-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, COPVVSCOe47wOl8pWtvFaNMxHBZV4nBBeU5RApTtAFU3nPDgp5CWSZHfqV+LvJb9 xjE3sCHnWpaBJ1uGR1paIQ== 0000893220-95-000525.txt : 19950814 0000893220-95-000525.hdr.sgml : 19950814 ACCESSION NUMBER: 0000893220-95-000525 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950811 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACS ENTERPRISES INC CENTRAL INDEX KEY: 0000702511 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 231976138 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12160 FILM NUMBER: 95562010 BUSINESS ADDRESS: STREET 1: 2510 METROPOLITAN DR CITY: TREVOSE STATE: PA ZIP: 19053-6789 BUSINESS PHONE: 215-396-9400 10-Q 1 FORM 10-Q, ACS ENTERPRISES, INC. 1 UNITED STATES 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 period ended June 30, 1995 OR / / 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 1-11584 ------- ACS ENTERPRISES, INC. --------------------- (Exact name of registrant as specified in its charter) Pennsylvania 23-1976138 ------------ ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2510 Metropolitan Drive, Trevose, Pennsylvania 19053 - ---------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (215) 396-9400 --------------- 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. X Yes No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date 10,577,079 (Shares outstanding at August 4, 1995). 2 ACS ENTERPRISES, INC. AND SUBSIDIARIES
Part I - Financial Information PAGE # ------ Item 1. Financial Statements (unaudited): Condensed Consolidated Balance Sheets at 3 June 30, 1995 and December 31, 1994 Condensed Consolidated Statements of 4 Operations for the six and three months ended June 30, 1995 and 1994 Condensed Consolidated Statements of 5 Cash Flows for the six months ended June 30, 1995 and 1994 Notes to Condensed Consolidated Financial 6-7 Statements Item 2. Management's Discussion and Analysis of 8-15 Financial Condition and Results of Operations Part II - Other Information Items 1 through 6 15 Signatures 16
2 3 Part I - Financial Information Item 1. Financial Statements ACS ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31, 1995 1994 ---- ---- ASSETS (Unaudited) * - ------ Current assets: Cash and cash equivalents $ 433,171 $ 1,788,766 Accounts receivable, net 2,078,931 1,681,770 Other current assets 777,166 827,143 ----------- ----------- Total current assets 3,289,268 4,297,679 Certificate of deposit 156,094 154,159 Materials and supplies, net 3,970,475 5,384,750 Plant and equipment, net of accumulated depreciation of $17,727,000 and $11,578,000 46,510,376 35,549,944 Goodwill, net 15,993,873 16,639,138 Deferred charges, net 1,513,473 1,432,518 Channel acquisition costs, net 4,316,148 3,833,592 ----------- ----------- $75,749,707 $67,291,780 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Current maturities of debt and capital lease obligations $21,732,078 $ 456,030 Accounts payable and accrued expenses 14,020,793 9,192,892 Accrued merger costs 250,000 --- Customer deposits and billings received in advance 1,707,995 1,540,416 ----------- ----------- Total current liabilities 37,710,866 11,189,338 Long-term debt and capital lease obligations 413,465 11,037,310 Minority interest 179,997 118,905 ----------- ----------- 38,304,328 22,345,553 ----------- ----------- Stockholders' equity: Preferred stock - par value $.01 per share; authorized 5,000,000 shares --- --- Common stock - par value $.01 per share; authorized 50,000,000 shares, issued 10,435,872 104,359 104,359 Additional paid-in capital 66,718,085 64,537,085 Accumulated deficit (29,343,664) (19,661,816) ----------- ----------- 37,478,780 44,979,628 Less: 10,950 shares of treasury stock, at cost (33,401) (33,401) ----------- ----------- Total stockholders' equity 37,445,379 44,946,227 ----------- ----------- $75,749,707 $67,291,780 =========== ===========
* The condensed consolidated balance sheet as of December 31, 1994 has been summarized from the Company's audited consolidated balance sheet as of that date. See accompanying notes. 