-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ae8gg0XhGr6WsiRK3osWl0gv5ZKK0fFRM4dsj2QvGh95K8lSzGhBRveeX/2xxrLn 4XK0rZ6qKay3gUNmPHwuEQ== 0000837993-97-000001.txt : 19970226 0000837993-97-000001.hdr.sgml : 19970226 ACCESSION NUMBER: 0000837993-97-000001 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19970225 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICONNECT INC CENTRAL INDEX KEY: 0000837993 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 481056927 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-18654 FILM NUMBER: 97543055 BUSINESS ADDRESS: STREET 1: 6750 W 93RD ST STE 110 CITY: OVERLAND PARK STATE: KS ZIP: 66212-1465 BUSINESS PHONE: 9133418888 MAIL ADDRESS: STREET 1: 6750 W 93RD STREET STREET 2: STE 110 CITY: OVERLAND PARK STATE: KS ZIP: 66212-1465 FORMER COMPANY: FORMER CONFORMED NAME: AMERIFAX INC /DE/ DATE OF NAME CHANGE: 19920703 10QSB/A 1 U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________________ to___________________ Commission file number 0-18654 AMERICONNECT, INC. (Exact name of small business issuer as specified in its charter) Delaware 48-1056927 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 6750 West 93rd Street, Suite 110, Overland Park, KS 66212 (Address of principal executive offices) (Zip Code) (913) 341-8888 (Issuers's telephone number, including area code (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ____ State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of October 7, 1996, the Issuer had outstanding 6,342,361 shares of Common Stock and 592,033 shares of Class A Common Stock. Transitional Small Business Disclosure Format (check one): Yes No X PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AMERICONNECT, INC. Consolidated Balance Sheets ASSETS September 30, 1996 December 31, 1995 Unaudited CURRENT ASSETS Cash $ 287,412 $ 293,492 Accounts receivable, net of allowance of $380,060 at 1996 and $361,260 at 1995 (Note 2) 2,144,140 1,961,815 Accounts receivable - -trade, with affiliates 8,062 6,065 Accounts receivable- agents, including accrued interest 32,140 1,492 Notes receivable- director/shareholder -- 14,500 Prepaid commissions 54,567 126,042 Other current assets 87,105 94,251 Total current assets 2,613,426 2,497,657 NON-CURRENT ASSETS Equipment and software, net of accumulated depreciation and amortization of $292,881 at 1996 and $230,868 at 1995 100,234 143,202 Deposits 18,027 19,528 TOTAL ASSETS $2,731,687 $2,660,387 See accompanying notes to financial statements AMERICONNECT, INC. Consolidated Balance Sheets September 30, 1996 December 31, 1995 Unaudited LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable (Note 2) $3,034,462 $2,782,432 Sales taxes payable 101,534 97,460 Accrued office closing costs -- 8,539 Other accrued liabilities 513 733 Total current liabilities 3,136,509 2,889,164 NON-CURRENT LIABILITIES Customer deposits 3,000 8,264 Total liabilities 3,139,509 2,897,428 COMMITMENTS AND CONTINGENCIES (Notes 2 and 4) -- -- STOCKHOLDERS' DEFICIT (Note 4) Class A common stock, par value $.00001 per share; 10,000,000 shares authorized; issued 6,562,033 shares 66 66 Common stock, par value $.01 per share; 20,000,000 shares authorized; issued 6,522,611 shares 65,226 65,050 Additional paid-in capital 3,647,174 3,642,731 Accumulated deficit (4,118,425) (3,943,025) Treasury stock - class A common, at cost; 5,970,000 shares (60) (60) Treasury stock - common, at cost; 180,250 shares (1,803) (1,803) Total stockholders' deficit (407,822) (237,041) TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $2,731,687 $2,660,387
See accompanying notes to financial statements AMERICONNECT, INC. Consolidated Statements of Operations (Unaudited) For The Three Months For The Nine Months Ended September 30, Ended September 30, 1996 1995 1996 1995 REVENUES Sales $4,175,148 $4,177,064 $12,740,335 $13,067,791 Sales to affiliates 21,967 21,435 63,477 62,969 Total revenues 4,197,115 4,198,499 12,803,812 13,130,760 COSTS AND EXPENSES Direct operating costs 3,237,198 3,487,873 9,609,495 10,293,096 Selling, administrative and general expenses 1,207,711 1,215,695 3,304,589 3,297,760 Depreciation and amortization 22,010 18,810 62,012 53,386 Total costs and expenses 4,466,919 4,722,378 12,976,096 13,644,242 Operating loss (269,804) (523,879) (172,284) (513,482) OTHER INCOME (EXPENSE) Interest income 2,410 4,215 6,888 16,786 Interest expense (6,503) (3,106) (23,794) (6,346) Loan fees -- -- -- (1,251) Miscellaneous 10,901 377 13,790 377 Total other income (expense) 6,808 1,486 (3,116) 9,566 NET LOSS BEFORE INCOME TAXES (262,996) (522,393) (175,400) (503,916) Income tax benefit (expense) (Note 3) -- -- -- -- NET LOSS ($262,996) ($522,393) ($175,400) ($503,916) Net loss per common and common equivalent share ($.038) ($.076) ($.025) ($.074) Weighted average common and common equivalent shares outstanding (Note 4) 6,921,189 6,841,499 6,921,189 6,841,499
