-----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, AEjzLJ8vIEvT/qgmTIVI8xr46iszRudcBNdeUKdI274+tFQS9DLz+1L2/MokHPKb I42QZyhc6yls5mASoMP+hQ== 0000927025-96-000048.txt : 19960517 0000927025-96-000048.hdr.sgml : 19960517 ACCESSION NUMBER: 0000927025-96-000048 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 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 SEC ACT: 1934 Act SEC FILE NUMBER: 000-18654 FILM NUMBER: 96566794 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 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 March 31, 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 (State of other jurisdiction of incorporation or organization) 48-1056927 (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 March 31, 1996, the Issuer had outstanding 6,338,361 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 MARCH 31, DECEMBER 31, 1996 1995 UNAUDITED CURRENT ASSETS Cash $ 147,202 $ 293,492 Accounts receivable, net of allowance of $378,317 at 1996 and $361,260 at 1995 (Note 3) 2,183,099 1,961,815 Accounts receivable-trade, with affiliates 7,301 6,065 Accounts receivable-agents, including accrued interest (Note 6) -- 1,492 Notes receivable-director/ shareholder (Note 2) -- 14,500 Prepaid commissions 109,142 126,042 Other current assets 119,724 94,251 Total current assets 2,566,468 2,497,657 NON-CURRENT ASSETS Equipment and software, net of accumulated depreciation and amortization of $251,073 at 1996 and $230,868 at 1995 133,625 143,202 Deposits 19,528 19,528 TOTAL ASSETS $2,719,621 $2,660,387
See accompanying notes to financial statements AMERICONNECT, INC. CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 DECEMBER 31, UNAUDITED 1995 LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable (Note 3) $2,993,718 $2,782,432 Sales taxes payable 102,328 97,460 Accrued office closing costs 3,798 8,539 Other accrued liabilities -- 733 Total current liabilities 3,099,844 2,889,164 NON-CURRENT LIABILITIES Customer deposits 9,264 8,264 Total liabilities 3,109,108 2,897,428 COMMITMENTS AND CONTINGENCIES (Notes 3 and 5) -- -- STOCKHOLDERS' DEFICIT (Note 5) 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 6,518,611 shares 65,186 65,050 Additional paid-in capital 3,647,094 3,642,731 Accumulated deficit (4,099,970) (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 (389,487) (237,041) TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $2,719,621 $2,660,387
See accompanying notes to financial statements AMERICONNECT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For The Three Months Ended March 31, 1996 1995 REVENUES Sales $4,242,911 $4,511,849 Sales to affiliates 21,691 15,124 Total revenues 4,264,602 4,526,973 COSTS AND EXPENSES Direct operating costs 3,202,346 3,444,446 Selling, administrative and general expenses 1,188,574 1,026,971 Depreciation and amortization 20,205 15,799 Total costs and expenses 4,411,125 4,487,216 Operating income (loss) (146,523) 39,757 OTHER INCOME (EXPENSE) Interest income 2,004 7,013 Interest expense (12,426) (742) Loan Fees -- (1,251) Total other income (expense) (10,422) 5,020 NET INCOME (LOSS) BEFORE INCOME TAXES (156,945) 44,777 Income Tax Expense (Note 4) -- -- NET INCOME (LOSS) $(156,945) $44,777 Net income(loss) per common and common equivalent share $(0.02) $0.01 Weighted average common and common equivalent shares outstanding (Note 5) 7,433,676 6,370,650
See accompanying notes to financial statements AMERICONNECT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months Ended March 31, 1996 1995 Cash flows from operating activities: Net income (loss) $(156,945) $44,777 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 20,205 15,799 Provision for doubtful accounts 63,830 113,175 (Increase) decrease in assets: Accounts receivable (285,114) (433,876) Accounts receivable-trade from affiliates (1,236) 1,936 Prepaid commissions 16,899 -- Other current assets (25,473) (35,747) Deposits -- (1,500) Increase (decrease) in liabilities: Accounts payable 211,286 180,338 Sales tax payable 4,868 15,291 Accrued office closing costs (4,741) (3,242) Deferred income -- (13,384) Customer Deposits 1,000 -- Other accrued liabilities (731) 6,175 Net cash used in operating activities (156,152) (110,258) Cash flows from investing activities: Purchase of equipment and software (10,628) (64,381) Payments on notes receivable - director/shareholder 14,500 -- Payments on agents notes receivable 1,492 61,740 Net cash provided by (used in) investing activities 5,364 (2,641) Cash flows from financing activities: Proceeds from bank loan 3,610,000 550,000 Payments on bank loan (3,610,000) (550,000) Sale of stock to employees 4,498 2,250 Net cash provided by financing activities 4,498 2,250 Net decrease in cash (146,290) (110,649) Cash at beginning of period 293,492 405,942 Cash at end of period $147,202 $295,293 Supplemental disclosures of cash flow information Cash paid during the period for: Interest $ 11,074 $ 563 Income taxes 1,765 1,608