3 4 ACS ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Six Months Ended Three Months Ended ---------------- ------------------ June 30, June 30, 1995 1994 1995 1994 ---- ---- ---- ---- Revenues: Pay television revenues $15,059,629 $7,279,009 $8,266,796 $ 4,484,310 Other income 13,550 61,152 13,550 30,825 ----------- ---------- ---------- ---------- 15,073,179 7,340,161 8,280,346 4,515,135 ----------- ---------- ---------- ---------- Expenses: Programming and license fees 5,709,575 2,543,988 3,060,643 1,575,681 General and administrative 7,117,770 3,894,126 3,804,565 2,313,943 Selling 1,323,521 576,051 713,823 386,549 Depreciation and amortization 7,049,300 2,762,402 3,913,325 1,762,499 Stock compensation 2,181,000 --- 1,090,500 --- ----------- --------- ---------- --------- 23,381,166 9,776,567 12,582,856 6,038,672 ----------- --------- ---------- --------- Operating loss (8,307,987) (2,436,406) (4,302,510) (1,523,537) Other income (expense): Interest expense (1,071,953) (541,483) (626,076) (291,727) Interest income 30,891 195,315 15,540 94,428 ---------- ---------- ---------- ---------- Loss before extraordinary item (9,349,049) (2,782,574) (4,913,046) (1,720,836) Extraordinary item: Fees relating to pending merger (332,799) --- (82,799) --- ----------- ---------- ---------- ---------- Net loss $(9,681,848) $(2,782,574) $(4,995,845) $(1,720,836) =========== =========== =========== =========== Loss per common share before extraordinary item $(0.90) $(0.30) $(0.47) $(0.17) Loss per common share from extraordinary item (0.03) --- (0.01) --- ------ ------ ------ ------ Net loss per common share $(0.93) $(0.30) $(0.48) $(0.17) ====== ====== ====== ====== Weighted average common shares outstanding 10,424,922 9,174,760 10,424,922 10,115,922
See accompanying notes. 4 5 ACS ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended ---------------- June 30, 1995 1994 ---- ---- Cash flows from operating activities: Net loss $(9,681,848) $(2,782,574) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 7,248,740 2,762,402 Stock compensation 2,181,000 --- Increase in deferred charges (280,394) (100,348) Changes in operating assets and liabilities net of businesses acquired: Increase in operating assets (472,318) (3,607,213) Increase in operating liabilities 445,480 510,347 ----------- ----------- Net cash used in operating activities (559,340) (3,217,386) ----------- ----------- Cash flows from investing activities: Purchases of businesses, net of cash acquired --- (25,426,623) Capital expenditures, net of assets purchased on account (11,507,614) (7,433,562) Purchase of investments (1,935) (4,547,193) ----------- ----------- Net cash used in investing activities (11,509,549) (37,407,378) ----------- ----------- Cash flows from financing activities: Net proceeds from issuance of common stock --- 40,087,500 Proceeds from issuance of notes payable --- 133,559 Borrowings under credit agreement 10,888,500 --- Payments of debt and capital lease obligations (236,298) (95,808) Net contributions (distributions) of minority interest 61,092 (10,150) Payments of preferred dividends --- (11,333) ----------- ----------- Net cash provided by financing activities 10,713,294 40,103,768 ----------- ----------- Net decrease in cash (1,355,595) (520,996) Cash and cash equivalents: Beginning of period 1,788,766 953,098 ----------- ----------- End of period $ 433,171 432,102 =========== =========== Supplemental disclosures of cash flow information: Interest paid $ 750,600 $ 722,600 ----------- ----------- Capitalized lease obligations incurred $ --- $ --- ----------- -----------
See accompanying notes. 5 6 ACS ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1995 (UNAUDITED) 1. Basis of Presentation The financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of financial position and results of operations for the interim period. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 1994 Annual Report on Form 10-K filed with the Securities and Exchange Commission. The results of operations for the six and three month periods ended June 30, 1995 and 1994 are not necessarily indicative of operating results for the full year. Certain 1994 amounts have been reclassified to conform to the 1995 presentation. 2. Stock Compensation Expense The Company has issued options for an aggregate of 726,000 shares of common stock under the 1994 Directors and Officers Stock Option Plan that provide for set option prices, but variable numbers of shares, based upon the net number of subscribers added to the Company's wireless cable systems during 1995. As a result of the variable numbers of shares, the difference between the option exercise price and the fair market value of the shares represents compensation expense to the Company. The Company estimates that the number of shares to be issued will not exceed 50% of the maximum number. For the six months ended June 30, 1995, the Company has recorded $2,181,000 of compensation expense in connection with these options. 