See accompanying notes to financial statements AMERICONNECT, INC. Consolidated Statements of Cash Flows (Unaudited) For the Nine Months Ended September 30, 1996 1995 Cash flows from operating activities: Net loss ($175,400) ($503,916) Adjustments to reconcile net income to cash provided by (used in) operating activities: Depreciation and amortization 62,012 53,386 Provision for doubtful accounts 191,650 376,555 (Increase) decrease in assets: Accounts receivable-trade (373,975) (156,457) Accounts receivable - trade from related parties (1,997) (2,782) Prepaid commissions 71,475 -- Other current assets 7,146 35,496 Deposits 1,501 (3,683) Increase (decrease) in liabilities: Accounts payable - trade 252,030 102,265 Sales tax payable 4,074 10,528 Accrued office closing costs (8,539) (13,349) Other accrued liabilities (220) (23,482) Customer deposits (5,264) (7,500) Deferred income -- (13,384) Net cash provided by (used in) operating activities 24,493 (146,323) Cash flows from investing activities: Purchase of equipment and software (19,044) (82,593) Notes receivable - director/shareholder -- (3,000) Payments on note receivable - - director/shareholder 14,500 -- Notes receivable - agents (20,000) (20,000) Notes receivable - employees (11,400) -- Payment on agents notes receivable 752 74,864 Net cash used in investing activities (35,192) (30,729) Cash flows from financing activities: Proceeds from bank loan 8,785,000 4,130,000 Payments on bank loan (8,785,000) (3,786,683) Sale of stock to employees 4,619 2,250 Net cash provided by financing activities 4,619 345,567 Net increase (decrease) in cash (6,080) 168,515 Cash at beginning of period 293,492 405,942 Cash at end of period $ 287,412 $ 574,457 Supplemental disclosures of cash flow information Cash paid during the period for: Interest paid $27,792 $5,370 Income taxes 2,245 3,340
See accompanying notes to financial statements AMERICONNECT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY: AmeriConnect, Inc. and its wholly owned subsidiary, AmeriConnect, Hampshire (collectively, the "Company") resell long distance telecommunications services primarily to individualsand small to medium-sized businesses. AmeriConnect, Inc. of New Hampshire was formed June 28, 1993, in order to do business in the state of New Hampshire. The consolidated balance sheets as of September 30, 1996, the consolidated statements of operations for the nine months ended September 30, 1996 and 1995, and the consolidated statements of cash flows for the nine months ended September 30, 1996 and 1995 have been prepared by the Company, without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows at September 30, 1996, and for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 1995 annual report to shareholders. The results of operations for the periods ended September 30, 1996, and September 30, 1995, are not necessarily indicative of the operating results for the full year. NOTE 2 - COMMITMENTS AND CONTINGENCIES The Company had a contract with a firm to provide subscriber statement processing and billing services. The contract was for a period of three (3) years and expired in September 1996. The Company has negotiated a month- to-month arrangement that began in October 1996. Terms of the month-to-month arrangement provide for a monthly base charge with additional per unit processing charges. The Company has a contract with Sprint to provide telecommunications services for the Company's customers. The Company has negotiated an amendment to the contract that was retroactive to January 1, 1996. The amendment covers the pricing of the services for a term of two years beginning January 1, 1996. The Company has a monthly minimum usage commitment of $500,000 for each of the months covered by the agreement with a total minimum commitment of $12,000,000. In the event the Company's customers use less than the minimum commitment, the difference is due and payable by the Company to Sprint. Prior to the amendment, the Company had a minimum monthly commitment of $1,000,000. For the period September 1, 1995, through December 1, 1995, the Company had an accumulated shortfall of approximately $719,549 which will be offset by the amount by which the Company's actual monthly billed usage for the period beginning on January 1, 1996 exceeds the $500,000 minimum commitment. As a result of this offset, at September 30, 1996, there was no accumulated shortfall and the Company was in compliance with the contractual requirements of the agreement. Due to the fact the merger with Phoenix Network, Inc. was consummated on October 8, 1996 (See Note 7), the Company's amendment to the Sprint contract terminated on the closing date. The Company has a