U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 0-25314
e.spire COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1947746
(State or other (I.R.S.
jurisdiction of Employer
incorporation or Identification
organization) No.)
133 National Business Parkway, Annapolis Junction, MD 20701
(Address of principal executive offices)
(301) 361-4200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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 past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of August 4, 1998, Common
Stock, Par Value $0.01 -- 47,568,046
<PAGE>
e.spire COMMUNICATIONS, INC.
FORM 10 -- Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- June 30, 1998 (unaudited)
and December 31, 1997 3
Condensed Consolidated Statements of Operations --
Three and Six Months Ended June 30, 1998 and 1997 (unaudited) 4
Condensed Consolidated Statements of Cash Flows -- Six
Months Ended June 30, 1998 and 1997 (unaudited) 5
Notes to Unaudited Condensed Consolidated Interim
Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 16
Item 6. Exhibits and reports on Form 8-K 16
Signatures.................................................................. 17
Index of Exhibits........................................................... 18
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1 -- Financial Statements
e.spire COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in thousands, except share data)
June 30, December 31,
1998 1997
------------- --------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $294,581 $260,837
Restricted cash and investments 29,213 26,526
Trade accounts receivable, net 28,638 15,514
Other current assets 4,797 6,127
------------- --------------
Total current assets 357,229 309,004
------------- --------------
Networks, equipment and furniture, gross 397,459 282,152
Less: accumulated depreciation
and amortization (48,192) (31,675)
------------- --------------
349,267 250,477
Deferred financing fees,
net of accumulated amortization of
$5,405 and $3,649 at June 30, 1998
and December 31, 1997, respectively 37,155 25,031
Intangible assets,
net of accumulated amortization of
$1,182 and $776 at June 30, 1998
and December 31, 1997, respectively 7,499 8,132
Restricted cash and investments 30,250 45,375
Other assets 1,042 876
------------- --------------
Total assets $ 782,442 $ 638,895
============= ==============
LIABILITIES, REDEEMABLE STOCK AND OPTIONS,
AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Notes payable - current portion $ 1,312 $ 438
Accounts payable 29,231 18,308
Accrued interest 14,907 13,360
Accrued employee costs 2,093 2,353
Lease obligation 7,353 0
Other accrued liabilities 6,106 2,311
------------- --------------
Total current liabilities 61,002 36,770
------------- --------------
Long Term Liabilities:
Notes payable, less current portion 474,082 460,848
Other long-term liabilities 1,956 474
Lease obligation 23,596 0
------------- --------------
Total liabilities 560,636 498,092
------------- --------------
Redeemable stock and options:
Redeemable options 0 1,000
14 3/4% Redeemable Preferred Stock due 2008 62,272 55,060
12 3/4% Junior Redeemable Preferred Stock
due 2009 159,987 150,099
------------- --------------
Total redeemable stock and options 222,259 206,159
Stockholders' Deficit:
Common Stock, $0.01 par value,
125,000,000 shares authorized,
47,385,349 and 37,219,419 shares,
respectively, issued and outstanding 474 372
Additional paid-in capital 261,069 131,728
Accumulated deficit (261,996) (197,456)
------------- --------------
Total stockholders' deficit (453) (65,356)
------------- --------------
Total liabilities, redeemable stock
and options and stockholders' deficit $ 782,442 $ 638,895
============= ==============
See accompanying notes to unaudited condensed consolidated interim
financial statements.
<PAGE>
<TABLE>
e.spire COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except per share data)
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
------------------------------ ------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues $ 35,752 $ 11,616 $ 63,221 $ 19,793
Operating Expenses
Network, development and operations 24,344 10,400 43,597 19,640
Selling, general and 21,648 14,851 41,454 28,205
administrative
Non-cash compensation expense 1,794 584 3,427 823
Depreciation and amortization 9,777 5,339 17,383 9,457
-------------- -------------- -------------- --------------
Total Operating Expenses 57,563 31,174 105,861 58,125
Loss from Operations (21,811) (19,558) (42,640) (38,332)
Non-operating income/expenses
Interest and other income (5,615) (194) (9,991) (1,078)
Interest and other expense 16,249 6,288 31,891 12,421
-------------- -------------- -------------- --------------
Net loss (32,445) (25,652) (64,540) (49,675)
Preferred stock dividends/accretion 8,607 106 17,100 1,095
-------------- -------------- -------------- --------------
Net loss to common stockholders $ (41,052) $ (25,758) $ (81,640) $ (50,770)
============== ============== ============== ==============
Basic and Diluted Loss per Share $ (0.91) $ (0.92) $ (1.97) $ (2.82)
============== ============== ============== ==============
Average number of common/common
equivalent shares outstanding 45,281,794 28,025,238 41,495,538 17,994,161
============== ============== ============== ==============
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements.