3. Fees Relating to Pending Merger The employment agreement the Company has with its Chairman and Chief Executive Officer, Alan Sonnenberg, provides for a payment upon a change in control of the Company, as defined in the employment agreement. In March 1995, the Company's Board of Directors amended the employment agreement with Mr. Sonnenberg to increase the contractual change in control payment by $1,000,000, to $1,500,000, which will be payable upon the consummation of the pending merger with CAI Wireless Systems, Inc. ("CAI"). Also, in connection with the pending merger, the Company retained Gerard Klauer Mattison & Co., L.L.C. ("GKM") to act as its financial advisor and to render a fairness opinion to the Company's Board of Directors as to the terms of the pending merger. The Company has agreed to pay GKM $250,000 for the fairness opinion, which was delivered to the Company by GKM on March 28, 1995. Further, the Company will pay GKM an additional $1,250,000 financial advisory fee upon consummation of the merger. 6 7 ACS ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1995 (UNAUDITED) The Company has accrued the $250,000 of fees it is obligated to GKM for as part of the $333,000 extraordinary merger expense for the six months ended June 30, 1995. The remaining $2,750,000 of fees discussed above will be recorded upon consummation of the merger transaction. Additional merger related costs will be expensed as incurred. 4. Credit Agreement with Banque Paribas As a result of the Merger Agreement entered into by the Company with CAI, Banque Paribas has further amended the Credit Agreement (the "April Amendment") to permit continued borrowings of up to an additional $4 million under the Credit Agreement, notwithstanding certain non-compliance of the company with certain of the amended Credit Agreement's performance covenants. The Company has borrowed, through June 30, 1995 the full $21,332,000 available under the Credit Agreement. Under the terms of the April Amendment, the Company has agreed to repay the balance outstanding under the Credit Agreement upon effectiveness of the merger with CAI. Further, in the event the pending merger with CAI does not become effective, an event of default will occur, permitting Banque Paribas to accelerate the due date of the balance outstanding under the Credit Agreement. Accordingly, the Company has recorded the entire amount outstanding under the Credit Agreement as a current liability at June 30, 1995. 5. Per Share Data Per share data is based on the weighted average number of common shares outstanding during the periods presented. 6. Capital Stock In July 1995, employee stock options for 60,000 shares at $2.23 per share were exercised on a cashless basis, resulting in the issuance of 52,157 shares of common stock. In August 1995, GKM exercised a warrant for the purchase of 100,000 shares of common stock for $450,000.00 cash. 7 8 ACS ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1995 (UNAUDITED) Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Pending Merger - On March 28, 1995, the Company entered into a definitive agreement to merge with a wholly owned subsidiary of CAI. Upon consummation of the merger, holders of the common stock of the Company will receive in exchange for each share of common stock of the Company, $3.50 in cash plus a minimum and a maximum number of shares of CAI common stock at the effective time of the merger, being 1.138 shares if the market value of CAI common stock is at $14.50 or greater, 1.65 shares if the market value of CAI common stock is at $10.00 or less, and in proportion if the market value of CAI common stock is between $10.00 and $14.50. Also, the BANX Partnership ("BANX"), a joint venture of Bell Atlantic Corporation and NYNEX, has purchased $30 million of CAI debt securities, and will also purchase $70 million of convertible preferred stock of CAI upon consummation of the pending merger. Additional conditions of closing include receipt of necessary shareholder and regulatory approvals, and the placement of $125 million of senior debt securities. Results of Operations General During the second quarter of 1993, the FCC issued its implementing regulations regarding the 1992 Cable Act. The 1992 Cable Act reregulates locally franchised cable operators in a broad range of areas, the most significant being rate regulation, customer service standards, local broadcast signal retransmission, and programming access for cable competitors. Since the Company operates under FCC regulated licenses instead of local franchises, the provisions dealing with basic service rates and customer service standards have no direct effect on the Company. Consent for transmission of local commercial broadcast signals other than most satellite-distributed superstations and