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, Inc. of New Hampshire (collectively, the "Company") resell long distance telecommunications services primarily to individuals and 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 March 31, 1996, the consolidated statements of operations for the three months ended March 31, 1996 and 1995, and the consolidated statements of cash flows for the three months ended March 31, 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 March 31, 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 March 31, 1996, and March 31, 1995, are not necessarily indicative of the operating results for the full year. NOTE 2 - NOTE RECEIVABLE - DIRECTOR/SHAREHOLDER During 1994 and early 1995, the Company made loans totaling $14,500 to a director/shareholder. They were secured by 19,000 shares of the Company's common stock and bore interest at 2 1/2% over the published prime rate found in The Wall Street Journal. The loans were paid in full on January 24, 1996. NOTE 3 - COMMITMENTS AND CONTINGENCIES The Company has a contract with a firm to provide subscriber statement processing and billing services. The contract is for a period of three (3) years and expires in September 1996. Terms of the contract provide for a monthly base charge with additional per unit processing charges. Termination of this contract for cause requires a 90-day period during which any breach of the contract can be cured, plus a requirement for a subsequent written 30-day notice. Termination for cause requires the payment of all amounts owed. Termination of the contract for the convenience of the Company requires a written 180-day notice and a termination fee equal to one year's charges. The Company is required to make minimum payments of $5,000 per month. The Company has a contract with Sprint to provide telecommunications services for the Company's customers. The agreement covers the pricing of the services for a term of two years beginning September 1995. The Company has an annual minimum usage commitment of $12,000,000 through August 1996 and $14,400,000 from September 1996 to August 1997. In the event the Company's customers use less than the minimum commitment, the difference is due and payable by the Company to Sprint. Assuming a monthly average requirement of $1,000,000 under the Sprint contract, for the period from September 1995 through March 1996, the Company has accumulated a shortfall of $1,076,875. The Company anticipates additional shortfall amounts to accumulate during 1996. In the event the proposed merger with Phoenix Network, Inc. occurs (See Note 9), the Company currently anticipates that all accumulated shortfall amounts will be addressed in a new contract between Sprint and the surviving corporation. In the event the proposed merger does not occur, the Company has begun negotiations with Sprint to address the accumulated shortfall. While the Company believes the accumulated shortfall at March 31, 1996, and any additional shortfall amounts, will be resolved in a manner which will not have a material adverse effect on the business or financial condition of the Company in the event the proposed merger does not occur, there can be no assurance of such a result. If the Company were required to pay the full amount of accumulated shortfalls, this would have a material adverse effect on the Company's financial condition. 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. The Company was in compliance with the contractual requirements of the agreement throughout the quarter ended March 31, 1996. On June 8, 1995, the Company entered into a revolving credit facility which expires June 1, 1996, and allows for maximum borrowings by the Company of the lesser of $1,000,000 or 50% of eligible (less than 61 days old) receivables. Interest is payable monthly at the bank's prime rate (8.25% at March 31, 1996) plus 1%. 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 first quarter of 1996, the Company had used this facility for short term borrowings, but had no outstanding borrowings at quarter end. At March 31, 1996, the Company was in default of certain of these financial covenants, which defaults are continuing. While the Company currently does not expect these defaults to impair its ability to utilize this facility during the remainder of the existing term, it may negatively impact the Company's ability to renew the credit facility. In the event the credit facility cannot be renewed or the Company is unable to utilize the existing facility, the Company would attempt to obtain a comparable credit facility from an alternative financing source. While the Company has been able to obtain such facilities in the past, there can be no assurance that the Company will be able to obtain a credit facility with comparable terms or at all. The inability to obtain a credit facility would have a material adverse effect on the Company's financial condition and business. 