contract with WilTel to provide telecommunications services at discounted rates which will vary based upon the amount of usage by the Company. The term of this usage commitment is thirty-nine (39) months. The Company's agreement with WilTel calls for a minimum monthly usage commitment of $50,000 through January 1998. In the event the Company's customers use less than the minimum commitment in any month, the difference is due and payable by the Company to WilTel in the following month. On June 21, 1996, the Company executed an amendment to the contract. The amendment provides for additional discounts to the Company for the usage months of June, July, August and September of 1996. The Company was in compliance with the contractual requirements of the agreement throughout the quarter ended September 30, 1996. On June 1, 1996, the Company entered into a revolving credit facility which expired October 1, 1996, and allowed for maximum borrowings by the Company of the lesser of $1,000,000 or 50% of eligible (less than 61 days old) receivables. This facility was renewed on October 1, 1996, and will expire on November 1, 1996. Interest is payable monthly at the bank's prime rate (8.25% at September 30, 1996) plus 2%. Under the terms of the credit facility, the Company is required to meet certain financial covenants. The line is secured by all of the Company's accounts receivable. During the third quarter of 1996, the Company had used this facility for short term borrowings, but had no outstanding borrowings at quarter end. At September 30, 1996, the Company was in default of certain of these financial covenants, which defaults are continuing. In accordance with the terms of the credit facility, the Company purchased a term life insurance policy on a key employee with a face amount of $1,750,000 during the year ended December 31, 1994. Annual premiums are approximately $3,500. NOTE 3 - INCOME TAXES A valuation allowance was established to reduce the deferred tax asset to the amount that will more likely than not be realized. The valuation allowance was adjusted for the nine month period ended September 30, 1996, and the year ended December 31, 1995, as follows: September 30, 1996 December 31, 1995 Valuation allowance, beginning of period $1,667,882 $591,512 Valuation adjustment 47,419 576,370 Adjustment in allowance due to change in estimate -- 500,000 Valuation allowance, end of period $1,715,301 $1,667,882
NOTE 4 - COMMON STOCK, WARRANTS AND OPTIONS PUBLIC OFFERING: In its initial public offering in 1989, the Company issued 828,000 units each of which consisted of five shares of previously unissued common stock, par value $.01 per share, and five redeemable Class A Warrants at a price per unit of $5.00. Each of the Class A Warrants, which was transferable separately immediately upon issuance, entitled the holder to purchase for $1.00 one share of common stock and one redeemable Class B common stock purchase warrant ("Class B Warrant"). The Class A Warrants expired on May 29, 1994. Each Class B Warrant entitled the holder to purchase one share of common stock at $1.50 until May 29, 1994. The warrants are not common stock equivalents for the purposes of the earnings per share computations. (See Note 1). In addition, the Company granted the underwriter and finder options to purchase 57,600 and 14,400 units, respectively, at $6.00 per unit exercisable over a period of four years commencing one year from the date of the prospectus. MISSING STOCK CERTIFICATES: Prior to the Company's initial public offering, the stockholders of record as of March 29, 1989, executed escrow agreements which required the placement in escrow of 150,000 shares of outstanding common stock and 5,970,000 shares of outstanding Class A common stock pending the achievement of certain earnings objectives. These earnings objectives were not met and, consequently, all of the shares subject to the escrow agreement were retired and have been accounted for as treasury stock since December 31, 1992. In addition, in connection with the execution of a voting trust agreement in 1989, certificates representing 3,014,751 shares of Class A common stock were issued in the name of a voting trust in substitution for the certificates held by some of the stockholder-parties to the voting trust agreement. This voting trust expired in June of 1992. During the first quarter of 1992, however, the Company learned that the escrow agent associated with the escrow agreements asserts that it has never received the stock certificates representing the shares subject to the escrow agreements. During the same period, the Company discovered that the certificates representing 2,975,751 of the shares transferred to the voting trust were never delivered to the Company for cancellation. The Company has been unable