non-commercial broadcast signals, must be obtained by wireless cable systems and satellite master antenna television ("SMATV") facilities, when the signals are not available without charge and the VHF/UHF antennas at single family homes are not owned or available for purchase and controlled by the subscribers, and at MDUs when the broadcast signals are not available without charge to individual residents and the antenna is not owned or available for purchase and controlled by the building owner or individual subscribers. The Company makes available for purchase the VHF/UHF antenna, when an MDU or a single family homeowner elects to discontinue service. Program access provisions of the 1992 Cable Act have facilitated the Company's ability to purchase programming, on terms no less favorable than had been enjoyed, and in some cases on substantially better terms. Several traditional franchise cable operators have commenced litigation over some provisions of the 1992 Cable Act, in particular the local broadcast signal retransmission regulations. Enforcement of the 1992 Cable Act, all provisions of which, as subsequently modified, are now effective, is expected to be a lengthy and complex process. 8 9 ACS ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1995 (UNAUDITED) The Company capitalizes the material, installation labor and allocated overhead costs related to the addition of new subscribers. These costs are then depreciated over their estimated useful lives. All marketing costs incurred in attracting new subscribers are expensed when incurred. Also, because the Company generally offers inducements for new subscribers, including free or reduced installation and reduced service fees for new subscribers for a limited period, the full revenue impact from the addition of a subscriber typically begins 30 to 60 days after the initial installation. On March 9, 1994, the Company acquired MetroCable, Inc. and Metropolitan Satellite Corp., two related companies that together operated the Cleveland, Ohio metropolitan area wireless cable system, which had at acquisition approximately 13,000 subscribers. On March 11, 1994, the Company acquired Valley Wireless Cable, Inc., which operated the Bakersfield, California and surrounding area wireless cable system, which had at acquisition approximately 2,700 subscribers. In December 1993, the Company entered into an agreement with Golden Bear Communications, Inc. ("Golden Bear") to lease 23 wireless cable channels in the combined market of Stockton and Modesto, California. As a result of, among other factors, additional time necessary to develop a comprehensive technical plan, the Company is still awaiting FCC approval of a series of major license modifications to permit service to commence in this market. The Company presently does not expect to be able to launch this system until the anticipated merger with CAI has been completed. Prior to launch, in addition to receipt of FCC approval of the technical plan, the Company will need to install electronics into the recently completed transmission facility, establish an administration and sales office, hire appropriate personnel and initiate marketing activities in the Stockton/Modesto service area. Dollar amounts discussed herein have been rounded to the nearest thousand. Six Months Ended June 30, 1995 and 1994 The net loss for the six months ended June 30, 1995 ("1995") was $9,682,000, an increase of $6,899,000 over the net loss for the six months ended June 30, 1994 ("1994"). The increased loss is principally due to a $4,287,000 increase in depreciation and amortization expense, a $3,224,000 increase in general and administrative expense, and stock compensation expense of $2,181,000, offset in part by a $4,615,000 increase in pay television revenues, net of related programming and license fees. These increased expenses and net revenues reflect the significant expansion of the Company's Philadelphia area wireless cable system, and the March 1994 system acquisitions described above. Had the March 1994 acquisitions been made on January 1, 1994, for the comparable 1994 period, revenues would have been approximately $1,400,000 higher, expenses would have been $1,730,000 higher (consisting mainly of depreciation and amortization), and the net loss would have been $330,000 higher. Pay television revenues for 1995 were $7,781,000 higher than 1994 amounts. The average number of wireless cable subscribers was approximately 79,500 in 1995, as compared to 40,600 in 1994, an increase of approximately 96%. The increase in revenues was almost entirely the result of an increase in wireless cable subscribers, primarily in the single family homes market, and not as a result of an increase in rates. At June 30, 1995, the Company had approximately 86,900 subscribers. 