<PAGE>
e.spire COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
For the six months ended June 30,
1998 1997
-------------- ---------------
(unaudited)
Cash flows from operating activities
Net Loss $ (64,540) $ (49,675)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 17,383 9,456
Interest deferral and accretion 14,108 12,239
Amortization of deferred financing fees 1,756 474
Noncash compensation 3,427 823
In-kind revenue (4,606) -
Changes in operating assets and liabilities:
Restricted cash related to operating
activities - (2,814)
Trade accounts receivable (13,124) (4,224)
Other current assets 1,330 (259)
Other assets (166) 365
Accounts payable 10,923 (4,162)
Other accrued liabilities 4,234 965
-------------- ---------------
Net cash used in operating activities (29,275) (36,812)
Cash flows from investing activities
Networks, equipment and furniture (79,752) (73,213)
-------------- ---------------
Net cash used in investing activities (79,752) (73,213)
Cash flows from financing activities
Issuance of common stock 135,227 40,702
Payment of deferred financing fees (14,669) (3,299)
Restricted cash related to financing
activities 12,438 -
Exercise of warrants, options and other 9,775 2,502
-------------- ---------------
Net cash provided by financing
activities 142,771 39,905
Net increase (decrease) in cash
and cash equivalents 33,744 (70,120)
Cash and cash equivalents
- beginning of period 260,837 78,619
-------------- ----------------
Cash and cash equivalents - end of period $ 294,581 $ 8,499
============== ================
Supplemental disclosure of cash flow information
Interest paid $ 14,453 $ -
Assets acquired under capital lease $ 37,045 $ -
Accrual of stock bonuses $ 1,859 $ -
Dividends declared with preferred stock $ - $ 1,095
Increase in goodwill $ - $ (8,119)
See accompanying notes to unaudited condensed consolidated
interim financial statements.
<PAGE>
e.spire COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS
Note 1: Basis of Presentation
The condensed consolidated financial statements include the accounts
of e.spire Communications, Inc. ("e.spire" or the "Company") and its
wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation.
The condensed consolidated balance sheet as of June 30, 1998, the
condensed consolidated statements of operations for the three and six months
ended June 30, 1998 and 1997, and the condensed consolidated statements of
cash flows for the six months ended
June 30, 1998 and 1997 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 June 30, 1998, and for all periods presented, have
been made. Certain amounts in the 1997 consolidated statements have been
reclassified to conform to the 1998 presentation. Operating results for the
three and six months ended June 30, 1998 are not necessarily indicative of
the operating results for the full year.
Certain information and footnote disclosures 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 Annual Report on Form
10-KSB for the fiscal year ended December 31, 1997.
Note 2: Significant Accounting Policies
Restricted Cash and Investments
The Company has provided performance bonds and letters of credit in various
cities in connection with its operations, resulting in a restriction to cash
amounting to approximately $1,213,000 at June 30, 1998 and $1,223,000 at
December 31, 1997. The face amount of all bonds and letters of credit is
approximately $6,769,000 as of June 30, 1998 and $6,300,000 as of June 30, 1997.
In addition, as of June 30,1998, the Company currently has approximately
$58,244,000 in an escrow account to be used to fund the next four interest
payments of its 13 3/4 percent senior notes due 2007. Approximately $27,994,000
of the escrow account is classified as current. The escrow account is invested
in cash equivalents consisting of government and commercial securities.
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 115,
Accounting for Certain Investments in Debt and Equity Securities, the Company's
short- and long-term debt securities and marketable equity securities are
accounted for at market value. The fair market value of short- and long-term
investments is determined based on quoted market prices. The Company's
marketable securities have been classified as available for sale and are
recorded at current market value with an offsetting adjustment to stockholders'
equity (deficit). At June 30, 1998 and December 31, 1997, fair market value
approximated amortized cost.
Use of Estimates
The preparation of the condensed 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.
<PAGE>
Risks and Uncertainties
The Company receives a significant portion of its revenues from a small
number of major customers, particularly the long distance telecommunications
companies that service the Company's markets. The loss of any one of these
customers could have an adverse material impact on the Company's results of
operations.
The Company provides services to certain Internet Service Providers (ISPs).
Such companies operate in a highly competitive and uncertain environment.
Approximately 7% and 11% of the Company's revenues for the three and six months
ended June 30, 1998 was attributed to these companies. At June 30, 1998, the
Company had trade accounts receivable of $4.7 million from ISPs. At June 30,
1998, the Company also had equipment with a carrying value of approximately
$13.3 million that is dedicated to providing service to these ISPs. The Company
believes that, if necessary, this equipment could be redeployed throughout the
Company's data network.