to locate neither the original share certificates nor the certificates issued to the voting trust. As a result, if a stockholder attempted to transfer any of the shares subject to the escrow agreements or the voting trust agreement in violation of such agreements, there can be no assurance that an innocent transferee could not successfully claim the right to the shares purportedly transferred to him or her. The Company believes, however, that the legends affixed to each of the missing certificates, which state that the shares are subject to the restrictions of the voting trust agreement and the escrow agreements, respectively, are sufficient to prevent a transferee from acquiring a valid claim with respect to the shares represented by the missing certificates. In addition, the Company has obtained affidavits from each holder of the missing certificates that no such purported transfers have been made. STOCK RIGHTS: The rights and preferences of common stock and Class A common stock are substantially identical except that each share of common stock entitles the holder to one vote whereas, each share of Class A common stock entitles the holder to five votes. Class A common stock automatically converts into common stock on a one-for-one basis upon sale or transfer to an entity or individual who was not a holder of Class A common stock before such sale or transfer, or at any time at the option of the holder. During each of 1994 and 1995, 113,400 shares of Class A stock were converted to common stock through private transactions. STOCK OPTION PLANS: On July 29, 1988, the Company adopted a stock option plan allowing 300,000 shares of unissued but authorized common stock for issuance of incentive and/or non-qualified stock options. At September 30, 1996, all options had been granted under the plan, and 23,000 options had been returned to the Company by employees who resigned prior to vesting. Such returned options are again available for use under the plan. On May 27, 1994, the Company adopted a second stock option plan allowing for 500,000 shares of unissued but authorized common stock for issuance of incentive and/or non-qualified stock options. As of September 30, 1996, 487,000 options under this plan had been granted and 182,856 options had been returned to the Company by employees who resigned prior to vesting. Such returned options are again available for use under the plan. Stock option transactions for the period ended September 30, 1996, are summarized below: 1988 Plan 1994 Plan Total Outstanding, beginning of quarter 163,000 302,000 465,000 Granted -- -- -- Exercised (1,000) -- (1,000) Cancelled -- (8,500) (8,500) Outstanding, end of period 162,000 293,500 455,500 Option price per share exercised $0.03 -- $0.03 Price for outstanding options $0.03 - $0.50 $0.26 - $0.75 $0.03 - $0.75
The expiration dates for the options issued under the 1988 Plan range from May 1998 to December 2003. At September 30, 1996, 23,000 shares were available for future grants under the 1988 Plan. The expiration dates for the options issued under the 1994 Plan range from August 2004 to December 2005. At September 30, 1996, 195,856 shares were available for future grants under the 1994 Plan. NOTE 5 - PROFIT SHARING PLAN The Company adopted a 401(k) savings plan effective January 1, 1994, covering nearly all eligible employees with at least six months of service. Under the terms of the plan, employees may contribute up to 15% of their gross wages. The Company matches 100% of the first 3% contributed by each employee. The Company's contribution to the plan was $14,907 in the first nine months of 1996. NOTE 6 - ONGOING OPERATIONS The accompanying financial statements have been prepared in accordance with generally accepted accounting principles. The Company reported a net loss of $175,400 for the nine month period ended September 30, 1996. At this time, liabilities exceed assets by $407,822. NOTE 7 - SUBSEQUENT EVENT On January 15, 1996, the Company and Phoenix Network, Inc. ("Phoenix"), a Golden, Colorado-based long distance reseller and provider of value-added telecommunications services, signed a letter of intent to merge the two companies in a stock-for-stock transaction. The parties executed a definitive merger agreement on June 14, 1996. In connection with the merger, Phoenix issued approximately 2.6 million shares of its common stock in exchange for all of the outstanding shares of the Company. The merger was consummated on October 8, 1996. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS REPORT ON FORM 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION ENTITLED "FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THE COMPANY'S REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. General The Company's financial condition and results of operations continue to be negatively affected by increasing competition which contributes to lower profit margins and increasing costs for new sales. Competition. Intense competition in the long distance telecommunications industry continues in 1996. Major long distance companies like AT&T and Sprint are continuing to market directly to the Company's primary market - small to medium-sized businesses. Other existing competitors are aggressively reducing rates to maintain and build customer base and expand minute volume. In addition, new competitors continue to emerge targeting the Company's primary market. Many of these competitors sought to build volume quickly and, in order to accomplish this goal, sold their long distance services at rates that, in the Company's opinion, do not reflect the full costs of doing business. Accordingly, while the Company reduced its rates and undertook efforts to maintain and build its customer base (as described below), the Company was unable to match the rates and/or services offered by many of its competitors, thereby increasing the number of customers lost to competitors. While the Company continued to acquire new customers, lost business and rate reductions to existing accounts more than offset new business. While total minutes billed increased approximately 8% from the third quarter 1995 to the third quarter 1996, the average revenue per minute dropped approximately 11%. Sales Costs. The Company sought to increase its volume by offering services at rates that were competitive in the market. In addition, the Company hired Area Sales Directors and other personnel to support its sales agent program, increased commissions to sales agents to maintain its relationship with key agents, hired a Kansas City area direct sales force and promoted aggressive marketing campaigns designed to increase sales. While the Company believes these actions to be necessary to respond to the competitive environment, they have the effect of increasing selling, general and administrative expenses. Third Quarter Results 1996 Compared to Third Quarter Results 1995 Total Revenues. Total revenues decreased from $4,198,499 in the third quarter 1995 to $4,197,115 in the third quarter 1996, a decrease of $1,384. The decrease is attributable to the decrease in average revenue per minute as previously discussed. Direct Operating Costs. Direct operating costs decreased from $3,487,873 in the third quarter 1995 to $3,237,198 in the third quarter 1996, a decrease of $250,675 or approximately 7%. As a percentage of revenues, direct operating costs decreased from approximately 83% in the third quarter of 1995 to approximately 77% in the third quarter of 1996. The decrease is due in large part to the fact that approximately $200,000 in credits due from a supplier were written-off in the third quarter of 1995. Excluding the effects of the write-off, direct operating costs as a percentage of revenues for the third quarter of 1995 would have been approximately 78%. Selling, Administrative and General Expenses. The Company's selling, administrative and general expenses decreased from $1,215,695 in the third quarter 1995 to $1,207,711 in the third quarter 1996, a decrease of $7,984 or approximately 11%. As a percentage of revenue, selling, administrative and general expenses remained constant at approximately 29%. Compensation expenses increased from $609,856 in the third quarter 1995 to $680,225 in the third quarter 1996, an increase of $70,369 or approximately 12%. Salaries for sales related positions increased from $82,479 to $108,311, an increase of $25,832 or approximately 31%, which resulted from the addition of several sales positions throughout 1996. In-house commissions increased from $9,434 to $27,698, an increase of $18,264 or approximately 194%. Agent commissions increased from $358,422 to $377,503, an increase of $19,081 or approximately 5% due to the introduction in late 1995 of a commission plan designed to attract high volume agents. Fees for professional services increased from $51,043 in the third quarter 1995 to $117,843 in the third quarter 1996, an increase of $66,800 or approximately 131%. This increase resulted primarily from increases in the costs of legal and accounting services associated with the merger. Nine Month Results 1996 Compared to Nine Month Results 1995 Total Revenues. Total revenues decreased from $13,130,760 for the first nine months of 1995 to $12,803,812 for the first nine months of 1996, a decrease of $326,948 or approximately 2%. This decrease in revenues is attributable to the decrease in average revenue per minute. Direct Operating Costs. Direct operating costs decreased from $10,293,096 for the first nine months of 1995 to $9,609,495 for the first nine months of 1996, a decrease of $683,601 