9 10 ACS ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1995 (UNAUDITED) During the second quarter of 1994, certain of the Company's franchise cable competitors began offering limited-time discounted service promotions. The Company believes these promotions are a competitive response to the value-oriented service offered by the Company. As a result, the Company responded with a revised promotional campaign to attract new subscribers, and an enhanced subscriber retention program. Beginning in March 1995, the Company began to curtail the use of extended period discounted service promotions in the Philadelphia area. However, the Company intends to maintain a flexible marketing strategy to maintain the attractiveness of wireless cable service to its existing and potential customers. The Company's single family homes/commercial business requires the installation of an antenna on each subscriber's home. Therefore, the rate of subscriber addition depends not only on sales orders, but on weather, daylight and an adequate number of properly trained installers. Daylight and weather conditions during the first calendar quarter in the Philadelphia and Cleveland areas are generally not conducive to installations. In particular, the first quarter of 1994 in Philadelphia was significantly impacted by a series of ice and snow storms. The Company expects that the Bakersfield and Stockton/Modesto (when launched) markets will be less affected by adverse weather conditions. Over the last year, by increasing the number of qualified installers, the Company has substantially increased its daily installation capacity. Programming and channel license fees in 1995 were $3,166,000 higher than in 1994, largely due to the increase in subscribers to the Company's wireless cable systems. The Company expects that programming and channel license fees will increase proportionately as subscriber revenue increases, and as the Company adds programming to its systems when additional channels become available. General and administrative expenses for 1995 were $3,224,000 higher than in 1994, principally due to (i) a $1,768,000 increase in payroll and subcontractor related expenses, net of capitalized amounts, and (ii) general increases in operating expenses resulting from higher levels of subscribers to the Company's wireless cable systems. Also, the Company continues to improve its service to subscribers, where possible, and implemented a monthly program guide in each market served during the third quarter of 1994. With the acquisition of the Cleveland, Bakersfield and Stockton/Modesto markets, and additional customer service features, the Company has incurred additional general and administrative expenses. However, management has been able to leverage certain corporate functions, with only modest expansion, to serve the new markets. Accordingly, the Company expects general and administrative expenses, as a percentage of revenues, will continue to decrease during 1995. Selling expenses for 1995 were $747,000 higher than in 1994, due in part to a $312,000 increase in independent salespeople commissions, reflecting primarily the higher level of subscriber activity in 1995. Selling expenses are expected to increase proportionately to the addition of new wireless cable subscribers in each market served by the Company. Depreciation and amortization in 1995 was $4,287,000 higher than in 1994, due primarily to higher depreciation of the increased investment in single family homes installations, a shortened estimated useful life for certain subscriber 10 11 ACS ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1995 (UNAUDITED) installations, and a full six months of depreciation and amortization of fixed and intangible assets of the Cleveland and Bakersfield acquisitions. Depreciation and amortization will increase as the Company installs additional subscribers. The Company has issued options for an aggregate of 726,000 shares of common stock under the 1994 Directors and Officers Stock Option Plan that provide for set option prices, but variable numbers of shares, based upon the net number of subscribers added to the Company's wireless cable systems during 1995. As a result of the variable numbers of shares, the difference between the option exercise price and the fair market value of the shares represents compensation expense to the Company. The Company estimates that the number of shares to be issued will not