The Company has recorded revenues of approximately $4.1 million and $6.6
million for the three and six months ended June 30, 1998 for reciprocal
compensation relating to the transport and termination of Internet traffic for
incumbent local exchange carriers ("ILECs") pursuant to various interconnection
agreements. To date, one ILEC has begun to make payments, and three ILECs
have
agreed to pay these amounts subject to record verifications pursuant to the
governing interconnection agreements with the Company. Historically, these ILECs
have not paid and have disputed these charges based on the belief that such
charges are not local traffic as defined by the various agreements. The
resolution of these disputes will be based on rulings by state public utility
commissions and/or by the Federal Communications Commission (FCC). To date,
there have been no unfavorable final rulings by any state public utility
commission in a state in which the Company provides switched services or the FCC
that would indicate that calls placed by end users to ISPs would not qualify as
local traffic subject to the payment of reciprocal compensation. At June 30,
1998, the Company had approximately $8.2 million in trade accounts receivable
related to these interconnection agreements.
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 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
adopted the provisions of this Statement in the quarter ended March 31, 1998.
The adoption of this statement had no impact in the manner of the presentation
of the Company's financial statements as currently or previously reported.
In June 1997, the FASB issued Statement No. 131, Disclosures About Segments
of an Enterprise and Related Information (SFAS 131). This statement
establishes additional standards for segment reporting in the financial
statements and is effective for fiscal years beginning after December 15, 1997.
The Company has not completed its analysis of the impact on the financial
statements that will be caused by the adoption of this statement.
On March 4, 1998, the American Institute of Certified Public Accountants
Issued Statement of Position 98-1 (SOP), Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. This SOP provides guidance on
capitalizing certain costs related to computer software developed or obtained
for internal use. The SOP is effective for financial statements for fiscal
years beginning after December 15, 1998. The Company has not completed its
analysis of the impact on the financial statements that will be caused by the
adoption of this statement.
In April 1998, the Accounting Standards Executive Committee (AcSEC) of the
AICPA issued Statement of Position (SOP) 98-5, Reporting on the Costs of
Start-up Activities (SOP 98-5). This statement requires that the costs of
start-up activities, including organization costs, be expensed as incurred and
is effective for fiscal years beginning after December 31, 1998. 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, for the
six months ended December 31, 1996 and the year ended December 31, 1997 included
in the Company's Form 10-KSB for the fiscal year ended December 31, 1997.
OVERVIEW
e.spire Communications, Inc. (formerly American Communications Services,
Inc.), formed in 1993, seeks to be a leading facilities-based Integrated
Communications Provider ("ICP") to businesses primarily in major markets in the
southern half of the United States. By the end of 1997, the Company had become
one of the first Competitive Local Exchange Carriers ("CLECs") to combine the
provision of dedicated, local and long distance voice services with frame relay,
Asynchronous Transfer Mode ("ATM") and Internet services. Having established
this suite of telecommunications services which emphasizes data capabilities in
addition to traditional CLEC offerings, the Company has evolved into an ICP.
e.spire seeks to provide customers with superior service and competitive prices
while offering a single source for integrated communications services designed
to meet its business customers' needs. The Company's facilities-based network
infrastructure is designed to provide services to customers on an end-to-end
basis, and, as of June 30, 1998, was comprised of 1,433 route miles of fiber in
its 32 local networks in 19 states, 44 Newbridge ATM switches, 17 Lucent 5ESS
switches and approximately 22,000 backbone long haul miles in its leased
coast-to-coast broadband data network.
With the passage of the federal Telecommunications Act of 1996 (the "Act"),
the Company has enhanced the scope of its product offerings from dedicated
services to a full range of switched voice, data and Internet services in order
to meet the needs of business end-users, and is expanding its sales, marketing,
customer care and operations support systems ("OSS") capabilities. The Company
introduced local switched voice services, including local exchange services in
late 1996 and long distance services in late 1997. As of June 30, 1998, e.spire
had sold 96,405 customer access lines, of which 85,633 were installed,
representing a significant increase over the 9,177 access lines sold as of June
30, 1997.
The development of the Company's business and the construction, acquisition
and expansion of its networks require significant capital expenditures, a
substantial portion of which are incurred before realization of revenues. These
expenditures, together with the associated early operating expenses, result in
negative cash flow until an adequate customer base is established. However, as
the Company's customer base grows, the Company expects that incremental revenues
can be generated with decreasing incremental operating expenses, which may
provide positive contributions to cash flow. The Company has made specific
strategic decisions to build high capacity networks with broad market coverage,
which initially increases its level of capital expenditures and operating
losses. However, the Company believes that over the long term this strategy will
enhance the Company's financial performance by increasing the traffic flow over
its network. The Company also has entered into leased dark fiber and fiber
capacity arrangements, which allow the Company, by installing one or more
switches and related electronics, to enter a market prior to completion of its
own fiber optic network.