or approximately 7%. As a percentage of revenues, direct operating costs decreased from approximately 78% in 1995 to 75% in 1996. The decrease was the result of the execution of a new carrier contract that was effective September 1, 1995 and an amendment to the new contract that was effective January 1, 1996. (See Third Quarter Results above.) Selling, Administrative and General Expenses. The Company's selling, administrative and general expenses increased from $3,297,760 for the first nine months of 1995 to $3,304,589 for the first nine months of 1996, an increase of $6,829 or approximately 1%. As a percentage of revenue, selling, administrative and general expenses increased from 25% in 1995 to 26% in 1996. The increase in selling, administrative and general expenses was insignificant due in large part to the recovery of a bad debt previously written off. The Company received a credit in the amount of $300,000 related to the bad debt previously written off. Without the effect of the $300,000 credit, selling, administrative and general expenses would have increased from $3,297,760 for the first nine months of 1995 to $3,604,589 for the first nine months of 1996, an increase of $306,829 or approximately 29%. The biggest single increase in this expense category in dollars was in compensation expense. Compensation expenses increased from $1,746,672 for the first nine months of 1995 to $2,004,804 for the first nine months of 1996, an increase of $258,132 or approximately 15%. Salaries for sales related positions increased from $217,752 to $329,625, an increase of $111,873 or approximately 57%, which resulted from the addition of several sales positions throughout 1996. In-house commissions increased from $29,208 to $79,437, an increase of $50,229 or approximately 172%. Agent commissions increased from $1,030,526 to $1,104,613, an increase of $74,087 or approximately 7% due to the introduction in late 1995 of a commission plan designed to attract high volume agents. Fees for professional services increased from $145,146 for the first nine months of 1995 to $333,557 for the first nine months of 1996, an increase of $173,411 or approximately 119%. This increase resulted primarily from increases in the costs of legal and accounting services associated with the merger. Liquidity and Capital Resources On December 31, 1995 and September 30, 1996, the Company had a stockholders' deficit of $237,041 and $407,822, respectively. During the first nine months of 1995, the Company used $146,323 cash from operations. During the first nine months of 1996, the Company provided $24,493 cash from operations. The Company has a contract with Sprint to provide telecommunications services for the Company's customers. The Company has negotiated an amendment to the contract that was retroactive to January 1, 1996. The amendment covers the pricing of the services for a term of two years beginning January 1, 1996. The Company has a monthly minimum usage commitment of $500,000 for each of the months covered by the agreement with a total minimum commitment of $12,000,000. In the event the Company's customers use less than the minimum commitment, the difference is due and payable by the Company to Sprint. Prior to the amendment, the Company had a minimum monthly commitment of $1,000,000. For the period September 1, 1995, through December 1, 1995, the Company had an accumulated shortfall of approximately $719,549 which will be offset by the amount by which the Company's actual monthly billed usage for the period beginning on January 1, 1996 exceeds the $500,000 minimum commitment. As a result of this offset, at September 30, 1996, there was no accumulated shortfall and the Company was in compliance with the contractual requirements of the agreement. Due to the fact the merger with Phoenix Network, Inc. was consummated on October 8, 1996 (See Note 7), the Company's amendment to the Sprint contract terminated on the closing date. The Company has a contract with WilTel to provide telecommunications services at discounted rates which will vary based upon the amount of usage by the Company. The term of this usage commitment is thirty-nine (39) months. The Company's agreement with WilTel calls for a minimum monthly usage commitment of $50,000 through January 1998. In the event the Company's customers use less than the minimum commitment in any month, the difference is due and payable by the Company to WilTel in the following month. On June 21, 1996, the Company executed an amendment to the contract. The amendment provides for additional discounts to the Company for the usage months of June, July, August and September of 1996. The Company was in compliance with the contractual requirements of the agreement throughout the quarter ended September 30, 1996. On June 1, 1996, the