exceed 50% of the maximum number. For the six months ended June 30, 1995, the Company has recorded $2,181,000 of compensation expense in connection with these options. The employment agreement the Company has with its Chairman and Chief Executive Officer, Alan Sonnenberg, provides for a bonus upon a change in control of the Company, as defined in the employment agreement. In March 1995, the Company's Board of Directors amended the employment agreement with Mr. Sonnenberg to increase the contractual change in control bonus by $1,000,000 to $1,500,000, which will be payable upon the effectiveness of a pending merger with CAI. Also, in connection with the pending merger, the Company retained Gerard Klauer Mattison & Co., LLC ("GKM")to act as its investment advisor and to render a fairness opinion to the Company's Board of Directors as to the terms of the pending merger. The Company has agreed to pay GKM $250,000 for the fairness opinion, which was delivered to the Company by GKM on March 28, 1995. Further, the Company will pay GKM an additional $1,250,000 financial advisory fee upon effectiveness of the merger. The Company has accrued for the $250,000 of fees it is obligated to GKM for as part of the $333,000 extraordinary merger expense recorded through June 30, 1995. The remaining $2,750,000 of fees will be recorded upon consummation of the merger transaction. Interest expense was $530,000 higher in 1995 than in 1994, reflecting primarily the higher average borrowing outstanding during 1995. Liquidity and Capital Resources The provision of television programming requires substantial initial capital outlays. The most significant start-up capital cost incurred in establishing wireless cable operations is for transmission equipment, aggregating in excess of $9,000,000 in the markets served by the Company. Adding single family homes and commercial subscribers requires an incremental investment for receiving equipment and installation-related costs of between $450 and $500 per subscriber. In addition, because of normal subscriber attrition, the Company requires capital to maintain its present level of subscribers. In apartment complexes, the Company intends to achieve a favorable 11 12 ACS ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1995 (UNAUDITED) return on investment over an extended contract term. The March 1994 acquisitions of the wireless cable systems serving the Cleveland, Ohio, and Bakersfield, California areas required an aggregate of approximately $28,000,000 cash. Accordingly, the Company's expansion efforts are largely dependent on its continuing ability to raise capital. Credit Agreement - On November 9, 1993, the Company entered into a new and significantly expanded credit agreement with Banque Paribas. This $25,000,000 credit agreement (the "Credit Agreement") replaced a fully utilized line of credit with Philips Credit Corporation. Outstanding amounts under the Credit Agreement accrue interest, at a rate three and a half points over the prime rate, or at a rate four and a half points over the Eurodollar rate, at the Company's option. At June 30, 1995, the interest rate applicable to the loan, as calculated, was 10.875%. Also, available but undrawn funds under the Credit Agreement require a quarterly commitment fee of 3/8 of 1% per annum. As required by the Credit Agreement, the Company has arranged interest rate protection for $8,000,000 of the loan balance. The Company entered into an interest rate swap with Banque Paribas, whereby the Company has secured a 5% Eurodollar rate on $8,000,000 for a period of three years commencing April 25, 1994. In connection with this transaction, the Company also issued to Banque Paribas warrants to purchase 576,819 shares of unregistered Common Stock at an average exercise price of $10.63 per share. The warrants, which contain certain registration rights for the underlying common stock which the Company partially fulfilled with a Form S-3 declared effective in August 1994, are exercisable at any time through November 9, 2003, and are subject to adjustment as to exercise price and number of warrants in certain circumstances. In December 1994, the Company entered into an amendment to the Credit Agreement with Banque Paribas (the "December Amendment"). The December Amendment restated the performance covenants required of the Company to remain in compliance under the Credit Agreement. The new performance covenants require minimum numbers of subscribers, maximum rates of churn, and minimum cash flow per subscriber. The Amendment also granted the lenders a security interest in the assets of the Cleveland