<PAGE>
RESULTS OF OPERATIONS
REVENUES
The Company reported an increase in revenues of $24.1 million, or 208%, to
$35.8 million for the three months ended June 30, 1998 compared with revenues of
$11.6 million for the three months ended June 30, 1997. For the six months ended
June 30, 1998, revenues increased by $43.4 million, or 219%, to $63.2 million
from $19.8 million for the same period of 1997.
The increases in revenues were primarily attributable to the Company's
greater presence and expansion in its 32 local fiber optic networks which is up
from 31 markets at June 30, 1997. The increase is also attributable to the
increase in route miles , buildings connected and voice and data switches
deployed as well as revenues from ACSI Network Technologies as described below.
As of June 30, 1998, the Company had installed 17 Lucent 5ESS
switches, up from 8 Lucent 5ESS switches as of June 30, 1997. In addition, the
Company has deployed 44 Newbridge ATM switches over its coast-to-coast data
network as of June 30, 1998. Also, access lines sold have increased to 96,405
at June 30, 1998 from 9,177 at June 30, 1997.
For the three months ended June 30, 1998 and 1997, approximately 41% and
43%, respectively, of the Company's revenues were derived from network services,
approximately 30% and 43% respectively, from data and Internet services and
approximately 29% and 14%, respectively, from switched local and other services.
For the six months ended June 30, 1998 and 1997, approximately 39% and 47%,
respectively of the Company's revenues were derived from network services,
approximately 32% and 44%, respectively, were derived from data and Internet
services and approximately 30% and 9%, respectively, from switched local and
other services. The increase in switched revenue reflects the Company's
expansion of its facilities-based infrastructure and the Company's continued
sales and marketing efforts. Included in the network services category of
revenues are high capacity dedicated and special access services, and revenues
from ACSI Network Technologies for construction contracts and long term leases
of high capacity systems. For the three and six month periods ended
June 30, 1998, approximately $6.7 million and $8.1 million is included from
these contracts, of which $4.6 million and $4.6 million, respectively was
derived from a single interexchange carrier.
OPERATING EXPENSES
Network, Development and Operations
For the three months ended June 30, 1998 and 1997, network, development and
operating expenses increased $13.9 million, or 134%, to $24.3 million from
$10.4 million for the same period of 1997. For the six months ended
June 30, 1998, network development and operating expenses increased
$24.0 million, or 123%, to $43.6 million from $19.6 million for the same period
of 1997.
Included in network, development and operations expense are costs of
telecommunications services paid to Interexchange Carriers ("IXCs")
, ILECs and others for leased
telecommunications facilities, access charges and services. Such costs increased
to approximately $21.7 million for the three months ended June 30, 1998 from
approximately $7.6 million for the three months ended June 30, 1997. For the six
months ended June 30, 1998, these costs increased to approximately $38.0 million
from $14.0 million for the same period of 1997. Also, included in network,
development and operations expenses are network related personnel costs such as
employee salaries and benefits. For the three months ended June 30, 1998 and
1997, these costs were approximately $2.6 million and $2.8 million,
respectively. For the six months ended June 30, 1998 and 1997, such costs were
approximately $5.6 million.
The increase in network, development and operations costs was primarily due
to the Company's expansion of its facilities-based infrastructure which includes
the rapid deployment of operational networks and Lucent 5ESS switches as well as
the increase in access lines. Also, the increase was due to costs associated
with the Company's construction line of business which were approximately $1.4
million and $1.8 million for the three and six months ended June 30, 1998,
respectively.
Selling, General and Administrative
For the three months ended June 30, 1998, selling, general and
administrative expenses increased $6.8 million, or 36%, to $21.6 million from
$14.9 million for the same period of 1997. For the six months ended June 30,
1998, selling, general and administrative expenses increased $13.2 million, or
47%, to $41.4 million from $28.2 million for the same period of 1997.
Included in selling, general and administrative expenses are personnel costs
such as employee salaries, benefits and commissions. Such costs increased to
$7.6 million for the quarter ended June 30, 1998 from $5.7 million for the
quarter ended June 30, 1997. For the six months ended June 30, 1998 and 1997,
these costs increased to $15.0 million and $10.5 million, respectively. Also,
included in selling, general and administrative expenses are operating costs
such as rent, advertising and general administrative and office expenses. These
expenses increased to $14.0 million for the quarter ended June 30, 1998 from
$9.2 million for the quarter ended June 30, 1997. For the six months ended June
30, 1998 and 1997, these costs increased to $26.4 million from $17.7 million,
respectively.
The increases in selling, general and administrative expense are a result of
the Company's efforts to significantly expand its network sales, support,
marketing and administrative staff and facilities. A significant portion of this
increase is due to an increase in the sales and marketing costs which have
increased due to an expanded field sales force aimed at supporting the Company's
strategy of building market share through focused customer sales and support.