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 4 - 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 three month period ended March 31, 1996, and the year ended December 31, 1995, as follows: March 31, 1996 December 31, 1995 Valuation allowance, beginning of period $1,667,882 $591,512 Valuation adjustment 39,340 576,370 Adjustment in allowance due to change in estimate -- 500,000 Valuation allowance, end of period $1,707,222 $1,667,882 NOTE 5 - 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 March 31, 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 March 31, 1996, 487,000 options under this plan had been granted and 162,356 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 March 31, 1996, are summarized below: 1988 Plan 1994 Plan Total Outstanding, beginning of quarter 169,000 345,000 514,000 Granted -- -- -- Exercised (3,000) (10,644) (13,644) Canceled -- (20,356) (20,356) Outstanding, end of period 166,000 314,000 480,000 Option price per share exercised $0.03-$0.50 $0.37 $0.03-$0.50 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 March 31, 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 March 31, 1996, 175,356 shares were available for future grants under the 1994 Plan. NOTE 6 - NOTES RECEIVABLE The Company conducts a portion of its business through agents. Some of these agents have borrowed from the Company in order to obtain necessary capital to expand their operations. These borrowings are represented by short term promissory notes. The terms of the notes permit the Company to withhold the monthly payments from commissions due the agents, if necessary. The interest rate for all the notes is 2 1/2% over the prime rate published by The Wall Street Journal. At December 31, 1994, a reserve of $100,000 was established against amounts due from a specific agent whose receivable, including unpaid charges, aggregated $498,061. During 1995, the Company and this agent became involved in litigation, and it was determined that no recovery on the amounts would be made. As a result, the remaining receivable of $398,061 was written off. The Company has negotiated a mutual release of all claims with this specific agent. NOTE 7 - 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 $5,129 in the first quarter of 1996. NOTE 8 - ONGOING OPERATIONS The accompanying financial statements have been prepared in accordance with generally accepted accounting principles. The Company reported a net loss of $156,945 in the first quarter of 1996. As a result, liabilities exceeded assets by $389,487. Non-cash items such as depreciation and amortization and provision for doubtful accounts collectively contributed $84,035 of the loss. The remaining $72,910, along with a $285,114 increase in accounts receivable and a $211,286 increase in accounts payable, contributed to cash used in operations of $156,152. In light of the foregoing, in order to become profitable, the Company must achieve sufficient volume levels to obtain additional discounts under its existing carrier contracts or negotiate new contracts with its carriers to obtain favorable pricing at existing volume levels and reduce other costs. In addition, the Company may explore financing and other strategic transactions, such as the proposed merger (discussed in Note 9 below). The proposed merger would reduce the Company's direct operating costs through volume discounts on long-distance pricing from its carriers and would provide certain economics of scale which management believes would allow its operations to become profitable and allow it to compete for new and existing customers. If, for any reason, the proposed merger is not consummated, the Company plans to increase sales and reduce its costs and will continue to explore other strategic alternatives (which may include financings, mergers, acquisitions, joint ventures or other strategic transactions). NOTE 9 - SUBSEQUENT EVENT On January 15, 1996, the Company and Phoenix Network, Inc. ("Phoenix"), a San Francisco, California-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 currently are negotiating a definitive merger agreement. In connection with the proposed merger, Phoenix expects to issue approximately 4 million new shares of common stock in exchange for all of the outstanding shares of the Company. It is currently anticipated that the closing will take place on or about August 15, 1996, pending the obtaining of all necessary regulatory approvals and approval of the shareholders of both companies. There can be no assurance that the ongoing negotiations between the Company and Phoenix will in fact result in the execution of a definitive merger agreement or that the terms of any such agreement would be as described above. 