and Bakersfield wireless cable systems. In connection with the December Amendment, the Company paid fees of $500,000, and reduced the exercise price on 192,273 Banque Paribas warrants to purchase the Company's common stock from $17.68 per share to $7.08 per share, the fair market value of the Company's common stock at the time of the Amendment. This adjustment of the warrant exercise price reduced the average warrant exercise price from $10.63 per share to $7.09 per share. Also in connection with the December Amendment, Banque Paribas required the Company's chairman and chief executive officer to personally guarantee the Company's loan. In addition to the personal guarantee of the loan, borrowings under the Credit Agreement are secured by substantially all of the assets of the Company, including licenses, accounts receivable, inventory, equipment, contract and license lease rights, and general intangibles. The Credit Agreement requires mandatory prepayment upon the sale of certain of these assets and in certain other events. 12 13 ACS ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1995 (UNAUDITED) The Credit Agreement loan commitment reduces as follows:
Amount of Reduction --------- 1994 0 1995 $ 937,500 1996 $ 4,687,500 1997 $ 9,062,500 1998 $10,312,500
The Company may prepay its obligations at any time without premium or penalty. As a result of the Merger Agreement entered into by the Company, Banque Paribas has further amended the Credit Agreement (the "April Amendment") to permit continued borrowings of an additional $4 million under the Credit Agreement, notwithstanding certain non-compliance of the Company with certain of the Amendment's performance covenants. As of June 30, 1995, the Company has borrowed the full $21,332,000 available under the Credit Agreement. Under the terms of the April Amendment, the Company has agreed to repay the balance outstanding under the Credit Agreement upon effectiveness of the merger with CAI. Further, in the event the pending merger with CAI does not become effective, an event of default will occur, permitting Banque Paribas to accelerate the due date of the balance outstanding under the Credit Agreement. Accordingly, the Company has recorded the entire amount outstanding under the Credit Agreement as a current liability at June 30, 1995. Under the terms of the Merger Agreement with CAI, CAI is obligated to assist ACS in funding its operations, beginning July 1, 1995, through closing of the merger transaction. Through August 11, 1995, CAI has advanced to ACS $4,000,000 of interim financing. The notes evidencing these borrowings by the Company are secured by a lien against substantially all of the assets of the Company, subordinate to Banque Paribas' liens. The notes, which mature February 28, 1996, bear interest at 12.5% per annum. At June 30, 1995, exclusive of the $21,332,000 Banque Paribas debt, the Company had a working capital deficit of approximately $13,090,000. Absent further amendment to the Credit Agreement, continued borrowings from or through CAI, or other suitable replacement sources of working capital, the Company will have to slow the addition of new subscribers in any significant amount until other sources of capital are available. In August 1995, the Company reduced installation efforts to match available capital resources. February 1994 Public Offering - In February 1994, the Company sold 2,500,000 shares of its Common Stock, in a public offering, at $15.00 per share. The proceeds to the Company, after the Underwriters' discount of $2,250,000, and offering costs of $450,000, were $34,800,000. In March 1994, the Underwriters exercised in full their overallotment option for an additional 375,000 shares. The proceeds to the Company, after Underwriters' discount of $338,000, were $5,287,000. August 1994 Warrant Exercise - Immediately prior to the effectiveness of 13 14 ACS ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1995 (UNAUDITED) the Company's August 1994 Form S-3, Three Sixty Corp., a former guarantor of the Company's senior indebtedness, exercised its warrant for the purchase of 300,000 shares of common stock for $1,500,000 cash. Wireless Cable System Acquisitions - In March 1994, the Company completed the acquisitions of wireless cable television systems in Cleveland, Ohio and Bakersfield, California. Additionally, in December 1993 the Company entered into an agreement for a lease of license rights with Golden Bear Communications, Inc. ("Golden Bear") for the Stockton/Modesto, California area. Under this lease agreement, the Company paid $200,000 immediately, and agreed to pay