Non-Cash Compensation
Non-cash stock compensation expense increased $1.2 million, or 207%, to $1.8
million for the quarter ended June 30, 1998 from $0.6 million for the quarter
ended June 30, 1997. For the six months ended June 30, 1998, non-cash stock
compensation expense increased $2.6 million, or 316%, to $3.4 million from $0.8
million for the same period of 1997. Included in non-cash compensation for 1998
are accruals for the issuance of common stock in connection with 1998
performance bonuses. In addition, the stock option costs associated with the
settlement of a lawsuit with a former executive is included.
Depreciation and Amortization
Depreciation and amortization expenses increased $4.5 million, or 83%, to
$9.8 million for the three months ended June 30, 1998 from $5.3 million for the
three months ended June 30, 1997. For the six months ended June 30, 1998,
depreciation and amortization increased by $7.9 million, or 84%, to $17.4
million from $9.5 million for the same period of 1997. These increases were due
to an increase in capital assets to $397.5 million at June 30, 1998 compared
with capital assets of $282.2 million at December 31, 1997 and capital assets of
$219.9 at June 30, 1997 as well as an increased amount of network assets placed
in service.
INTEREST AND OTHER INCOME
Interest and other income increased $5.4 million, or 2794%, to $5.6 million
for the three months ended June 30, 1998 from $0.2 million for the three months
ended June 30, 1997. For the six months ended June 30, 1998, interest and other
income increased $8.9 million, or 827%, to $10.0 million from $1.1 million for
the same period of 1997. The increases in interest and other income reflects the
increase in earnings from the proceeds received from the issuance of the
13 3/4% Senior Notes due 2007 (the "2007 Notes"), the 14 3/4% Redeemable
Preferred Stock due 2008 (the "14 3/4% Preferred Stock), the 12 3/4% Junior
Redeemable Preferred Stock due 2009 (the "12 3/4% Preferred Stock") and the
8,100,000 shares of Common Stock (the "1998 Common Stock Offering")
which have been invested.
INTEREST AND OTHER EXPENSE
Interest and other expense increased $10.0 million, or 158%, to $16.2
million for the three months ended June 30, 1998 from $6.3 million for the three
months ended June 30, 1997. For the six months ended June 30, 1998, interest and
other expense increased $19.5 million, or 157%, to $31.9 million from $12.4
million for the same period of 1997. The increase reflected the accrual of
interest related to the 13% Senior Discount Notes due 2005 (the "2005 Notes"),
the 12 3/4% Senior Discount Notes due 2006 (the "2006 Notes") and the 2007 Notes
and the Company's increased borrowings under the credit facility with AT&T
Credit Corporation.
EBITDA
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
increased $3.4 million, or 25%, to ($10.2) million for the three months ended
June 30, 1998 from ($13.6) million for the three months ended June 30, 1997. For
the six months ended June 30, 1998, EBITDA increased $6.2 million, or 22%, to
($21.8) million from ($28.1) million for the same period of 1997. The increase
was due to the changes in revenues, network development and operations and
selling, general and administrative expense discussed above.
<PAGE>
NET LOSS
As a result of the aforementioned increases in revenues, operating expenses,
depreciation and amortization, and interest income and expense, net loss
increased $6.8 million, or 27%, to $32.4 million for the three months ended June
30, 1998 from $25.7 million for the three months ended June 30, 1997. For the
six months ended June 30, 1998, net loss increased $14.9 million, or 30%, to
$64.5 million from $49.7 million for the same period of 1997. Further, net loss
to common stockholders increased $16.8 million, or 65%, to $42.6 million for the
three months ended June 30, 1998 from $25.8 million for the same period of 1997,
due to the increase in preferred stock dividends and accretion during 1998. For
the six months ended June 30, 1998, net loss to common stockholders increased
$32.4 million, or 64%, to $83.2 million from $50.8 million for the same period
of 1997. These increases are primarily attributable to the issuance of 14 3/4%
Preferred Stock and the 12 3/4% Preferred Stock.
LIQUIDITY AND CAPITAL RESOURCES
Managements anticipates that the Company's current cash resources are
sufficient to fund the Company's negative cash flow and required capital
expenditures of the near future. The Company's further development and
enhancement of new services as well as
the continued development, construction, expansion, operation and potential
acquisition of networks, will require substantial capital expenditures. The
funding of these expenditures is dependent upon the Company's ability to raise
substantial financing. On July 24, 1998, the Company completed a private
placement of 10 5/8% Senior Discount Notes due 2008 yielding net proceeds to the
Company of approximately $225 million (the "2008 Notes"). The 2008 Notes
will accrue to an aggregate principal amount of $375 million by July 2008.
