1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/ X / QUARTERLY REPORT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the period ended March 31, 1995
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-11584
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ACS ENTERPRISES, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-1976138
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(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
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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 10,424,922 (Shares
outstanding at May 5, 1995).
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ACS ENTERPRISES, INC. AND SUBSIDIARIES
Part I - Financial Information PAGE #
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Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets at 3
March 31, 1995 and December 31, 1994
Condensed Consolidated Statements of 4
Operations for the three months ended
March 31, 1995 and 1994
Condensed Consolidated Statements of 5
Cash Flows for the three months ended
March 31, 1995 and 1994
Notes to Condensed Consolidated Financial 6-7
Statements
Item 2. Management's Discussion and Analysis of 7-14
Financial Condition and Results of Operations
Part II - Other Information
Items 1 through 6 14
Signatures 15
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Part I - Financial Information
Item 1. Financial Statements
ACS ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1995 1994
---- ----
ASSETS (Unaudited) *
- ------
Current assets:
Cash and cash equivalents $ 103,838 $ 1,788,766
Accounts receivable, net 1,735,263 1,681,770
Other current assets 756,665 827,143
----------- -----------
Total current assets 2,595,766 4,297,679
Certificate of deposit 155,158 154,159
Materials and supplies, net 4,896,855 5,384,750
Plant and equipment, net of
accumulated depreciation of
$14,269,000 and $11,578,000 41,165,602 35,549,944
Goodwill, net 16,316,214 16,639,138
Deferred charges, net 1,582,763 1,432,518
Channel acquisition costs, net 2,284,755 2,345,947
Deposits on pending acquisitions 2,021,658 1,487,645
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$71,018,771 $67,291,780
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current maturities of debt and
capital lease obligations $16,434,126 $ 456,030
Accounts payable and accrued expenses 10,658,680 9,192,892
Accrued merger costs 250,000 ---
Customer deposits and billings
received in advance 1,669,148 1,540,416
----------- -----------
Total current liabilities 29,011,954 11,189,338
Long-term debt and capital lease
obligations 512,629 11,037,310
Minority interest 143,464 118,905
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29,668,047 22,345,553
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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 65,627,585 64,537,085
Accumulated deficit (24,347,819) (19,661,816)
----------- -----------
41,384,125 44,979,628
Less: 10,950 shares of treasury stock
at cost (33,401) (33,401)
----------- -----------
Total stockholders' equity 41,350,724 44,946,227
----------- -----------
$71,018,771 $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.
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ACS ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
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March 31,
1995 1994
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Revenues:
Pay television service $ 6,620,274 $2,714,616
Installation 172,559 80,082
Other --- 30,327
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6,792,833 2,825,025
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Expenses:
Programming and license fees 2,648,932 968,308
General and administrative 3,313,205 1,580,037
Selling 609,698 189,501
Depreciation and amortization 3,135,975 999,904
Stock compensation 1,090,500 ---
----------- ----------
10,798,310 3,737,750
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Operating loss (4,005,477) (912,725)
Other income (expense):
Interest expense (445,877) (249,756)
Interest income 15,351 100,887
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Loss before extraordinary item (4,436,003) (1,061,594)
Extraordinary item:
Fees relating to pending merger (250,000) ---
----------- ----------
Net loss $(4,686,003) $(1,061,594)
=========== ===========
Loss per common share before
extraordinary item $(0.43) $(0.13)
Loss per common share from
extraordinary item (0.02) ---
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Net loss per common share $(0.45) $(0.13)
======= ======
Weighted average common shares
outstanding 10,424,922 8,219,992
See accompanying notes.
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ACS ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
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March 31,
1995 1994
---- ----
Cash flows from operating activities:
Net loss $(4,686,003) $(1,061,594)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 3,235,695 1,077,820
Stock compensation 1,090,500 ---
Fees relating to pending merger 250,000 ---
Increase in deferred charges
and deposits on pending
acquisitions (783,977) (2,074)
Changes in operating assets and
liabilities net of businesses acquired:
Decrease (increase) in
in operating assets 443,334 (733,798)
Increase (decrease) in
operating liabilities 1,594,520 (912,626)
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Net cash provided by (used in)
operating activities 1,144,069 (1,632,272)
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Cash flows from investing activities:
Purchases of businesses, net of cash
acquired --- (25,426,623)
Capital expenditures (8,305,972) (2,651,516)
Purchase of investments (999) (3,460,159)
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Net cash used in
investing activities (8,306,971) (31,538,298)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of
common stock --- 40,087,500
Borrowings under credit agreement 5,588,500 ---
Payments of debt and capital lease
obligations (135,085) (44,505)
Net contributions (distributions)
of minority interest 24,559 (5,075)
Payments of preferred dividends --- (10,500)
----------- -----------
Net cash provided by
financing activities 5,477,974 40,027,420
----------- ------------
Net (decrease) increase in cash (1,684,928) 6,856,850
Cash and cash equivalents:
Beginning of period 1,788,766 953,098
----------- ------------
End of period $ 103,838 $7,809,948
=========== ============
Supplemental disclosures of cash flow information:
Interest paid $ 298,700 $ 235,200
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Capitalized lease obligations incurred $ --- $ ---
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See accompanying notes.