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 severe competition, high direct operating costs and increasing costs for new sales. In addition, fees for professional services in conjunction with the proposed merger with Phoenix Network were approximately $62,000 which negatively affected first quarter results. There is no assurance that the proposed merger will be consummated. Competition. Intense competition in the long distance telecommunications industry continued into 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 emerged 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 5% from the first quarter 1995 to the first quarter 1996, the average revenue per minute dropped approximately 10%. Direct Operating Costs. The Company was able to obtain a new contract with its major underlying carrier in September 1995. While the new contract reduces the Company's costs at certain increased volume targets, which would result in significant cost reductions for the Company, to date the Company has been unable to achieve the volume targets necessary to realize the reduced carrier pricing. As a result, the Company has been unable to significantly increase margins. 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. RESULTS OF OPERATIONS Total Revenues. Total revenues decreased from $4,526,973 in the first quarter 1995 to $4,264,602 in the first quarter 1996, a decrease of $262,371 or approximately 6%. This decrease in revenues is attributable to the decrease in average revenue per minute. Direct Operating Costs. Direct operating costs decreased from $3,444,446 in the first quarter 1995 to $3,202,346 in the first quarter 1996, a decrease of $242,100 or approximately 7%. As a percentage of revenues, direct operating costs decreased from approximately 76% in 1995 to 75% in 1996. The decrease is consistent with the decrease in revenues noted above. Selling, Administrative and General Expenses. The Company's selling, administrative and general expenses increased from $1,026,971 in the first quarter 1995 to $1,188,574 in the first quarter 1996, an increase of $161,603 or approximately 16%. As a percentage of revenue, selling, administrative and general expenses increased from 23% in 1995 to 28% in 1996. The biggest single increase in this expense category in dollars was in compensation expense. Compensation expenses increased from $534,829 in the first quarter 1995 to $650,571 in the first quarter 1996, an increase of $115,742 or approximately 22%. Salaries for sales related positions increased from $55,646 to $105,594, an increase of $49,948 or approximately 90%, which increase resulted from the addition of several sales positions throughout 1995 and early 1996. Agent commissions increased from $310,893 to $353,969, an increase of $43,076 or approximately 14% due to the introduction in late 1995 of a commission plan designed to attract high volume agents. Fees for professional services increased from $44,689 in the first quarter 1995 to $106,519 in the first quarter 1996, an increase of $61,830 or approximately 138%. This increase resulted primarily from increases in the costs of legal and accounting services associated with the potential merger previously mentioned. LIQUIDITY AND CAPITAL RESOURCES On December 31, 1995 and March 31, 1996, the Company had a stockholders' deficit of $237,041 and $389,487, respectively. In the first quarter 1995, the Company used $110,258 cash from operations. In the first quarter 1996, the Company used $156,152 cash in operations. While the Company reported a net loss of $156,945 for the first quarter 1996, non-cash items such as depreciation and amortization and provision for doubtful accounts collectively contributed $84,035 of the total loss. The remaining portion of the total loss, $72,910, along with a $285,114 increase in accounts receivable and a $211,286 increase in accounts payable, contributed to the cash used in operating activities. On June 8, 1995, the Company entered into a revolving credit facility which expires June 1, 1996, and allows for maximum borrowings by the Company of the lesser of $1,000,000 or 50% of eligible (less than 61 days old) receivables. Interest is payable monthly at the bank's prime rate (8.25% at March 31, 1996) plus 1%. 