Company entered into a revolving credit facility which expired October 1, 1996, and allowed for maximum borrowings by the Company of the lesser of $1,000,000 or 50% of eligible (less than 61 days old) receivables. This facility was renewed on October 1, 1996, and will expire on November 1, 1996. Interest is payable monthly at the bank's prime rate (8.25% at September 30, 1996) plus 2%. Under the terms of the credit facility, the Company is required to meet certain financial covenants. The line is secured by all of the Company's accounts receivable. During the third quarter of 1996, the Company had used this facility for short term borrowings, but had no outstanding borrowings at quarter end. At September 30, 1996, the Company was in default of certain of these financial covenants, which defaults are continuing. In accordance with the terms of the credit facility, the Company purchased a term life insurance policy on a key employee with a face amount of $1,750,000 during the year ended December 31, 1994. Annual premiums are approximately $3,500. At September 30, 1996, the Company had a ratio of current assets to current liabilities of 0.83. Working capital deficit at September 30, 1996 was $523,083. The Company's business as a non-facilities based reseller of long distance telecommunications services is generally not a capital intensive business, and at September 30, 1996, the Company had no material commitments for capital expenditures. The Company anticipates any additional capital expenditures in the future will be confined to minimal purchases of office fixtures and equipment. Factors That May Affect Future Results of Operations Dependence on Service Providers. The Company depends on a continuing and reliable supply of telecommunications services from facilities-based, interexchange carriers. Because the Company does not own or lease switching or transmission facilities, it depends on these providers for the telecommunications services used by its customers and to provide the Company with the detailed information on which it bases its customer billings. The Company's ability to expand its business depends both upon its ability to select and retain reliable providers and on the willingness of such providers to continue to make telecommunications services and billing information available to the Company for its customers on favorable terms and in a timely manner. Potential Adverse Effects of Rate Changes. The Company bills its customers for the costs of the various telecommunications services procured on their behalf. The total billing to each customer is generally less than telephone charges for the same service provided by the major carriers. The Company believes its lower customer bills are an important factor in its ability to attract and retain customers. To the extent the differential between the telephone rates offered by the major carriers directly to their customers and the cost of the bulk-rate telecommunications services procured by the Company from its underlying carriers decreases, the savings the Company is able to obtain for its customers could decrease and the Company could lose customers or face increased difficulty in attracting new customers. If the Company elected to offset the effect of any such decrease by lowering its rates, the Company's operating results would also be adversely affected. Competition. An existing or potential customer of the Company has numerous other choices available for its telecommunications service needs, including obtaining services directly from the same carriers whose services the Company offers. From time to time, the Company's competitors may be able to provide a range of services comparable to or more extensive than those available to the Company's customers at rates competitive with, or lower than, the Company's rates. In addition, most prospective customers of the Company are already receiving service directly from at least one long distance carrier, and thus the Company must convince prospective customers to alter these relationships to generate new business. The Company competes with three major interexchange carriers, AT&T, MCI and Sprint, other large carriers, including Frontier and WorldCom, and several hundred smaller carriers. Additionally, as a result of legislation enacted by the federal government in February of 1996, the RBOCs and GTOCs will have, upon compliance with certain regulatory requirements, the right to provide long distance service. Many of the RBOCs and GTOCs have already announced their intention to enter the business of providing long distance service. As a consequence, the telecommunications industry will remain highly competitive and be subject to rapid technological and regulatory change. Because the tariffs offered by the major carriers for