The 2008 Notes will require payment of
cash interest semi-annually in arrears beginning January 1, 2004. As of June 30,
1998, the Company had raised approximately $759 million from debt and equity
financings (approximately $978 million after giving pro forma effect to the
issuance of the 2008 Notes). The Company estimates that during the
calendar year 1998, capital
required for expansion of its infrastructure and services and to fund negative
cash flow will be approximately $225 million. The Company continues to consider
potential acquisitions or other arrangements that may fit the Company's
strategic plan. Any such acquisition or arrangement that the Company might
consider is likely to require additional equity or debt financing, which the
Company will seek to obtain as required and may also require that the Company
obtain the consent of its debt holders. There can be no assurance
that the Company will be able to secure financings necessary to fund its
negative cash flow or any such incremental activities that it may contemplate
in the future.
On February 26, 1998, the Company paid approximately $10.3 million to effect
amendments (the "Amendments") to the indentures under which three classes of its
outstanding debt securities were issued. The Amendments revised certain
covenants in the indentures which significantly limited the ability of the
Company and its subsidiaries to incur additional indebtedness or make certain
investments or acquisitions. The limitations on indebtedness contained in the
indentures were amended to provide an alternative test permitting the incurrence
of additional indebtedness based on a debt to capital ratio test, and increased
the amount of unrestricted indebtedness that the Company can incur. The
Amendments also permit the incurrence of indebtedness solely for the
construction, acquisition, and improvement of telecommunications assets, subject
to certain limitations.
On April 3, 1998, the Company completed the public offering of 8,100,000
shares of
Common Stock at a price of $18.50 per share. 7,502,418 of such shares were
issued and sold by the Company and 597,582 of such shares were sold by certain
stockholders of the Company. Total net proceeds to the Company from the1998
Common Stock Offering and the exercise of certain options and warrants in
connection therewith were approximately $134.2 million.
On March 31, 1998, the Company restructured certain leases resulting in a
change from operating to capital lease treatment. This transaction resulted in
capital leases obligations totaling $27,604,000 being included in liabilities
as of June 30, 1998.
On December 30, 1997, the Company entered into a credit facility with AT&T
Capital Corporation ("AT&T") which replaced an existing credit facility with
AT&T (the "New AT&T Credit Facility") for the development and construction of
fiber optic local networks. The Company has financing commitments for $35.0
million under the New AT&T Credit Facility, of which $35.0 had been borrowed as
of December 31, 1997 and June 30, 1998. Payments of interest on borrowings under
the New AT&T Credit Facility are payable quarterly, commencing in December 1998.
In October 1997, the Company issued the 12 3/4% Preferred Stock from which
the Company received net proceeds of approximately $146.0 million. Dividends on
the 12 3/4% Preferred Stock accrue from the date of issuance, are cumulative and
are payable quarterly in arrears, at a rate per annum of 12 3/4% of the
liquidation preference per share. Dividends on the 12 3/4% Preferred Stock will
be paid, at the Company's option, either in cash or by the issuance of
additional shares of 12 3/4% Preferred Stock; provided, however, that after
October 15, 2002, to the extent and for so long as the Company is not precluded
from paying cash dividends on the 12 3/4% Preferred Stock by the terms of any
agreement or instrument governing any of its then outstanding indebtedness, the
Company shall pay dividends on the 12 3/4% Preferred Stock in cash.
On July 23, 1997, the Company completed the sale of the 2007 Notes. Of the
total net proceeds of $204.3 million, the Company placed $70.0 million
representing funds sufficient to pay the first five interest payments on the
2007 Notes into an escrow account for the benefit of the holders thereof.
Payments of interest on the 2007 Notes are payable semi-annually, and began in
January 1998.
On July 10, 1997, the Company completed the issuance and sale of 75,000
units (the "Unit Offering"), consisting of 14 3/4% Redeemable Preferred Stock
due 2008 and warrants (the "Unit Warrants") from which the Company received net
proceeds of approximately $70 million. Dividends on the 14 3/4% Preferred Stock
accrue from the date of issuance, are cumulative and are payable quarterly in
arrears, at a rate per annum of 14 3/4% of the liquidation preference per share.
Dividends on the 14 3/4% Preferred Stock will be paid, at the Company's option,
either in cash or by the issuance of additional shares of 14 3/4% Preferred
Stock; provided, however, that after June 30, 2002, to the extent and for so
long as the Company is not precluded from paying cash dividends on the 14 3/4%
Preferred Stock by the terms of any then outstanding indebtedness or any other
agreement or instrument to which the Company is then subject, the Company shall
pay dividends on the 14 3/4% Preferred Stock in cash.
On March 21, 1996, the Company completed a private offering of the 2006
Notes from which the Company received net proceeds of approximately $61.8
million. The 2006 Notes will accrue to an aggregate principal amount of $120.0
million by April 1, 2001, after which cash interest will accrue and be payable
on a semi-annual basis.