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ACS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 three month periods ended March 31, 1995 and 1994
are not necessarily indicative of operating results for the full year.
Certain prior period 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 three months ended March 31, 1995,
the Company has recorded $1,090,500 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., LLC ("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.
The Company has accrued the $250,000 of fees it is obligated for as an
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ACS ENTERPRISES, INC. AND SUBSIDIARIES
extraordinary expense for the three months ended March 31, 1995. The remaining
$2,750,000 of fees will be recorded upon consummation of the merger
transaction.
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, as of May 5, 1995, approximately $19,332,000 under
the Credit Agreement. Moreover, the Company is permitted to borrow an
additional $2,000,000 at the end of May 1995.
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 March 31, 1995.
5. Per Share Data
Per share data is based on the weighted average number of common
shares outstanding during the periods presented.
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 coincident with the 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.
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ACS ENTERPRISES, INC. AND SUBSIDIARIES
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.
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 presently does not expect to be able to launch this
system until the second half of 1995. Prior to launch, in addition to receipt
of FCC approval of the technical plan, the Company will need to finish
construction of the
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ACS ENTERPRISES, INC. AND SUBSIDIARIES
transmission facility (which commenced in March 1995), 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.
Three Months Ended March 31, 1995 and 1994
The net loss for the three months ended March 31, 1995 ("1995") was
$4,686,000, an increase of $3,624,000 over the net loss for the three months
ended March 31, 1994 ("1994"). The increased loss is principally due to a
$2,136,000 increase in depreciation and amortization expense, a $1,733,000
increase in general and administrative expense, stock compensation expense of
$1,091,000, offset in part by a $2,317,000 increase in pay television and
installation 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 and installation revenues for 1995 were $3,998,000
higher than 1994 amounts. The average number of wireless cable subscribers
was approximately 74,000 in 1995, as compared to 34,000 in 1994, an increase of
approximately 118%. 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 March 31, 1995, the
Company had approximately 78,700 subscribers.
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. 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 $1,681,000 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
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ACS ENTERPRISES, INC. AND SUBSIDIARIES
adds programming to its systems when additional channels become available.
General and administrative expenses for 1995 were $1,733,000 higher
than in 1994, principally due to (i) an $857,000 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 $420,000 higher than in 1994, due in
part to a $186,000 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 $2,136,000 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 installations, and a full quarter 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 three months ended March 31, 1995,
the Company has recorded $1,091,000 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.
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ACS ENTERPRISES, INC. AND SUBSIDIARIES
The Company has accrued for the $250,000 of fees it is obligated for
at March 31, 1995. The remaining $2,750,000 of fees will be recorded upon
consummation of the merger transaction.
Interest expense was $196,000 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 the construction of the head-end
transmitter, aggregating to date approximately $5,000,000 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 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. 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. At March 31,
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. 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.
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ACS ENTERPRISES, INC. AND SUBSIDIARIES
In connection with the December Amendment, the Company paid fees of
$500,000, and reduced the exercise price on Banque Paribas' 192,273 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.
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 up to an additional $4 million under the
Credit Agreement, notwithstanding certain non-compliance of the Company with
certain of the Amendment's performance covenants. The Company has borrowed, as
of May 5, 1995, approximately $19,332,000 under the Credit Agreement.
Moreover, the Company is permitted to borrow an additional $2 million at the
end of May 1995. Borrowings beyond the $21,332,000 will require further
amendment to the Credit Agreement, and cannot presently be assured.
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 March 31, 1995.
Absent further amendment to the Credit Agreement, or suitable
replacement sources of working capital, in June 1995 the Company will have to
cease adding additional subscribers in any significant amount until other
sources of capital are available. At March 31, 1995, the Company had a working
capital deficit of approximately $26,416,000.
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
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ACS ENTERPRISES, INC. AND SUBSIDIARIES
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 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 in either cash or in ACS common stock with a then
fair market value of $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, by payment of the remaining $800,000
due towards the $1,600,000. The entire 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 between
$1,500,000 and $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 $8,307,000 exceeded cash
provided by financing activities of $5,478,000 by $2,829,000. Cash provided by
operating activities was $1,144,000 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.
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
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ACS ENTERPRISES, INC. AND SUBSIDIARIES
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.
Items 6 - Exhibits and Reports on Form 8-K
The Company filed the following report on Form 8-K in the quarter
ended March 31, 1995.
(a) March 30, 1995 Form 8-K regarding the Agreement and Plan of
Merger with CAI Wireless Systems, Inc. whereby a wholly-owned
subsidiary of CAI will merge with and into ACS Enterprises,
Inc.
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ACS ENTERPRISES, INC. AND SUBSIDIARIES
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: May 11, 1995
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