telecommunications services are not proprietary in nature, there are no effective barriers to entry into the Company's line of business. Because of the considerably greater resources of competitors of the Company, there can be no assurance that the Company will be able to become or remain competitive in the current telecommunications environment. Possible Volatility of Stock Price. The market price of the Company's Common Stock has, in the past, fluctuated substantially over time and may in the future be highly volatile. Factors such as the announcements of potential mergers, acquisitions, joint ventures or other strategic combinations involving the Company. The announcement of the inability to consummate the proposed merger, rate changes for various carriers, technological innovation or new products or service offerings by the Company or its competitors, as well as market conditions in the telecommunications industry generally and variations in the Company's operating results, could cause the market price of the Common Stock to fluctuate substantially. Because the public float for the Company's Common Stock is small, additional volatility may be experienced. Control by Officers and Directors. As of September 30, 1996, the Company's executive officers and directors beneficially owned or controlled approximately 46.5% of the total voting power represented by the Company's outstanding capital stock, taking into account that holders of the Company's Class A Common Stock are entitled to five votes per share of such stock and assuming the exercise of all outstanding options for the Company's capital stock which are exercisable within sixty (60) days. The votes represented by the shares beneficially owned or controlled by the Company's executive officers and directors would, if they were cast together, control the election of a majority of the Company's directors and the outcome of most corporate actions requiring stockholder approval. Investors who purchase Common Stock of the Company may be subject to certain risks due to the concentrated ownership of the capital stock of the Company. Such risks include: (i) the shares beneficially owned or controlled by the Company's executive officers and directors could, if they were cast together, delay, defer or prevent a change in control of the Company, such as an unsolicited takeover, which might be beneficial to the stockholders, and (ii) due to the substantial ownership or control of outstanding shares by the Company's executive officers and directors and the potential adverse impact of such substantial ownership or control on a change in control of the Company, it is less likely that the prevailing market price of the outstanding shares of the Company's Common Stock will reflect a "premium for control" than would be the case if ownership of the outstanding shares were less concentrated. Governmental Regulation. As a reseller of long distance telecommunications services, the Company is subject to many of the same regulatory requirements as facilities-based interexchange carriers. The intrastate long distance telecommunications operations of the Company are also subject to various state laws and regulations, including certification requirements. Generally, the Company must obtain and maintain certificates of public convenience and necessity from regulatory authorities in most states where it offers service, and in some of these jurisdictions it must also file and obtain prior regulatory approval of tariffs for intrastate offerings. There can be no assurance that the regulatory authorities in one or more states or the FCC will not take action having an adverse effect on the business or financial condition of the Company. PART 2. - OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 1. Financial Data Schedule (b) Reports on Form 8-K On September 3, 1996, the Company filed a report on Form 8-K - Events regarding a press release issued by the Company that they have established the close of business on September 3, 1996, as the record date for determining the stockholders entitled to notice of and to vote at a special meeting of stockholders to be held to consider and approve the proposed merger with a wholly owned subisidary of Phoenix Network, Inc. SIGNATURE 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 (the undersigned being its President). AMERICONNECT, INC. Date: November 14, 1996 /s/ Robert R. Kaemmer Robert R. Kaemmer President EX-27 2 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 9-MOS 12-31-96 09-30-96 287,412 0 2,564,402 380,060 0 2,613,426 393,115 292,881 2,731,687 3,136,509 0 0 0 65,292 (473,114) 2,731,687 12,803,812 12,803,812 9,609,495 12,976,096 (20,678) 0 23,794 (175,400) 0 (175,400) 0 0 0 (75,400) (.025) (.025)
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