On November 14, 1995, the Company completed a private offering of the 2005
Notes and warrants from which the Company received approximately $96.1 million
in net proceeds. The 2005 Notes will accrue to an aggregate principal amount of
$190.0 million by November 1, 2000, after which cash interest will accrue and be
payable on a semi-annual basis.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable
<PAGE>
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 99.2 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1997 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>
PART II
OTHER INFORMATION
ITEM 1 -- Legal Proceedings
On June 19, 1998, the Company completed a settlement with e.spire's former
Chief Financial Officer, Harry J. D'Andrea who had initiated litigation against
the Company in the Circuit Court of Maryland for Anne Arundel County.
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
At the annual meeting of shareholders on May 13, 1998,
the shareholders of the Company approved two proposals to ratify and amend
the Certificate of Incorporation: a proposal to increase its authorized shares
of common stock from 75,000,000 to 125,000,000 and a proposal to increase its
authorized shares of "blank check" preferred stock from 1,500,000 to 3,000,000.
On May 20, 1998 , Lightwave Spectrum International, Inc. ("LSII") exercised
options to purchase 50,000 shares of common stock, $.01 par value, at an
exercise price of $4.00 per share. LSII tendered 10,256 shares to the Company as
consideration for such exercise, resulting in a net issuance of 39,744 shares of
Common Stock. Such shares were issued pursuant to the exemption from the
registration requirements of the Securities Act of 1933 set forth in
Section 4(2) of such Act.
On June 30, 1998, Commonwealth Life Insurance Company (Teamsters-Camden
Non-Enhanced) exercised options to purchase 500,000 shares of Common Stock, at
an exercise price of $8.66 per share. Pursuant to a Letter Agreement dated
December 2, 1997 (the "Letter Agreement"), Louisville Gas & Electric Company
("LG&E"), Camden Asset Management, L.P. ("Camden") and the Company, LG&E agreed
to assign and deliver such option to Camden.
<PAGE>
ITEM 4 -- Submission of Matters to a Vote of Security Holders
On May 13, 1998, the Company held its annual meeting of stockholders and
seven proposals were considered. All such proposals were approved by the
stockholders.
The first proposal was to elect the eight nominees to the Board of
Directors. The following is a separate tabulation with respect to the vote for
each nominee.
Anthony J. Pompliano: For: 26,414,661 Against: 0
Edwin M. Banks: For: 26,414,661 Against: 0
Peter C. Bentz: For: 26,414,661 Against: 0
Benjamin P. Giess: For: 26,414,661 Against: 0
George M. Middlemas: For: 26,414,661 Against: 0
Christopher L. Rafferty: For: 26,414,661 Against: 0
Jack E. Reich: For: 26,414,661 Against: 0
Olivier L. Trouveroy: For: 26,414,661 Against: 0
The second proposal was to approve and ratify an amendment to the Company's
Certificate of Incorporation to increase its authorized shares of common stock
from 75,000,000 to 125,000,000. The following is a breakdown of the vote on such
matter.
Abstained For Against Broker Non-Votes
200 26,409,600 4,861 0
The third proposal was to approve and ratify an amendment to the Company's
Certificate of Incorporation to increase its authorized shares of preferred
stock from 1,5000,000 to 3,000,000. The following is a breakdown of the vote on
such matter.
Abstained For Against Broker Non-Votes
200 25,948,300 466,161 0
The fourth proposal was to approve and ratify an amendment to the Company's
1994 Stock Option Plan, as amended, to increase the number of shares of Common
Stock reserved for issuance upon exercise of options granted under the Plan from
5,000,000 to 11,000,000. The following is a breakdown of the vote on such
matter.
Abstained For Against Broker Non-Votes
150,200 25,818,000 446,461 0
The fifth proposal was to approve and ratify amendments to the Stock Option
Plan to the current provisions of Rule 16b-3 under the Securities Exchange Act
of 1934. The following is a breakdown of the vote on such matter.
Abstained For Against Broker Non-Votes
475 25,402,667 2,800 1,008,719
The sixth proposal was to approve and ratify amendments to the Stock
Option Plan to modify the definition of the term "Outside Director". The
following is a breakdown of the vote on such matter.
Abstained For Against Broker Non-Votes
200 25,402,867 2,875 1,008,719
The seventh proposal to ratify the selection of KPMG Peat Marwick, LLP as
the independent auditors of the Company for the fiscal year ending December 31,
1998. The following is a breakdown of the vote on such matter.
Abstained For Against Broker Non-Votes
0 26,414,661 0 0
<PAGE>
ITEM 5 -- Other Information
On April 15, 1998, the Company announced that it had changed its name from
American Communications Services, Inc. (ACSI) to e.spire Communications, Inc.
Effective as of such date, "ESPI" became the Company's new Nasdaq trading symbol
for its common stock.