a further $1,600,000 when at least 12 ITFS channels became available. As a result of, among other factors, additional time necessary to develop a comprehensive technical plan, the Company and Golden Bear modified their original lease agreement to permit interim payments towards the $1,600,000. In March 1995, the Company completed the initial payments required under the lease agreement, as modified. The entire $1,800,000 of initial payments required under the lease of license rights was paid in cash. The businesses recently acquired by the Company will require substantial investment. In the case of the Stockton/Modesto acquisition, in addition to the acquisition costs, the Company expects to incur approximately $2,000,000 for the construction of transmission facilities and start up of operations. The Company's failure to obtain financing for the acquired businesses would preclude any substantial growth in subscribers and revenues. While no assurances can be made that the Company will be able to add significant numbers of new subscribers, or that the Company will become profitable with the addition of new subscribers, management believes increased subscribers and revenues are essential to realize the potential of the Company's substantial investment in its wireless cable systems. In 1995, cash used in investing activities of $11,510,000 exceeded cash provided by financing activities of $10,713,000 by $796,000. Cash used in operating activities was $559,000 in 1995. Income Tax Developments The Company and its wholly-owned subsidiaries file a consolidated federal tax return. The Company has had no current state or federal income tax expense over the three years ended December 31, 1994. 14 15 ACS ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1995 (UNAUDITED) As of December 31, 1994, the Company has available net operating loss carryforwards of approximately $21,000,000 for tax reporting purposes to offset future taxable income, the primary difference from financial reporting accumulated losses being the difference in depreciation methods for financial and tax reporting purposes used in previous years. The net operating loss carryforwards expire through 2009. A greater than 50% change in ownership for purposes of Section 382 of the Internal Revenue Code limits the annual utilization of net operating loss carryforwards against net taxable income. The Company has undergone a greater than 50% change in ownership as a result of the 1992 stock offering, and has incurred a Section 382 limitation. As a result, management estimates the utilization of its operating loss carryforward existing at December 15, 1992 (approximately $8,500,000) is limited to approximately $750,000 per year. Under Section 382, allowable deductions not utilized are able to be carried forward, subject to the life of the net operating loss carryforwards. The remaining net operating loss carryforward of approximately $12,500,000 is unrestricted as to its future usage. Inflation Inflation did not significantly impact the Company's operations in the periods discussed above since many of the costs incurred by the Company are fixed in nature. If necessary, the Company has the ability to increase charges for services in future periods, subject to competitive pressures. Part II - Other Information Items 1 through 5 None. Item 6 - Exhibits and Reports on Form 8-K The Company filed the following report on Form 8-K during the quarter ended June 30, 1995. (a) Limited Consent to Credit Agreement, dated as of April 26, 1995, by and among ACS Enterprises, Inc., ACS Home Systems, Inc., Apartment Cable Systems, Inc., each of the other credit parties listed on the signature pages thereof, the financial institutions listed on the signature page thereof and Banque Paribas, as Agent. 15 16 ACS ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1995 (UNAUDITED) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ACS ENTERPRISES, INC. /s/ Alan Sonnenberg ------------------------------------ Alan Sonnenberg Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ Charles J. Mallon ------------------------------------ Charles J. Mallon Chief Financial Officer (Principal Financial Officer) Date: August 10, 1995 16 EX-27 2 FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1995 JAN-01-1995 JUN-30-1995 433,171 0 2,078,931 0 3,970,475 3,289,268 64,237,637 17,727,261 75,749,707 37,710,866 22,145,543 104,359 0 0 37,341,020 75,749,707 15,059,629 15,073,179 5,709,575 15,490,591 2,181,000 0 1,071,953 (9,349,049) 0 (9,349,049) 0 (332,799) 0 (9,681,848) (0.93) (0.93)
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