Transaction"), ACSI issues MCI warrants to
purchase up to 620,000 shares of ACSI's Common Stock at $9.86 per share,
subject to number and price adjustment in certain circumstances. ACSI has also
agreed to issue warrants to purchase up to an aggregate of approximately 2.3
million additional shares of ACSI's Common Stock at fair market value on the
date of grant in tranches every six months after execution of the preferred
provider agreement, subject to, and a based upon, certain increases in revenues
to ACSI generated under that agreement. Also, this Form 8-K reported that the
Company filed a registration statement with the Securities and Exchange
Commission for a proposed underwritten Public offering involving to $50 million
of its Common Stock.
PAGE 18
<PAGE> 19
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
American Communications Services, Inc.
--------------------------------------
(Registrant)
May 15, 1997
- ------------------- --------------------------------------------------
(Anthony J. Pompliano, Executive Chairman)
May 15, 1997
- ------------------- --------------------------------------------------
(David L. Piazza, Chief Financial Officer)
PAGE 19
<PAGE> 1
AMERICAN COMMUNICATIONS SERVICES, INC.
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS (LOSS)
<TABLE>
<CAPTION>
Three Months ended March 31,
NET LOSS 1996 1997
- ------------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
1 Net Loss $ 9,141,144 $24,023,574
2 Less: Preferred Stock Accretion 955,489 988,638
------------- -------------
3 Net Loss to Common Stockholders 10,096,633 25,012,212
4 Add: Effect on Interest Income & expense $899,499 $797,264
Add: Convertible Preferred Dividends Saved 955,489 988,638
------------- -------------
5 Net Loss to Common Stockholders, Anti-Dilutive Basis $ 8,241,645 $23,226,310
============= =============
AVERAGE SHARES OUTSTANDING
- -------------------------------------------------------------------------
6 Weighted Average Number of
Common Shares Outstanding 6,536,722 7,852,467
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 9,275,515 10,234,568
Additional shares assuming conversion of
preferred shares 17,377,274 17,260,864
------------- -------------
8 Weighted average number of common
and common equivalent
shares outstanding 33,189,511 35,347,899
============= =============
PER SHARE AMOUNTS
- -------------------------------------------------------------------------
9 Net loss per common share as
presented in statements of
operations (3 / 6) $ (1.54) $ (3.19)
============= =============
10 Net loss per share as antidilutive basis (5 / 8) $ (0.25) $ (0.66)
============= =============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 22,523,042
<SECURITIES> 0
<RECEIVABLES> 5,232,536
<ALLOWANCES> (1,069,945)
<INVENTORY> 975,642
<CURRENT-ASSETS> 27,661,275
<PP&E> 185,994,973
<DEPRECIATION> (11,919,902)
<TOTAL-ASSETS> 220,950,700
<CURRENT-LIABILITIES> 34,536,193
<BONDS> 226,044,230
183,754
277,500
<COMMON> 81,931
<OTHER-SE> (42,172,908)
<TOTAL-LIABILITY-AND-EQUITY> 220,950,700
<SALES> 0
<TOTAL-REVENUES> 8,176,675
<CGS> 8,669,113
<TOTAL-COSTS> 13,287,322
<OTHER-EXPENSES> 3,473,127
<LOSS-PROVISION> 637,545
<INTEREST-EXPENSE> 6,133,142
<INCOME-PRETAX> (24,023,574)
<INCOME-TAX> 0
<INCOME-CONTINUING> (24,023,574)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,023,574)
<EPS-PRIMARY> (3.19)
<EPS-DILUTED> 0
</TABLE>