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 Supplemental Financial Information
(b) Reports on Form 8-K
(a) On April 14, 1998, the Company filed with the SEC a Current Report on
Form 8-K announcing the filing of a Certificate of Ownership and Merger
with the Secretary of State of Delaware on April 13, 1998, merging
e.spire Communications, Inc., a wholly-owned subsidiary, into the
Company, in accordance with the provisions of Sections 103 and 253 of
the General Corporation Law of the State of Delaware (the "Merger"). At
the effective time of the Merger, the name of the surviving corporation
was changed to e.spire Communications, Inc.
(b) On July 27, 1998, the Company filed with the SEC a Current Report on
Form 8-K announcing the completion of a private placement of 10 5/8%
Senior Discount Notes due 2008 yielding gross proceeds of approximately
$225 million.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
e.spire Communications, Inc.
(Registrant)
/s/ JACK E. REICH
-----------------
Jack E. Reich,
August 12, 1998 President and Chief Executive
Officer
/s/ DAVID L. PIAZZA
-------------------
David L. Piazza
August 12, 1998 Chief Financial Officer
<PAGE>
INDEX OF EXHIBITS
EXHIBIT
NO. DESCRIPTION PAGE NO.
11 Statement re: computation of per-share earnings (loss) E-1
27 Financial Data Schedules E-2
99 Supplemental Financial Information E-3
<TABLE>
EXHIBIT 11
e.spire COMMUNICATIONS, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (LOSS)
($ in thousands, except per share data)
<CAPTION>
Three months ended June 30, Six months ended June 30,
1998 1997 1998 1997
----------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
Net Loss $ (32,445) $ (25,652) $ (64,540) $ (49,675)
Less: Preferred Stock Accretion 8,607 106 17,100 1,095
----------------- ---------------- --------------- --------------
Net Loss to Common Stockholders $ (41,052) $ (25,758) $ (81,640) $ (50,770)
================= ================ =============== ==============
AVERAGE SHARES OUTSTANDING
Weighted Average Number of
Common Shares Outstanding 45,281,794 28,025,238 41,495,538 17,994,161
Net additional shares assuming stock options and warrants
exercised and proceeds used to purchase treasury stock 11,205,932 6,466,496 11,205,932 6,466,496
----------------- ---------------- --------------- --------------
Weighted average number of common and
common equivalent shares outstanding 56,487,726 34,491,734 52,701,470 24,460,657
================= ================ =============== ==============
PER SHARE AMOUNTS
Basic earnings per share $ (0.91) $ (0.92) $ (1.97) $ (2.82)
================= ================ =============== ==============
Diluted earnings per share $ (0.73) $ (0.75) $ (1.55) $ (2.08)
================= ================ =============== ==============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
E.SPIRE COMMUNICATIONS, INC. FORM 10Q FOR THE SIX MONTHS ENDED 6/30/98
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 323,794
<SECURITIES> 0
<RECEIVABLES> 30,633
<ALLOWANCES> (1,995)
<INVENTORY> 4,797
<CURRENT-ASSETS> 357,229
<PP&E> 397,459
<DEPRECIATION> (48,192)
<TOTAL-ASSETS> 782,442
<CURRENT-LIABILITIES> 61,002
<BONDS> 474,082
0
222,259
<COMMON> 474
<OTHER-SE> (1,927)
<TOTAL-LIABILITY-AND-EQUITY> 782,442
<SALES> 0
<TOTAL-REVENUES> 63,221
<CGS> 43,597
<TOTAL-COSTS> 41,454
<OTHER-EXPENSES> 10,819
<LOSS-PROVISION> 1,846
<INTEREST-EXPENSE> 31,891
<INCOME-PRETAX> (64,540)
<INCOME-TAX> 0
<INCOME-CONTINUING> (64,540)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (64,540)
<EPS-PRIMARY> (1.97)
<EPS-DILUTED> (1.97)
</TABLE>
EXHIBIT 99.1
e.spire COMMUNICATIONS, INC.
SUPPLEMENTAL FINANCIAL INFORMATION (UNAUDITED)
YEAR TO DATE - JUNE 30, 1998
($'s in thousands)
Networks Placed Networks Placed Networks Placed
in Service in Service in Service
Prior to During 1996 During 1997
12/31/95
-------------- ----------------- ---------------
Property, Plant &
Equipment $ 137,781 $ 102,809 $ 121,916
Revenues $ 22,831 $ 11,634 $ 11,905
EBITDA $ (1,322) $ (2,681) $ (5,016)
EBIT $ (5,450) $ (6,008) $ (8,301)
Network Statistics (cumulative)
Access Lines Sold 29,375 27,976 39,054
Fiber Miles 45,948 39,196 38,838
Route Miles 692 410 330
Buildings Connected 1,222 672 499
Voice Grade Equivalents 618,472 319,576 295,940