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 first quarter of 1996, the Company had used this facility for short terms borrowings, but had no outstanding borrowings at quarter end. At March 31, 1996, the Company was in default of certain of these financial covenants, which defaults are continuing. While the Company currently does not expect these defaults to impair its ability to utilize this facility during the remainder of the existing term, it may negatively impact the Company's ability to renew the credit facility. In the event the credit facility cannot be renewed or the Company is unable to utilize the existing facility, the Company would attempt to obtain a comparable credit facility from an alternative financing source. While the Company has been able to obtain such facilities in the past, there can be no assurance that the Company will be able to obtain a credit facility with comparable terms or at all. The inability to obtain a credit facility would have a material adverse effect on the Company's financial condition and business. The Company has a contract with Sprint to provide telecommunications services for the Company's customers. The agreement covers the pricing of the services for a term of two years beginning September 1995. The Company has an annual minimum usage commitment of $12,000,000 through August 1996 and $14,400,000 from September 1996 to August 1997. In the event the Company's customers use less than the minimum commitment, the difference is due and payable by the Company to Sprint. Assuming a monthly average requirement of $1,000,000 under the Sprint contract, for the period from September 1995 through March 1996, the Company has accumulated a shortfall of $1,076,875. The Company anticipates additional shortfall amounts to accumulate during 1996. In the event the proposed merger with Phoenix Network, Inc. occurs (See Note 9), the Company currently anticipates that all accumulated shortfall amounts will be addressed in a new contract between Sprint and the surviving corporation. In the event the proposed merger does not occur, the Company has begun negotiations with Sprint to address the accumulated shortfall. While the Company believes the accumulated shortfall at March 31, 1996, and any additional shortfall amounts, will be resolved in a manner which will not have a material adverse effect on the business or financial condition of the Company in the event the proposed merger does not occur, there can be no assurance of such a result. If the Company were required to pay the full amount of accumulated shortfalls, this would have a material adverse effect on the Company's financial condition. 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. The Company was in compliance with the contractual requirements of the agreement throughout the quarter ended March 31, 1996. At March 31, 1996, the Company had a ratio of current assets to current liabilities of 0.83. Working capital deficit at March 31, 1996 was $533,376. The Company's business as a non-facilities based reseller of long distance telecommunications services is generally not a capital intensive business, and at March 31, 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. Currently none of the Company's customers represents more than 2% of the monthly revenues. The proposed merger would reduce the Company's direct operating costs through volume discounts on long-distance pricing from its carriers and would provide certain economies of scale that together management believes would allow its operations to become profitable and allow it to compete for new and existing customers. If for any reason the proposed merger is not consummated, the Company plans to increase its sales and reduce its costs and will continue to explore other strategic alternatives (which may include financings, mergers, acquisitions, joint ventures or other strategic transactions). In addition, if the proposed merger is not consummated, the Company intends to negotiate new contracts with its carriers which would allow its operations to become profitable. 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 March 31, 1996, the Company's executive officers and directors beneficially owned or controlled approximately 52.9% 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 None (b) Reports on Form 8-K None 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: May 15, 1996 /s/ Robert R. Kaemmer Robert R. Kaemmer President EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF AMERICONNECT, INC. CONTAINED IN ITS QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1996 MAR-31-1996 147,202 0 2,561,416 378,317 0 2,566,468 384,698 251,073 2,719,621 3,099,844 0 0 0 65,252 (454,739) 2,719,621 4,264,602 4,264,602 3,202,346 4,411,125 (2,004) 0 12,426 (156,945) 0 (156,945) 0 0 0 (156,945) (0.02) (0.02)
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